The Real World of Real Estate
The real estate entrepreneur has many options when it comes to investing strategies. Some strategies call for the home to be repaired or renovated, while other strategies call for homes to be bought and flipped. Other techniques fall in between these two.
Throughout many of my years as an investor, I have utilized the buy and hold strategy. In my early days of investing, I would look for properties that only needed minor repairs. Once I found a house that fit my criteria, I negotiated the purchase. After the repairs were made, I would rent the house out.
My exit strategy was to hold the property for long term growth. Over the years as a landlord, I learned what it takes to manage property effectively. Running a real estate business and dealing with tenants takes knowledge, skill, determination and guts. I learned quickly that some tenants will test you to the limit. Staying focused on what you are about in your business is critical.
A New Technique
After about 7 years renting out the houses, I learned about the lease with option to purchase technique. I was at a real estate conference listening to a speaker who revealed this technique to the attendees. It didn’t take me long to realize that I needed to change the way I was doing business.
Once the presentation was over, I went to the back of the room and purchased the materials that were offered in teaching this strategy. This was the beginning of a whole new world of investing. I soon realized that the strategy of renting to tenants needed to be replaced by selling to tenant/buyers. As my properties became vacant and new ones were purchased, I began looking for tenant/buyers rather than tenants. This has been one of the best discoveries I have made as an investor.
My duties as a landlord have become less troublesome and the financial picture of each property has improved. This better positioning however as good as it is, has not solved all the problems of holding property. The lease with option to purchase technique as good as it is still requires hands on management.
Case Study
This brings me to the heart of this article. I have a property that I have been managing for the past 2 years. The lease will be up at the end of this month. The tenant/buyer has decided not to exercise the option to purchase the property. Even though this technique is a great strategy to get houses sold, some tenant/buyers do not buy.
After the tenant/buyer let me know her intensions, I sent a letter letting her know what the agreements called for as she was getting ready to move. I also told her that I would follow-up with a phone call to discuss the final details of her move.
Some Initial Concerns
I had some business near the house last week so I decided to stop by and talk to the tenant/buyer about some concerns I had. As I drove into the driveway, I immediately noticed that the grass had not been cut for some time. There had also been a storm recently and there were branches and other debris on the lawn.
My experience has taught me that when I see these signs the house is usually empty and the tenant/buyer has moved. I looked thru the windows and could see some of the tenant’s personal items. I went to the back yard and discovered 2 dogs that had been left there. The back screen door was broken and the solid door behind it had some damage as well. I could see thru the back window that the room was full of boxes and other items all over the floor.
Following Up
At this point, I decided to call the tenant and find out what was going on. She told me that she had moved about 3 weeks earlier, but was still moving things from the house. She also said that she was taking care of the dogs while she was moving. She reminded me that she was paid up until the end of the month and that she would be out then.
I asked her if there was anything in the house that needed to be repaired. She mentioned a couple of minor things, and then she asked if she could get any of her deposit back. I reminded her that the option deposit was non-refundable. She told me that she would have her brother cut the grass and the dogs would be picked-up by the end of the month.
As I was leaving the property, she called me back to tell me that there was one other item that I should know about. She said that the large wagon wheel light fixture in the family room fell from the ceiling. She said it simply fell on its own and that she was glad that none of her children had been under it. I asked her when did this happen and she said that it fell about a year ago.
I asked her why did she not call me and report it. She said she had not called because she had not been using the room, so the light was not necessary. I knew that this light fixture was placed in the ceiling securely. It would not have fallen down on its own. It seems more likely that someone had pulled on it and dislodged it.
From Tenant/Buyers to Tenants
This tenant/buyer was always quick to call or write me when anything needed to be repaired, so not calling when the light fixture “fell” was odd. Things can change over time during the lease term. When we signed the agreements 2 years ago, she was excited about the house and intended to buy it. She was always on time with the rent payment, which is always a good sign.
A few days later I received a call from a neighbor who noticed the dogs in the back yard. He was not sure if they were mine or they had wondered in the enclosed fence area and could not get out. I let him know what the tenant’s intensions were and that I was monitoring the situation.
This will be an on-going post as the story develops. I just want you to know what is involved when you own or control property. The details of this article are not meant to discourage or scare you away from investing. I want you to know and understand what to expect from some tenants. When you are prepared for any situation, you will be able to handle it effectively. To be continued.
Essentials for Setting Up the Home Office
Setting up your home office is a necessary part in the life of a real estate investor. In order to conduct business, there will be certain pieces of equipment, office furnishings and services necessary so work can be done effectively and efficiently. I would suggest that you designate a part of your house that will give you some privacy and enough room to accommodate the necessary items you will need.
Communications
· Land line telephone: I would recommend the use of a land line phone system. I currently have one. I realize that with the cell phone explosion many families have decided to discontinue this service.
· It is an additional expense; however, a land line can come in handy. It can be used when you want to save your plan minutes on you cell phone or your service may be temporarily down. There are also times when a cell phone connection won’t be clear, but when switching to a land line the reception will be much better. I use a service called Magic Jack. It does have some glitches from time to time, but the expense to operate it are minimal. I use my cell phone most of the time, but having a land line gives me the added service when needed.
· Mobile Phone: Having a mobile or cell phone is a must. At times, it will be necessary for the investor to be out in the field looking at houses or doing research, etc., where the only way he will be able to communicate will be by cell phone. Today there is a huge variety of cell phones and plans available to choose from. You can either select the basic plan where calling and texting are provided or you can up- grade to a plan where internet access can be added. The investor will have to decide what will best suit his budget and needs.
· Fax machine: A fax machine is a must item. Documents will need to be sent back and forth to clients, attorneys, lending institutions, title companies, etc. Time will be a factor in many deals. When you send a fax, it arrives at its destination immediately. I would not recommend a land line fax machine. I would rather you subscribe to a fax service through the internet. The cost is very reasonable. I pay $10.00 per month for my service. Do a Google search to find one you like. It saves me time and the added expense of ink cartridge replacememts and breakdowns.
Computer and Printer
· The computer is a very effective tool in conducting business for the real estate investor. It is simply amazing what the computer can do. With all the software applications available today, the computer eliminates much of the need to outsource work that may have been difficult to do in the past. Basic applications for the investor will include contract preparation, writing letters, post card and flyer designing, organization of files and digital pictures. You will also be sending and receiving e-mail correspondence.I would also recommend that you get a fast internet connection (DSL or cable) as many of the newer programs will require this service to work properly.
· I also have a lap top computer. This works especially well when other family members are using the desk top computer or I am away from my home and need to keep up with my business. New technology has also developed the smaller note book computer and the I Pad/PC note pad. These are amazing devices, but I would not recommend that you go overboard in the beginning days of you investing career to purchase them. These items are expenses and you need to have good reason to buy them. When just starting out, stick to the basics and move up as the need arises.
· The printer is another essential item for the home office. Printing documents will be a necessary task when doing deals. You will also need a printer when sending and receiving faxes. I would recommend that you purchase an all-in-one, printer/fax/copier/scanner, unit. This is a big time saver and there cost is very reasonable.
Camera
· The Digital camera will be an item that you will use quite often. When out in the field looking at houses to purchase or getting one under contract, you will need a camera. When you place your listings on line, you will want to show perspective buyers what the property looks like. Most buyers today look on the internet when they begin their search for a home, so take several pictures.
· The Flip video camera is not a requirement, but I would recommend it. I use mine on every home I put under contract. I do a visual tour of the home and property using it, then down load it on YouTube and place it on my website.This gives perspective buyers the best viewing of the property short of personally being at the house. Buyers really love this option.
Furniture
· Desk: Purchase a desk that will be adequate for your needs. I personally use my computer desk/workstation to do all my work. I must admit this is not the best solution. It would be better for the work I do, to have a separate desk, but it is what I have become use to using. Just be sure you have adequate room to do your work. You can make changes as necessary. Don’t overlook a comfortable chair, but not too comfortable or your work may suffer.
· Filing cabinets: You will need to file reports, client folders, estimates, tax returns and other items. This is just good organization sense. When you need to find an item, it is a joy to know where to look.
· Book shelves: I have several book shelves that hold the dozens of books, CDs, DVDs, courses and other items that I have accumulated over the years. They provide me with easy access when I need any of these items for reference or review.
These are the basics of what I would suggest for you consider when setting up your home office. Over time, you can add items and make any necessary change to suit your wants and needs. Remember however, to spend within your budget. Don’t go into excessive debt before you bring in income from doing deals. You don’t want the pressure of having to make payments, when you have more month than income.
Answering Sellers Objections – The 4 Top FAQ
Investing in real estate can certainly be challenging, but also rewarding. It is important that the investor be prepared for any and every situation that comes about. During the negotiations with the seller this is especially true. In the buying and selling exchange, buyers and sellers negotiate out their wants and needs in order the get the best deal for themselves.
Seller and Buyer Needs
Sellers will have questions that need to be answered. When considering questions, and more importantly objections, keep in mind that these are not negative signs during the negotiation process. In fact, objections are really positive signs where the seller is actually saying, “Please give me more information”.
Buyers will need to be able to provide answers that can satisfy the needs and in some cases the fears that sellers may be having. Investors should be looking for these ‘buying signals’, where the seller is open to the selling concept, but is still somewhat hesitant to move forward until more information is provided.
Buying Strategy
All the buying strategies that we have discussed in other articles require sharp negotiation skills. Each one has specific criteria that will require the investor to know what his exit strategy will be before the buying process begins.
In this article, the buying strategy will be the lease with option to purchase technique. The answers to the most frequently asked questions using this buying method will be discussed next.
FAQ
Why don’t I just list my house with a Realtor?
That is certainly an option, buy obviously a Realtor won’t
make your payment for you or take care of the maintenance
and repairs, while they are attempting to sell your house.
Also, according to a recent survey, less than half of the
houses listed with realtors sell during the initial listing period.
If you want to sell your house fast, you have to offer buyers
something special that makes your house attractive.
What if the tenant/buyer causes damage to my house?
Our objective is not to find a tenant, but to find a buyer who
will eventually own your house. We investigate them
thoroughly and provide you with all the information, so you
can make the final decision. Damages are rarely a problem.
In fact, in most cases we have found that buyers have
improved the house with new carpet or some other upgrades
such as fencing or a deck. If any damages do occur, the
tenant/buyer will be responsible to fix it at his expense and
that is in the contract. As the owner, you continue to
maintain homeowners insurance that should cover major
repairs.
When will the tenant/buyer close on my house?
We cannot determine an exact date. It will up to the tenant/
buyer to make that decision within the time frame they have.
We will place them in credit repair and monitor their
progress. As their credit improves we will have a much better
idea of when the loan application process will begin. In the
meantime, the tenant/buyer will living in the home, paying
the rent on time, and taking care of the maintenance and
minor repairs.
Can your program really help me?
Mr. Seller, I am a real estate consultant and have been
helping homeowners with the sale and leasing of their
homes for some time. I know what homeowners go through
when they try to sell their homes. You may be just in the
‘thinking about it’ stage or maybe you have tried to sell your
home ‘by owner’ or even listed it with an agent, without
much success.
A real estate agent has a computer loaded with hundreds of
nice homes in great neighborhoods. Do you think they would
have the same feeling for your house as you do? Would they
really go out and put all their effort into selling one particular
house, or would they pick out a selection of houses to show
their perspective buyers? This is the strategy they use in the
hope of having them pick one house out of the lot.
You, the seller, have the most at stake. You should want the
largest pool of buyers, so you can get a fast sale and top
sales price. This is what the lease with option to purchase
selling method will do for you.
I don’t know of an easier or faster way to sell your house
or that can give you more money, with none of the hassles
normally involved when using traditional selling methods.
Investor’s Assignment
Take some serious time to study these questions and answers. Don’t try to memorize the answers, but study to give the seller your answer in your own words, in a conversational manner. This will take some practice. Does some role play with a family member and get good at it. Once you are able to answer the seller’s objections effectively, you will well on your way to real estate profits.
Getting the Seller to Yes – Top 10 Seller Benefits
Selling a home can be a very emotional experience. Buyers and sellers usually have an agenda of what they want to accomplish in the transaction. In order for sellers to come to an agreement with perspective buyers, they have to realize certain benefits that give them reason to sell.
In this article, the discussion will center on the top 10 seller benefits when they sell using a lease with option to purchase contract. These benefits taken together, build a strong case when choosing to use the lease with option to purchase strategy. In today’s market climate where houses can sit unsold for months, sellers want the security of knowing that they put together a good deal, one that will be safe and make their house salable.
Best Seller Benefits
- Full Market Price, Regardless of Demand: More tenant/buyers will be attracted to the home, which are willing to pay full price, because the seller will be offering special terms with the financing. This will demonstrate to the perspective tenant/buyers value that will be difficult to pass up.
- Non-Refundable Option Deposit: When tenant/buyers enter into an agreement with sellers, they will put up a good faith option deposit. This is their intension to buy the house. There is some risk involved since the deposit is non-refundable. Sellers feel more secure when tenant/buyers show this good faith act.
- Positive Cash Flow: Rents are usually set above any debt service on the property. With higher than market rent in place, the seller will enjoy a positive cash flow. This will help with any unforeseen expenses the seller may be responsible for during the term of the lease.
- Above Market Rent: Sellers who offer exclusive financing terms and outstanding value can expect and usually receive rent that is above the market, from 5-10%.
- Better Quality Tenants, Reduced Risk: The occupants renting the home not only have a vested interest in it, but they are also planning to own it in the future. They will have a homeowners mind set, and take better care of the home.
- No Maintenance or Minor Repairs Required: The “Pride of Ownership” is a strong motivator for tenant/buyers. With a vested interest in the property along with the homeowners mind set, tenant/buyers will be encouraged to pay the rent on time, perform regular maintenance, and make minor repairs and even improvements and upgrades to the home
- Thousands in Commissions and Fees are saved: Properties that are sold “Buy Owner” will not be required to pay any Realtor’s commission or fees. Commissions can cost between 6-7% of the sales price. The seller will also save on advertising expenses, since using the lease with option should generate a faster sale.
- Little or no Vacancies: Other than the initial advertising period, the tenant/buyer selected should continuing renting until he purchases the house. Even if the initial tenant/buyer does not work out and moves out of the house, finding another one will not take long. The great thing about a lease with option opportunity is there are always more tenant/buyers looking for houses than there are houses available to buy.
- Available Tax Shelter: With a lease with option to purchase the seller doesn’t transfer the deed, so he remains the legal owner until the option is exercised. This gives him all the benefits of home ownership.
- Peace of Mind: With the home occupied with quality tenant/buyers who paid an up-front option deposit and who are responsible for maintenance and minor repairs, the seller can enjoy the lease term while he waits for the home to close. All the other benefits mentioned give him the assurance that he has made the best possible deal rather than the anxiety of having his home “sit on the market” an indefinite period of time while he waits for a sale.
Investors will do well to educate perspective sellers with these benefits. Showing what the seller has to gain from the sale is one of the keys to investing success. If you will keep providing the seller with more reasons to say yes, your investing will be fun and profitable.
Best Investing Strategy for Success, Part 8, Consulting
We have come to the eighth and final installment in this series, in our quest to discover the best investing strategy for success. As I write this post and consider every technique that I have discussed, I am convinced that the lease option strategies offer the beginning investors the best lead-in to success in real estate investing. It is the strategy that I specialize in. The one where you will find the greatest opportunity in today’s real estate market.
This article will focus on the consulting lease option technique. This strategy, of the three discussed is the easiest to understand and implement. It is safe, with no down side risk. The pay days are excellent for the work and time you put into the deal.
The Market
In the process of investing, you will encounter properties that will be difficult and challenging, where deal structure may be impossible. Many properties will be in bad neighborhoods or they will be located out of your local market. Other properties could have numbers that are “upside down”, meaning that what is owed on the house is more that what it is worth.
The beauty of this technique is that your market has no geographical limitations. Where ever there are houses for sale with free property rights, you will have opportunity. It comes down to the strength of your marketing efforts. Without marketing to find these homeowner/sellers, you will have no business.
Finding the Sellers
Once you have your marketing in place as discussed in my previously articles, you will begin get calls from sellers. These will primarily be sellers in your local market. You will have to prescreen these callers and weed out those who are not motivated enough to fit into your funnel. Remember, you are looking for those who need to sell, rather than want to sell. Ask these sellers open ended questions. These are questions that require more than a yes or no answer. You have to discover their pain. In other words, what is happening in their lives that require that they must sell their house now.
This consulting technique seems to work best outside the investor’s local market, since these will be homes you will not be able to visit. There will be properties that come across your desk where you could put together a sandwich or cooperative lease option deal, but they are too far away. Rather than pass on the deal, you could consult with the seller.
Your market will not be limited to the typical homeowner who can’t sell. There will be landlords, investors, and tenant/buyers who will need your services as well.
Working the Process
Once you locate a good prospect, you have to sell your services. If he is truly motivated, this will not be too difficult. No doubt, he has probably tried other selling methods that have not worked. You may be his last hope.
The services you will be selling will be your time, knowledge and experience. Even if you are just beginning this endeavor, the knowledge you have acquired up to this point gives you “expert” status in the eyes of the homeowner.
You should be working from your home office, using your phone, fax, and e-mail. There really isn’t any reason to leave the comfort of your home to do deals.
The Contract
You will need to have a formal agreement for the seller to sign. This will be a consulting agreement that will layout what you will provide to the homeowner and what your expectations will be for him. Your fees will also be stated.
You will need to require that your clients pay you up front, before any work is done. Sometimes, this can be done with an initial installment, then additional payments as needed. This is for your protection. Once your services have been given out and the information has been provided, it can be difficult to collect your fee from some clients. It will work best for you to set up a Pay Pal account, so you can collect payments on line.
Working with the Seller
You will provide the seller with all the documents necessary to complete the transaction. Your services will also provide him with a specified number of consulting hours. The average lease purchase deal usually takes between 2 to 4 hours. The more complicated deals will take more time. Your experience doing deals will give you a good understanding of what to expect in terms of service hours to provide and fees to charge.
You will consult with the seller and provide your expertise, telling him how to put the transaction together. As mentioned above, you will use the telephone, fax and e-mail. You could also produce a video to add more of a personal touch. This will work especially well, where you could show the seller how to complete the agreements line by line, rather than in a phone conversation.
Usually, you have the initial consulting session where you introduce the strategy concept. This gives the seller an overview of how he will present the nuts and bolts of the deal to his tenant/buyer. The seller will have to understand the process so he will be able to communicate it effectively to his buyer. It is usually necessary for the seller to have several sessions with the investor as the process goes forward, since technical questions will come up that will need to be answered.
Conclusion
There you have it, the consulting lease option technique. The more you do it the better you will become at it and the more money you will make. Keep in mind though; your goal should be to help people who are in a difficult place. Do not take advantage of them. You have the knowledge to make a difference in their lives. Go out into the market place and make it happen.
Happy investing!
Best Investing Strategy for Success, Part 7, Cooperative Assignment
In this article, our discussion will focus on the cooperative lease option assignment. This strategy involves much less risk than the sandwich lease option and it doesn’t involve managing the property. It also requires only a few dollars to put down to bind the agreements with the seller.
Presently, this is my favorite investing technique. I am able to help sellers get their property occupied with a qualified tenant/ buyer who has a good chance for loan qualification, and eventually buy the house. With no management responsibilities, low risk and a small binder deposit, the profit margin is very good for the effort I put into the deal.
Finding the Right House
What you want to look for are houses with at least 3 bedrooms and 1.5 baths, in a neighborhood that is safe and pleasant to live in. It should be in an area where there is ample shopping, good schools, recreation and other amenities that families look for. The houses should be priced in the middle to upper middle price range for your market.
Finding these houses should not be too difficult. You can begin by looking in your local newspaper under homes for sale and rent. Looking for homes for rent will usually produce better results, since the obstacle of the seller’s decision to rent the home has already been removed. So, you are already a head in your efforts even before you call.
If you have access to the internet, you can use a web site called craigslist to look for similar homes. These are free resources that can produce good results. As mentioned in a previous article, you can also send direct mail pieces to a targeted list of homeowners. New technology has brought about other possibilities in marking. You can now send sellers a voice blast and text messages to get their attention.
Talking to sellers
You have to remember that this process is a numbers game. The more people you contact the better your chances of putting a house under contract.
Once you find a property where the seller agrees to work with you, you will need to get a signed agreement with him. The agreement I use is an option to lease option the property. This agreement gives me the right to go out into the market place and find a third party tenant/buyer and assign this contract I have with the seller to him. In other words, the new tenant/buyer will take my place in the deal.
Screening the Tenant/Buyer
The perspective tenant/buyer must be thoroughly screened. Review and check his current and past rental and work history, references, credit and income. You could also do a criminal background check.
The best candidates should be able to qualify for a new loan in no more that 12 to 24 months. Once the candidate is selected, he should be placed in credit repair. This will give him the best chance to get his credit repaired and qualify for a loan and purchase the property.
Tenant/Buyer Requirements
Along with agreeing with the terms and conditions of the lease and option to purchase, he will need to pay a non-refundable option deposit. This can go toward to down payment. He will also be eligible to receive rent credits. I usually require that the tenant/buyer keep the maintenance up on the property and do the minor repairs to receive these rent credits.
I like to think of the tenant/buyer as a future homeowner in training. This is his chance to prove himself. After all, he has made a financial and written commitment stating so. At some point in the future, this house will be his, so he needs to begin taking care of it now.
Lease Term to Closing
Once the lease agreements are signed with the tenant/buyer, the investor will assign them back to the seller. At this point the seller takes the responsibility as landlord. This means he has the duties of property management. The investor will stay involved in a supporting role only.
His responsibilities will include monitoring the tenant/buyers progress in credit repair and be available if and when the seller needs assistance during the lease term.
If the tenant/buyer follows his credit improvement plan, pays the rent on time, maintains the property, and completes any minor repairs when needed, he will enjoy the fruits of his efforts. He will take ownership of the property. The seller will have his property sold and the investor will move on to the next deal.
In my next and final article in this series, I will be discussing the consulting lease option strategy. Please plan to join me.
Best Investing Strategy For Success, Part 6, Sandwich Lease Option
In this article, I am about to discuss what I believe is the best investment strategy for the new investor's success. It is the lease with option to purchase strategy. Of all the investing techniques I have tried, the lease with option is my favorite. I have been using it since 1995. It has brought good tenants to my properties, provided good up-front cash, positive cash flow, and acceptable back end profit. This technique has several variations. I will briefly discuss each one to show you how versatile the strategy is, in terms of ways you can implement it. Due to the amount of information presented in this article, I will compose it in three separate posts.
3 Ways to profit
The lease with option to purchase technique can be implemented in at least 3 variations, the sandwich lease option, the cooperative lease option assignment, and the consulting lease option. Each one is a great strategy. I would encourage the new investor to learn them all, since there will be times when he may be in a situation where if he knew how to use them, he can profit from the deal.
The Sandwich Lease Option
The sandwich lease option is best described with the word control. The investor has the opportunity to control an expensive piece of real estate with little or no money out of his pocket. He uses his knowledge of home values and rents to secure a nice home in a nice neighborhood.
Locating such a home will be similar to the methods we discussed in the previous articles. He will be looking for a motivated seller. This will be someone who needs to sell, rather that someone who wants to sell or is testing the market.
Seller Considerations
The investor will be looking to lease the property with an option to purchase. The length of the lease can vary from one to three years or more. The investor will be making an agreement with the seller, then going out into the market place and finding another buyer who he will sub-let the property to. In effect, the investor will be sandwiched in the middle. Once the property is put under contract, the title should be checked to see if there are any hidden or unknown liens and to be sure the legal owner is the same person who signed the contract.
Revenue Streams
The investor will be looking to profit from three revenue streams. The first will be the up-front option deposit. This will be an amount of money the tenant/buyer will put down on the house for the opportunity to lease now and buy later. This deposit is usually non refundable. Next, with his knowledge of rents for the neighborhood where the house is located, he will set the rent high enough to produce a positive cash flow. Homes offered to lease with the option to purchase command a higher rent than straight rentals.
He will do his best to cover the seller’s mortgage payment, and then increase the rent above this figure. Finally, with his knowledge of home values he will calculate the home's future appreciation and set the selling price. This will be a number above the mortgage debt, and any seller equity. The difference will be his profit.
Tenant/Buyer Considerations
The investor will be looking for prospects who want to own a home rather than rent. It will need to be someone whose credit is good enough to qualify for a loan in the near future. I would suggest that the investor place the tenant/buyer in credit repair and monitor his progress.
Once the tenant/buyer is found, screened and accepted the paper work is reviewed and signed. The investor will usually give the tenant/buyer a one to three year lease, depending how long it will take for him to qualify for a new loan. The tenant/buyer will usually be responsible for maintenance and minor repairs on the property during the term of the lease.
As an incentive for paying the rent on time and taking care of the maintenance and minor repairs, the tenant/buyer will receive rent credits. These credits will be redeemable when the house is actually purchased. The amount of the credit will be subtracted from the final sales price.
Property Management
Since the investor has taken the position of landlord, he will need to manage the property. As discussed in a previous article, he will need to develop people skills and at the same time run his business successfully. He should inspect the property regularly to be sure it is being maintained and any repairs that had been scheduled were completed.
Property management is an important consideration. There is a chance that the tenant/buyer may not buy the property or due to unforeseen circumstances, the investor may want to give the house back to the seller. It will be important that the property is returned in good condition at least the same condition as when the investor took possession of it.
There will be times when tenant/buyers will not perform according to the agreements. If this happens, remember the investor has the responsibility to make things right. To avoid any negative surprises, keep in close contact with the tenant/buyer.
Getting to the Closing
If the investor has been monitoring the tenant/buyer’s progress in credit repair, he will know when he is ready to make application for a new loan on the property. At this point, a new purchase and sale agreement is completed and presented to the lender, along with any other supporting documents.
This process should go more smoothly due to the tenant/buyer being in credit repair. If all went well through the lease term, it was probably not necessary to have much contact with the seller. Now, however, the seller will need to be contacted to discuss the closing.
Be sure to keep in close contact with the closing agent. You don’t want any last minute snags to develop.
When the closing day arrives, you will be rewarded for all the hard work you put into the deal. Up to this point, you have profited with the up-front option deposit and you enjoyed a positive cash flow on the property. At the closing, you will have your biggest pay day, the back end profit.
In this strategy, everyone wins. The seller has closed on his home; the tenant/buyer is now the new legal owner and you the investor has the satisfaction of a job well done, while being well paid for your services.
We will continue this discussion in the second part of this article as we talk about the cooperative lease option assignment and consulting. I hope you will stay with me.
Best Investing Strategy For success, Part 5, Wholesaling
After several articles discussing different investment strategies, we have finally come to one of the two investing techniques that I believe the new investor would be wise to consider. In this article, I will talk about wholesaling. The new investor will find that the wholesaling strategy will allow him to enter the market more easily and with concepts that are easier to understand. There will be less risk and will require very little money.
The Process
The process is quite simple. You find a property that needs a lot of work and can be purchased under the market price. You put the property under contract and assign your contract to another buyer, someone who will take your place in the deal. This new buyer will probably fix the property up and either sell it or rent it out. Then, the property is flipped to your buyer for a price a little higher than what you paid for it.
Each part of this process needs some further explanation, so we will break things down to understand how it all comes together. But first, I want to mention an even easier way to get started using this technique.
Being A Scout
The scout or bird dog can enter the investing market by looking for properties and selling the information to the wholesaler. In this role, he can become an expert at locating houses that fit the investors criteria. As a scout he learns the market, how to locate properties and what neighborhoods to target. He will also receive a good education as he works closely with the wholesaler, seeing other aspects of how the deal is processed through to the end buyer. There are some beginners who become scouts and decide to do nothing more. They become experts at locating houses, which is the most difficult part in the process. The best scouts get paid very well for their services.
Find The End Buyer
The first step in the process of wholesaling is to research your market to find out what kind of properties your end buyers want to buy. This step will save you time and no doubt frustration by looking for houses that you can pass on to other investors. You don't want to put properties under contract that no one else wants to buy.
I would suggest that you develop a system to locate you end buyers. One way to do this is to place an ad in your local paper that would advertise a low end property for sale. This ad would generate many calls. From the calls, you would screen each caller to discover which ones fit your criteria as a potential buyer.
If they ask about the property in the ad, you can say that this house is not currently available, but you will have other houses from time to time and would like to know if you should contact them when you do. You could develop a sheet with questions for the prospects when they call.
Find The Property
The next step is to go out into the market place and find properties that your end buyers want to buy. Generally, these houses will need a lot of work. You will have to learn the difference between cosmetic and structural repairs. Many investors who do repair work, will avoid properties that need structural repairs. Along with knowing this difference, it will also be necessary for you to learn how to estimate the repairs that will be needed to get the house ready to sell.
You should focus your search by looking for people who have problems and a property associated with them. Search out people who are in financial distress as a result of job loss, divorce, medical bills, etc. These people may need to sell quickly. You need to discover where their pain is coming from. In other words, why are they wanting to sell. Knowing this, will give you an edge in the negotiations.
You could also drive neighborhoods and look for vacant or abandoned properties. Look for lawns with high grass and papers that are still in the newspaper holder. There will be other obvious signs that will give clues that the house is vacant. You can check with the neighbors to discover who the owners are and how to get in touch with them. If you can't get any information from the neighbors, write down the address and research the public records to see if you can determine who the owner is and how to locate them.
You could also send direct mail pieces to Absentee homeowners. These are owners of houses who do not live in them, but the tax notice is sent to where they reside. There could be motivated sellers just waiting for your mailing to arrive.
Title Work
Once you are successful in obtaining a signed contract, it will be necessary to take it to a title company or attorney so that the title can be checked. This is very important to do. You want to be sure that the person who signed the contract is the legal owner of the property. You will also be checking to see what liens are currently on the property. Whatever you find could affect the contract price that you and the owner agreed upon. There could be hidden or unknown liens that the seller wasn't aware of. You will never want to present a property to a perspective buyer before you have the title work completed. This is unprofessional and could negatively affect your credibility among other investors.
Contact Your Buyers
From your buyers list that you put together earlier, call each of then to see if they are interested in the property. Remember, these are the investors you contacted to discover their buying guidelines, they are the best candidates for your property. If by chance you don't find anyone interested, you could place an ad in your local newspaper. Your phone should ring off the hook, so be prepared for the calls.
The interested buyers will want to look at the property, so you will need to set up appointments for them. Even though you have done your own analysis of the work that needs to be done and expenses associated with it, they will want to evaluate the property themselves to prepare a cost estimate of their own.
Negotiate With Your Buyer
Once you have a verbal agreement with your buyer, you must put it in writing. This contract will be separate from the one you signed with the seller/owner of the property. Your plan will be to assign this contract you have with your buyer, over to the seller/owner. All this will be handled at the closing. You just have to make sure that you present to the title company or attorney the proper paperwork.
At this point, you take the signed contract you have with your buyer back to the closing agent and you set up the closing. You will communicate the closing date to the buyer and seller. The closing agent will review the paperwork to be sure everything is in order. I would recommend that you keep in contact with the closing agent as the closing date approaches. You don't want any last minute snags before the closing.
The Closing
The day has finally arrived. You should personally attend the closing. You not only have a check to pick-up, but your presence there will help the process go smoothly. The buyer and seller have probably not met as yet. You have been coordinating the whole process. It may even be that the seller did not know that you were going to assign the contract to another buyer, so you need to be at the closing to answer any questions that may come up.
Conclusion
In my experience wholesaling , I have found that it is easy to understand and not to difficult to coordinate the process from the beginning to the closing table. This technique requires very little money and the level of risk is low. For these reasons, I am going to recommend this strategy for the new investor. However, my article has only scratched the surface of this technique. In future articles, we will discuss each step in more detail.
At this point in this series, I have written all but the last article. I have in my opinion, saved the best for last. It is the investing technique that I personally favor and the one I work at presently. I hope you can join me for this discussion.
If these articles have been helpful or you have a question or other comment, please leave it in the comment box. Thanks.
Best Investing Strategy for Success, Part 4, Buy & Hold
Up to this point, the discussion has centered on three real estate investing strategies, Subject-To, Retailing, and Foreclosures. In this article, we are continuing our pursuit of the best investing strategy for the beginning investor. In my opinion, the new investor will do best using an investing strategy that will allow him to enter the market easier without the necessity to acquire complicated knowledge that takes to much time to implement. This is our goal, which brings us to the next strategy in our discussion, the buy and hold strategy.
Buy and Hold
The buy and hold method of investing is really two separate strategies. The first event is the purchase of the property and the second, is to hold the property as an investment. As in every buying strategy it is always important to buy right, however, with the buy and hold method you will have ownership of the property for many years, so if you didn't buy as effectively as you would have liked, you will have plenty of time to make it up.
This strategy is usually thought of as the traditional way of real estate investing. In fact, if you consider what the word "investing" really means, you may conclude that this method is probably the true investing strategy. What I mean by this is that when the property is purchased, it usually involves money out of your own pocket (the investment) and then the property is placed in your portfolio, so to speak, for long term gain. Here, you have the traditional investment model.
Buying the Property
Buying the property is a term that can be used loosely. Buying generally is associated with using money as an exchange to acquire something, in this case a property. However, for our purposes I am going to use the term, "taking possession or ownership" of the property. I am using this term because taking possession or ownership may not involve your money or in some cases any money in the exchange.
Taking possession of the property can be done using several different techniques. The two such methods we have already discussed are the subject-to and foreclosure methods. Some other methods to acquire property would be owner financing, lease options, and placing a down on the property and getting a new loan.
Since the topic of acquiring property has been discussed in the previous articles in this series and will be further discussed in the remaining articles, we don't need to elaborate on it any further here. Just keep in mind that you need to have an exit strategy prior to taking possession of the property. Again, you should work toward getting the best deal possible, but because you will hold the property long term you can make up any marginal deal during future years.
Holding The Property
The process of holding the property involves two distinct aspects for the investor. The first has to do with how well the investment performs and the second involves the management of the property. These are important points to consider before you enter into any deal. As an investor you will want to evaluate to what degree the investment will perform. In other words, what return can I expect on my investment.
An investor's return can be estimated from the income, appreciation, tax benefits, and expenses on the property. Cash flow is usually an important factor to consider as you estimate the day to day expenses. You want to be sure that the property will produce enough income to pay any debt service and other expenses associated with it.
The investor would also be hoping for appreciation, where the property would increase in value from year to year. This is not always a given. The past few years have shown a fairly flat market and in some parts of the country homes have lost value. Another positive for the investor is equity build up. As the mortgage is paid down by the tenant, the equity in the property increases.
There will also be the enjoyment of tax shelter from the ownership of the property. The investor will be able to show depreciation over several years on the property.This will reduce his gross taxable income from year to year and give him more spendable income due to paying less taxes. As you can see there are great financial advantages to owning investment property.
Property Management
Secondly, the property has to be physically managed. Property management, if not done correctly can be a nightmare. The investor will have to determine if he will manage the property himself or hire a management company. The answer to this question is partly determined by whether or not there will be positive cash flow on the property and to what extent the investor has experience in dealing with tenants.
Managing rental property is not for the light of heart. The investor is running a business and he must treat his investments as such. From time to time, difficult decisions will need to be made Dealing with tenants can be very challenging. The investor as a business owner must walk a fine line between understanding people situations and what constitutes business. People do have problems in life, but as a business owner it is his job to make the business profitable, while at the same time not to be insensitive to the needs of others.
The property will have to be maintained to satisfy the tenants and the requirements of state and local codes. Even beyond this, however, there is a pride that comes with ownership. Having properties that are safe, in good repair, and look good will attract the best tenants. A major goal of managing property is to keep tenant complaints to a minimum.
Personal Experience
The buy and hold strategy has been my main method of investing in real estate over the years. I acquired several properties and managed them myself. The management responsibilities were not always easy and at times a real headache. To me the most difficult and challenging aspect was dealing with the tenants. Over time I was able to see certain patterns of behavior and through trial and error I was able to develop better management skills.
Doing repairs and general maintenance, especially when tenants move out was always a challenge for me, since I had the obligation of full time employment. It would be necessary for me to take leave from work in order to get the property ready for the next tenant. I would usually do most of the work myself and hire a helper, but when there was work that needed someone with greater skill or a required license I would hired it out.
I enjoyed doing the work on the houses since my full time job was more office related. Keeping the properties in good repair gave me the pride of ownership, and it reduced my expenses, while increasing my cash flow.
Conclusion
The buy and hold method of investing is a good strategy for the investor. It is no doubt the most well known and widely used technique for investors. It can be a good strategy for the new investor as well. It was the strategy that I used when I began my own investing career. However, when I began investing the buy and hold method was about all I knew at the time.
Over the years, I became aware of other techniques that I tried and liked better. The other techniques were easier, less risky and required less money to be put into the deal. The income potential was also very good. It is these methods of investing that are yet to be discussed in this series, so please keep reading. I am sure you will be as excited as I was to have learned about them. Thanks again for you time. I hope this article has been helpful, if so please leave me a comment.
Best Investing Strategy For Success, Part 3, Foreclosure
In this article, we are continuing our series toward the discovery of The Beginners Best Investing Strategy For Success. In the past two articles, we have discussed the Subject-To and Retailing investing methods. In this article, the discussion will center on the Foreclosure market. This strategy in particular, due to the current state of the economy has the attention of not only the investing community, but the general population as well.
Home foreclosures today are at an all time high. The stability of our economy is tied closely to the housing market. We have seen in recent years home prices falling from the strong appreciation enjoyed earlier in the past decade. To make matters worse, a larger percentage of the population are currently out of work. Many of the unemployed are homeowners, who have much less income to pay their bills. As a result, a large number of these homeowners can not pay their mortgage and are forced the let their homes go into foreclosure.
Three Ways To Buy
In the foreclosure market, there are three ways the investor can purchase the property. He can buy the property before the notice of default is filed. He can purchase the property after the notice of default is filed, during the foreclosure process, or he can buy the property at the court house steps or foreclosure auction. Let's examine these three buying opportunities individually.
Preforeclosure
There are a great many homeowners today who are struggling to make their mortgage payments. Whether it be because of a job loss, out of control medical expenses, living beyond their means, or some other family crisis the homeowner has gotten behind on his payments. If the homeowner misses to many payments, it will becomes very difficult to make them up.
The investor will usually find these homeowners through his marketing efforts. At this stage, the investor will not usually know the homeowners situation. The homeowner will probably receive a direct mail piece from the investor, with an offer to buy his house. This mailing piece could be from a targeted list of homes for sale or sent out in a mass mailing.
If the homeowner is in trouble by getting behind in his mortgage payments, the mailing may have come at the right time. The investor never knows what kind of pressure individual homeowners are under when the mailings go out. They is some awareness, however, that there will be homeowners who may be in trouble and want a quick sale. It really comes down to a numbers game. The more mailing pieces that are send out the more responses you will get.
Once the investor receives a call from the homeowner, he will try to determine the nature of the homeowner's pain and what are his most pressing needs. From this conversation, he will determine if there is a deal there. Usually, this doesn't happen immediately. With this initial conversation with the homeowner, the second contact has been made, however, it could be the third or forth contact depending on the number of mailings the homeowner has received.
If the conversation is favorable, the investor will continue the process and pursue the lead. This may be to either schedule a call back or go out and take a look at the house. If at all possible, It will be to the investor's advantage to firm up the deal before a notice of default is filed against the homeowner. If this happens, the legal process of foreclosure has begun and the investor must deal with it. It will be much more difficult in most cases, to put a deal together with all the legal issues pending, but not impossible.
The Foreclosure Process
Once the notice of default is filed, the legal process of foreclosure on the property begins. This is a process that can be of a short or long duration, depending on the particular state you reside in. Some states offer the homeowner a time table of only a few weeks to cure the debt, while other states have legal proceedings the last many months.
During this stage of the process, the homeowner will try desperately in an attempt to make up his mortgage payments and save his house. He realizes that he has a fixed amount of time to get this done. The longer he goes without being able to make up the payments the more pressure is feels. Homeowners who are under this kind of pressure do strange things. Here is where you will best find the classic "motivated seller".
The investor could have make the initial contact by his direct mail efforts or the homeowner may have seen an ad placed by the investor. Either way, contact is made. It is always better when the homeowner makes the initial contact. His level of motivation is much greater if he makes the initial call.
Many homeowners regardless of how many payments they are behind, will have the belief that can catch them up. Initially, they may show no interest in the investor's offer, but time and a lack of money has a way of helping the homeowner face reality. If he cannot cure the debt and the home is foreclosed, he will not only lose his home, but any equity he has will be lost and his credit will be damaged severely.
It is important that the investor take the homeowners emotional state into consideration. The process of foreclosure is very stressful and can be an emotional roller coaster. It can be easy for the investor to take advantage of homeowners in this situation. Courts have taken a strong position against investors who take advantage of homeowners who are in foreclosure.. You must always be fair in your dealings. The homeowner needs help. Keep in mind what you would want someone to do for you if given the same situation.
The Auction
If the homeowner could not make up the back payments along with any legal expenses that he would be required to pay, the house will be taken back by the lender and sold on the court house steps . When this happens, the homeowner looses the house. Some states have the provision of redemption rights, where the homeowner will have a certain amount of time to redeem the house by satisfying certain requirements.
Investors who are attending the auction are looking for great deals.There are many experienced buyers at the auction who know how to bid. Some investors team up to gain an advantage in the bidding. The auction is not the place for the inexperienced investor. This process involves an all cash sale, so not having any money or resources to obtain any will exclude many investors from bidding. However, it can still be a great education attending an auction. You can see how the process works and you can meet other investors who you may be able to partner up with in the future.
The lender will make the opening bid on the property, usually for the loan balance. The bidding will go up from there. If no one matches to opening bid, the lender becomes the successful bidder. He will put the property in his Real Estate Owned (REO) file and market it for sale through a Real Estate Brokerage firm.
Personal Experience
I have purchased a couple of properties at the auction, however, this auction was somewhat different than what I have described above. An investor had several properties he had renovated and was auctioning them off through an auction company. Some of the homes were occupied. You could visit the homes, buy could not get any information from the owner or tenants about the properties. You bought the homes "as is, where is", so "buyer beware". All you could do is prepare by doing some research and set a bid limit and hope for the best.
Upon being the proud owner of two of the properties sold, I soon discovered some unexpected surprises. They were not positive either. All in all I made out okay. I kept one of the properties for a few years and sold it. I still have the other one.
Conclusion
The foreclosure market is lucrative and somewhat complicated. New investors will do best if they focus in the preforeclosure market. Here, they will deal with homeowners who have not as yet had the notice of default filed against them. With their marketing efforts, they may come across some homeowners in default. This will be more difficult and challenging for the new investor to deal with. If this happens, they can seek help from more experienced investors or through their local real estate association. Even with the preforeclosure market possibilities, there are better investing strategies for the new investor. So, please keep reading these articles to learn what these strategies are.
One very important point we have not discussed is the exit strategy. In other words, once you take possession of the property what do I do with it. You can't wait until you are the owner to make that decision. You must decide at the beginning of the process what your plans for the property will be. We will talk about this topic in a future article in this series.
I hope you will stay with me. Thanks for your time and interest.
Don
