Real Estate Acquisition A Smart Investment When Done Wisely Why Buy Real Estate? Because real estate, when properly acquired and managed, provides capital appreciation, equity build up, cash flows, tax benefits and a hedge against inflation. Real estate, both land and improved, has a broad-based marketplace with many and varied values, uses and users. Our country has a vast supply. The demand for real estate is there always, at some price or terms by users, investors or speculators. Although real estate is not as liquid as a savings account, if you know your market place and a few techniques, real estate equities can quickly turn into cash or cash flows. Equities can be traded for other benefits. For me, real estate is the best investment opportunity around. Having owned land, apartment buildings, commercial properties and single family homes, my preference is the latter. Of all the forms of real estate, the single family house seems to be the one with the most opportunities. It is the easiest to acquire and manage, and has the most liquidity. The small size of a single family transaction is well within the means of most investors. Unlike apartment buildings, a single family portfolio is not subject to a rent strike. There are ample opportunities for each of us who is willing to learn and to do. The key is “proper” acquisition. Finding Single Family House Opportunities If you’re new to single family investing, look at one hundred homes for sale before you write your first offer. Drive around clean, neat and reasonably priced neighborhoods in your area. Where would you would feel comfortable owning a rental house? Jot down the addresses and telephone numbers of FSB’s (For Sale By Owner). Knock on doors and ask questions of the owners. By taking the time to talk with a hundred sellers, you will learn the values in your market place and come to recognize a good deal. You’ll become comfortable asking important questions about the property, the owners and their problems. Find out what the sellers would charge for rent. What are other properties renting for in the neighborhood? Talk with brokers about current sales and rentals. Become the most knowledgeable person in your chosen investment area of town. Stick to your local area. Buying houses in other states and all over the country may impress your friends, but wait until you have a problem a thousand miles away! It can be a very expensive lesson. Let’s assume you have taken the time to learn your market place, talked with one hundred owners and have decided to begin investing in single family houses. Where do you begin? Since we are in the “profit” business, the place to start is distress ownership situations. That’ s where the profit is. You make your profit when you buy, not when you sell. With some effort you can find distressed properties. Eventually, owners will contact you. Now, you must do the locating. You need a system for finding, tracking and cataloguing opportunities. Mine works well and it’s simple. I use 3×5 cards. Everyday I cut out the FSBO ads from the real estate section of my local paper. I paste each to its own card. I copy the ad phone number in the upper left hand corner and the date in the upper right corner. The property address (when I get it) goes in the top center. My cards are filed by the first three digits of the telephone number. I arrange all my 3×5 ad cards in order by telephone number, marked by tabs indicating which set of numbers follow. I know when owners change their ads. I know how long they have been marketing their property without success. Their ads may change, but their phone numbers don’t. By reviewing my cards I can see who has stopped advertising. From this I know who sold their property, gave up, or can no longer afford the ads. All this is important information in the quest of a good deal. Real estate rentals are another opportunity. Two types of owners place “for rent” ads: investors like you (a great source of information) and people hoping to rent properties they’ve failed to sell. (More about these ideas later). These ads get posted in my 3×5 box along with “For Sale” ads. Tack fliers on public bulletin boards and place “house buying” ads in your local newspaper. I have found that the “shopping-guide” newspapers–the free ones thrown in your yard–are good sources and the ad costs are cheaper. Hang “I Buy Houses” ads on doors. Actively canvas subdivisions on foot, bicycle, or car to find FSBO signs. Talk with people you meet in the neighborhood. Always carry a business card or flyer bearing your phone number. It might read, “I Buy Houses.” Get the word to as many people as possible that you are in the single family house buying business. Eventually your phone will not stop ringing! More sources of single family home opportunities are: real estate brokers, foreclosure notices, and bank-owned properties (REOs). Now that you have some sources and your 3×5 card system is in place, begin your phone campaign. The telephone qualifying process separates the lukewarm from the highly motivated. (We want only highly motivated sellers.) With experience, you will develop your own effective questioning technique. Here’s some guidance on where to go with your questioning: Telephone Questions Hi, I’m calling about the house. Are you the owner? I’m (name). I am an investor who saw your ad. I may be interested in purchasing your home if you can make me a good deal. (Possible questions). 1. If I buy your house this week, can you make me a good deal? 2. Why are you selling it? 3. What kind of loan do you have? 4. If you don’t sell, will you move? 5. How did you arrive at your price? 6. Are any other homes for sale on your street? 7. If I could only pay part, how much cash would you need now? 8. Would you consider renting me the property? 9. Could we close in six months? 10. If I bought it, would you like to stay in the house and rent it from me? For how long? For how much? Summary Report (List the strengths and weaknesses of this property) From the above sampling of questions, you can get a feel for the approach you need to take. The object is to learn everything you can about the physical aspects of the property, the owners’ situation, their problem, their motivation to sell and what they are prepared to do to resolve the problem. With proper questioning, the seller will begin to realize just how serious his problem might be. Start with questions about the property which are non-threatening and will help build rapport between the seller and you. You need to know its location, neighborhood, style, size, number of bedrooms, baths, appliances, garage, exterior, roof, heat and air conditioning systems, pool, water, sewer, and general condition of all of the above. Next, and equally as important, find out about the existing debt(s) structure, the taxes and insurance costs, any arrearage, and any other economic factors pertaining to the property. Move on to questions about the owners’ situation and why they have decided to sell. Use short, direct questions requiring more than a “yes” or “no.” Here are few of my directed questions: ” What brought about your situation?” ” What have you done to resolve your situation?” ” What are you doing to delay the foreclosure?” ” Why have you rejected previous offers?” ” Who is advising you on this matter?” ” What will you do if you don’t sell your house?” ” How much are you in arrears?” ” If I brought the arrearage current and took over your payments, how much cash would you need to move?” ” How soon?” ” How quickly could we close?” ” I’m free this evening. When could you show me the house?” Phone questioning is strictly for ascertaining property details and the seller’s situation and motivation. Do not hesitate to ask any questions that will lead to more information. The better your understanding of the seller’s situation, the better offer you’ll write. Make an Offer Motivated sellers are selling because their situation is changing rapidly for the worse for any number of reasons. They are highly motivated to act now to solve their problem. Tactfully probe: why are they selling? What are their bottom-line needs? From your phone questions you should have a firm grasp of their situation and problem. Tailor your offer to meet just those needs–no more. Be absolutely certain you can perform on what you have offered. (You will hear all kinds of sad stories; this is the time for action; not charity.) Remember, always write at least one offer. You will be surprised how often they are accepted or reasonably countered. There are as many ways to make an offer as there are sellers. Offers can be structured in numerous ways depending upon the seller’s motivation and your abilities to perform. Let’s talk about a few approaches to offers. All Cash For the Property Cash really does talk. A friend in Texas told me the other day about a brand new home he purchased last year for $175,000 ALL CASH. Its list price was $495,000. The builder/seller or his banker was highly motivated to get out of title to this 4,000+ sq. ft. custom house. After my friend lived there for a year or so he resold the house for $150,000 profit. He’s looking for another residence. The numbers are large, but the idea should be clear–cash gets action. As a footnote remember: your home is a single family investment. It’s better to live in a “good deal” than a spectacular house with huge monthly payments. Most of us don’t have $175,000 in ready cash. However, an investor who does have money might gladly put up $20,000 or $50,000 — with several caveats. You do all the work and guarantee his money back first. Agree to split the profits 50/50 or in a mutually acceptable arrangement. Small pension funds will loan against real estate using a mortgage or deed of trust and be comfortable with monthly payments. The key to “all cash” buying is acquisition of the property at deep, deep discount and accessibility to necessary cash. You make your profit when you buy, not when you sell. Another source for “all cash” houses is banks holding foreclosed properties. Get to know your local banker. Ask about REOs (real estate owned by the bank). Bankers frequently discount the price of houses they have taken back in foreclosure. Seller Financing Today many transactions involve seller financing where the seller holds paper for part or all of the equity. As buyer, the trick here is to get the softest terms possible. One technique is interest only with the balance (balloon) due some time in the future. Be careful about having too many balloons on a number of different properties all coming due at the same time. You will find yourself in a real fire drill in a hurry. Try to structure an escape mechanism in the balloon, such as bubbles where you can extend the balance for an additional period of time by making a small payment at the due date of the balloon. This small payment will buy you time to get your ducks in a row and avert a liquidity crisis. In a number cases you will be able to write your contract in such a manner as to create a principal only loan. For example, an absentee seller with a $50,000 free and clear house is motivated to sell. Offer $3000 down. You’ll pay the balance ($47,000) with payment of $470.00 per month for 100 months. Now you have a principal-only loan. Options There is seemingly no limit to the power of real estate options. With them, investing in single family houses suddenly gets a lot simpler. Consider what options can do: & #317; eliminate management & #317; lower the necessary investment cash & #317; reduce the “at-risk factor” to the amount of the option consideration & #317; present no liability exposure; remove any need for commercial lenders & #317; step over due-on-sale clauses; control real estate appreciation & #317; capture the amortization of the existing debt & #317; give tremendous leverage for greater profit with no down side & #317; allow more freedom and capital to do more deals than previously possible. You can see why options grabbed my undivided attention. One way or another options became part of my daily life. An option contract states this: one side in the transaction (the Optionor) has sold, leased, transferred ownership, or divested himself completely of an asset, subject to the other side (the Optionee) making up his mind to accept or reject the contract sometime in the future. The optionee may exercise or abandon the option without suffering any liability. The optionee’s only loss probably would be any option consideration he paid up front in acquiring the option. The option is a very powerful tool. The first option consideration I ever paid was one dollar. It was for the right to buy a foreclosed single-family-house lot owned by a Salem, Massachusetts bank. After some homework (8 hours) and a land survey ($250), I sold my option for $3,000. I was hooked on options and went after bigger fish. In North Carolina I acquired a 120-day option to purchase 15 newly built single family houses from a financially strapped construction company. I paid a $100 option consideration. My price was to be $32,000 each (this would just about pay off the company’s lender). The houses had a market value each of $50,000. There was one problem: no market for the value. The construction company understood building, but not marketing. The next day I traded my option position to a local single-family investor for an option position on each house. Within 90 days, each of the fifteen houses sold for $49,900. I used my equity participation formula. I controlled 25% ($4,475) of the equity per house. This totaled $67,125. I had no liability to anyone. Now you see the power of options. Lease/Options One common technique of optioning is to join an option with a lease. The lease/option is a powerful combination which can control, acquire and divest real estate. If you acquire using a lease/option, separate the documentation: one lease and one option. Creating two documents gives you future flexibility. Should you decide to go out of title to the option you’ll still have the lease. And vise versa. The lease should run as long as the option. The longer the option period and the more rights to extend, the better. Have the title examined thoroughly before you close your deal. Be sure to record a notice of contract (not the option itself) in the county registry of deeds. This prevents any future title problems. Get a signed and notarized deed from the other party placed in escrow. Escrow instructions must specify exactly how, when and to whom the deed passes. (Seek legal counsel on help with escrowed deeds). These measures help insure that what has been contracted to happen will happen when and if you decide to exercise your option. In the option contract the optionor agrees to make all necessary payments, maintain the property and keep it insured.