New Investors – You don’t necessarily need boat loads of cash to do your first or even your fifth real estate deal. If you have a Motivated Seller, you can get them involved in the financing of your deal.
Seller Financing terms do not have to be an “All or Nothing” arrangement either. When it comes to Seller Financing or Owner Financed Properties, the Seller can Owner Finance the entire transaction or in some cases part of the real estate transaction . Here are the basic steps involved a seller financing real estate deal: Seller Funds the Property Deal If the Seller owns the property free and clear, you can negotiate that they can carry a mortgage for the entire agreed upon purchase price of the real estate property. Achieving this would me that as a real estate investor you will probably only need enough money to cover closing costs to get into the property or to take control of ownership. ACE IN THE HOLE! But more than likely, real estate investors involved in a Seller Financed or Owner Financed deal will have to come up with some sort of down payment and cover closing costs. The amount of down payment on a Seller Financed or Owner Financed deal often is negotiated and related to the amount of comfort or trust equity that the investor has built up with the owner. Here is a Seller Financed Case Study example: 123 Maple St is owned by Peter Harry free and clear. It is an older SF home built in the 1950′s and very close to major employers and a University. Mr. Harry has not made any repairs or upgrades to the property since the 1980. As result of this, his house has been on the market for 15 months. He wants to move into an Assisted Living but needs the proceeds from the sale of his home to help him fund his golden years in a Retirement home. Austin Smith, real estate investor, noticed that this property has been on the market for over an year and has had 3 price reductions. He decides to drive by the property. After all, it is in an upcoming neighborhood and great for student housing being so close to the university. He meets Mr.Harry and tells him he is an investor and very interested in buying his property. He then asks three very important questions:
Let me know what other case studies you are interested in. Good Luck and remember don’t be afraid to try something new! My infamous message when explaining about real estate and how to make a dollar is that there are a million and one ways to wheel the deal. It can be a hair-pulling experience to try and familiarize yourself with the many different tactics that are involved in the industry. In this post we will discuss a technique utilized in creative real estate investing called getting a property “subject-to”. This method requires acquiring a home subject to the existing mortgage.
Many investors love this tactic because there is never any reason to include a bank in the process. No bank qualification is ever required, so your credit is what it is and a 400 doesn’t hinder you one little bit. If you’re like many, you may be wondering, how is this possible? Are better yet, is it even legal? I would just say to you that it is Definitely Possible and 110% Legal. This method is typically called owner financing or seller financing and has even been referenced as “seller carrying the note”. In this type of structure you get the deed to the house right away. In subject 2 deals, you are finding an owner, who typically doesn’t have much, if not any equity in their home, but they are still motivated to sell. For whatever reason, they need immediate relief from their current situation and cannot afford to pay their mortgage payments too much longer. In some situations, they are even behind on payments and possibly up for foreclosure if something does not change quick, fast, and in a hurry! With your promise to take over mortgage payments and or bring them current on their payments they are more than willing to sign the deed over into your name. This means that once each party signs off on the deed and it is recorded, you become the new property owner, however, the seller, remains on the deed. And yes inDeedy, THE SELLER is FULLY Responsible in the event that you fall behind or do not make the payments. In a desperate situation, that is the risk that many sellers are willing to take. You have to remember that depending on the particulars of the situation the seller was already at risk of losing their home and killing their credit, so in most cases the outcome couldn’t get any worse. This is where we as real estate investors have to come through with our promises to take over payments on the properties that we commit to. Savvy investors; always have a “weasel-out” clause where they are able to “cut-loose” if they are unable to make future payments. That is what differentiates the classy investors with integrity from the ones lacking in character and morals. In a subject-to deal with no equity there are tons of ways to make a positive monthly cash flow and remarkable BIG PAY DAY in future months to come. Be sure to review my other blogs where I reveal these Real Estate Secrets the guru’s don’t want you to know! Many apartment or would-be apartment investors have come to me to learn how to do creative financing for their various reasons. Nearly all the reasons why a person would need creative financing are because:
• you have little cash • you cannot obtain a loan due to poor credit or lack thereof • you desire to leverage what cash or resources you have • you need short-term seller-financing prior to permanent bank financing If you do fit into one of those categories, then you’ll be joining a very populous club today. But don’t fret because today’s real estate marketplace is ripe for creative financing. First of all, how do you find those creative apartment deals? Below, I have listed 5 “owner situations” that are prime for a type of creative financing. If you spot an apartment owner in any these situations, odds are they are ready for someone creative like yourself to come along and help them with their “situation”. Here are 5 owner “situations” that you should always look for to find creative financing deal opportunities. They’re everywhere! If you come across a property owner who: #1 wants to avoid capital gains taxes on profits after a sale #2 would have to pay a large pre-pay loan penalty if he sells #3 is ill or has personal circumstances that hinder him from operating the property, causing it to be in poor operating and physical condition #4 needs to sell the property for whatever reason, but there is no equity in the property #5 is tired and burnt out and/or if the property is under-performing (distressed) These are all potential cases for creative financing to take place. Always, always keep your eyes and ears open to theses situations. On the other hand, if you see within a property listing or hear the following words from brokers or owners, this is an indication that a creatively financed deal can take place as well: “owner motivated”, “seller financing”, “owner will carry”, “master lease option”, “creative offers welcome”, “distressed property”, “bring all offers”, “JV partner wanted”, or “investor wanted”. A simple way to go online and find hundreds of these deals is to go onto Loopnet.com and enter those key words above into their key word search window. But when you really get down to it, here is the secret to doing creatively financed deals, no matter how large or small or who you are or where you’re at: You must ASK! That is the secret!! If you didn’t ask your wife to marry you, you would be married to her. If you didn’t ask your boss for that raise or promotion, you’d be stuck where you were before. You see? That’s where it starts. Therefore, the key to getting and achieving anything greater than what you are today is to…ASK! How do you apply this to creative financing you say? Easy. First, obtain the owner’s motivation for selling his or her property. Then, construct a creatively financed offer that meets some or all of his or her needs. Then ask the owner by communicating your offer (that’s called asking!). That’s where it all begins my friend. If you don’t ask, you’ll never know. And if you never know, you’ll never grow. No question, the market (stock, real estate, heck, even the grocery) has taken quite a beating lately. Everywhere is fear and uncertainty, but this also gives you the exact opposite end of the spectrum: extreme opportunity. Over the next two to five years, a LOT of money will be made, and you get to decide if you are going to “play by the rules” (which have been changing almost weekly for the past year, in case you haven’t been keeping score) or break out of the box the bank wants you to be in and loan out some money for a great return.
Bernie Madoff Would Be Jealous Madoff went under offering 12% return on your money – crazy, as far as others thought, if the bank is only paying 1-3%. But in real estate, how does earning 8-15% or more on your money sound, secured against first mortgages (trust deeds) on real property? This is a typical range of interest rates you can charge people to borrow your money – loan as little as $25,000 in some areas, up to as high as you want. Got IRA? Short on cash? Use your IRA or 401K – as you may have noticed, it’s not doing well in the stock market! If you take about a month to transfer it over to a self-directed plan, you can loan it out just as you would your cash, and the profits will help to grow your IRA. Below is an example of how to do this: Use a Strong System But how to protect yourself? There are nightmares about people having to foreclose, and then ending up with worthless property, but it’s easy to avoid these missteps. The trick, like everything in business, is to use a strong system. First, choose the amount you will lend. Set your parameters, just as if you were a bank – after all, you are the bank in this case. Here are some questions you should ask yourself before you make your first loan:
I have been a Real Estate investor for about the past 20 years and I must admit; it was rather easy to make a great income when the market was booming. No matter what I touched seemed to turn to gold. Almost every property I purchased turned a huge profit and there was no end in sight to what I could earn. I was a genius… not.
Then around 2005 I started to realize that things were changing dramatically and today it seems that Real Estate is not the smartest place to invest. Values are dropping all over, foreclosures are at an all time high and things are getting worse. Unemployment is rising, money is getting tight and things are looking grim. Listen to the negativity out there and we may as well just put everything on hold or give it all up. There is more than enough bad news to go around. The question is ; Will things ever get better? What to do in times like this when it seems all opportunity has dried up and there is no light at the end of the tunnel? If history is any guide we know that yes this too shall pass. Most true entrepreneurs know there is always opportunity. There are new opportunities in down markets as well as up markets. You just have to know where to find it. The first thing you have to do is develop a different mindset. Yes these are challenging times and I myself have taken more than my share of losses in the past two years, but what else can you do except take responsibility for your actions, look at where you are and then move forward. Steer clear of negative people who like to dwell in gloom and doubt, they are energy zappers. If you begin to tolerate the negative people in your life you will quickly find yourself living a life of negativity. You must set yourself apart, not letting the media, the stock market, the job market or anything else shape your attitude. Yes “positive thinking” will help and it is necessary to maintain a positive attitude, but you can always do more than just think positve. Develop a plan and once you have set the plan in motion work at it relentlesslyevery day . · Take Control – Write down your goals short, and long term, look at them twice a day. Put them in a place where they will be constantly in your face. · Develop the habit of writing a daily “to do list” - Every evening write down what you want to accomplish for the following day. Then in the morning start working on your list, start with the more difficult tasks. Once you get those out of the way you will breeze through the simple stuff. Throughout the day if new tasks need attention, don’t get hung up, put them on the list and move forward. · Prioritize Everything – Don’t spend time on things that don’t help you get what you want. Shuffling papers may be tension relieving or keep you in your comfort zone but you will have accomplished nothing at the end of the day. Fight the urge to spend time on less important things. · Rethink and Reevaluate – Look at your plans weekly, are there things that can be modified or improved? Review budgets for savings; you should always be looking for ways to save money. Stop and evaluate your plan once a week to see if you are on track or need to make adjustments Yes the recession impacts you, it has impacted most of us, but you can grow during the recession. Only you must first decide what your future is? Are you going to let these times take control of you or vice versa? Just decide and you will be amazed how things will begin to improve al around you. I have lost count on the number of investors I have coached into their first or tenth apartment investment. But it has to be over a 1000 since I first started coaching in 2003. You’d be surprised how much I have learned from my students. It’s really true that what you teach you become very sharp at. Teaching and coaching apartment investing has really helped my own investing greatly. The marketplace has changed drastically since 2007, but coaching investors is still going strong. For this blog, I thought it would be helpful to share with you my observations from a coaches perspective of what today’s students are doing and are up against.
5 Observations I See Today As a Coach Observation #1: From the 10,000 foot level, I see a lot of confusion and fear on both sides – sellers and buyers. The questions I get from student investors often are, have we reached the bottom yet, what if I buy and the market further tanks, and what should I invest in – apts., retail, self-storage, mobile home parks, etc. Sellers fall into two categories: ones that are doing okay and two, ones that are desperate to sell. The ones that are desperate to sell are being represented by brokers who have given up on them basically. These sellers need creative student investors to rescue them! Like you! Observation #2: Banks and lending institutions are causing the most roadblocks to getting a deal done. Enough said on this point. But honestly, the answer to this problem is: skip using the banks and use Master Leases or Land Contracts to buy apartments. As I mentioned in Observation #1, sellers are being abandoned by brokers, but sellers still want to or need to sell. And that’s where you come in. Go make those deals! Observation #3: Prices of properties in some areas are down to 2002-2003 prices. I also see cap rates from 2004 levels in great cities to invest in. Large office buildings here in SF are selling for 2003 prices per sqft. In Texas, areas that were 7 or 8 cap two years ago are now 9 and 10 caps. I expect cap rates to creep up even more. Take a look on the website www.loopnet.com and you’ll see what I’m talking about. Observation #4: We need to think long-term now for wealth-building purposes. 7 year hold for cash flow strategy is a smart thing to do today. Instead of buying and flipping apartments right away, you’ll need to hold onto it to maximize your profits. This is a change in our mindset, but how it was done in the old days (when things were stable). Face the fact that the economy and the way we do business has changed forever. Don’t give up, just make adjustments. Observation #5: Students and people I meet at seminars need to be more aggressive in making offers to sellers. We are in a buyer’s market and we set the market price, not the seller or broker. The property is only worth as much as you are willing to pay for it. BONUS Observation: Don’t give up! The roughness and toughness of today’s market is a “weeding out” process. This down market is a filter so to speak and is going to greatly reward those who stay in this game. It’s okay to sit on the bench to take a short breather, but don’t leave the game. Don’t give up. The big thing I hear typical real estate investors complain about today is that the banks won’t give them enough property. They’re stingy with REOs, they’re holding property back, and worse, they won’t loan, even when they say they will. What’s a real estate investor to do?
Well, for starters, get creative! Don’t consider the banks as a source of money, or even property if they won’t play ball. Here is a list of five ways to finance your properties in today’s market (and these work pretty well any time!): 1. Use the house. If there’s equity in it, see if you can pull the equity out. Perhaps cash back at closing won’t work any longer, but sometimes you can get creative, like using the equity as security against a private loan. If you already own properties with equity, use the equity in one to buy another property. With houses in Atlanta and Cleveland going for $25K-$35K, do you have to buy another house down the street from the ones you’ve got, or can you consider going to a new market where you can turn that equity into a cash purchase? 2. Use the owner. Owner-carry financing is often overlooked or rejected, but it’s one of the first questions I always ask. Why? Because it’s a buyer’s market, and the seller may be in need of next month’s mortgage payment, causing him to be more flexible than the ad you’re answering indicates. Always ask the seller if they are willing to carry all or part of the note. 3. Use hard money. If the deal is good enough, and if you have some cash, consider hard money as a source. However, make sure you are going to flip the deal, AND that you have a back-up. People who end up with hard money loans that they pay on longer than 6 months almost always lose. 4. Use private money. If you don’t have any cash, consider offering a good rate of return to someone you know who’s losing money in the stock market or grumbling about the lousy rates of return the bank is getting. Offering someone 8% when they’re used to getting 3% is very interesting! Just make sure you have an excellent business plan to back up your expectations, and multiple exit strategies so that you can make your payments. BONUS: Private money lenders are often willing to be flexible, like not taking monthly payments, perhaps in exchange for a slightly higher rate of return. 5. Use the tenants. What was that one? Am I crazy? Well, in higher-end markets, lease option or rent-to-own tenants often have cash to put down, but no credit, especially now due to foreclosure. So if you can get a house under contract for 30 days, you may be able to get a tenant into the property on a rent-to-own basis and give part or all of their down payment to you to the seller. This one works best if you’re doing subject-to deals, or there’s a lot of cash flow after you close on the property. Otherwise, there won’t be enough cash to create the down payment, or you’ll be left without a cushion, which are both reasons not to do the deal. A word of caution: in this market especially, but in all your dealings, disclose, tell the truth, be forthcoming, did I mention disclose? Make sure the seller knows you’re flipping the deal, the lease option tenant knows you’re not on title, etc. Much of this market is uncharted territory and the laws change daily. So long as you are honest and straightforward, you’ll have happy clients with no excuse to make trouble. Now go buy some houses! Real Estate investors have faced one of the most challenging years in decades. Just when we thought we had mastered the rules for the game of real estate investing, we were faced with the reality that the rules had changed. As we reflect on the past months it is evident at the rules are still changing and even the most seasoned investors are having to reinvent themselves in order to survive and thrive during this recession and overcome the real estate recession blues.
I recently read this quote by Warren Buffet, ” When everyone is greedy be fearful. When everyone is fearful be greedy.” We know from observing successful people like Warren Buffet, Donald Trump and others that money is made when real estate can be purchased at a bargain price. and when others are fearful about purchasing property. In simple terms “buy low and sell high”. Real Estate opportunities are very plentiful throughout the country with the massive numbers of foreclosures on the market today. As we move forward into a new year we can increase our odds for success by focusing on our own personal development . This is very important for all investors but even more so for new investors just starting on thier real estate Investing journey. Here are four keys to overcoming the real estate recession blues. 1. You are in the Real Estate Investing business. Like all businesses, even home based businesses, we are faced with challenges. It is very easy to stay focused and committed when things are working well, but the true winners are the investors who dig in and stay the course through the tough times because they know they will reap the rewards just a little further down the road. 2. Examine your attitude. Ask yourself , “What am I focusing on every day? What can I do today to secure positive results in my real estate investing business?” It is so easy to be influenced by the constant negative information about the economy, recession and poor housing markets , but our survival will depend our ability to focus on activities that will create positive results . 3. Acquire more knowledge. Local Real Estate Investor Associations nationwide are providing educational opportunities in real time to inform and train their members with the latest information on real estate investing. Many investors are returning to the basics, using creative financing and other options to purchase properties in a challenging environment. Investors accustomed to purchasing and reselling properties may now have to learn how to be landlords as they purchase and hold properties until the market is suitable to sell. Investors should be talking advantage of the training , knowledge and support provided by the local REIA’s. 4. Be flexible. With the ever changing Real Estate market investors have to be very flexible and willing to change. As in all occupations within our economy today, we have to be able to “reinvent” ourselves. As we do so, connect with others who have had past success as a landlord, wholesaler or rehabber. Learn from others about how they are financing and acquiring properties. A few years from now, we will be remembering the challenges we all have faced as real estate investors during these challenging times, I am sure that we will discover that the knowledge and experience we have acquired have made us better investors and it will contribute to our success in the future. March Madness, College basketball and real estate investing. How could they have anything in common? Actually we can learn some valuable lessons that we can apply daily to our real estate investing business. After several weeks of March Maddness it was finally time for the “Final Four”. Then the championship game. Duke University vs. Butler. The top two collegiate basketball teams met on Easter Monday and basketball fans found themselves sitting on the edge of their seats as the excitement from the game radiated from the T.V. screen. The players did not acquire their basketball skills overnight. It required years of endless practice and commitment to reach the championship level. They absorbed the knowledge and guidance from their coach, worked as a team and applied it to their performance on the court. Each game they played on their road to the championship required the teams to create a game plan specific to the team they were facing. As investors we must have the same commitment, vision and desire to reach our investing goals . 1. Love the game. Success in real estate investing comes from more than just thinking that investing sounds like a good idea or that it is something we might want to try for a while. We have to create a love for investing and acquire the knowledge and skill necessary to stay focused and committed for the long term. 2. Enjoy what you do. Investing is made up of many things. Searching for the right property, creating a business plan, developing an investment team, putting together estimates, marketing, acquiring education and more. Not everything we do is easy and we face many challenges . When we enjoy what we do we can overcome the challenges and reach our goals. As a rehabber there is nothing I enjoy more than finding the perfect “distressed property” and transforming it into a home that will help improve the neighborhood and will welcome buyers. 3. Develop endurance. It is not the person who starts the fastest, but the one who finishes that matters. Investors must have the commitment and endurance to finish the game. 4. Plan for detours. I can not remember a real estate transaction that went just as planned. Every real estate deal has its own unique “detours” as we navigate through home inspections, appraisals, creating financing, working with contractors, marketing and endless other challenges. Being flexible, acquiring the ability to expect detours and knowing how to respond positively will result in a successful project and in a successful real estate investing business. 5. Create a winning game plan. Someone once said ” Plan your work and work your plan”. Every real estate project must have a plan. This is our guidance system from start to finish. It outlines your outcome and the action necessary to get there. Include your project details, who will be on your project team, and what your desired outcome for the project . What we witnessed during March Madness was that the skill, mindset and ability required to reach this level of excellence was created over time and not at just one game. Our real estate investing skills also take time and hard work. Apply the lessons we can learn from basketball and see yourself in the real estate winner’s circle. Do you ever feel like a failure? The reason I ask is because like you I have felt like a big failure in all sorts of aspects of my life from time to time. Ideally we should raise ourselves to a very high standard, way above the standards that others hold us to. Each of us has so much potential power and energy that can be used for good and to build something great:
While I don’t have the schooling or answers to these questions I do have a little secret that helps me get through the tough times I’ve made mistakes in my real estate investing past (watch video). Some of the past real estate mistakes that sting and come to mind are:
Pro Tip: Never make the same mistake twice. Seems obvious right… When you know an error has been made, here are some simple steps to follow to help insure the lesson is not repeated.
1. Andre-Francois Raffray In 1975, at the age of 90, Jeanne Calment signed an agreement with young, suave attorney named Andre-Francois Raffray. The agreement read that Raffray would pay 2,500 francs ($500) per month to Calment for the rest of her life, with the condition that he would purchase her apartment home when she passed away, paying only what he had already given her. The obvious benefit to Raffray is that he would purchase this elderly woman’s home for pennies on the dollar when she inevitably passed away in a number of months or years. However, time rolled by. Months turned to years, and years turned to decades. After 30 years of waiting for his apartment home, Raffray died himself, leaving his wife obligated to pay this $500 per month debt. Jeanne Calment went on to do the improbable. Calment lived to be the oldest living person in recorded history, passing away at the age of 122 in 1997. The Raffrays eventually paid over $180,000 for the home, twice what the apartment was worth at the time. 2. Ponte City Apartments In 1975, the tallest building in Africa was built. This pinnacle of luxury, located in Johannesburg, South Africa, stands an impressive 54 stories high. In addition to being the tallest building around, the property also boasts a cylindrical shape with a massive atrium area in the middle, known as “the Core,” to let added light in for the luxury residence. However, while the luxury was evident, the higher-end residents never came. Soon after the construction ended, gangs moved into the building, and the crime rate soared. More and more lower income households moved in, and during the 1990’s, the building was even considered a “high-rise penitentiary.” In 2007, new owners purchased the building with plans to revitalize the area and remove the gangs. Plans were underway until the sub-prime collapse of the real estate market withdrew the needed funds to complete the project. The building was given back to the prior owners and currently sits in disrepair, a reminder of a once-great dream turned into an epic failure. 3. George C. Parker George C. Parker was an ambition business man and real estate mogul in the early 1900’s living in New York City. Parker’s prestigious rel estate company sold many landmark properties, such as the original Madison Square Garden, the Metropolitan Museum of Art, Grant’s Tomb, the Statue of Liberty, and the Brooklyn bridge. Parker was certainly doing well for himself. Many of Parker’s customers were other immigrants just arriving to the country and eager to invest. The only problem with what Parker was doing was that he did not own or represent any of these properties. Parker is still one of the most brazen con-men to have lived, oftentimes placing no more than a “For Sale” sign on the Brooklyn Bridge and waiting for his victims to come to him. He once sold the Brooklyn Bridge for $50,000. Parker was sentenced to life in prison after his third arrest and conviction for fraud. Conclusion A takeaway from these tales is that it is important to remember that we as real estate investors are here to help others, both buyers and sellers. Oftentimes, humans can be too money hungry to see past the harm we may knowingly or unknowingly cause others. For most of us reading this article, we have never made a deal that killed anyone, displaced a section of the population, or destroyed anyone’s life. |
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February 2017
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