I love doing lease options and subject-to’s. And with the properties that don’t go into my buy-and-hold portfolio, I sell almost all of them via lease option. However, the huge downturn in the real estate market has caused a problem for many landlords and their lease option tenants.
You see, since 2008 the market has dropped 30%-50% in many locations. If you gave a tenant/buyer an option to buy a house for $100,000 a few years ago, the house might now be worth only $70,000 and you’ve got a problem. So what do you do? Well… a lot of it depends on your tenants. Your tenants might decide they can buy a house down the street for a lot cheaper and they might move out when their lease is up. If a tenant can get a house for $70,000 and you can’t sell them your house for that price then there’s not much you can do. In fact, this just happened to me on a property I have in Stafford, VA. I had an excellent tenant for the last several years that just moved out. She could buy a similar house in the area for $150,000 and the best price I could give her was around $200,000. I hated to lose her, but I certainly don’t blame her for moving out. In this case, I do have a good property so I’ll get it filled quickly. However, if possible, I would encourage you to work with the tenant if you can. Let me give you another example from a property of mine. I have a row house in Baltimore, MD. The tenants absolutely love the house and want to purchase it, but the appraisal came in a few thousand short below their option price. They didn’t want to move out so we extended the lease for another 6 months and will reevaluate things at that time. Now, with the Baltimore property I could have dropped the price slightly, but it’s another good property and I am in no need or hurry to sell it. However, if it was a dump which I didn’t want any longer I would have dropped the price in a heartbeat to get rid of it. What you have to remember is that every situation is different and everything is negotiable. If you have quality tenants that truly want to buy the house and they’ve paid rent on time every month, I would definitely try and work with them. Much of the time this will be extending the lease every 6 months or so until the property is worth their option price. Or, if you have a ton of equity in the property you could always reduce the price if you wanted to. On the other hand, if the tenants have been a pain in the butt and you’ve had to chase the rent every month then I would not extend the option and I would try and get new tenant/buyers in the property as soon as possible. Just remember to remain flexible and take each property on a case by case basis. Posted by Jason Hanson Is there a new “norm” in the real estate market? The economy? Can we expect our financial and economic picture to be that of what it used to be? The good news from it all is that investors, owners and real estate professionals are focusing on the fundamentals; and the fundamentals should be focused on in any market, especially one whereby optimism among senior executives about the future of the economy increased slightly in the last three months.
Measuring the economic assumptions of more than 400 executives across six functional business roles, the latest Business Barometer by the Corporate Executive Board shows that sentiment among business leaders is improving due to a positive outlook for sales, IT spending and emerging market growth. “The uptick in optimism we see among senior executives reflects a moderation in concerns about downside economic scenarios as well as increased confidence from continued sales and earnings growth in a challenging economic environment,” said Michael Griffin, executive director, Global Research for the Finance and Strategy Practice at CEB. “Faced with modest growth expectations and increasing cost concerns, executives have little margin for error in setting budgets for next year. Leading companies are taking a highly selective approach to resource allocation, working back from key growth and efficiency bets.” Investors in this distressed market space should also take a selective approach to resource allocation, but eventually, after due diligence, implement and buy. The key is work with a group of professionals, a team, that has your best interests in mind. Your thoughts? Invest well. Peace. Posted by Peter Mosca Okay, I remember my very first inspection on commercial property. It almost caused me to quit and be discouraged about real estate investing.
I was contacted about a new apartment building that was on the market. I liked what I saw: the apartments were large and well designed. But I didn’t know what I was doing and was nervous about making an offer on the building. The asking price was $85,000. As far as I could make out, the seller was retiring and planning on moving out of state. He wanted to liquidate this asset, his only real estate investment, before moving from Chicago. I told the agent I’d put in an offer. We drove to her office to draw it up. She agreed the building was a good deal and warned me that several other offers would be coming in from other people who were at the open house of this apartment building. She persuaded me to offer more than the asking price, to maximize the odds of my offer being accepted. I offered $85, 700 with $25,000 as a down payment. As a first-time investor, I was very cautious. Perhaps scared. I asked my agent to include certain conditions, known as contingencies, in the offer, so I would be protected against unseen problems, should the seller accept my proposal. These contingencies had to be met to my satisfaction before I would finalize the purchase. One of my conditions were: * a professional building inspector would examine the overall condition of the property and give me a report of his findings My First Serious Inspection
We could find no storm windows in the basement, so I would have to purchase the energy-savers for the entire building. The paint protecting the wood window frames needed scraping and painting. The plumbing was fine, except none of the apartments had shut-off valves. This meant if I had to do even the simplest repair – such as replace a leaking faucet – I would be forced to shut off the water supply to the entire building. Otherwise, when I removed the leaking faucet, a geyser of water would spew everywhere in the room. Obviously being able to turn off the water supply under every sink and commode is the way to go. The steam boiler heating system was functional but according to the inspector, too small for a building with the square footage of mine. The building had a very thick stone foundation. The brick walls bowed inward. Fortunately, the owner had completed structural repairs to make sure this would not develop into a long-term problem. The last item on the inspection was the flat roof; it would need replacement in about three years. The inspector estimated the cost of repairs, then said, “The building would work out if you follow my suggestions for improvements.” He handed me his invoice. “I’ve owned some buildings myself, and to be honest, management is the dregs.” As I wrote out his check, I chuckled and asked, “Are you trying to scare me off?” “Nah. It just wasn’t for me. You might like it fine.” At this point I had three choices: I could back out of the purchase agreement because of the cost of the repairs; I could request, through our agent, that the seller look over the inspection report and the repair estimates and adjust his asking price down; or I could approve the inspection contingency. I chose option three. Here’s why: 1) Everything was cosmetic repairs, except for upgrading the electrical service. 2) My agent had been right about other offers coming in. Three were presented three days before Christmas, and the seller chose ours because of the extra $700. Three offers in a lousy market indicated that I was getting a good property at a good price. I did not want to risk losing this apartment building to one of the other prospective buyers by giving the owner an opportunity to back out by asking him to lower the purchase price. Time proved buying this apartment building and investing in commercial property was one of the best choices I ever made. Don’t let inspections scare you away from great deals. Approach each real estate opportunity with a open mind and the cash and success will follow. Posted by James Pockross Commercial construction loan is a loan used to finance the construction of commercial property, such as office complexes, retail centers, apartments, hotels, warehouses, and other business properties. Construction loans are short-term and meant to be paid off when construction is completed.
While construction loan programs offer differing features, they also have a number of characteristics in common. For example, construction loans generally require interest only payments during construction; terms typically are for 12 to 36 months; most lenders require a 12-month interest reserve; and pay off occurs when a certificate of occupancy is issued. Because borrowers usually require follow-on financing when a construction loan comes due, lenders sometimes offer construction-to-permanent loan programs that provide construction loans during the building phase and longer-term fixed-rate financing that kicks in upon issuance of the certificate of occupancy. This two-in-one loan process tends to be more convenient and less costly for borrowers in that there is only one loan application and one closing, with associated fees, instead of two. Because of the complexity of construction loan financing, borrowers may find it difficult to compare construction-to-permanent loan financing with the two-loan process. That’s where the experts can help. The combined market-focused expertise of a Structured Finance Group and a Capital Markets Group, can take the guess work out of construction lending so that commercial real estate clients are able to secure the best possible interest rates and terms consistent with their objectives and market conditions at the time. Bottom line, is do your homework and be prepared. *God Speed* Posted by Tom Donnell “The difference between the impossible and the possible lies in a person’s determination.” — Tommy Lasorda
Investing in commercial investment real estate can be one of those things that gets you out of your comfort zone. The main reason is most of us have not had a lot of practical experience with investing in commercial real estate. Especially over a long period of time. I remember when I was a little kid the piggy bank. I went from the piggy bank the the Savings and Loan (Remember those?) and then to a CD, and then to a money market account and then to a mutual fund, etc. Out of your comfort zone investing. It was a number of years before I considered commercial investment real estate. Or was even exposed to the possibilities of building my wealth through commercial investment real estate. It all starts with your first commercial property – whether it be an apartment building, mini-storage, office building, strip mall…as long as the net income and property type fits your goals, it doesn’t matter. But you’ve got to get started with number one, then focus on the next steps. This will involve getting out of your comfort zone, and you 100% need to get out of your comfort zone to be successful. To be a successful commercial real estate investor especially. Here are a few tips to get started and break out of your comfort zone: 1. Take the time to write out your goals and put together a business plan for your investment business. I did say “investment business”. That is what this is and you should treat it as such. Now, you don’t need a 100-page business plan with charts, graphs, photos, etc. Keep it simple, and make it very goal-oriented. 2. Get around other like-minded investors through mastermind groups, investment associations, and other success-minded groups. This will give you the edge you need to break out of your comfort zone – possibly more than anything else. When you see what other successful investors are doing at different levels, it will automatically bring your game up a notch – just by association. I cannot emphasize this step enough. 3. Continue your commercial real estate education. Reading this article is a great start, but keep going with your investment education. Every successful investor I know can tie their success back to several courses, books, or live events that were key in their ability to leap-frog beyond their investment obstacles…and they continue to educate themselves in the business. It’s a profession, and you should treat it as such. It really does come down to “No Pain No Gain” investing. The pain is getting out of that comfort zone. This means participating in mastermind groups, getting educated, and working on your goals, and thinking about the benefits that you’d like to achieve through investing in commercial real estate. Posted by Darin Garman Most real estate investors start out with very little money. I know I did. And of course, we all become real estate investors so that we can acquire money and stop living paycheck to paycheck and don’t end up working 40 years in a job we can’t stand.
However, the problem becomes that in order to become a successful real estate investor you have to do some form of marketing. Many of the best marketing methods aren’t cheap either. Even though direct mail is by far the best marketing method in my opinion, you still have to be able to afford envelopes and stamps. The same thing goes with bandit signs, which I also love. Purchasing several hundred bandit signs will set you back several hundred dollars. But remember, you will only have this outlay of cash in the beginning. After you start doing deals you will fund your future marketing with a percentage of the profits of the deals you do. But let’s get back to what to do if you’re broke right now… Well, there is a marketing method that’s my favorite if you truly have zero cash to spare. It’s also one of the best ways to get deals. In fact, if someone told me that I had 30 days to buy a house or I would be killed, I would immediately start off doing this method. So what is it? It’s not talked about often, because most people hate it and refuse to do it. I’m talking about door knocking. But before you cringe, I’m going to share with you a way that will make door knocking 100% non-confrontational and will get you a lot of deals yourself. I’ve personally used this method for years and never had a negative reaction to it. Here’s how it works: First, you have to choose the neighborhood you want to invest in. I prefer 3 bedroom, 2 bath, bread and butter areas. Once you’ve picked a neighborhood, you need to dress appropriately to go out. I wear khakis and a button-up shirt. You don’t want to overdress, but you don’t want to look like a slob either. Next, you have to choose the time to go knock on doors. I’ve found that 6:00 to 8:00 on the weeknights is the best time to go. Now, here’s the “million dollar script” you’ll say when you knock on someone’s door. “Hi, my name is John and I was wondering if you might know if any of your neighbors are looking to sell their house. I’m a real estate investor and am interested in picking up some properties in this area.” Do you see what that script does? It takes away any “pressure” on the homeowner and they’ll be more than happy to gossip about their neighbors. Of course, if they want to sell their house, they’ll tell you that too. This is truly a failsafe way to go door knocking. The only problem you’ll run into is that sometimes people gossip so much you’ll have to figure out a way to end the conversation so you can move on to the next door. Posted by Jason Hanson With bargain-priced properties and record low interest rates, today’s real estate market presents tempting investment opportunities — including new openings for the first time investor.
Owning investment properties can be an exciting and lucrative decision. However if you’re considering an investment in real estate (whether a vacation rental, long-term rental, or for re-sale), be aware that these properties can also create liabilities. For example, a tenant might trip on a wobbly staircase. A guest could slip on an uneven sidewalk. Faulty electrical wiring causes a fire or shocks a tenant. A clogged chimney leads to a flue fire. Or a slow leak might result in mold that affects a tenant’s health. Accidents happen. And when tenants, guests, or their invitees are injured on a property, victims can sue the property owner for damages. Without the proper liability protection, you – as the property owner – are personally liable for any damages. Let’s say you researched the market, purchased a foreclosed property in Florida and turned it into a promising vacation property. A guest falls from the balcony (faulty railing) and the court awards a multi-million dollar judgment to the plaintiff (worst case scenario, I know…). Without the right protection, the defendant in the case is you. And your personal bank accounts, stocks, other properties are all vulnerable to cover the settlement award. What may have started out as a savvy investment for your retirement or child’s college fund can end up wiping out all of your hard-earned savings. I don’t particularly like using scare tactics and in no way do I want to discourage anyone from considering an investment in real estate. However, I do want to prevent new investors from falling prey to what could have been so easily avoided in the first place. In a series of posts to come, I’ll guide real estate investors through some of the keys to limiting liability and protecting their assets – including covering the basics of the Limited Liability Company (LLC). Real estate investing doesn’t have to be such a scary prospect; and a few simple steps can save you a great deal of money and stress in the long run. You just need to take your legal liability seriously. Posted by Nellie Akalp Do you know the TOP 10 MISTAKES that new investors make when buying investment (rental) properties across the country? There is so much more to consider beyond just cash flow and appreciation. Here they are:
Here they are: 1. Buy new homes – New homes can be fun to live in, but they are rarely the best value as investments. Spec homes generally cost more per foot than neighboring houses (but don’t resell for much more), and tract homes are generally found in areas that are the worst areas for appreciation (see #2)…Unless you are picking up new homes at substantial discounts from builders, its best to stay away from these homes as they will rarely cash flow and usually have a two year time frame before any type of appreciation. One successful strategy is to either buy the note on the construction loan at a substantial discount and then either rent, lease option, or owner finance the property. You can also negotiate the builder down and take the property under an option fee and sell the property above the option price. 2. Buy in areas that will have more construction – People buy new houses in up and coming areas because they want to live in a new house. Guest what – all of the people you go to sell the home to in 5 years also come to that area because they want a new house… and now you’ve got an old house, and the once empty field down the road is now plum full of new houses. This is why these homes and areas don’t appreciate well! You need to be prepared to usually hold onto the property or sell the property with owner financing that way your aren’t responsible for tenants and toilets! 3. Buy in their own neighborhood – Just because it’s a great neighborhood for you does not mean it’s a great neighborhood for a rental property. Rental properties tend to be LESS EXPENSIVE than the homes of the owners, and they probably don’t have all the amenities. Rents don’t double as prices double, thus more expensive properties yield worse cash flow and bad use of leverage. An example of this would be the Phoenix and California markets where prices doubled but rent rates didn’t increase. Novice investors were left holding the bag in these markets as they were never able to rent the properties in the past to cover their mortgage payments. 4. Buy for price over location – So you got a GREAT DEAL on a house. Awesome – sell it and take your profits! Rental property ownership is all about long-term appreciation and total return on investment. For that you want close-in up-and-coming neighborhoods. Don’t be greedy! Sell your property with a bit of equity in the property for a conventional buyer or sell with owner financing and take the down payment as immediate cash with the monthly cashflow (as you can charge 8-10% on your owner financed note) and the remaining balance and profit to arrive in 24-36 months. 5. Buy for cash flow over location – Yes, you can get great cash flow buying duplexes and four-plexes in slums…but, they just don’t appreciate much. When you add it all up, would you rather have $3500/yr in positive cash flow on a slumlord property that has massive turn-over and is only worth $15K more in 10 years, or would you prefer $500/yr cash flow and minimal turnover on a property that will be worth $100K more in 10 years. I’ll take 10 of #2 any day. 6. Buy in rental property area – I’ve actually heard people describe a neighborhood as a “good rental area” because it has lots of rent houses!! That’s nuts! A “good rental area” is a neighborhood that has virtually NO rent houses. This allows your house to be a rarity or an opportunity for a family to move into a desirable area wihtout having to purchase. Remember – it’s all about appreciation, and neighborhoods full of rent houses, are not as well kept, and just don’t appreciate much! 7. Buy for “future potential” – Yes, the highway may go there. Yes, the light rail may help the neighborhood. Yes, the neighborhood may become gentrified. Yes, the dice may land on seven! Don’t be a real estate gambler – be an investor. There are plenty of great opportunities in great neighborhoods that will do just fine without relying on possible future demographic changes. With the housing market being like it is, take advantage of the current REO’s and short sales to buy properties now. Utilize the path of progress for your commercial deals! 8. Buy for “themselves” – Just because you might prefer living in a large, new, 4-side brick house in a rural area vs. a small, old, 4-side wood house in the city, does not mean that that’s a better investment. When you consider that for the same price, you can buy a house in the rural area that is a large expensive house on a cheap lot (that requires a lot of $$ for paint and carpet every time a tenant moves out) or a house in the city which is a small cheap house (that requires minimal $$ in paint and carpet) on an expensive lot – which sounds more appealing? Then consider that they both get the same rent, but the city home appreciates at twice the rate, rents in half the time, and has less turn-over… Hmmm…. 9. Buy based on advice from Realtors rather than investors - I love realtors – I even married one. However… realtors tend to be better at finding people what they want than what they need. Before you ask a realtor for help finding a good rental property – make sure you understand exactly what a good rental property is. Better yet – become an investor and learn how to find your own rental properties – properties often available at discounts and/or with free existing loans, no $$ out of pocket, and that are not found in the MLS. Expect to spend some time training a realtor and stick to your guns and numbers when it comes to investing than instead of someone who is trained to be an “inside the box,” traditional thinker. 10. Condo’s, Duplexes, and almost anything other than a small 3/2 – To me owning a rental property is a 5-15 year (or more) commitment and all I really care about is how much appreciation the property will make me during that time horizon. When you factor in appreciation, turn-over, all carry costs and cash flow, it becomes pretty obvious that condo’s, duplexes, and just about anything bigger (or more expensive) than a simple 3/2 in an up-and-coming neighborhood just does not yield the best return. Condo’s are especially a bad deal currently unless you can get them for pennies on the dollar and either owner finance, lease option, or rent with huge positive cash flow for an extended period of time in a desirable area. Posted by Scott Carson “Real estate is the locomotive that pulls the economic train here in [fill in your market area]…” As a Spokesperson Trainer, who has helped thousands of REALTORS be better communicators, there hasn’t been a workshop or seminar where I haven’t urged attendees to use that quote, believing it to be the truth. A recent report from the New America Foundation corroborates my belief. According to the group, the housing market could become the engine that pulls our economy out of its ditch (they claim it put it there but to blame real estate alone after the fiasco of Wall Street is quite unfair).
New America Foundation’s Patrick Doherty, along with Christopher Leinberger in a provocative cover story in the latest issue of the Washington Monthly, wrote that a “vast wave of new demand for housing is coming… thanks to an epic demographic convergence. Baby boomers, the biggest demographic bloc in the country, are looking to downsize as their nests empty and retirement looms, while their children, the similarly numerous millennial generation, will soon want to purchase their first homes.” They continued, “… but more walkable neighborhoods could be built (and quickly, argue the authors) if the next Congress will act — for instance, by shifting federal transportation dollars from highways to mass transit. Despite what Republicans might think, such actions would not increase the deficit, but would instead draw hundreds of billions of private investment dollars now sitting on the sidelines back into the productive economy, creating millions of jobs and neighborhoods that are healthier, more energy-efficient, and in line with the way more and more Americans actually want to live.” It is so nice to read what I’ve felt for many years has been right in front of our collective faces — that a ‘New Deal-like’ push toward GREEN, sustainability and energy efficiency is THE way to make America strong again, employ millions and save our economic present — and future. Thoughts? Invest well. Posted by Peter Mosca So what did I do next? How did I go about buying my first apartment building?
At first it was hell. I’d call the agent named in an ad and obtain some preliminary information on the building: address, projected rents, some of the projected expenses, and the price and terms. Then I’d drive to the location, park my car, walk around the property, check the mailbox for vacancies, and so on. If the property looked interesting, I’d make an appointment to see the interior. I felt very uncomfortable doing these inspections. I had no idea what I was doing. I could not tell a good investment from one just short of displaying a BUYER BEWARE! sign on the front door. Going by the advice in the books I had studied, I would pull out my “Apartment Inspection Checklist” and insist on looking at every room, including closets, in every apartment. A typical inspection of a four- to six-unit building would take me two hours. (To put this in perspective, once I became experienced, I could conduct a ten-minute inspection on a sixty-unit building and purchase it on the spot.) As hungry as real estate agents were for commissions at this crazy time, and even though the majority of them had plenty of free time, many refused to work with me a second time. They despaired of my never making a purchase. They were wrong. After driving by about a hundred buildings and inspecting twenty of them, I made an offer on an eight-unit building with an asking price of $135,000. The Seller and I agreed to terms and I was on my way on becoming the next Donald Trump. So I had finally found a building a was willing to make an offer on. FINALLY. After kicking enough tires, I made an offer on an eight-unit building with an asking price of $135,000. The seller and I agreed on the price and terms. My agent mailed a standard contract to him at his winter home in Arkansas, with a few blanks filled in based on our agreement. All the seller had to do was sign it, date it, have it witnessed, and return it. That never happened. About six months later I learned that the seller sold the building to someone else for the same price and terms as ours, about three months after he and I had struck a deal. To this day, I don’t know what happened.
I continued to search. One day I received a call from an agent who had shown me one of her listings. She wanted to tell me that a six-unit building in a good area with low rents was being offered for a low price. I knew the area; at one time I had lived a quarter of a mile east of there. YES. My patience paid off. I made an offer shortly after attending an open house and finally closed on my first Apartment Building. So I say to you….don’t give up! Posted by James Pockross |
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