What To Do When You Don’t Know What To Do

What To Do When You Don’t Know What To Do

“What do I do…should I do this deal?…HELP!”

Do you ever get into a situation and wonder what to do? You’ve worked hard to find a deal, you’ve got one, but you’re not sure what to do. Has this ever happened to you?

Here is something I received in the “Investor’s Email Bag” recently. Can you see yourself in this guy’s shoes?

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Dear What Do I Do Now,

When buying for cash we always talk about MACO (Maximum Allowable Cash Offer), which is the ARV (After Repaired Value) minus 30% (your profit plus other expenses), minus Repairs.

So in this case, the ARV (as per your comps) is $100,000. Deduct $30,000 (your profit plus holding costs) and it equals $70,000 BUT you still need to deduct the repair costs.

If you consider it a junker when you drive by, then it’s a pretty good indication that the inside is a disaster as well. Your renovation costs could be as low as $3,000 (just for paint and carpet), but there is no limit as to what it can cost you depending on how much work is needed.

You’ll need a good general contractor to look at the house and estimate the costs of renovations (someone like my contractor friend Greg charges a $250 for the estimate, but if he ends up doing the work, he’ll deduct the fee from his price).

If you don’t know how to calculate the costs of renovating a junker then $250 is worth it. You don’t want to go in thinking it’s going to cost you $5,000 and it costs you $50,000. Better to be safe than sorry.

Don’t over-renovate. A $100,000 house dipped in gold is still going to sell for $100,000.

The house in your comps for $56,000 may have been a similar situation. An investor may have bought the house, made the repairs, and is either renting it out to a tenant or a lease option buyer. That’s why you may not see a new higher sales price.

Do NOT be a motivated buyer!

How long has this woman been trying to sell her house? If she expects to get $100,000 and is holding out for that, you cannot make her motivated. But if she’s been trying to sell it for 6 months without a nibble, then she may listen to reason. It depends on her motivation. If she’s moving out of state or into a nursing home, or she can’t make her payments, she may take a lot less…and I mean a LOT less.

You could always make her an offer contingent upon an inspection; that is, if the home inspector comes up with thousands of dollars in repairs & maintenance that you didn’t count on, you could always go back and change your offer.

First find out from your friend how motivated she is. You can always go see the woman and give it a try. The worst thing she’ll do is to ask you to do is leave, the best thing would be that you get a deal.

Consider the Cost to Sell Guidelines

When you talk to Ms. Homeowner (the seller) and she is shocked at your offer, consider taking her through the Cost To Sell GuidelinesWith paper and pencil walk her through the reality of what she will face selling the house retail.

This is in no way an adversarial conversation, but instead one to enlighten her about reality. Here is the equation and an explanation.

Ms. Homeowner’s Asking Price Minus The Costs of The Sale = Her Profit

Cost to Sell Guidelines (Costs of the Sale)

  • Retail Buyers Discount of 3 to 10%:  This is the price at which the property will close. In this market, every retail buyer is going to put in an offer of at least 3% less than the asking price.
  • Closing costs paid by the seller: 2%-3%
  • Closing costs paid by the buyer but frequently paid by seller: Because the buyer can’t afford to pay them–3%
  • Realtor Commission: Usually 6% but sometimes higher if the seller is desperate and wants to offer an incentive.
  • Repairs: Use whatever value or cost the HOMEOWNER estimates. You can confirm this for yourself later (and remember, a retail buyer is going to estimate higher; so if the house needs a new roof, a retail buyer will assume it’s almost twice what it will actually cost).
  • Holding costs: On average it will take 4 to 6 months to sell; so multiply 6 times their monthly mortgage payment plus utility bills, insurance, etc. By the way, if the house is vacant, there is a much higher insurance premium. The owner must have a “vacant house policy” or you won’t be protected from vandalism, liability if someone falls, etc. It is twice the price of homeowner occupied insurance.
  • Inspection costs: What might a home inspector find that will require repair? Usually $1,000 plus.
These selling expenses should help you negotiate
your offer and increase accepted offers.

If you think it could be a good deal and she appears motivated, but you’re worried about doing the deal, then find a partner who is more experienced. You may not make as much money since you will have to share some of the profit with the partner, but you’ll still make money and get your first deal done.

I think the deal is good IF you buy right! If you buy it low enough, then you’ll be able to sell it to a renovator and you’ll both make money. If you pay too much, well, then you’ll be holding onto it. Maybe for quite a while.

To your success!

Augie

Putting Profit in your Pocket Through Probate Properties

Putting Profit in your Pocket Through Probate Properties

Putting Profit in your Pocket Through Probate Properties 

Leads are the lifeblood of any business and there are all kinds of ways to generate them. But this way is a guaranteed winner!

Target marketing is how we maximize our marketing dollar by selecting a very specific audience and marketing to them. This means identifying people who most likely need to sell their house. People need to sell their houses quickly for ALL kinds of reasons but one that is often overlooked is when a property is going through (drum roll please)…PROBATE.

Probate Is The Legal Process That Takes Place After Someone Dies.

Here’s what it includes:

PROBATE PROCESS

And these are just to name a few. The probate process can be simple and pain free or it can be downright messy and complicated. Don’t let that scare you though because sometimes the messier it is, the better the deal it is!

The person in charge of the probate process, and who typically makes the decisions regarding the house, is called the executor. You will also see him or her (it is usually one person but not always) called the petitioner or the personal representative.

This person is often one of the heirs and is the person named in the Will that will handle the probate from start to finish. If there is no Will in place then this person is usually appointed by a judge.

The responsibilities of a petitioner can be quite time consuming and burdensome which makes them great candidates as motivated sellers. Here are a few of the petitioner’s responsibilities:

  • Petitioner's BurdensFiling papers in court
  • Managing the assets
  • Proving the validity of the will
  • Presenting lists of property to the court
  • Paying off debt still owed by the estate
  • Distributing all assets to the heirs as dictated by the will

The executor (or petitioner) is the person we want to locate because he is typically the one that is handling the affairs in regard to the property and will sign all of the paperwork to sell the house.

It Can Complicated But It’s Worth It

Sometimes, all of the heirs have to be in agreement before any paperwork is signed and sometimes they have the authority to decide for themselves.

Vacant HouseOnce we locate the executor it is now time to pre-screen him or her and go take a look at the house. Probate properties are often a “perfect storm” for a great deal.

Most of the time they are vacant, are outdated, have no mortgage, and the personal representative needs to sell it to pay off debts the estate owes and pay the attorney handling the probate. The deceased owner was typically elderly and had the house for a long time which means in many cases the mortgage has been satisfied.

It also not uncommon that the person did absolutely no updating to it and had a hard time maintaining the property which will make it perfect for a rehab and flip or even a wholesale deal to sell to someone else.

So How In The World Do We Find These Precious Deals?

Most often we need to march ourselves down to the courthouse to obtain the information. Probate records can be found at the courthouse in the county where the house is located. Usually we will need to use the computers at the courthouse to find the information we are looking for.

While this may sound inconvenient and time consuming, it will produce quality leads which other investors are missing out on because they don’t want to do the work!

Look For Two Kinds of Probate Cases

There are two main types of probate cases when it comes to those involving real estate: Formal Administrative and Summary Administrative.

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Formal administrative cases are the most common type of probate case. Formal cases are done when the assets in the estate are more than $75,000. These types of cases are usually taken care of with an attorney and last longer than the summary administrative cases.

On the other hand, summary administrative cases can be used to probate an estate when the decedent’s (the person who died) assets are $75,000 or less or they have been deceased for more than 2 years.

This type of case may be done with an attorney or may be handled by the executor and the heirs themselves. This type of case is typically shorter and less complicated than its counterpart, the formal administration.

Once we find all of the formal and summary administrative cases for a given time period we can now begin to locate the “Golden Docket,” the Petition for Administration. It is is the golden docket because it contains all of the information we need to know to send the letter.

Four Pieces of Information You Need To Send Out a Good Letter and Generate a Quality Lead:

  1. Deceased Name
  2. Deceased Property
  3. Executor’s name
  4. Executor’s mailing address

Once you have all of this information you can now send out the letter. The letter should be personalized and mention the passing of the heirs’ loved one. It should also have the property address in the body of the letter and it should list all of the benefits that we can offer.

When It Comes To Probate We Can Offer Some Things Typical Retail Buyer Probably Won’t

  • An all cash offer that will make it easy for the personal representative to disperse
  • Handling of paperwork (the executor will appreciate this as for last few months they have been handling all of the probate paperwork
  • The heirs can leave whatever they don’t want, in the house
  • No need for the heirs to clean up the house

If done right and consistently, the time and effort it takes to collect the information will be well worth it.

Once you start sending out the letters, the phone will be ringing with motivated sellers who have vacant, outdated, free and clear properties that need to be sold NOW!

And don’t we investors love those 5 words in one sentence: motivated, vacant, outdated and free and clear?! They are the words of a great lead and a profitable deal.

Why Real Estate is the IDEAL Investment

Why Real Estate is the IDEAL Investment

So… Why is Real Estate is the I.D.E.A.L. Investment?

The first thing I’d like to discuss with you before we even get into the techniques of real estate investing is why should you even bother with real estate. What is it that makes this such a great way to become wealthy? Real estate has been called the IDEAL investment because what it produces spells the word…IDEAL.

Investment real estate gives you: Income, Depreciation, Equity, Appreciation and Leverage.

screen-shot-2016-11-30-at-12-21-17-pm“I” is for INCOME

Real estate entrepreneurs enjoy income in the form of cash flow created by rents, lease payments, option fees, pet rent (yes, rent for Rover), extra-resident rent (Uncle Joe), and even mortgage payments when we provide seller financing. In addition to recurring income streams we also enjoy income in lump sums; some large, some small. These include sale proceeds, option fees, down payments, and balloon payments.

Real estate generates two types of income and each is taxed differently. Ordinary income is income generated from flips, quick turn rehabs, and any property not held for investment longer than 12 months. Rental properties generate passive income which is exempt from self employment tax (currently 15.3%).

The key to passive income is the intent to rent the property and the holding period exceeding 12 months. Talk with your CPA to understand the tax implications of your transactions…it can make a massive difference to your financial future.

When selling properties, I like to use the lease option or lease purchase technique because I’m blending the sale of some rights. One is the right to purchase the property at an agreed price at a future date using an option.  The other is a rental agreement which generates passive rental income.

“D” is for DEPRECIATION

This benefit is unique to anything in the finance world because depreciation is a deductible expense created by investment property. Depreciation allows you to deduct an amount equal to 1/27.5th per year against the income produced by the property. However, if the deduction exceeds the income, the depreciation may be taken against other income or carried forward.

To fully understand this benefit I strongly encourage you to consult your tax adviser. I assure you it will be worth the conversation!

There are many strategies and techniques involving entity structuring that will help you to maximize the tax benefits afforded entrepreneurs who own a business and do not act as a sole proprietor.

“E” is for EQUITY

Equity is that amount of a property that is not pledged as collateral for a debt. The simple way to look at it is if you have a property valued at $150,000 and it has a $100,000 mortgage on it, then you have $50,000 in equity that could potentially be used as collateral for additional financing.

One important thing to note is that many sellers confuse equity with the amount of money they’ll walk away with after a sale. (They seldom consider things like closings costs, commissions, and other seller concessions.) We’ll discuss this in another post.

“A” is for APPRECIATION

I just love appreciation; where else can you make money while you sleep? When things go up in value without any effort on my part that is a good deal! Real estate is cyclical. So, remember friends; it will not go up in a straight line, but over time it always does go up.

Even though the current market is flat in some areas and receding in others we know that over time our real estate will increase in value .However this is not why we buy real estate.

To good investors, appreciation is just a bonus because we make our money when we buy either with great terms or because we buy at below market process. We cannot always predict when or by how much a property will appreciate, so if we buy right, but timing doesn’t allow for appreciation… we still make a profit.

If, however, we do benefit from appreciation, we still make our profit and we get a bonus too! People who buy looking for appreciation are not really investors, they are speculators…they are the dot.com bubble people of real estate.

“L”  is for LEVERAGE

If I’m a new investor just starting out and I go to my stock broker and tell him I want 1000 shares of a $100 stock he’s going to ask me for $100,000. If I don’t have the $100,000, I’m done and there’s no deal.

But let’s say I have a big account of say $500,000.  He may let me margin the securities, which means he’ll lend me some of my own money (about 50 cents on the dollar) to buy the stock.

In this example, I can buy the stock with only $50,000. So looking at the stock market I can get no leverage if I buy 1000 shares for $100,000, BUT, I can get 2 to 1 leverage using a margin account. I could use $100,000 to buy $200,000 worth of stock.

In real estate many lenders will allow me to purchase a property valued at $100,000 with only 10% down. This means that I’d put only $10,000 down and the bank would finance the remaining $90,000.

screen-shot-2016-11-30-at-12-20-36-pmThis would suggest that with $100,000 cash I could control 10 PROPERTIES valued at $1,000,000!

THAT’S RIGHT, $1 MILLION DOLLARS!

If each of these investments appreciated 5% in one year who would have the best return on their investment?

Stock Purchase without leverage $ 100,000 x 5% = $5,000

Stock purchase with leverage 2 to 1 $ 200,000 x 5% = $10,000

Real Estate with leverage of 10 to 1 $1,000,000 x 5% = $50,000

The power of leverage with real estate is unmistakable.

Let’s say you played this out for 10 years. The numbers would be staggering. While there are interest expenses and carrying costs, these will be paid by your tenant. Additionally, your equity would increase as they pay down your mortgage.

It gets even better when you learn techniques like buying with “Seller Financing” or by using existing debt and buying the property “Subject To” both techniques which are near and dear to my heart which will be covered in a future post!

So, are you ready to start making I.D.E.A.L. investments?

To Your Success,

Augie