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The December 2014 Edition of The Profit Newsletter is available for download just in time for our Atlanta REIA Main Meeting on December 1st. The Profit is an digital, interactive newsletter for new and seasoned real estate investors delivered as an Adobe PDF file to read on your PC, Mac, Smart Phone, iPad or other mobile ready devices with a PDF reader. Many of the articles and ads in The Profit contain many hyperlinks you can click or tap to visit websites, watch videos, listen to audios, download content, send emails, comment on articles, share socially and much more! The high res version of The Profit is “print ready” for those who want to print the newsletter on their home or business printer. Also, be sure to Subscribe to The Profit Here so you don’t miss a single monthly issue.
I’ll admit it; I’m a bit of a seminar junkie. I go to every seminar I can and I probably should go to the “Seminars Anonymous” meeting too. The truth is, I’ve learned from all of them (even the bad ones). I sit near the back so that I can find an electrical outlet for my laptop and type furious notes as I’m listening. Some larger conferences offer wi-fi (wireless) access so you can browse the Internet when a speaker mentions a specific site. Trouble is you tend to check your email and wander other places online. And then you’re not actively listening. So beware of being too plugged in.
How do you know if the seminar was worth the cost, the hassle of traveling and the time out of the office? If you’re not purposeful, after a week or two, you may not even remember the name of the great speaker let alone what he or she said or what you got out of it. And you really haven’t changed the way you do business or anything. Here are some steps to take to set yourself up for success before you actually fork out your hard earned dollars.
To get the most out of any seminar (or event in general), there are two sets of preparation, pre and post event. US Army lives by the 5 P’s – Prior Preparation Prevents Poor Performance. So, here are a few things you can do prior to jetting out. Read More→
As the real estate market shifts in different areas investors must adapt to the changes in both their buying and selling strategies. Many people, including myself, strongly believe that you make your money when you buy a property at the right price. Recently, due to lack of inventory and/or more competition, investors have begun to buy outside my personal comfort level. I see them beginning to buy/invest based on future appreciation. If the appreciation comes the profits will be great but if not then they remodeled a house for a new owner for pennies or nothing.
Just two years ago I was acquiring single family residential properties for 65% LTV, last year I was still picking up a good amount of investments at 70% LTV and today I am having to go as high as 75% LTV. I understand that some areas are hot and demand is high but going above that seems ridiculous for a flip. Buying at a high LTV to rent I can understand but that is a whole other topic. There are investors who have given criteria that they will buy at 90% LTV. These are seasoned investors that buy, fix, and sell homes regularly. I ran into one of these investors the other day and had the opportunity to ask how he is making a profit buying at 90% LTV. He turned to me and said, “Appreciation!” As soon as he said this I already knew his business model. I myself benefited from the recent appreciation he was referring to on a few deals I joint ventured on this year. Essentially, he is figuring out the average appreciation in the area the property is located in and estimating what this property will be worth when it is renovated. He then runs his numbers based on those future appreciated values. Thus, while I am using current values and purchasing at 75% LTV he is buying based on estimated appreciated values at 75% LTV. This makes his true LTV greater than 75% based on current values and he would out bid my offer. When I benefited from appreciated values I still bought based on the current value. When I listed the property and ran a new CMA I adjusted the list price up to the new values. This increase in value was a bonus and nice to have but I did not base my entire investment on this appreciation. In fact, I could have still listed the property at the original ARV, undersold all the other listings on the market, had a better product, and sold even faster. Read More→
There are several rather unusual ways that I like to use to locate motivated sellers. I’d like to share several of my favorites with you so you can find even more motivated sellers in a non-conventional way. This is absolutely the best time of the year to be locating motivated sellers since property tax bills have just gone out to owners in many states AND the holiday season is upon us. As you know one of my favorite techniques to locate highly motivated sellers is using direct mail and during the holiday season sellers are opening all of their mail since they are getting letters from friends they have not heard from in a year. Here are some of my other favorite albeit unusual techniques to find highly motivated sellers.
The first of these is to contact auction houses in your area and work with them to help you find leads on houses for sale. I’m talking about the auction you go to on Friday or Saturday night to buy “stuff”. Where do you think these auction houses get their merchandise? They get it from homeowners who need to get rid of a household full of items. One way to find these auction houses is to look in the yellow pages or google “Auctions” and find the ads that say “we consign estates”. These are going to be the ones you will want to work with. Many times an auction house will be contacted by an heir to sell items remaining in a property to settle an estate or to simply get rid of things remaining in the property after they inherit it. They may also be working with a widow or widower who wants to get rid of their excess furnishings, sell the home, and move into an assisted living facility or with a relative. The next item of business is to get the property sold as well. You can make a deal with the owner of the auction house to contact you when these situations arise, and they will give you the information about the sellers. If you offer a fair price and the auction house gets paid a commission, this is a good way to buy houses no one else knows about.
Another unique way to buy houses that no one thinks about is to contact local attorneys in your area who handle estate, probate, family, real estate and business law. Quite often they will have clients come to them with a probate situation, a divorce situation or a bankruptcy situation or other situation that they need handled. These clients need to sell a property quickly in order to liquidate assets no matter what condition the property is in. If you are a person of integrity and you do what you say you are going to do and offer a fair price, these attorneys will continue to contact you with potential deals. Interestingly enough, you will find that these attorneys talk to one another and you will find yourself getting referral business from other attorneys. This is one of the ways I use in my own business to bring in new leads on a regular basis.
Another way to find motivated sellers is to contact mortgage brokers who deal with private lenders. I have personally purchased several foreclosure properties this way. A private lender would just as soon sell a property they have had to foreclose on to you as they would rehab it themselves or sell it conventionally. This is an excellent way for you to get leads coming into your business, especially if you are just getting started. Very often the same private lender who had to foreclose will finance the same property for you if they see that you are going to get it sold and get them paid off. In addition, this is a good way for you to bring new private lenders into your own business. This is another technique that most of your competitors just don’t think about.
The fourth unique way I use to find motivated sellers is to check various types of ads in the newspapers and online. For example, you can check the marriage notices to find out who is getting married. If you see older couples, you can pretty much assume that they both already own homes and want to sell one or both to buy a home of their own. You can also check the death notices. When someone dies, there may be an heir who now has a house they need to sell. Tread lightly when following up on these leads, you don’t want to offend a potential seller. Send them a generic type of letter explaining that you are interested in buying some houses in their neighborhood. DO NOT refer to the fact that you know the person has died. You can also watch the paper for public auctions, bank foreclosures, and divorce filings. In divorce cases, you will have situations arise where neither spouse wants the property; therefore they are anxious to sell. Or they need to sell in order to liquidate assets.
Another way I like to locate potential deals is to locate vacant houses. I simply drive around and look for them whenever I am out driving somewhere. I will tell you, the more difficult it is to find the owner of these vacant houses, the better a deal you are likely to make. These houses are sitting empty for a reason. It may be a divorce situation where both parties just walked away, or an estate, or perhaps a pre-foreclosure. These are all good lead possibilities and vacant houses are some of the easiest potential leads to locate. In my personal business I use a skip trace service to find the owners of these vacant houses.
Another unconventional way to find a bargain is to make a friend of someone who owns a junk or disposal service. These folks are an excellent source of leads for you. Think about it. Who do people call when they have just inherited a house loaded with junk? Or maybe a widow or widower who needs to have the attic or basement cleaned out? In these scenarios the junk hauler is often the first person to be aware that a sale of the property is imminent based on their conversation with the owner. I will offer the hauler money for the lead and another fee if I actually purchase the property. This keeps him very interested in finding more properties for me to buy. And, once again these are leads your competition knows nothing about.
Speaking of unconventional ways to find deals, how about working with the owners of storage units? Think about it, if someone is putting things in storage, most likely it’s because they are moving. The owner or office manager of the storage unit is going to know it before anyone else and this is a very good source of leads for you. In addition, inside the offices of storage units there is usually a public board where you can post your business cards or a flyer with pull-tabs. When the person comes in to pay their bill, they will see your information. We have purchased properties using this very strategy.
Another great way to find excellent leads is by going to estate sales and yard sales. I know many of you like to do this on the weekend anyway, so here’s a great opportunity to mix business with pleasure. When you arrive at one of these sales, ask the person running it why they are selling their stuff. It’s that simple. I once bought a house where the owners were trying to sell enough “stuff” to make up a past due mortgage payment and they were in pre-foreclosure. If you see a sign that says “everything must go” this is also a pretty good indicator that they might be selling the house as well. Sometimes in estate situations you will see a sign that says “estate sale”, another good indicator that the home might be for sale. If they don’t want to talk to you just then, leave your business card with them and also try to get a phone number to contact them later as well. These sales can be a very good source of leads for you and another idea that your competitors are simply not thinking of.
And last, but certainly not least are your tenants. What an incredible source of leads for you if you are a landlord. We have a tenant referral program where we offer our tenants a credit of one hundred dollars toward the following month’s rent if they give us a lead and we buy the property. We have purchased multiple houses on the same street using this technique. Your tenants are hearing about situations while talking to their neighbors that you would never know about otherwise. When the tenant knows they can make money from it, they will refer these people to you.
We also put signs in the yard of every rental property that we own which helps our tenants start a conversation with a potential seller. They will give the potential seller our contact information as well as getting their information for us. We have some tenants who are fairly greedy and send us lots of potential leads.
As a real estate investor, you always want to be finding new ways to locate properties no one else knows about, and to have between three and five marketing strategies in place at all times.
This month I want to continue the line of thinking how sellers think differently than investors. Last month I talked about how sellers believe their property is worth top dollar even though many times they failed to keep the property in good condition.
Once you realize this will be what you will be facing when you first talk to most sellers you will have a better understanding of why sellers say the things they do when you ask them questions, such as “We Want ALL Cash” for our house.
You need to realize that the investor is trying to buy just another house they can make money with, while many sellers are selling a home that has emotional meaning to them if they live in the property. This difference of thoughts and emotion make a huge difference when you are negotiating. As I said before, this isn’t rocket science it’s just a fact of life. When you understand how sellers think you might have an easier time putting together a more profitable deal. By finding out what the seller’s true needs are, will give you a position of power when negotiating your deals. Remember, each seller has just one house to sell and you have thousands of houses to look at and choose from. This is why you are the one in the position of power when negotiating.
More than anything else you need to know why the seller is selling their house if you want to create a win-win deal. You truly are in control of each negotiation. You just don’t realize it. I concluded many years ago that I have lived many years without this seller’s house and if I am unsuccessful making a deal I will probably live out the rest of my life just fine without that house.
Here is a list of things you need to think about when talking to every seller. Read More→
I was recently on a panel discussing the business models of pretty houses vs. ugly houses. The good news is that both businesses are extremely viable in today’s economy.
Because I have been a successful investor for so many years, I know that there is no wrong choice between the two strategies, but I also know that it is essential to have both techniques in your arsenal so that you can take advantage of all possibilities. The more options you have, the better your chances are of making the most money.
I would like to teach YOU about both business models so that you have yet another tool to help you to succeed. Here is just some of the knowledge I’d like to share with you.
The Ugly House
An Ugly House is a distressed property. When you drive past an ugly house, you will see needed repairs, tall grass, and broken windows. There may be prostitutes, drug dealers, and individuals who make it unappealing to live in the community. A majority of Ugly houses are typically in lower socioeconomic neighborhoods, but sometimes in moderate or middle class neighborhoods.
The Ugly House Market is large because after 15 years, a new house will have a higher chance of being ugly because of deterioration. The owners have let things go. They have not maintained the property. They may not have bought a new roof or an HVAC system; there are large ticket items that need to be addressed. Read More→
When most people think of retirement they think of long walks on the beach, golf, sitting around the house enjoying their grandchildren, and other happy thoughts. If you look at how most investment and annuity companies advertise, that’s exactly the dream they’re pushing. That advertising and marketing strategy has worked very well at getting Americans to fork over their hard-earned money to money managers, brokers and other financial professionals for them to underperform the Index on their behalf.
The thing is, it used to be easier. For example, the long term average dividend for U.S. equities has been 4.4 percent, going back to the 1920s. Stocks are paying a dividend of less than half that figure now, at 1.9 percent for the S&P 500.
Meanwhile, investors are currently paying 20 times earnings and up for exposure to the stock market. The long-term average is closer to 15 times earnings. Your parents and grandparents were getting a much greater return on investment than you are likely to get going into retirement.
In the 1970s, you could easily buy bonds that generated 10 to 12 percent interest, without breaking a sweat. Money markets even generated some solid numbers north of 5 percent and up. Inflation was a factor then, but inflation moderated, finally, going into the 80s, when investors simultaneously enjoyed the beginning of one of the biggest bull markets in history. But that happened because dividends could be profitably reinvested and multiples were simultaneously expanding from the tough times of the 1970s. Read More→
This technique will be used frequently and is one of my favorites to make a property easy to fund. It simply means the seller will take back a second, allowing you to get a new first to cover down payment and other costs.
The big advantage is it sets the stage for you to negotiate a deal that’s easy to fund because you can borrow the first at a low LTV making a hard money loan easy to get.
Seller wants $1,000,000 for an apartment complex that needs $100,000 in work. She owns it free and clear and fixed up and rented, you feel it’s worth $1,800,000. Seller says she’ll take $100,000 down and the balance within 24 months but will subordinate to a new first and take low or no payments or interest on the $900,000 second.
Purchase price $1,000,000
Down payment $ 100,000
Seller second $ 900,000
New hard money 1st $300,000
Less down payment -100,000
Less rehab costs -100,000
Cash to you $100,000
New 1st $300,000
Seller 2nd +900,000 – no or low payments
Your exit is to buy, fix and refinance with a good, permanent loan, or sell. You should be able to get a $1,350,000 loan (75%) or more and pull out cash once it’s stabilized. Read More→
“What the world really needs is more love and less paperwork.” ~ Pearl Bailey
Welcome to 2015 – I know it’s going to be a great year! And while the weather is cold, what a good time it is to review office procedures and forms to make sure the business is humming along as efficiently as possible. I guess you could call it a kind of pre-spring cleaning. I know, it’s not as good as sledding, but work with me, here.
If you’ve taken any of my courses, you know how much I like to automate. The fewer steps it takes to get something done, the better I like it. Creating a good system of business forms is a big part of automation, especially if I can get forms to share information with each other, or feed data into a spreadsheet. So part of my pre-spring cleaning is to review my forms every now and then to make sure they still make sense.
And let’s face it: There’s nothing more annoying than trying to work with a badly designed form. If you doubt that, get online right now and try applying for a job at some big company. It can be a real nightmare!
Forms, of course, have always been a pain in the neck. The military is famous for them. Heck, the Romans probably had rotten forms, too. Until just a few years ago, there was no relief from bad forms. You were stuck with whatever form somebody handed you. Read More→
In January of 2014, Florida passed a law that allowed the Banks to push their foreclosures through the court system faster than the normal 879 days that it used to take. I have seen foreclosures go through the court as quickly as 4 to 5 months because the Sellers, even though they do not have an attorney, do not take the time to file an “Answer” when they are served with the Summons and Complaint. An Answer, in which they themselves can file, simply states that they would like this matter set for trial. This letter includes the caption of the court pleading and their address and telephone number. They would have to file this Answer with the Court along with a Proof of Service that they mailed a copy to the Attorney representing the Plaintiff (Bank). Once an Answer is filed, the Court must slow down the Foreclosure proceedings to allow enough time for the proper hearings that are entitled to the Sellers.
I used to advise my students to wait to send marketing letters to Sellers who were in Foreclosure for at least 6 months. Times have changed! I am now recommending, due to this new law, that the marketing starts as soon as the Notice of Lis Pendens (a document letting the public know that the Sellers are in Foreclosure) is served to the Seller. Many Sellers are running scared. They are moving out before they even have time to fight the fight. I say “Don’t Run and Don’t Let the Bank Win” and do a short sale. Even if you are doing a Loan Modification and/or Short Sale, the Bank is still pushing through the Courts to get a foreclosure hearing date set. However, a short sale takes control of the Sellers destiny. Read More→
It is the goal of this column to answer questions about QuickBooks and how it is used in the REI arena. Know how to record transactions in the proper way and have your set of books in good shape when it comes time for taxes. It is our intention to do this by you the members submitting questions to Karen@smallbusinessadvisor.biz, and getting answers here in this column.
Q: What are the important tasks I should be doing to prepare for Year End?
- There are a number of things to do for Year End and tax filing:
- Reconcile all bank statements and credit card accounts – you may have to reconcile the credit cards into January to capture all your December expenses
- Order w-2’s and 1099’s forms and envelopes
- Print W-2’s and 1099’s – W-2’s if you are using the Pay Roll module and 1099’s for all subcontractors (they should be set up as vendors and you must have their Social in order to print a 1099). You have until January30th to produce these.
- If you have inventory that you track in QuickBooks you must take a physical inventory and reconcile with book inventory for accuracy.
- Check with your CPA if he/she requires a full back up of your QuickBooks or an Accountant’s copy. If they take a full back up that they are going to make adjustments to you cannot work in your copy – if they are going to send you a printed copy of the adjustments for you to enter then you can continue working.
- An Accountant’s copy will ask for a cutoff date for the accountant to work in a certain period and this allows you to continue work – when the accountant has finished you should be able to import the accountant’s changes.
- Back up your data as an additional safety at year end for you to keep after you send the file to the CPA
- Print out your Income Statement and Balance Sheet with a comparison to the prior year. This will provide you with some information on increases/decreases in expenses, income, liabilities, assets, etc. Don’t forget the Income statement is only half the picture – the Balance sheet is the other half.
Q: I run the P&L (Income Statement) and the Balance Sheet reports but I am not sure I fully understand everything on these reports.
- Make sure you take the time to understand every report you generate from your books. If you don’t understand them then you don’t have a full understanding of the financial situation of your business. Your CPA should be able to sit down and answer your questions, if not we at SBA are also available to guide you in this area.
Q: Are there any issues outside of QuickBooks that I should look at for Year End?
- You should review the following areas:
- Get with employees/subcontractors and verify that you have their correct information: mailing address, Social, # of dependents etc.
- Review your insurance: general liability and workmen’s comp to be sure you have adequate coverages.
- Did you make any major purchases during the past year? Will they create additional job openings – this may qualify for a tax credit.