Monday, June 23. 2008
Ivory Tower Foreclosure Data Number Crunchers - More Beast than Beauty...
Tonight’s short Blog is written in reference to the Housing Commission hearing that I was a part of today (as one of the appointed commissioners). The topic of the hearing in the General Assembly Building in Richmond Virginia concerned mortgage defaults and housing foreclosures. As a quick comment – This most recent hearing was very much like the previous briefings we were given during the period of January to March 2008 as a part of the Virginia Governor’s Foreclosure Prevention Task Force. Unfortunately (for sellers anyway) the briefing continued to reinforce the same negative trends we have been seeing for the past 6-months or so…
The briefing started off with the Deputy Commissioner of the Bureau of Financial Institutions (Head Banking Regulator in Virginia) addressing the several mortgage and lending regulation laws that have been passed in Virginia this past legislative session (and which go into effect on 01 July 2008 – HB 1487 in particular – licensing for individual loan officers, criminal background checks for persons with access to applicants/borrowers credit reports and social security numbers). No real news in this area, just the reaction to lending misdeeds of past years…
The next briefer was the Chief Banking Regulator of the Federal Reserve Bank in Richmond, who had a very detailed analysis of the problems facing the broader marketplace. Specifically, the Federal Reserve briefer noted the following items:
1. In year 2006 Virginia ranked 41st in foreclosure activity.
2. In year 2007, Virginia ranked 24th in foreclosure activity.
3. In April 2008, Virginia now ranks 12th in foreclosure activity.
Virginia has not yet caught up with California, Florida, Nevada, Arizona or Ohio but we are closing in on the foreclosure leaders… Anyway, not a good trend line to be on.
The briefer went on to say that while bad Sub-prime loans have taken us to this specific foreclosure point, the on-going credit crisis and resulting lack of buyers have now resulted in home price instability that is now causing Alt-A and Prime loans to increasingly also go into default and foreclosure, as even normal sellers who are current on their loans do not have many buyers to sell to (and since the rest of the foreclosures in the area are now driving house prices down so they can no longer sell their houses for what they owe on their mortgages – a self-fulfilling downward spiral). Of course, this is a state-wide picture and is not to be considered as the case in your neighborhood.
As an example – in Prince Henry County Virginia, 62% of the homes listed for sale in April 2008 were bank owned REO’s. I will go over the specific high foreclosure zip codes in the Hampton Roads area at the training class on 30 June (next Monday).
The next briefer was the Assistant Director of the Virginia Housing Development Administration (VHDA) who noted the following:
1. They noted the fact that FHA (Federal Housing Administration) is the only real source of mortgage underwriting other than Veteran’s Administration (VA) loans. She went on to note that FHA is the most flexible lending underwriter who is currently underwriting residential loans. Great. So with all the rule/credit tightening going on inside FHA headquarters right now, meaning that this is not looking good for the home team with credit/money is becoming less available each week…
2. VHDA wrote 1.4 Billion in low interest loans in 2007 but only has funding to write 840 Million in loans in 2008 (i.e., about 650 loans for the whole year).
3. VHDA said they have just finished holding 5 mortgage clinics from around the state of Virginia (May-June 2008) and that they had over 700 homeowner attendees at these clinics. The shocking thing to VHDA's staff was that the overwhelming number of attendees only wanted advice from the VHDA counselors on how to walk away from their upside down mortgages…
The final briefer was from the Home Builders Association. He started off with the observation that “The home-building industry is flat on its back”. The briefer also noted that their current and immediate future prospects were pretty bleak. He went on to offer these building start numbers:
a. 50,000 home building starts in 2005.
b. 40,000 home building starts in 2006.
c. 30,000 home building starts in 2007.
d. On pace to only have 20,000 building starts in 2008.
This home builder briefer then concluded with the observation that builders have realized that they first need to sell what they built (and so far have not sold from last year) before they build anymore houses this year. He also said that he did not see any possibility of a housing building starts rebound before the Spring of 2009…
In summing up all of this Virginia wide housing defaults and foreclosure data, it seems clear that the basic problem has not yet been solved and that there is no clear plan on a national scale to solve it other than to allow the market to solve the issue through more and more foreclosures going full term. Additionally, it should be noted that Congress says it is taking a last shot later this week at agreeing on a legislative package (until they go on break for the 4th of July break) to try to solve this foreclosure issue with federal legislation. The Senate is expected to pass their version on 24 June but the House has a different version...
Accordingly, if this bill does not become law in the very near future, there will most probably be no “action based law” passed until January 2009 (i.e., after the election in November and well after it would have any positive effect on the eventual outcome in any event). This simply means to me that there will most probably be no national plan in place to soften the foreclosure process. Accordingly, it is anyone's guess what other economic dominos may fall as a result of this downward spiral process (especially as interest rates and inflation both also continue to rise for the rest of this year and next year).
Anyway, this is the big picture of the doom & gloom increasing foreclosure trend that we are all on BUT it should not be considered as being necessarily bad for the investor-buyer who does not use money from banks and who believes in creative seller financing, long term property ownership and positive cash flow as the ultimate goal.
We’ll talk more about this game plan next Monday at the FPCofAmerica.org training session (7-9pm).
Best wishes for your Great Investing!
Mike Cheatwood
Hi Mike,
I have a motivated seller who has filed bankruptcy in April. The home is also in foreclosure and he has no intentions of staying there. The home is located in the Beach. With all the training, I can't remember the specific details of a transaction like this. My question(s) is this still a deal or has the bankruptcy prevented us from moving forward? Our strategy is to wholesale it, but if the opportunity presents itself, we would like to maximize our potential profit considering we are trying to establish capital for future deals. I didn't see any blogs on something this detail but I could have overlooked it. Thank you BJ
BJ,
I have purchased 3 properties in the past 2 years out of bankruptcy where there was first and foremost a large equity in the property. One time I waited until their bankruptcy was discharged and twice I got them to ask the Court to dimiss their bankruptcy. In each case it was a very nice payday!
Give me a call with the numbers and let's talk about how we can do this together.
Good luck,
Mike
831-9910
The briefing started off with the Deputy Commissioner of the Bureau of Financial Institutions (Head Banking Regulator in Virginia) addressing the several mortgage and lending regulation laws that have been passed in Virginia this past legislative session (and which go into effect on 01 July 2008 – HB 1487 in particular – licensing for individual loan officers, criminal background checks for persons with access to applicants/borrowers credit reports and social security numbers). No real news in this area, just the reaction to lending misdeeds of past years…
The next briefer was the Chief Banking Regulator of the Federal Reserve Bank in Richmond, who had a very detailed analysis of the problems facing the broader marketplace. Specifically, the Federal Reserve briefer noted the following items:
1. In year 2006 Virginia ranked 41st in foreclosure activity.
2. In year 2007, Virginia ranked 24th in foreclosure activity.
3. In April 2008, Virginia now ranks 12th in foreclosure activity.
Virginia has not yet caught up with California, Florida, Nevada, Arizona or Ohio but we are closing in on the foreclosure leaders… Anyway, not a good trend line to be on.
The briefer went on to say that while bad Sub-prime loans have taken us to this specific foreclosure point, the on-going credit crisis and resulting lack of buyers have now resulted in home price instability that is now causing Alt-A and Prime loans to increasingly also go into default and foreclosure, as even normal sellers who are current on their loans do not have many buyers to sell to (and since the rest of the foreclosures in the area are now driving house prices down so they can no longer sell their houses for what they owe on their mortgages – a self-fulfilling downward spiral). Of course, this is a state-wide picture and is not to be considered as the case in your neighborhood.
As an example – in Prince Henry County Virginia, 62% of the homes listed for sale in April 2008 were bank owned REO’s. I will go over the specific high foreclosure zip codes in the Hampton Roads area at the training class on 30 June (next Monday).
The next briefer was the Assistant Director of the Virginia Housing Development Administration (VHDA) who noted the following:
1. They noted the fact that FHA (Federal Housing Administration) is the only real source of mortgage underwriting other than Veteran’s Administration (VA) loans. She went on to note that FHA is the most flexible lending underwriter who is currently underwriting residential loans. Great. So with all the rule/credit tightening going on inside FHA headquarters right now, meaning that this is not looking good for the home team with credit/money is becoming less available each week…
2. VHDA wrote 1.4 Billion in low interest loans in 2007 but only has funding to write 840 Million in loans in 2008 (i.e., about 650 loans for the whole year).
3. VHDA said they have just finished holding 5 mortgage clinics from around the state of Virginia (May-June 2008) and that they had over 700 homeowner attendees at these clinics. The shocking thing to VHDA's staff was that the overwhelming number of attendees only wanted advice from the VHDA counselors on how to walk away from their upside down mortgages…
The final briefer was from the Home Builders Association. He started off with the observation that “The home-building industry is flat on its back”. The briefer also noted that their current and immediate future prospects were pretty bleak. He went on to offer these building start numbers:
a. 50,000 home building starts in 2005.
b. 40,000 home building starts in 2006.
c. 30,000 home building starts in 2007.
d. On pace to only have 20,000 building starts in 2008.
This home builder briefer then concluded with the observation that builders have realized that they first need to sell what they built (and so far have not sold from last year) before they build anymore houses this year. He also said that he did not see any possibility of a housing building starts rebound before the Spring of 2009…
In summing up all of this Virginia wide housing defaults and foreclosure data, it seems clear that the basic problem has not yet been solved and that there is no clear plan on a national scale to solve it other than to allow the market to solve the issue through more and more foreclosures going full term. Additionally, it should be noted that Congress says it is taking a last shot later this week at agreeing on a legislative package (until they go on break for the 4th of July break) to try to solve this foreclosure issue with federal legislation. The Senate is expected to pass their version on 24 June but the House has a different version...
Accordingly, if this bill does not become law in the very near future, there will most probably be no “action based law” passed until January 2009 (i.e., after the election in November and well after it would have any positive effect on the eventual outcome in any event). This simply means to me that there will most probably be no national plan in place to soften the foreclosure process. Accordingly, it is anyone's guess what other economic dominos may fall as a result of this downward spiral process (especially as interest rates and inflation both also continue to rise for the rest of this year and next year).
Anyway, this is the big picture of the doom & gloom increasing foreclosure trend that we are all on BUT it should not be considered as being necessarily bad for the investor-buyer who does not use money from banks and who believes in creative seller financing, long term property ownership and positive cash flow as the ultimate goal.
We’ll talk more about this game plan next Monday at the FPCofAmerica.org training session (7-9pm).
Best wishes for your Great Investing!
Mike Cheatwood
Hi Mike,
I have a motivated seller who has filed bankruptcy in April. The home is also in foreclosure and he has no intentions of staying there. The home is located in the Beach. With all the training, I can't remember the specific details of a transaction like this. My question(s) is this still a deal or has the bankruptcy prevented us from moving forward? Our strategy is to wholesale it, but if the opportunity presents itself, we would like to maximize our potential profit considering we are trying to establish capital for future deals. I didn't see any blogs on something this detail but I could have overlooked it. Thank you BJ
BJ,
I have purchased 3 properties in the past 2 years out of bankruptcy where there was first and foremost a large equity in the property. One time I waited until their bankruptcy was discharged and twice I got them to ask the Court to dimiss their bankruptcy. In each case it was a very nice payday!
Give me a call with the numbers and let's talk about how we can do this together.
Good luck,
Mike
831-9910
Friday, June 20. 2008
Where is the money? Can you say owner financing terms?
Today’s Blog follows up on the 150+ real estate investor group meeting that I enjoyed MC’ing this past Tuesday evening in Virginia Beach, VA. The good news is that with 150+ attendees (22 guests, 130+ dues paying members) there is still a lot of local interest in real estate investing, networking and training. Contrast this with the 30 odd attendees at meetings of this same group (TRIG) in the 1990’s when everyone was in love with the stock market and it is clear we have a bunch of much more educated and motivated investors these days.
In going back to this investor group meeting (of which I am also the immediate past president – 2002-2006) , our speaker of the evening was the current President who is also a well known local real estate attorney (Stephen Gunther) as well as being my attorney and friend. He went on to speak about the challenges this market poses to investors and others in the associated real estate businesses (loan officers, real estate agents, closing agents, builders, etc…). The evenings topics included many of the former Blog posts I have covered on this “Ask Mike” site over the past year. And obviously the growing challenges on the question “where’s the money?” are a moving target as FHA has taken over a majority of the residential loan market and keeps changing/tightening the rules as to who and how they will lend mortgage money.
Recent FHA rulings since April 2008 are as follows:
1. FHA backed loans restricted to a maximum of 4 per investor (down from 10).
2. FHA will no longer permit 3rd party down payment assistance (sometime in August 2008).
3. FHA will no longer allow mortgages to be refinanced if the deed is in one name and the loan is in another person’s name (i.e., basically the definition of a subject to purchase situation).
4. Investor down payment requirements from conventional lenders are steadily increasing.
In continuing on the theme of “where’s the money?”, the State of Virginia has also contributed to the current credit crunch by passing legislation this year thereby restricting (unlicensed) private hard money lenders to 3 loans in any 12 month period while also removing the “owner-occupant” characterization from the loans. This change seems to blur the line between private lenders making business loans to rehabbers/investors (i.e., OK) and those consumer protection homeowner loans (only OK if you are a licensed lender – otherwise this would be considered predatory lending). Of course, there are those of us who have already figured out ways for private money to continue to do business in funding the pre-foreclosure/rehab purchase of property by investors (The exact procedure will be detailed in the soon to come out Hard Money Lending book I am working on with 3 time Author/National Speaker Lonnie Scruggs).
Besides the lack of conventional financing options in the current marketplace, what else should investors be informed about so they avoid the big mistakes? One of the big ones is to pay for you education at a time and place of your own choosing but also choose to not pay these exorbitant fees to the “guru’s” that want to sell you boot camps at $5,000 and up… It just makes me cringe to have recently talked with several local investors that have paid $30,000 or more by following the guru’s “step plan” or whatever they call it… (step into debt I guess…). So do we all need more education as markets change? By all means YES, but it should not cost you these ridiculous amounts. The point being that for an investment of $1,000, an investor can have 2-3 different training courses (if you avoid the names like Trump, Rich Dad, etc...) The next step is to learn the processes taught in your new courses and then go make offers (just do not keep buying books/courses until you have put the current ones to use! = Just do your best to avoid falling into that self-defeating delaying tactic called analysis paralysis…).
It should be just as obvious that the investor has to make offers if the investor is going to be more than just all hat and no cattle. In any event, make sure you remember to do your due diligence homework before you close on your accepted offers. NOTE - I always prefer to have a phone call from an investor start off with “Mike, I need you advice/help, I made an offer last night and I sure hope they say no” rather than “Mike, I just closed on _______ and here is the problem I am having” (i.e., usually too late by that point). The other thing is that when investors get into trouble, please stay in tune with what is going on in the market now (not what was happening last summer or two years ago) and try to get out of the bad situation as soon as possible even if this means you make no profit. Unfortunately, by not making this decision soon enough too many investors are going, going, gone all the way into foreclosure and this is happening only after they have also gone through all of their money too... So if you have already made a bad decision (or two or three and yes, it happens to all of us) and the market just will not cooperate and the property will not sell/cash flow, do you want to try to hang on until all of your money and credit are gone or should you cut your losses earlier and try to hang onto one or the other?
Ok, so you are not in this situation and are also an optimistic as concerns the “system” providing the necessary tools for the investor to succeed... Hmmmm… Let’s see, interest rates are now at the highest point in the past 9 months and not likely to come down since we are now experiencing higher and higher inflation due to the rise in energy costs and food. The Federal Reserve has also been signaling they plan to raise rates soon anyway…. This means that conventional loans are becoming more and more unattractive unless house prices drop by a corresponding amount so that rate, term and price are once in balance and the property will again cash flow based on the purchase math numbers.
Alright, let’s talk about available housing stock (current inventory for sale) and the effect of this fact on the ability of the investor to be successful in today’s market. Nationally, there is about a 10.5 month supply which is more than double the usual 4-5 month supply. Locally we have more than 15,000 houses for sale which again is a large over-supply. As with any product oversupply situation, the more supply you have the less it is worth. However, in every market affordable housing is still sought after and this sweet spot in the market is a sought after piece of information. Sweet spot? Yes, I mean that “zone” in the local housing market that equates to the location, modern features and affordability that the majority of the house buying public is always seeking. Locally where I live this usually equates to a $100,000 - $200,000 home with 3 bedrooms and 2 baths in safe neighborhoods close to schools, work and major transportation routes. Currently, this means buyers want to live closer to city/town centers, relative to their expenses of the rising cost of gas and diesel, to the detriment of the further out suburb neighborhoods… And no, this trend is not going to change anytime soon…
Finally, there is the overall confidence problem that is keeping buyers from buying as they wait to see what is going to happen with prices – continue to drop? Interest rates go down or up? Etc…? Unfortunately, with rising national unemployment and a general recession mentality this mental psychology problem is going to take the average potential buyer some more time to get comfortable with the new market we are in (and seem to be stuck in) for the foreseeable future. Does this mean people will not buy houses? No, I am not saying that but the fact that we have more houses (inventory) for sale than we have buyers coupled with this negative mentality means the problem is not going away tomorrow either.
In summary of the challenges the investor is facing in today’s market, it is probably not the best plan to continue to try to use conventional banks for your purchase financing money and it is still a tough time to be a seller of a property that is outside of your markets sweet spot. Otherwise it is a great time to be a landlord receiving positive cash flow and it is becoming better everyday to be a buyer, as long as you choose to deal with motivated sellers and employ creative owner financing methods.
And what are some of the creative owner financing methods? Let’s review the ideas (if not the specifics) of how each method is employed and which situations make the most sense.
Subject to purchases – This is where the investor buys the house (gets the signed deed from the seller) and where the seller agrees to keep their existing mortgage in place on the property. The investor does not have to get a new loan and keeps their “get in the deal” cash to a minimum (and this deal does not show up on the investor’s credit report either). This technique is in favor of the buyer.
Wrap around mortgage (AKA – All Inclusive Trust Deed) – This is where the seller agrees to fund some or all of their equity by creating a second mortgage that wraps around the sellers existing first mortgage. The investor-buyer then gets the signed deed from the seller and the seller takes back this seller financed wrap mortgage for their benefit (no banks needed). This technique is in favor of the buyer.
Land contract – This is where the seller gives the possession and use of the property to the buyer and also conveys equitable title to the buyer but retains the legal title/deed until the requirements laid out in the contract are met and the legal title/deed is then transferred from the seller to the buyer (i.e., usually when some or all of the payments have been made). This technique is in favor of the seller.
Lease-option/lease-purchase – This is where the seller gives possession and use to the buyer-tenant and where the buyer tenant either has the right to purchase under the option (but not the obligation) or where under the lease-purchase the tenant-buyer has the possession and use as well as the obligation to buy the property at some future point. This technique is in favor of the seller (unless you do like I do and sub-sequentially re-lease the property out to qualified occupant-tenants at a higher monthly rent than I negotiated having to pay to the owner-seller – And then live on the several hundred dollar per month spread created X the number of these type deals that any of us can easily do...).
In closing, I think we are all aware that this market has a number of challenges and we should all be aware that they will be with us for awhile. Of course, the investor that gets away from having to sell (especially outside of the sweet spot ) and having to use banks to fund deals, will do just fine. Oh, and remember that the definition of a “good deal” has not changed in many years – If you can buy it cheap (i.e., purchase price and the amount of your cash required going in) so that the property produces a positive monthly rental cash flow right away = you got a good deal.
And these are the type of deals we will be talking about at my next investor training class on 30 June (Monday) from 7-9pm at the Crowne Plaza Hotel in VA Beach, VA.
See you there!
Best wishes for your great investing!
Mike Cheatwood, President
Foreclosure Prevention Council of America
Past President Tidewater Real Estate Investors Group
In going back to this investor group meeting (of which I am also the immediate past president – 2002-2006) , our speaker of the evening was the current President who is also a well known local real estate attorney (Stephen Gunther) as well as being my attorney and friend. He went on to speak about the challenges this market poses to investors and others in the associated real estate businesses (loan officers, real estate agents, closing agents, builders, etc…). The evenings topics included many of the former Blog posts I have covered on this “Ask Mike” site over the past year. And obviously the growing challenges on the question “where’s the money?” are a moving target as FHA has taken over a majority of the residential loan market and keeps changing/tightening the rules as to who and how they will lend mortgage money.
Recent FHA rulings since April 2008 are as follows:
1. FHA backed loans restricted to a maximum of 4 per investor (down from 10).
2. FHA will no longer permit 3rd party down payment assistance (sometime in August 2008).
3. FHA will no longer allow mortgages to be refinanced if the deed is in one name and the loan is in another person’s name (i.e., basically the definition of a subject to purchase situation).
4. Investor down payment requirements from conventional lenders are steadily increasing.
In continuing on the theme of “where’s the money?”, the State of Virginia has also contributed to the current credit crunch by passing legislation this year thereby restricting (unlicensed) private hard money lenders to 3 loans in any 12 month period while also removing the “owner-occupant” characterization from the loans. This change seems to blur the line between private lenders making business loans to rehabbers/investors (i.e., OK) and those consumer protection homeowner loans (only OK if you are a licensed lender – otherwise this would be considered predatory lending). Of course, there are those of us who have already figured out ways for private money to continue to do business in funding the pre-foreclosure/rehab purchase of property by investors (The exact procedure will be detailed in the soon to come out Hard Money Lending book I am working on with 3 time Author/National Speaker Lonnie Scruggs).
Besides the lack of conventional financing options in the current marketplace, what else should investors be informed about so they avoid the big mistakes? One of the big ones is to pay for you education at a time and place of your own choosing but also choose to not pay these exorbitant fees to the “guru’s” that want to sell you boot camps at $5,000 and up… It just makes me cringe to have recently talked with several local investors that have paid $30,000 or more by following the guru’s “step plan” or whatever they call it… (step into debt I guess…). So do we all need more education as markets change? By all means YES, but it should not cost you these ridiculous amounts. The point being that for an investment of $1,000, an investor can have 2-3 different training courses (if you avoid the names like Trump, Rich Dad, etc...) The next step is to learn the processes taught in your new courses and then go make offers (just do not keep buying books/courses until you have put the current ones to use! = Just do your best to avoid falling into that self-defeating delaying tactic called analysis paralysis…).
It should be just as obvious that the investor has to make offers if the investor is going to be more than just all hat and no cattle. In any event, make sure you remember to do your due diligence homework before you close on your accepted offers. NOTE - I always prefer to have a phone call from an investor start off with “Mike, I need you advice/help, I made an offer last night and I sure hope they say no” rather than “Mike, I just closed on _______ and here is the problem I am having” (i.e., usually too late by that point). The other thing is that when investors get into trouble, please stay in tune with what is going on in the market now (not what was happening last summer or two years ago) and try to get out of the bad situation as soon as possible even if this means you make no profit. Unfortunately, by not making this decision soon enough too many investors are going, going, gone all the way into foreclosure and this is happening only after they have also gone through all of their money too... So if you have already made a bad decision (or two or three and yes, it happens to all of us) and the market just will not cooperate and the property will not sell/cash flow, do you want to try to hang on until all of your money and credit are gone or should you cut your losses earlier and try to hang onto one or the other?
Ok, so you are not in this situation and are also an optimistic as concerns the “system” providing the necessary tools for the investor to succeed... Hmmmm… Let’s see, interest rates are now at the highest point in the past 9 months and not likely to come down since we are now experiencing higher and higher inflation due to the rise in energy costs and food. The Federal Reserve has also been signaling they plan to raise rates soon anyway…. This means that conventional loans are becoming more and more unattractive unless house prices drop by a corresponding amount so that rate, term and price are once in balance and the property will again cash flow based on the purchase math numbers.
Alright, let’s talk about available housing stock (current inventory for sale) and the effect of this fact on the ability of the investor to be successful in today’s market. Nationally, there is about a 10.5 month supply which is more than double the usual 4-5 month supply. Locally we have more than 15,000 houses for sale which again is a large over-supply. As with any product oversupply situation, the more supply you have the less it is worth. However, in every market affordable housing is still sought after and this sweet spot in the market is a sought after piece of information. Sweet spot? Yes, I mean that “zone” in the local housing market that equates to the location, modern features and affordability that the majority of the house buying public is always seeking. Locally where I live this usually equates to a $100,000 - $200,000 home with 3 bedrooms and 2 baths in safe neighborhoods close to schools, work and major transportation routes. Currently, this means buyers want to live closer to city/town centers, relative to their expenses of the rising cost of gas and diesel, to the detriment of the further out suburb neighborhoods… And no, this trend is not going to change anytime soon…
Finally, there is the overall confidence problem that is keeping buyers from buying as they wait to see what is going to happen with prices – continue to drop? Interest rates go down or up? Etc…? Unfortunately, with rising national unemployment and a general recession mentality this mental psychology problem is going to take the average potential buyer some more time to get comfortable with the new market we are in (and seem to be stuck in) for the foreseeable future. Does this mean people will not buy houses? No, I am not saying that but the fact that we have more houses (inventory) for sale than we have buyers coupled with this negative mentality means the problem is not going away tomorrow either.
In summary of the challenges the investor is facing in today’s market, it is probably not the best plan to continue to try to use conventional banks for your purchase financing money and it is still a tough time to be a seller of a property that is outside of your markets sweet spot. Otherwise it is a great time to be a landlord receiving positive cash flow and it is becoming better everyday to be a buyer, as long as you choose to deal with motivated sellers and employ creative owner financing methods.
And what are some of the creative owner financing methods? Let’s review the ideas (if not the specifics) of how each method is employed and which situations make the most sense.
Subject to purchases – This is where the investor buys the house (gets the signed deed from the seller) and where the seller agrees to keep their existing mortgage in place on the property. The investor does not have to get a new loan and keeps their “get in the deal” cash to a minimum (and this deal does not show up on the investor’s credit report either). This technique is in favor of the buyer.
Wrap around mortgage (AKA – All Inclusive Trust Deed) – This is where the seller agrees to fund some or all of their equity by creating a second mortgage that wraps around the sellers existing first mortgage. The investor-buyer then gets the signed deed from the seller and the seller takes back this seller financed wrap mortgage for their benefit (no banks needed). This technique is in favor of the buyer.
Land contract – This is where the seller gives the possession and use of the property to the buyer and also conveys equitable title to the buyer but retains the legal title/deed until the requirements laid out in the contract are met and the legal title/deed is then transferred from the seller to the buyer (i.e., usually when some or all of the payments have been made). This technique is in favor of the seller.
Lease-option/lease-purchase – This is where the seller gives possession and use to the buyer-tenant and where the buyer tenant either has the right to purchase under the option (but not the obligation) or where under the lease-purchase the tenant-buyer has the possession and use as well as the obligation to buy the property at some future point. This technique is in favor of the seller (unless you do like I do and sub-sequentially re-lease the property out to qualified occupant-tenants at a higher monthly rent than I negotiated having to pay to the owner-seller – And then live on the several hundred dollar per month spread created X the number of these type deals that any of us can easily do...).
In closing, I think we are all aware that this market has a number of challenges and we should all be aware that they will be with us for awhile. Of course, the investor that gets away from having to sell (especially outside of the sweet spot ) and having to use banks to fund deals, will do just fine. Oh, and remember that the definition of a “good deal” has not changed in many years – If you can buy it cheap (i.e., purchase price and the amount of your cash required going in) so that the property produces a positive monthly rental cash flow right away = you got a good deal.
And these are the type of deals we will be talking about at my next investor training class on 30 June (Monday) from 7-9pm at the Crowne Plaza Hotel in VA Beach, VA.
See you there!
Best wishes for your great investing!
Mike Cheatwood, President
Foreclosure Prevention Council of America
Past President Tidewater Real Estate Investors Group
Monday, June 16. 2008
The Cheapest Eviction is the one you never have to do...
The conventional wisdom is that no one wins going to Court over tenants/toilets… And I fully agree! Of course, this does not mean that you never go to court as you do have to protect your cash flow stream and enforce your various real estate contracts from time to time...
Today’s Blog is taken from my day in landlord court today and is not a story about great success nor is a tale of woe. This is just the story of a contested hearing (continued from 08 May 2008) with a tenant that said she did not owe rent. Please also note that I have not been in a Virginia Landlord (General District) Court since 2003 but I recently took over a rental portfolio for a friend/fellow investor on 01 June. My sole intention in going to court today was that I wanted to help my friend’s lawyer get this one tenant out of the property where she had been “squatting” for 6 months without paying. Of course, the property and case were in Portsmouth VA and for those of you without rentals in this fair city, this is the court of “let’s always believe whatever the tenant says” and if that does not work, then the court usually “just starts making stuff up” (that are not part of the current statute or in the law books) that quite often result in the landlord getting beat up and the case being continued, dismissed, delayed, etc...
Before we get started, many of you may be wondering what this has to do with you and your rentals (or future rentals) and this is the point. Quite often we buy properties and inherit tenants that someone else put in the property. Sometimes this is the reason you can buy the property and get a good deal to begin with! The first step after you take over is to explain to the tenants where you are coming from, what actions you will take if they do not perform as expected (within the confines of the lease agreement and law) and then continue to train them or process them out of the property if they are un-trainable. Having processed out (evicted) well over 100 tenants during my apartment building days, I could already tell that this tenant (in court today) was on her way out. I think the $4,600+ that she owed was a fairly good indication that she was about done milking my friend and was ready to find a new sucker (I mean rental property owner) to rent from. Note – I feel that I can say landlords/owners can be suckers because I also fell for just about every BS tenant story when I started out as a landlord years ago. Of course, my friend (with the tenant in court today) had lots of help in being played for a sucker by his former “professional property management company” that just could not seem to get this tenant to pay nor could find a way to get her evicted (i.e., obviously bigger is not always better as many landlords being "served" by BIG Property Management Companies seem to feel overlooked to the detriment of their cash flow streams).
In moving on, I was able to get the “possession order” in court and will have her out of the property a week from Thursday. Our actually getting paid the $4,600.00 will be another story (as in how do you get blood from a turnip) but I was able to get her new address today so we know where to find her for the pending judgment and garnishment order. The next step is to get these properties on a positive cash flow basis so my friend can start to enjoy the benefits of owning real estate on a long term basis.
So let’s review the basic court process and then the specifics of today’s court case.
Assuming you have a rental property and it is rented, the legal/court process starts with the landlord/property manager sending the non-paying tenant a notice to perform as agreed in the rental lease (usually called a “Pay of Quit’ Notice in general terms). If the tenant still does not pay, then the next step is to file an unlawful detainer warrant once the notice period has expired. The plaintiff (landlord) must also sign the Service Member Civil Relief Act affidavit stating whether or not the tenant is in the military (i.e., if they are in the military the tenant has more rights that must be observed before any serious legal action can take place).
The next step is to go back to court on the appointed day. The landlord needs to bring a copy of the 5-day notice, the lease and a record of payments (if any). The landlord’s dialogue is usually pretty simple – Yes, your honor I gave them the 5-day notice, there are no credits (payments) made on the account since filing or if there are credits then state what partial payments have been made to date. The landlord’s summary to the court (the Judge) is to say that you request judgment for the amount still owed and that you request possession of the property. If the tenant did not show up you will want to request immediate possession so that you do not have to wait the 10 days in order to file the eviction warrant with the clerk of court (this is the document that then brings the Sheriff to the property to oversee the eviction the landlord will conduct). Anyway, this is the way the process is supposed to work and it usually goes this way if the tenant does not show up or does not contest the money owed…
So how did it go today? Well, first of all the above process did not work as planned back in May when the tenant contested the rent being owed when the former property manager/attorney took the tenant to court the first time.
That brought us to today where the facts of her contesting the case were to be heard. Anyway, she did not have any facts to refute her owing the money but still tried to change the subject by complaining about repairs needing to be done and by lying in her saying that the former property manager had allowed her to offset her rent against her utility bills and repairs that were not part of the court case (i.e., rent money is owed – yes or no).
The amazing thing was the judge actually allowed the tenant is “assert” these repair issues as a defense against owing the rent, which is specifically not allowed by the Virginia Residential Landlord Tenant Act statute (i.e., the make stuff up part of Portsmouth Court). The Judge also decided that he would continue the case until 15 July to consider how much rent was actually owed – Amazing! Fortunately, we were able to convince the Judge that since she had not paid rent in 6 months, that since her lease had expired and we were not going to renew it that we were entitled to possession. The Judge then granted us a possession order for the property.
So out of the courtroom to the hallway the tenant and I go (remember I am the “new guy”, not the bad old property manager of the past 6 months) and we have a friendly talk. I asked her what her plans were and the tenant volunteers she is moving out on 26 June as she has already found a new place to live (beware you landlords out there!). Not missing a beat, I asked her what the address was and she gave it to me. Anyway, it will be time to file on her for the 6 months of rent and any damages owed in about 2 weeks (as well as to place a claim against her security deposit) once she is out and we can assess the damages to the unit.
In summary – Once I get these problem tenants out of the properties, I will go back to just letting the attorney go to court (if needed). The real point to remember is that I feel that successful landlording (at least the way I do it) starts with great applicant screening and using a tight and enforced lease so that these type of problems should be few and far between. The cheapest eviction is always the one you do not have to do which is usually because you did not “hire” the wrong tenant in the first place!
In closing, I would tell you about the other court case that took place today right after mine, where another good friend of mine was suing a non-paying tenant that also had given him $3,000.00 as an option consideration payment (this was a lease-option purchase deal gone bad) but I will save that story for my Creative Landlording class on 30 June.
Best wishes for your Great Investing!
Mike Cheatwood
PS The new landlord-tenant handbooks should be out soon and are free (i.e., one to a customer) if you call (804) 371-7000 and say “I would like to request a free copy of the landlord-tenant handbook. The department of housing will ask you for your name and address – The handbook will arrive in 3-5 days…
Today’s Blog is taken from my day in landlord court today and is not a story about great success nor is a tale of woe. This is just the story of a contested hearing (continued from 08 May 2008) with a tenant that said she did not owe rent. Please also note that I have not been in a Virginia Landlord (General District) Court since 2003 but I recently took over a rental portfolio for a friend/fellow investor on 01 June. My sole intention in going to court today was that I wanted to help my friend’s lawyer get this one tenant out of the property where she had been “squatting” for 6 months without paying. Of course, the property and case were in Portsmouth VA and for those of you without rentals in this fair city, this is the court of “let’s always believe whatever the tenant says” and if that does not work, then the court usually “just starts making stuff up” (that are not part of the current statute or in the law books) that quite often result in the landlord getting beat up and the case being continued, dismissed, delayed, etc...
Before we get started, many of you may be wondering what this has to do with you and your rentals (or future rentals) and this is the point. Quite often we buy properties and inherit tenants that someone else put in the property. Sometimes this is the reason you can buy the property and get a good deal to begin with! The first step after you take over is to explain to the tenants where you are coming from, what actions you will take if they do not perform as expected (within the confines of the lease agreement and law) and then continue to train them or process them out of the property if they are un-trainable. Having processed out (evicted) well over 100 tenants during my apartment building days, I could already tell that this tenant (in court today) was on her way out. I think the $4,600+ that she owed was a fairly good indication that she was about done milking my friend and was ready to find a new sucker (I mean rental property owner) to rent from. Note – I feel that I can say landlords/owners can be suckers because I also fell for just about every BS tenant story when I started out as a landlord years ago. Of course, my friend (with the tenant in court today) had lots of help in being played for a sucker by his former “professional property management company” that just could not seem to get this tenant to pay nor could find a way to get her evicted (i.e., obviously bigger is not always better as many landlords being "served" by BIG Property Management Companies seem to feel overlooked to the detriment of their cash flow streams).
In moving on, I was able to get the “possession order” in court and will have her out of the property a week from Thursday. Our actually getting paid the $4,600.00 will be another story (as in how do you get blood from a turnip) but I was able to get her new address today so we know where to find her for the pending judgment and garnishment order. The next step is to get these properties on a positive cash flow basis so my friend can start to enjoy the benefits of owning real estate on a long term basis.
So let’s review the basic court process and then the specifics of today’s court case.
Assuming you have a rental property and it is rented, the legal/court process starts with the landlord/property manager sending the non-paying tenant a notice to perform as agreed in the rental lease (usually called a “Pay of Quit’ Notice in general terms). If the tenant still does not pay, then the next step is to file an unlawful detainer warrant once the notice period has expired. The plaintiff (landlord) must also sign the Service Member Civil Relief Act affidavit stating whether or not the tenant is in the military (i.e., if they are in the military the tenant has more rights that must be observed before any serious legal action can take place).
The next step is to go back to court on the appointed day. The landlord needs to bring a copy of the 5-day notice, the lease and a record of payments (if any). The landlord’s dialogue is usually pretty simple – Yes, your honor I gave them the 5-day notice, there are no credits (payments) made on the account since filing or if there are credits then state what partial payments have been made to date. The landlord’s summary to the court (the Judge) is to say that you request judgment for the amount still owed and that you request possession of the property. If the tenant did not show up you will want to request immediate possession so that you do not have to wait the 10 days in order to file the eviction warrant with the clerk of court (this is the document that then brings the Sheriff to the property to oversee the eviction the landlord will conduct). Anyway, this is the way the process is supposed to work and it usually goes this way if the tenant does not show up or does not contest the money owed…
So how did it go today? Well, first of all the above process did not work as planned back in May when the tenant contested the rent being owed when the former property manager/attorney took the tenant to court the first time.
That brought us to today where the facts of her contesting the case were to be heard. Anyway, she did not have any facts to refute her owing the money but still tried to change the subject by complaining about repairs needing to be done and by lying in her saying that the former property manager had allowed her to offset her rent against her utility bills and repairs that were not part of the court case (i.e., rent money is owed – yes or no).
The amazing thing was the judge actually allowed the tenant is “assert” these repair issues as a defense against owing the rent, which is specifically not allowed by the Virginia Residential Landlord Tenant Act statute (i.e., the make stuff up part of Portsmouth Court). The Judge also decided that he would continue the case until 15 July to consider how much rent was actually owed – Amazing! Fortunately, we were able to convince the Judge that since she had not paid rent in 6 months, that since her lease had expired and we were not going to renew it that we were entitled to possession. The Judge then granted us a possession order for the property.
So out of the courtroom to the hallway the tenant and I go (remember I am the “new guy”, not the bad old property manager of the past 6 months) and we have a friendly talk. I asked her what her plans were and the tenant volunteers she is moving out on 26 June as she has already found a new place to live (beware you landlords out there!). Not missing a beat, I asked her what the address was and she gave it to me. Anyway, it will be time to file on her for the 6 months of rent and any damages owed in about 2 weeks (as well as to place a claim against her security deposit) once she is out and we can assess the damages to the unit.
In summary – Once I get these problem tenants out of the properties, I will go back to just letting the attorney go to court (if needed). The real point to remember is that I feel that successful landlording (at least the way I do it) starts with great applicant screening and using a tight and enforced lease so that these type of problems should be few and far between. The cheapest eviction is always the one you do not have to do which is usually because you did not “hire” the wrong tenant in the first place!
In closing, I would tell you about the other court case that took place today right after mine, where another good friend of mine was suing a non-paying tenant that also had given him $3,000.00 as an option consideration payment (this was a lease-option purchase deal gone bad) but I will save that story for my Creative Landlording class on 30 June.
Best wishes for your Great Investing!
Mike Cheatwood
PS The new landlord-tenant handbooks should be out soon and are free (i.e., one to a customer) if you call (804) 371-7000 and say “I would like to request a free copy of the landlord-tenant handbook. The department of housing will ask you for your name and address – The handbook will arrive in 3-5 days…
Friday, June 13. 2008
Humor in life, focus and sucess in investing!
Today’s blog starts with the observation that while we are always out looking for good deals to buy (and sometimes sell) there are also other ways to pass (and even enjoy) the day in this business that involve humor and finding ways to improve our continuing education. So, did you hear the one about the investor who was walking down the street wearing red shoes and where a house fell on him? No, that was the other story about the girl from Kansas with the dog and the witch, etc…
Anyway, sometimes in the course of being out and about looking for deals and talking with people, I also come across humorous situations in my day like when I was called yesterday by a well known local TV reporter (who had previously laid in wait for Steve Gunther and me after we had testifyied in a House of Delegates hearing in Richmond on pro-investor foreclosure legislation in February 2008). This reporter wanted to interview me again but this time about foreclosure prevention counseling procedures as concerns the current market as he was aware I was on the Governor’s Foreclosure Prevention Task Force. I said no problem but I forewarned him that my homeowner counseling consisted of finding out information over the phone to see if this was a situation that I may be interested in solving as an investor (by buying the property). If I did not find the information interesting as an investor (i.e., location, no equity, payment a lot more than rent, etc…) I would then offer some advice about talking with their lender and other consumer advocate types like the Housing Opportunities Made Equal (HOME) organization or the federal HOPE NOW organization, etc… Anyway, I convinced the TV reporter that he needed to call the HOME organization…
However, before we got off the phone I had already looked his name up on line and had determined that he owned 8 rental properties in the local area AND had also just started buying them 4 years ago (2004) when it started being the “in” thing to do to get in and make money in real estate (i.e., right before the market topped out in 2005). I then asked him how he liked being a landlord and here is where the conversation turned interesting… He said that his properties provided cash flow but that he was trying to sell his properties so that he could “get his life back” (sounded like an unhappy landlord to me). In talking further (he was on a roll by now) he said he was able to keep tenants longer by promising them he would reduce their rent by $50 for every year they stayed in the property. I admitted that I had never heard this type of landlord plan before so I asked him to tell me more (as in how was this decreasing cash flow plan working for him?). He went on to say that he wasn’t sure because he could not keep tenants for a year before they stopped paying or had to be evicted! Imagine that… After he went on to offer that he was not in foreclosure, he went on to say that he would be interested in me buying his houses. I told him I would take a look at his portfolio and get back with him if I was interested. I also went ahead and invited him to the Landlord Class I am teaching on 30 June and he said he would like to attend (which we agreed would be in an unofficial capacity)…
Note - I am constantly running into investors who seem to have little clue about what it takes to be a sucessful and happy landlord over the longterm. Do you know anyone that would be happier if they were not landlording?
Another humorous situation happened today when I call to “call” someone on a message board posting that said “wholesale deal, $165,000 cash/firm, with the foreclosure schduled in a week. They went on to say that the ARV is $195,000 and it just needs paint, carpet and landscaping (according to the would-be wholesaler). Feeling this was at a minimum a poor solicitation (although it was also fairly humorous at the same time), I responded by asking for a better explanation of where the deal was? No response was given… The point is that this erstwhile “wholesaler” was either uneducated as to what a wholesale deal actually was (i.e., 65% ARV deal as a maximum), was out “fishing” for a new investor using the “greater fool theory” or was just spinning/puffing a property to help out a fellow investor/property owner who was stuck in a bad deal. Obviously this was a retail deal with lipstick on it that will then become a foreclosure at the end of next week…
I also regularly question wholesalers that can only seem to negotiate all cash deals. If the deal is that good and the seller all that motivated, then the wholesaler needs to get the deal under contract both at a low price and with flexible buying (if not loan) terms as these loan terms are quite often controlled by the actual lender of record. My feeling is that wholesalers also need to leave the bigger portion of potential profit to the end buyer-investor, especially if they want to develop a longer term buyer-seller relationship that keeps their buyers coming back for more wholesale deals. The general rule is that the wholesaler leaves 2-3 times as much (real) profit on the table for the end buyer. An example would be a wholesaler that negotiated a purchase on a $200,000 ARV house for $120,000 where $10,000 in fix-up was also needed took a $15,000 assignment fee ($145,000 total to this point) thereby leaving $55,000 for the end buyer-investor to pay for holding costs, resale costs to include real estate commission, buyer assistance, etc… (usually the top 10% of the deal - $20,000 in this case). This then leaves the end buyer-investor the difference between $180,000 and $145,000 as their profit for taking this risk ($35,000 or 2.333 times the amount the wholesaler received for finding and negotiating the deal).
Additionally, wholesalers that cannot find a way to negotiate seller financing in their deals (as in subject to purchases or other wrap around mortgages) need to really concentrate on negotiating low sale cash prices as this keeps the end buyers cash needed to close and finish the deal to a more manageable level (and thereby enables all parties to get more deals done). Of course, we are still seeing investors come and go each year and are seeing even more wholesalers going (and at a faster rate) as most of them are not finding the great deals that keep them in business (at least as wholesalers…). NOTE – I am not “down” on wholesalers as I am aware that in general they are a newer group of investors (on average) but I wish they would work on their craft as a group so as to offer better service to investors as a whole (Sorry – This is one area that I do not offer training on but I think all seasoned investors can tell if a good deal is being offered or if this is just the only thing the wholesaler could find this week to advertise out to their buyer list…).
In summarizing, I seem to remember that I started out with observing that we need to find the humor in life's different situations before I wound up adding constructive criticism about time wasting retail deals being advertised in wholesale clothing, so let me finish on a positive note with a real joke that seeks to make a point both about enjoying life, finding ways to ignore the distractions and overcome the little preconceptions we each have and just focus on achieving your real estate education and investing goals…
The funniest times in life (not always the most profitable) are usually when we are surprised by what happens as compared to what we think is going to happen. The better the “twist” that leads to the eventual punch line the better! Obviously in having and being able to exercise your sense of humor this will allow the investor to better enjoy what they do and also have more staying power in this ever changing game. Just remember that there are times to look for laughs and there are times to be serious about your business. Also remember that success in real estate investing is basically the same way, it is mainly about how dedicated we each are and how seriously you approach the subject, the time and effort you devote to it and where you work to keep yourself from being distracted from other interests so that you reach your goals (i.e., think turn off the TV!).
Anyway, just remember that this joke deals with how we can each get locked into preconceptions about other people, their situations and what is happening, that may or may not have anything to do with the facts actually in front of us at any one time. Remember this point when you are talking with sellers as you want to keep an open mind (and ears) so you can make your best deals. ***Please also note that this joke may have more to say about the mind and focus of the reader, than of the writer… Turn back now if you are easily offended by your personal preconceptions!
"A first-grade teacher, Ms. Brooks, was having trouble with one of her
students. The teacher asked, 'Harry, what's the problem?'
Harry answered,
'I'm too smart for the 1st grade. My sister is in the 3rd grade and I'm
smarter than she is! I think I should be in the 3rd grade too!'
Ms. Brooks had had enough. She took Harry to the principal's office.
While Harry waited in the outer office, the teacher explained to the
principal the situation that her student had a high opinion of his education level. The principal told Ms. Brooks he would give the boy a test. If he failed to answer any of his questions he was to go back to the 1st grade and behave. She agreed.
Harry was brought in and the conditions were explained to him and he
agreed to take the test.
Principal: 'What is 3 x 3?'
Harry: '9.'
Principal: 'What is 6 x 6?'
Harry: '36.'
And so it went with every question the principal thought a 3rd grader
should know.
The principal looks at Ms. Brooks and tells her, 'I think Harry can go to
the 3rd grade.'
Ms. Brooks says to the principal, 'Let me ask him some questions.'
The principal and Harry both agreed.
Ms. Brooks asks, 'What does a cow have four of, that I have only two of?'
Harry, after a moment: 'Legs.'
Ms Brooks: 'What is in your pants that you have but I do not have?'
The principal wondered why would she ask such a question!
Harry replied: 'Pockets.'
Ms. Brooks: 'What does a dog do, that a man steps into?'
Harry: 'Pants.'
The principal sat forward with his mouth hanging open.
Ms. Brooks: 'What does a man do standing up, a woman does sitting down
and a dog does on three legs?'
Harry: 'Shake hands.'
The principal was trembling.
Ms. Brooks: 'What goes in the mouth hard and pink then comes out soft and sticky?'
The principal's eyes opened really wide and before he could stop the
answer, Harry replied, 'Bubble gum.'
Ms. Brooks: 'What word starts with an 'F' and ends in 'K' that is a part of a
lot of heat and excitement?'
Harry: 'Firetruck.'
The principal breathed a sigh of relief and told the teacher, 'Put
Harry in the fifth-grade, I got the last six questions wrong.....'"
In closing, I am sure that while you were reading this little joke your mind was firmly fixed on achieving your real estate goals and that you were following along with the humorous education theme so as to look for opportunities to enjoy the furthering of our individual educations and therefore become a better investor. Hopefully you did not jump to any conclusions (which may only be a bit embarassing to you in this context) but which can become expensive if you become judgmental in your meeting with distressed sellers and then jump to the wrong conclusions and wind up losing a profitable deal!
Of course, for those of you that allowed your minds to wander into Saturday Night Live territory (and failed the above test) it is also probably time for you to say 3 “Hail Mary’s” (or whatever works for you) and I will plan to see you at Creative Cash Flow/Landlord training on 30 June at 7pm…
Best wishes for your great investing!
Mike Cheatwood
(800) 269-9416
Anyway, sometimes in the course of being out and about looking for deals and talking with people, I also come across humorous situations in my day like when I was called yesterday by a well known local TV reporter (who had previously laid in wait for Steve Gunther and me after we had testifyied in a House of Delegates hearing in Richmond on pro-investor foreclosure legislation in February 2008). This reporter wanted to interview me again but this time about foreclosure prevention counseling procedures as concerns the current market as he was aware I was on the Governor’s Foreclosure Prevention Task Force. I said no problem but I forewarned him that my homeowner counseling consisted of finding out information over the phone to see if this was a situation that I may be interested in solving as an investor (by buying the property). If I did not find the information interesting as an investor (i.e., location, no equity, payment a lot more than rent, etc…) I would then offer some advice about talking with their lender and other consumer advocate types like the Housing Opportunities Made Equal (HOME) organization or the federal HOPE NOW organization, etc… Anyway, I convinced the TV reporter that he needed to call the HOME organization…
However, before we got off the phone I had already looked his name up on line and had determined that he owned 8 rental properties in the local area AND had also just started buying them 4 years ago (2004) when it started being the “in” thing to do to get in and make money in real estate (i.e., right before the market topped out in 2005). I then asked him how he liked being a landlord and here is where the conversation turned interesting… He said that his properties provided cash flow but that he was trying to sell his properties so that he could “get his life back” (sounded like an unhappy landlord to me). In talking further (he was on a roll by now) he said he was able to keep tenants longer by promising them he would reduce their rent by $50 for every year they stayed in the property. I admitted that I had never heard this type of landlord plan before so I asked him to tell me more (as in how was this decreasing cash flow plan working for him?). He went on to say that he wasn’t sure because he could not keep tenants for a year before they stopped paying or had to be evicted! Imagine that… After he went on to offer that he was not in foreclosure, he went on to say that he would be interested in me buying his houses. I told him I would take a look at his portfolio and get back with him if I was interested. I also went ahead and invited him to the Landlord Class I am teaching on 30 June and he said he would like to attend (which we agreed would be in an unofficial capacity)…
Note - I am constantly running into investors who seem to have little clue about what it takes to be a sucessful and happy landlord over the longterm. Do you know anyone that would be happier if they were not landlording?
Another humorous situation happened today when I call to “call” someone on a message board posting that said “wholesale deal, $165,000 cash/firm, with the foreclosure schduled in a week. They went on to say that the ARV is $195,000 and it just needs paint, carpet and landscaping (according to the would-be wholesaler). Feeling this was at a minimum a poor solicitation (although it was also fairly humorous at the same time), I responded by asking for a better explanation of where the deal was? No response was given… The point is that this erstwhile “wholesaler” was either uneducated as to what a wholesale deal actually was (i.e., 65% ARV deal as a maximum), was out “fishing” for a new investor using the “greater fool theory” or was just spinning/puffing a property to help out a fellow investor/property owner who was stuck in a bad deal. Obviously this was a retail deal with lipstick on it that will then become a foreclosure at the end of next week…
I also regularly question wholesalers that can only seem to negotiate all cash deals. If the deal is that good and the seller all that motivated, then the wholesaler needs to get the deal under contract both at a low price and with flexible buying (if not loan) terms as these loan terms are quite often controlled by the actual lender of record. My feeling is that wholesalers also need to leave the bigger portion of potential profit to the end buyer-investor, especially if they want to develop a longer term buyer-seller relationship that keeps their buyers coming back for more wholesale deals. The general rule is that the wholesaler leaves 2-3 times as much (real) profit on the table for the end buyer. An example would be a wholesaler that negotiated a purchase on a $200,000 ARV house for $120,000 where $10,000 in fix-up was also needed took a $15,000 assignment fee ($145,000 total to this point) thereby leaving $55,000 for the end buyer-investor to pay for holding costs, resale costs to include real estate commission, buyer assistance, etc… (usually the top 10% of the deal - $20,000 in this case). This then leaves the end buyer-investor the difference between $180,000 and $145,000 as their profit for taking this risk ($35,000 or 2.333 times the amount the wholesaler received for finding and negotiating the deal).
Additionally, wholesalers that cannot find a way to negotiate seller financing in their deals (as in subject to purchases or other wrap around mortgages) need to really concentrate on negotiating low sale cash prices as this keeps the end buyers cash needed to close and finish the deal to a more manageable level (and thereby enables all parties to get more deals done). Of course, we are still seeing investors come and go each year and are seeing even more wholesalers going (and at a faster rate) as most of them are not finding the great deals that keep them in business (at least as wholesalers…). NOTE – I am not “down” on wholesalers as I am aware that in general they are a newer group of investors (on average) but I wish they would work on their craft as a group so as to offer better service to investors as a whole (Sorry – This is one area that I do not offer training on but I think all seasoned investors can tell if a good deal is being offered or if this is just the only thing the wholesaler could find this week to advertise out to their buyer list…).
In summarizing, I seem to remember that I started out with observing that we need to find the humor in life's different situations before I wound up adding constructive criticism about time wasting retail deals being advertised in wholesale clothing, so let me finish on a positive note with a real joke that seeks to make a point both about enjoying life, finding ways to ignore the distractions and overcome the little preconceptions we each have and just focus on achieving your real estate education and investing goals…
The funniest times in life (not always the most profitable) are usually when we are surprised by what happens as compared to what we think is going to happen. The better the “twist” that leads to the eventual punch line the better! Obviously in having and being able to exercise your sense of humor this will allow the investor to better enjoy what they do and also have more staying power in this ever changing game. Just remember that there are times to look for laughs and there are times to be serious about your business. Also remember that success in real estate investing is basically the same way, it is mainly about how dedicated we each are and how seriously you approach the subject, the time and effort you devote to it and where you work to keep yourself from being distracted from other interests so that you reach your goals (i.e., think turn off the TV!).
Anyway, just remember that this joke deals with how we can each get locked into preconceptions about other people, their situations and what is happening, that may or may not have anything to do with the facts actually in front of us at any one time. Remember this point when you are talking with sellers as you want to keep an open mind (and ears) so you can make your best deals. ***Please also note that this joke may have more to say about the mind and focus of the reader, than of the writer… Turn back now if you are easily offended by your personal preconceptions!
"A first-grade teacher, Ms. Brooks, was having trouble with one of her
students. The teacher asked, 'Harry, what's the problem?'
Harry answered,
'I'm too smart for the 1st grade. My sister is in the 3rd grade and I'm
smarter than she is! I think I should be in the 3rd grade too!'
Ms. Brooks had had enough. She took Harry to the principal's office.
While Harry waited in the outer office, the teacher explained to the
principal the situation that her student had a high opinion of his education level. The principal told Ms. Brooks he would give the boy a test. If he failed to answer any of his questions he was to go back to the 1st grade and behave. She agreed.
Harry was brought in and the conditions were explained to him and he
agreed to take the test.
Principal: 'What is 3 x 3?'
Harry: '9.'
Principal: 'What is 6 x 6?'
Harry: '36.'
And so it went with every question the principal thought a 3rd grader
should know.
The principal looks at Ms. Brooks and tells her, 'I think Harry can go to
the 3rd grade.'
Ms. Brooks says to the principal, 'Let me ask him some questions.'
The principal and Harry both agreed.
Ms. Brooks asks, 'What does a cow have four of, that I have only two of?'
Harry, after a moment: 'Legs.'
Ms Brooks: 'What is in your pants that you have but I do not have?'
The principal wondered why would she ask such a question!
Harry replied: 'Pockets.'
Ms. Brooks: 'What does a dog do, that a man steps into?'
Harry: 'Pants.'
The principal sat forward with his mouth hanging open.
Ms. Brooks: 'What does a man do standing up, a woman does sitting down
and a dog does on three legs?'
Harry: 'Shake hands.'
The principal was trembling.
Ms. Brooks: 'What goes in the mouth hard and pink then comes out soft and sticky?'
The principal's eyes opened really wide and before he could stop the
answer, Harry replied, 'Bubble gum.'
Ms. Brooks: 'What word starts with an 'F' and ends in 'K' that is a part of a
lot of heat and excitement?'
Harry: 'Firetruck.'
The principal breathed a sigh of relief and told the teacher, 'Put
Harry in the fifth-grade, I got the last six questions wrong.....'"
In closing, I am sure that while you were reading this little joke your mind was firmly fixed on achieving your real estate goals and that you were following along with the humorous education theme so as to look for opportunities to enjoy the furthering of our individual educations and therefore become a better investor. Hopefully you did not jump to any conclusions (which may only be a bit embarassing to you in this context) but which can become expensive if you become judgmental in your meeting with distressed sellers and then jump to the wrong conclusions and wind up losing a profitable deal!
Of course, for those of you that allowed your minds to wander into Saturday Night Live territory (and failed the above test) it is also probably time for you to say 3 “Hail Mary’s” (or whatever works for you) and I will plan to see you at Creative Cash Flow/Landlord training on 30 June at 7pm…
Best wishes for your great investing!
Mike Cheatwood
(800) 269-9416
Saturday, June 7. 2008
Cloudy Days and Silver Linings - Or Lion's, Tiger's and Bears if opportunity scares you too much...
Gas prices, increasing defaults/foreclosures, credit crisis meltdown, financial company cash shortages, inflation, unemployment, etc… Oh My!
I know – Nothing new here right? Lots of gloom and doom in the news… But even though we are all aware of all the bad economic news going back to the end of July 2007, what does it mean to you the investor? And where are all those great deals that this buyers market is supposed to bring (besides the ones that are currently in the multiple listing service for sale)?
Let’s take these issues and look at them one at a time and see what good news we can decipher from them as we look ahead through this year and into 2009 and beyond…
Inflation – This is on everyone’s mind right now because of the dramatic 2008 gas, diesel and food price increases. And no, I do not see these commodities/products going down in price anytime soon, so we better all get used to it and find a way to pass along these costs to someone else if we want to hang onto our money. Let me pause here for a moment and ask if everyone has heard the stories and definitions (and there are many) about the difference between who is a rich person and who is a poor person? One way to say this might be to look at who owes who or more correctly, who is making payments and who is collecting payments? Generally Lenders and Landlords are on the “right side” of this payment flow chart and borrowers and tenants are on the wrong side of this money flow path (hopefully those of you presently on the wrong side have a plan and have identified the education program to get back to the right side as soon as possible). Another way of saying this is that those in the economic food chain that cannot pass along their costs to someone else are simply going to be poor. Example - Lenders do not pay for appraisals, surveys, applicants credit reports, etc… = borrowers pay these costs. Smart landlords do not pay for routine maintenance, property tax and insurance increases = their tenants pay for these inflationary (profit) increases via smart provisions built into the lease and higher rents. As the current box office movie implies, it is time to “get smart”.
A final word on inflation – House prices are only driven higher by one of 3 factors, lack of supply, excessive speculation (i.e., 2002-2006) or run-away inflation (i.e., 1970’s/Jimmy Carter years). I doubt we will see the type of speculation in real estate in the next 5 years that we have recently seen and home building starts are also way down at present (except for all of the current building of rental apartments). Accordingly, I see the real beneficiaries over the next 5 years as those long-term investors (landlords) who will see their rental properties appreciate in line with the inflation numbers (i.e., thru the roof! But not in 2008-2009 as we work through our public confidence and inventory issues).
Accordingly, if it provides positive cash flow each month = hang onto it as the price will probably double in the next 5-years as the dollar continues to devalue with increasing inflation (but the big uptick in appreciation will not happen until after 2009). The bad news is that to contain inflation, the only tool in the Federal Reserve Banks tool box is raising interest rates = stand by because rate increases will be coming right after the election no matter who wins…
The on-going credit crisis/financial lenders melt-down – This is the situation that we all see as “credit tightening” or as a lack of available credit, even though there are still good lenders out there providing FHA and VA backed loans. However, with FHA and VA comprising over 70% of the entire loan market, this major retreat of most of the conventional lenders from the field of real estate loans means there are less lender options available for buyers and investors. Note - I was asked this week if I saw this credit situation getting any better and the answer is “no”. The simple reason is that Wachovia and WaMu (both) just fired their CEO’s at the end of May for getting these major lenders into the home lending sub-prime mess and I do not think the new guys/gals in these jobs are going to be in a hurry to take these same type of risks anytime soon (call me crazy but that is the way I see it…).
Additionally, Bear-Stearns did everything but file the big “BK” back in March (when the Federal Reserve and JP Morgan stepped in to bail/buy them out). Bear-Stearns was then the 5th biggest investment bank on Wall Street (there are now only 4 Big Boys left). This past week the number 4 investment bank (Lehman Brothers) is doing its best imitation of “weebles wobble but don’t fall down” as they appear to be short of “cash on hand” to meet creditor/payment demands.
Why does this Wall Street financial stuff matter you say? Well, besides the potential of having cascading cross defaults (a fancy way bankers say “domino theory”) whereby the entire banking system would collapse, these were the lenders that bought the packaged/securitized sub-prime and Alt-A home loans for their managed hedge and pension plan funds. Accordingly, there are no more end buyers for these type loans and without the new pension and hedge fund plan money coming in the front door there are no more of these loans being made available to be made and then sold out the back door. In summary – Absent a major new government underwriting of lenders (i.e., some of the stuff being talked about in Washington now) the credit market that we now have will be here for sometime = get used to it. The good news is that this is bringing back “home town lenders” (the friendly main street banks) into the home lending ballgame and it is also encouraging owner financing – my favorite way to invest!
Housing Defaults and Foreclosures – The big picture still has these events increasing (at least through 2009) and now are also affecting prime borrowers as they cannot find buyers for their expensive houses (i.e., lack of available credit market, lack of public confidence in prices, recession worries about cost of gas and jobs). There are also two adjustable rate loan re-set points this summer (June and August) and defaults generally happen about 3 months later and foreclosures about 4-5 months after that (except that the lenders are currently so backed up that foreclosures have been slower to happen then before). The good news is that there are still price increases in local markets as long as you are staying in the sweet spot (under $250K, at least in the Norfolk-Hampton-VA Beach area).By the way – these loan re-sets will continue to happen through 2011…
Additionally, the interesting news coming out of California, Florida, Nevada and Arizona is that banks are now slashing their asking prices (both at auction and on their REO portfolios) by huge amounts just to dump the excess inventory. This smacks of banking regulator pressure and directly hurts regular sellers and all the associated businesses involved in the buying and selling of houses. The good news is that besides the fact that houses have become more affordable to more buyers, the deals are getting better especially if you stay in the sweet spot of your local market. The sweet spot for me is in the $100,000-$200,000 market as well as in choosing to deal with investor friendly real estate professionals that have been there and done that before...
A couple of final thoughts in closing –
1. Unemployment – Even though I have just reviewed (above) a number of things that are not pleasant to think about right now, we are still experiencing a relatively low unemployment figure (despite the uptick at the end of May 2008 to 5.5% nationally). However, I want to propose to the reader that you consider the potential effect of a much larger increase in unemployment later this yearand what this may do to your tenant base and your ability to stay in the real estate business. Are there steps you can take to insulate yourself from potential damage? Possibly by not personally gaurenting debt? Possibly by keeping your property mix to those “sweet spot” fixed-up rentals in desirable areas that could quickly be sold for cash? Or by using excess cash/cash flow to pay off debt on your houses so you have free and clear houses that could allow you to reduce your rents or drop insurance coverage (if needed) so that you could survive a major economic downturn?
2. I also know that many investors have chosen to take a vacation (or two or three), explore other markets or just sit on the side-lines while all of this plays out. Some are also inventing themselves in new ways that maximize cash flow and minimize exposure to risk and the sometimes mirage of “paper equity” (especially if you get stuck holding a house trying to defend rapidly evaporating paper equity while paying out negative cash flow). Whatever you are thinking, just concentrate on generating more positive cash flow, make offers but stay away from skinny/marginal deals, dump your loser properties (now!) so they do not drag you down into bankruptcy and get more education/training on ways to survive and thrive in this new and exciting market (and come see me if you are having trouble figuring this part out...).
Best wishes for your great investing!
Mike Cheatwood / Landlord
President TRIG 2002-2006
I know – Nothing new here right? Lots of gloom and doom in the news… But even though we are all aware of all the bad economic news going back to the end of July 2007, what does it mean to you the investor? And where are all those great deals that this buyers market is supposed to bring (besides the ones that are currently in the multiple listing service for sale)?
Let’s take these issues and look at them one at a time and see what good news we can decipher from them as we look ahead through this year and into 2009 and beyond…
Inflation – This is on everyone’s mind right now because of the dramatic 2008 gas, diesel and food price increases. And no, I do not see these commodities/products going down in price anytime soon, so we better all get used to it and find a way to pass along these costs to someone else if we want to hang onto our money. Let me pause here for a moment and ask if everyone has heard the stories and definitions (and there are many) about the difference between who is a rich person and who is a poor person? One way to say this might be to look at who owes who or more correctly, who is making payments and who is collecting payments? Generally Lenders and Landlords are on the “right side” of this payment flow chart and borrowers and tenants are on the wrong side of this money flow path (hopefully those of you presently on the wrong side have a plan and have identified the education program to get back to the right side as soon as possible). Another way of saying this is that those in the economic food chain that cannot pass along their costs to someone else are simply going to be poor. Example - Lenders do not pay for appraisals, surveys, applicants credit reports, etc… = borrowers pay these costs. Smart landlords do not pay for routine maintenance, property tax and insurance increases = their tenants pay for these inflationary (profit) increases via smart provisions built into the lease and higher rents. As the current box office movie implies, it is time to “get smart”.
A final word on inflation – House prices are only driven higher by one of 3 factors, lack of supply, excessive speculation (i.e., 2002-2006) or run-away inflation (i.e., 1970’s/Jimmy Carter years). I doubt we will see the type of speculation in real estate in the next 5 years that we have recently seen and home building starts are also way down at present (except for all of the current building of rental apartments). Accordingly, I see the real beneficiaries over the next 5 years as those long-term investors (landlords) who will see their rental properties appreciate in line with the inflation numbers (i.e., thru the roof! But not in 2008-2009 as we work through our public confidence and inventory issues).
Accordingly, if it provides positive cash flow each month = hang onto it as the price will probably double in the next 5-years as the dollar continues to devalue with increasing inflation (but the big uptick in appreciation will not happen until after 2009). The bad news is that to contain inflation, the only tool in the Federal Reserve Banks tool box is raising interest rates = stand by because rate increases will be coming right after the election no matter who wins…
The on-going credit crisis/financial lenders melt-down – This is the situation that we all see as “credit tightening” or as a lack of available credit, even though there are still good lenders out there providing FHA and VA backed loans. However, with FHA and VA comprising over 70% of the entire loan market, this major retreat of most of the conventional lenders from the field of real estate loans means there are less lender options available for buyers and investors. Note - I was asked this week if I saw this credit situation getting any better and the answer is “no”. The simple reason is that Wachovia and WaMu (both) just fired their CEO’s at the end of May for getting these major lenders into the home lending sub-prime mess and I do not think the new guys/gals in these jobs are going to be in a hurry to take these same type of risks anytime soon (call me crazy but that is the way I see it…).
Additionally, Bear-Stearns did everything but file the big “BK” back in March (when the Federal Reserve and JP Morgan stepped in to bail/buy them out). Bear-Stearns was then the 5th biggest investment bank on Wall Street (there are now only 4 Big Boys left). This past week the number 4 investment bank (Lehman Brothers) is doing its best imitation of “weebles wobble but don’t fall down” as they appear to be short of “cash on hand” to meet creditor/payment demands.
Why does this Wall Street financial stuff matter you say? Well, besides the potential of having cascading cross defaults (a fancy way bankers say “domino theory”) whereby the entire banking system would collapse, these were the lenders that bought the packaged/securitized sub-prime and Alt-A home loans for their managed hedge and pension plan funds. Accordingly, there are no more end buyers for these type loans and without the new pension and hedge fund plan money coming in the front door there are no more of these loans being made available to be made and then sold out the back door. In summary – Absent a major new government underwriting of lenders (i.e., some of the stuff being talked about in Washington now) the credit market that we now have will be here for sometime = get used to it. The good news is that this is bringing back “home town lenders” (the friendly main street banks) into the home lending ballgame and it is also encouraging owner financing – my favorite way to invest!
Housing Defaults and Foreclosures – The big picture still has these events increasing (at least through 2009) and now are also affecting prime borrowers as they cannot find buyers for their expensive houses (i.e., lack of available credit market, lack of public confidence in prices, recession worries about cost of gas and jobs). There are also two adjustable rate loan re-set points this summer (June and August) and defaults generally happen about 3 months later and foreclosures about 4-5 months after that (except that the lenders are currently so backed up that foreclosures have been slower to happen then before). The good news is that there are still price increases in local markets as long as you are staying in the sweet spot (under $250K, at least in the Norfolk-Hampton-VA Beach area).By the way – these loan re-sets will continue to happen through 2011…
Additionally, the interesting news coming out of California, Florida, Nevada and Arizona is that banks are now slashing their asking prices (both at auction and on their REO portfolios) by huge amounts just to dump the excess inventory. This smacks of banking regulator pressure and directly hurts regular sellers and all the associated businesses involved in the buying and selling of houses. The good news is that besides the fact that houses have become more affordable to more buyers, the deals are getting better especially if you stay in the sweet spot of your local market. The sweet spot for me is in the $100,000-$200,000 market as well as in choosing to deal with investor friendly real estate professionals that have been there and done that before...
A couple of final thoughts in closing –
1. Unemployment – Even though I have just reviewed (above) a number of things that are not pleasant to think about right now, we are still experiencing a relatively low unemployment figure (despite the uptick at the end of May 2008 to 5.5% nationally). However, I want to propose to the reader that you consider the potential effect of a much larger increase in unemployment later this yearand what this may do to your tenant base and your ability to stay in the real estate business. Are there steps you can take to insulate yourself from potential damage? Possibly by not personally gaurenting debt? Possibly by keeping your property mix to those “sweet spot” fixed-up rentals in desirable areas that could quickly be sold for cash? Or by using excess cash/cash flow to pay off debt on your houses so you have free and clear houses that could allow you to reduce your rents or drop insurance coverage (if needed) so that you could survive a major economic downturn?
2. I also know that many investors have chosen to take a vacation (or two or three), explore other markets or just sit on the side-lines while all of this plays out. Some are also inventing themselves in new ways that maximize cash flow and minimize exposure to risk and the sometimes mirage of “paper equity” (especially if you get stuck holding a house trying to defend rapidly evaporating paper equity while paying out negative cash flow). Whatever you are thinking, just concentrate on generating more positive cash flow, make offers but stay away from skinny/marginal deals, dump your loser properties (now!) so they do not drag you down into bankruptcy and get more education/training on ways to survive and thrive in this new and exciting market (and come see me if you are having trouble figuring this part out...).
Best wishes for your great investing!
Mike Cheatwood / Landlord
President TRIG 2002-2006
Tuesday, June 3. 2008
Real Estate Crystal Ball time, ramblings and predictions for the coming months and year…
This evenings Blog starts with the recent election coverage of the Democratic primaries that will just not seem to end. Of course, it does appear that the next Democratic candidate has been chosen (for better or worse). So what does this actually mean to investors?
First of all it means taxes will most probably be going up in 2009-2010 on top of the gas and food prices that are going up now. As the democrats also try to roll back the 2003 Bush tax cuts on capital gains as well as the death tax, I think we will see rental property owners less likely to sell for “getting cash” reasons if they have to pay taxes at higher rates than now. Of course an increase in taxes could also help owners decide to sell via owner financing terms where the tax burden is spread out over the term of the installment sale payment plan (a good thing). Anyway, make your for sale plans now as next year make be a tougher year to sell tax wise… (NOTE – As I have been saying for some time now it is time to stop selling, start being a full-time landlord (who can sleep late if you want to) and buy more and more positive cash flow properties to use as long term rentals).
So what is in store for Sellers over the next couple of months in this strong buyers market?
For one thing, this is prime selling season through August and buyer activity in our area has picked up somewhat (since February 2008). But what happens after Labor Day 2008 to those houses that did not sell? Simply put they will have to keep lowering their prices, offer owner financing terms, become rentals or just sit and wait for next year’s buying season. Realistic sellers that have well fixed up properties in the right price range (the local market sweet spot - $100,000 - $250,000 in my area) can still sell but are having to give a lot to the buyers as far as closing costs are concerned, fix-up/repair money and a full real estate commission to a well trained agent. As an example -Sea Shore Realty just sold a $150,000 single family house for an investor to a VA home buyer this past week that went under contract 7 days after it was listed and which closed on time the following month (and this is only one of many sucessful sales of realistic investors, with good houses in the right price range who will fund commissions for well trained/professional real estate agents).
On another vein, who are and will be the selling investor’s competition the rest of this year and probably next year as well? There are a couple of contenders for this position that we will review as follows:
1. Builders – Although there are far fewer builders out there right now the ones that are working closely with their lenders and who are trying to get out of houses they are stuck with are offering everything under the sun to get a buyer to buy (new cars, pools, cash at closing, etc…). Of course, this makes it difficult for a regular seller (investor or not) to compete with this process…
2. Banks/lenders – In our local area there are 15,231 listings where 233 are currently listed as REO (real estate owned by banks/lenders) but this number is growing. Additionally, lenders under pressure from banking regulators to get rid of the bad debt/foreclosed houses are cutting their prices a lot quicker than regular homeowners. Additionally, when a bank takes a property back in foreclosure it goes ahead and “books” the loss on its books (i.e., gets a tax credit against other income coming into the bank) and essentially has a free and clear house. In this situation, the bank can obviously undercut any other “seller” on the market = not the sort of competition you want if you want or need to sell a house (or two).
3. Owner-occupant sellers – These sellers have little motivation and also have time on their side. Even so, their ability (except the ability to wait) to profit from their sales will also be affected by the other players who will keep dragging down sale prices in 2008 and 2009 (at least in the selling range below $300,000 sale prices).
So who are the potential buyers in the coming months and year?
1. The average home-buyer who wants to down-size, up-size, move to a new state for a job or other reason and for all those myriad other reasons. Of course, most of these buyers getting a regular bank loan will have to qualify via FHA or VA financing (and have to have ever higher credit scores and ever larger down payments).
2. Investors who want a good deal that will provide positive cash flow or perhaps even to buy for those “paper equity” reasons…
3. Governments that will buy for road expansion, school building or other public policy eminent domain reasons. Additionally, if the new federal legislation is passed into law that grants local government $10,000,000,000 (BILLION) dollars in order to buy up vacant and abandoned properties. Yes, this sounds like government getting into the same buying game and into the same type of properties that investors also like to buy at bargain basement prices. What a good deal – Our tax dollars at work but now competing with us in the investor-business world…
4. And of course there are those buyers that we see every week at the court house which are those unfortunate banks/lenders that are still paying too much at most foreclosure auction sales. The foreclosure auctions will continue and are clearly increasing in number – We will have to see if the prices asked for at auction become anymore reasonable in the near future…
In closing, there will always be elections, tax issues, more foreclosures and government bailout money to consider. Some of this “noise” the investor should be aware of but most of it should not stop you from finding motivated sellers, making offers and closing on good deals as an investor-buyer in this great buyers market. Go forth and make good deals!
Best wishes for your good investing!
Mike Cheatwood
(800) 269-9416
First of all it means taxes will most probably be going up in 2009-2010 on top of the gas and food prices that are going up now. As the democrats also try to roll back the 2003 Bush tax cuts on capital gains as well as the death tax, I think we will see rental property owners less likely to sell for “getting cash” reasons if they have to pay taxes at higher rates than now. Of course an increase in taxes could also help owners decide to sell via owner financing terms where the tax burden is spread out over the term of the installment sale payment plan (a good thing). Anyway, make your for sale plans now as next year make be a tougher year to sell tax wise… (NOTE – As I have been saying for some time now it is time to stop selling, start being a full-time landlord (who can sleep late if you want to) and buy more and more positive cash flow properties to use as long term rentals).
So what is in store for Sellers over the next couple of months in this strong buyers market?
For one thing, this is prime selling season through August and buyer activity in our area has picked up somewhat (since February 2008). But what happens after Labor Day 2008 to those houses that did not sell? Simply put they will have to keep lowering their prices, offer owner financing terms, become rentals or just sit and wait for next year’s buying season. Realistic sellers that have well fixed up properties in the right price range (the local market sweet spot - $100,000 - $250,000 in my area) can still sell but are having to give a lot to the buyers as far as closing costs are concerned, fix-up/repair money and a full real estate commission to a well trained agent. As an example -Sea Shore Realty just sold a $150,000 single family house for an investor to a VA home buyer this past week that went under contract 7 days after it was listed and which closed on time the following month (and this is only one of many sucessful sales of realistic investors, with good houses in the right price range who will fund commissions for well trained/professional real estate agents).
On another vein, who are and will be the selling investor’s competition the rest of this year and probably next year as well? There are a couple of contenders for this position that we will review as follows:
1. Builders – Although there are far fewer builders out there right now the ones that are working closely with their lenders and who are trying to get out of houses they are stuck with are offering everything under the sun to get a buyer to buy (new cars, pools, cash at closing, etc…). Of course, this makes it difficult for a regular seller (investor or not) to compete with this process…
2. Banks/lenders – In our local area there are 15,231 listings where 233 are currently listed as REO (real estate owned by banks/lenders) but this number is growing. Additionally, lenders under pressure from banking regulators to get rid of the bad debt/foreclosed houses are cutting their prices a lot quicker than regular homeowners. Additionally, when a bank takes a property back in foreclosure it goes ahead and “books” the loss on its books (i.e., gets a tax credit against other income coming into the bank) and essentially has a free and clear house. In this situation, the bank can obviously undercut any other “seller” on the market = not the sort of competition you want if you want or need to sell a house (or two).
3. Owner-occupant sellers – These sellers have little motivation and also have time on their side. Even so, their ability (except the ability to wait) to profit from their sales will also be affected by the other players who will keep dragging down sale prices in 2008 and 2009 (at least in the selling range below $300,000 sale prices).
So who are the potential buyers in the coming months and year?
1. The average home-buyer who wants to down-size, up-size, move to a new state for a job or other reason and for all those myriad other reasons. Of course, most of these buyers getting a regular bank loan will have to qualify via FHA or VA financing (and have to have ever higher credit scores and ever larger down payments).
2. Investors who want a good deal that will provide positive cash flow or perhaps even to buy for those “paper equity” reasons…
3. Governments that will buy for road expansion, school building or other public policy eminent domain reasons. Additionally, if the new federal legislation is passed into law that grants local government $10,000,000,000 (BILLION) dollars in order to buy up vacant and abandoned properties. Yes, this sounds like government getting into the same buying game and into the same type of properties that investors also like to buy at bargain basement prices. What a good deal – Our tax dollars at work but now competing with us in the investor-business world…
4. And of course there are those buyers that we see every week at the court house which are those unfortunate banks/lenders that are still paying too much at most foreclosure auction sales. The foreclosure auctions will continue and are clearly increasing in number – We will have to see if the prices asked for at auction become anymore reasonable in the near future…
In closing, there will always be elections, tax issues, more foreclosures and government bailout money to consider. Some of this “noise” the investor should be aware of but most of it should not stop you from finding motivated sellers, making offers and closing on good deals as an investor-buyer in this great buyers market. Go forth and make good deals!
Best wishes for your good investing!
Mike Cheatwood
(800) 269-9416
Sunday, June 1. 2008
Back to basics – Real estate investing techniques explained…
Today’s Blog is titled “Back to the Basics” and is provided to the readership due to the fact that I was recently reminded while speaking to a group of investors that it helps to define a topic you are speaking on (even if they already have the name of the topic – i.e.., Subject to investing) before getting in to the specifics of how to do deals using these various techniques and in changing situations. Accordingly, let’s go back and review some of the most common/popular investor topics and discuss what each one means to the investor.
First of all, it should be understood that investors do not know (when they are going into a motivated seller deal) exactly which technique they are going to use to actually do the deal. Accordingly, the investor needs to have more than just one of these technique tools in their tool box so they can both better understand different seller’s situations and what accompanying technique would work best for that particular deal.
So what investing techniques are on the discussion menu today? Let’s go ahead and review SUBJECT TO investing, SHORT SALES, REHABBING (find, fix and flip deals) and WHOLESALING deals. If I have missed a specific technique that you are interested in or if you still have questions, please feel free to comment on the Blog or e-mail me/call me with your question.
SUBJECT TO investing deals – Background - I was speaking to a new group of investors last month and had just started my Subject to investing power point presentation when an impatient individual spoke up and asked “What is Subject to investing”? There was not a murmur in the group showing they found this question out of place so I started thinking that maybe I needed to spend more time on explaining the concept rather than assume the audience knows the subject as concerns the audience understanding the how to part of the deal (at least for this particular evenings 1 hour training session). Anyway, 2.5 hours later I finished up my presentation and the new group of investors seemed to now have the concept and the how to parts down fairly well.
So what is Subject to investing? Simply put it is a basic investor technique whereby a motivated seller of real estate with a mortgage loan/deed of trust lien against the properties deed wants to sell and an investor-buyer wants to buy, where the seller signs the property deed over to the buyer but where the sellers current mortgage loan remains in place against the deed. In other words, the buyer is buying the property (i.e., getting the deed) subject to all currently recorded existing mortgages, deeds of trust, liens, judgments, taxes owed, etc… The procedure is legal (even if very creative) as can be seen if you look at a standard HUD 1 settlement statement in line item 203 or 503 where these federal government documents that closing attorney’s use to conduct purchase-sale proceedings for properties being sold state “loans taken subject to”. Obviously individual states can further modify their state laws as regards subject to purchases but the federal government regards them as legal. Benefits to the buyer (investor) are simple – Less cash needed to close, quicker, no banks involved and you get the benefit of the sellers owner-occupant financing terms (unless they have a screwy loan with pending loan resets, etc… Benefits to the motivated seller are that they get a sale not a foreclosure, do not have to make these payments anymore, have it settled quickly and they can move on with their lives (problem solved). NOTE – My Subject to investing book (due out shortly in being available at FPCofAmerica.Com) has this information and much, much more available in it at a fraction of the price of the TV ad guru’s…
SHORT SALES – This advanced investor technique is one in which the homeowner has little or no equity in their home but still needs to sell for some reason and just cannot afford to bring money to the closing table to complete the sale (i.e., real estate commissions, the attorney, deed recording, repairs, etc… all still must be paid/accounted for in any transaction). The banks are the ones that invented short sales because they know that they lose (on average) 30% whenever they have to foreclose. Short Sale Requirements – No equity in the property, cooperative sellers who are at least 3 months behind on their payments, who will also be around several weeks to a month or so (not a quick process) and who also know they cannot receive any money but do not want a foreclosure on their record. Short sales can offer the well trained and dedicated investor big profits but there is a lot more paperwork, time and dealing with banks in this scenario = not for anyone who does not have a lot of patience. LOTS of opportunity for the well trained investor – Check out my Short Sale book/course at FPCofAmerica.org and the 5 minute video clip of training.
REHABBING (find, fix and flip for chunks of cash) – Rehabbing houses can either be something the investor loves to do as they take a beaten up/worn out old house and fix it up as the gem of the neighborhood or it can be your nightmare if you do not enjoy the work or do not have the analysis skills for making sure you buy it right, estimate the repairs correctly and stick to a time schedule to re-sell the house for a profit. Due to the cash requirements needed to operate in this investor technique, rehabbing houses as a business plan works great in a seller’s market and/or in an appreciating market. However, in today’s market it is fairly tough to operate as a full time rehabber as the sellers housing inventory levels are high and loans are hard to get. Be careful on choosing to become a rehabbing investor for the next year or two…
WHOLESALING (find, put under contract and sell/assign the contract) – And that is about it. Of course, you have to know your market so you get the house under contract at a price that a buyer will want, you have to have a list of ready buyers (rehabbers, landlords, owner-occupants, etc…) for your houses under contract so you can get your chunk of cash (contract assignment fee and you have to know how to negotiate). A marketing plan and a couple of forms/contracts to use and that is about it. A good technique to use in this market to minimize investor risk while still providing chunks of cash!
In summary – I trust that this blog has explained some of the basics of investing for the general benefit of newer investors and investors looking to branch out into new areas of investing. In a future edition I will go into detailed explanations on explaining how OPTIONS, OWNER FINANCING, HARD MONEY LOANS, COMMERCIAL REAL ESTATE, NOTES/MORTGAGES/DEEDS OF TRUST, etc…. can also make educated investors successful and wealthy.
Best wishes for your great investing!
Mike Cheatwood
FPCofAmerica.Com
First of all, it should be understood that investors do not know (when they are going into a motivated seller deal) exactly which technique they are going to use to actually do the deal. Accordingly, the investor needs to have more than just one of these technique tools in their tool box so they can both better understand different seller’s situations and what accompanying technique would work best for that particular deal.
So what investing techniques are on the discussion menu today? Let’s go ahead and review SUBJECT TO investing, SHORT SALES, REHABBING (find, fix and flip deals) and WHOLESALING deals. If I have missed a specific technique that you are interested in or if you still have questions, please feel free to comment on the Blog or e-mail me/call me with your question.
SUBJECT TO investing deals – Background - I was speaking to a new group of investors last month and had just started my Subject to investing power point presentation when an impatient individual spoke up and asked “What is Subject to investing”? There was not a murmur in the group showing they found this question out of place so I started thinking that maybe I needed to spend more time on explaining the concept rather than assume the audience knows the subject as concerns the audience understanding the how to part of the deal (at least for this particular evenings 1 hour training session). Anyway, 2.5 hours later I finished up my presentation and the new group of investors seemed to now have the concept and the how to parts down fairly well.
So what is Subject to investing? Simply put it is a basic investor technique whereby a motivated seller of real estate with a mortgage loan/deed of trust lien against the properties deed wants to sell and an investor-buyer wants to buy, where the seller signs the property deed over to the buyer but where the sellers current mortgage loan remains in place against the deed. In other words, the buyer is buying the property (i.e., getting the deed) subject to all currently recorded existing mortgages, deeds of trust, liens, judgments, taxes owed, etc… The procedure is legal (even if very creative) as can be seen if you look at a standard HUD 1 settlement statement in line item 203 or 503 where these federal government documents that closing attorney’s use to conduct purchase-sale proceedings for properties being sold state “loans taken subject to”. Obviously individual states can further modify their state laws as regards subject to purchases but the federal government regards them as legal. Benefits to the buyer (investor) are simple – Less cash needed to close, quicker, no banks involved and you get the benefit of the sellers owner-occupant financing terms (unless they have a screwy loan with pending loan resets, etc… Benefits to the motivated seller are that they get a sale not a foreclosure, do not have to make these payments anymore, have it settled quickly and they can move on with their lives (problem solved). NOTE – My Subject to investing book (due out shortly in being available at FPCofAmerica.Com) has this information and much, much more available in it at a fraction of the price of the TV ad guru’s…
SHORT SALES – This advanced investor technique is one in which the homeowner has little or no equity in their home but still needs to sell for some reason and just cannot afford to bring money to the closing table to complete the sale (i.e., real estate commissions, the attorney, deed recording, repairs, etc… all still must be paid/accounted for in any transaction). The banks are the ones that invented short sales because they know that they lose (on average) 30% whenever they have to foreclose. Short Sale Requirements – No equity in the property, cooperative sellers who are at least 3 months behind on their payments, who will also be around several weeks to a month or so (not a quick process) and who also know they cannot receive any money but do not want a foreclosure on their record. Short sales can offer the well trained and dedicated investor big profits but there is a lot more paperwork, time and dealing with banks in this scenario = not for anyone who does not have a lot of patience. LOTS of opportunity for the well trained investor – Check out my Short Sale book/course at FPCofAmerica.org and the 5 minute video clip of training.
REHABBING (find, fix and flip for chunks of cash) – Rehabbing houses can either be something the investor loves to do as they take a beaten up/worn out old house and fix it up as the gem of the neighborhood or it can be your nightmare if you do not enjoy the work or do not have the analysis skills for making sure you buy it right, estimate the repairs correctly and stick to a time schedule to re-sell the house for a profit. Due to the cash requirements needed to operate in this investor technique, rehabbing houses as a business plan works great in a seller’s market and/or in an appreciating market. However, in today’s market it is fairly tough to operate as a full time rehabber as the sellers housing inventory levels are high and loans are hard to get. Be careful on choosing to become a rehabbing investor for the next year or two…
WHOLESALING (find, put under contract and sell/assign the contract) – And that is about it. Of course, you have to know your market so you get the house under contract at a price that a buyer will want, you have to have a list of ready buyers (rehabbers, landlords, owner-occupants, etc…) for your houses under contract so you can get your chunk of cash (contract assignment fee and you have to know how to negotiate). A marketing plan and a couple of forms/contracts to use and that is about it. A good technique to use in this market to minimize investor risk while still providing chunks of cash!
In summary – I trust that this blog has explained some of the basics of investing for the general benefit of newer investors and investors looking to branch out into new areas of investing. In a future edition I will go into detailed explanations on explaining how OPTIONS, OWNER FINANCING, HARD MONEY LOANS, COMMERCIAL REAL ESTATE, NOTES/MORTGAGES/DEEDS OF TRUST, etc…. can also make educated investors successful and wealthy.
Best wishes for your great investing!
Mike Cheatwood
FPCofAmerica.Com
Thursday, May 29. 2008
Do you have real estate/financial friends to help you thru the tough times? Why or why not?
Tonight’s Blog deals with navigating troubled waters and having real estate/financial friends to help you as you help them along the way. When I mentioned this phrase at the investing class I was teaching this past Tuesday night I saw a lot of blank stares so I guess I need to explain what I mean by “real estate/financial friends”.
As is usually the case, this idea has come about due to the many conversations I have each week with other investors where many of them are dealing with trying to extricate themselves from various situations that they might have avoided if they had discussed the deal with one of their friends before jumping in the deal (sometimes with someone that they later regretted being “partners” with…). Of course, friends in real estate does not just mean being partners or even to the degree of being a person you are in a joint venture deal with but they should be someone you know (if not totally trust), someone who has been around for a few years, and someone who has the proven skills/track record to properly advise someone else.
As I enjoy talking real estate with people I enjoy talking with other investors except in one situation and that is where they call me once it is too late except for me to tell them to pack up shop as they have waited too long and are out of options. I am reminded of that old story that says if you find yourself in a hole that you are digging and it seems to be getting deeper = stop digging and do something else! This story is a perfect example of investors who are holding onto negative cash flow properties (trying to defend their diminishing paper equity) and where this ill timed game plan is taking their whole economic situation right down the drain. I know that it can be hard to make the decision to just dump your loser properties any way you can (advertise “subject to, come and get it” or tell the Bank to work something out with you or they can have the keys, take on an equity partner, etc…) before these loser properties bankrupt you is tough but at least you are taking action to change your destiny for the (potential) better!
So who are your potential real estate and financial friends in your area? How about those investors who actively take time to help out other investors at local association meetings? They may not be giving everything away for free and they may not know everything but they are your first line of seeking help as they are at least “givers”. Who has been around in a leadership position or has been a real investor with a rental portfolio for at least 10 years? Point being there are plenty of here today and gone tomorrow types out there but the real deal people will have been around for 10 years or more. These are also the same people that will have seen different markets and this can be very important in today’s market that few of the current investor crop have seen and even fewer know what to do about it…
So who do you need to become friends with? Well we have established several criteria so far:
1. Been around a while.
2. Givers.
3. Experienced and successful (not just volunteers with opinions).
4. Good reputations for honest dealings.
5. Varied types of friends (money friends, attorney, CPA, real estate broker, Landlord, Creative Investors with experience in many types of deals, etc…
6. Who are willing to do deals with you in a mutually beneficial relationship (can you say 50-50%?).
So let’s talk about why many of us stick with one friend for a particular part of real estate investing such as an attorney or a real estate broker or a property manager or lender. Let’s take the real estate agent (or if you want the best, a Realtor) first:
The real estate broker/agent is the person that helps you find properties to buy, gives you good comparative market analysis data on the market conditions and value so that what you buy makes basic sense. Of course, the real estate agent is not responsible for you making a good deal as that is the investors responsibility but they will provide you a lot of the data and assurance that you are not making a really bad investing deal (if you have a good agent). So how do you tell the difference you say? One way is to always ask the various real estate professionals you are considering dealing with what rental real estate do they own and how long have they owned it? The ones that are not investors will have a harder time being good advisers as they do not put their money where their advice (mouth) is! I also want an agent that did not just show up in the past 5 years of easy money selling (well not the last year or so but 2002-2006 anyway) so that you know you have a real agent that has seen and knows what to do in different markets. “Ya gets what ya pay for” when you decide to go with the newest/cheapest out of the box agent with a quick smile – buyer beware! In my area I strongly recommend Tracy Boswell, Broker-Owner of Sea Shore Realty (757) 301-8550 as she is an investor, has been the Vice-President and/or Secretary of the local investor group since 1997 or so and has been full time in this business since 1991. Tracy is also my good friend - Call her or take your chances elsewhere…
Attorney – This is the person that can get that HOT deal done for you this week when it just has to close or the foreclosure will happen. The fastest one my attorney did for me was 36 hours and the check I got when I sold this property was $55,000. Simply put, your attorney has to be able to know what you the investor are doing in your different real estate ventures and the attorney has to be able to move fast so great deals do not get away. I use Steve Gunther for all of my closings (757) 671-3352. He is also the person that succeeded me as the President of the local real estate investor group and is a great guy who went to bat with me in our state capital earlier this year to fight (and win) against bad legislation that would have hurt all investors in Virginia.
Property Manager – I do not know a good one except me . I am a natural landlord and have many rentals myself. We also manage other investor’s rentals so they can concentrate on finding and buying good deals. An interesting thing I hear from investors looking to replace themselves or a bad property manager is “what does it cost?”. A simple question but not always a simple answer if you understand that not all property management companies make their profit in the same way. How’s that you say? Doesn’t everyone charge 10% management fee, a one month lease-up fee to fill vacancies and a 10% surcharge for maintenance activities? No, some PM companies charge less up front but make their profit from charging their owners a lot of maintenance fees. My thinking on this is simple – Use strict tenant screening procedures to only accept the ones that will pay on time and maintain the property themselves and also use a tight lease that puts the majority of the “work responsibility” onto the tenant so that costs are minimized. Accordingly, we operate in a transparent manner with 10% per month management fee (but only off of rents actually collected), a ½ month’s rent lease up fee for vacant units needing new/good tenants and almost no maintenance fees to the owners as the tenants are responsible for most of the maintenance. We always win when we are compared apples to apples – Call us to smooth out your cash flow and fire your tenants – (757) 301-3395. By the way – I only use National Tenant Network to screen my tenants (Skip and Mary Saylor – Past President of our investor group/TRIG) and they can be reached at (757) 827-5775. They have been investors for over 30 years and have over 70 rentals themselves.
By the way - I just took over a 5 property rental portfolio in May 2008 and am in discussions on taking over management of a 6 property group and a 21 property group as of 30 June 2008. The reason? One - The owners and I have known each other for years and they know me as a good landlord for my own rental properties. They also apreciate the fact that unlike most of the other property managemnt companies out there that I first go after the tenant for the cost of the repairs before coming to the owner to have them pay for the repairs. Most of the other property managers just seem to take the path of least resistance and have the owner pay for all repairs.
And the lender - Of course, I am not talking about the bank, I am talking about private money whether of a short term hard money loan nature, an equity partner or a self directed IRA from a financial friend. So why is it important to have "friendly lenders"? For one thing the lenders that are also your friends will help keep you from making a mistake on a deal that institutional lenders will not. Friendly financial friend lenders can also trade favors back and forth using their personal and their families self directed IRA's to fund each others deals (i.e., the way to take institutional lenders out of your life) . And your private money lender is also the person who can move fast to fund a deal or become part of a deal when time is of the essense. And while I have several of these financial friends they will have to remain nameless in this Blog for obvious reasons of their privacy.
So who are your real estate and financial friends?
What have you done to meet and cultivate these type friends? Remember, it is a two way street!
Are there also others out there that are also good people in real estate? Yes, there obviously are other good investors who also have a real estate business that they run for cash flow and fun… Some of us just see the situation in more of a long term sense rather than just trying to make a quick buck off of the people we know in real estate. Your decision...
In summary – We all should have someone that we seek out when we are doing a new type of deal or if we are checking out a new potential partner, etc… Just make sure that you do this before you get into the deal and still have a chance to protect yourself, make some money and survive this tough 2008 real estate year. The good buying time is coming, get ready...
Call me anytime…
Best wishes for your Great Investing!
Mike Cheatwood
(800) 269-9416
mcheatwood@cox.net
As is usually the case, this idea has come about due to the many conversations I have each week with other investors where many of them are dealing with trying to extricate themselves from various situations that they might have avoided if they had discussed the deal with one of their friends before jumping in the deal (sometimes with someone that they later regretted being “partners” with…). Of course, friends in real estate does not just mean being partners or even to the degree of being a person you are in a joint venture deal with but they should be someone you know (if not totally trust), someone who has been around for a few years, and someone who has the proven skills/track record to properly advise someone else.
As I enjoy talking real estate with people I enjoy talking with other investors except in one situation and that is where they call me once it is too late except for me to tell them to pack up shop as they have waited too long and are out of options. I am reminded of that old story that says if you find yourself in a hole that you are digging and it seems to be getting deeper = stop digging and do something else! This story is a perfect example of investors who are holding onto negative cash flow properties (trying to defend their diminishing paper equity) and where this ill timed game plan is taking their whole economic situation right down the drain. I know that it can be hard to make the decision to just dump your loser properties any way you can (advertise “subject to, come and get it” or tell the Bank to work something out with you or they can have the keys, take on an equity partner, etc…) before these loser properties bankrupt you is tough but at least you are taking action to change your destiny for the (potential) better!
So who are your potential real estate and financial friends in your area? How about those investors who actively take time to help out other investors at local association meetings? They may not be giving everything away for free and they may not know everything but they are your first line of seeking help as they are at least “givers”. Who has been around in a leadership position or has been a real investor with a rental portfolio for at least 10 years? Point being there are plenty of here today and gone tomorrow types out there but the real deal people will have been around for 10 years or more. These are also the same people that will have seen different markets and this can be very important in today’s market that few of the current investor crop have seen and even fewer know what to do about it…
So who do you need to become friends with? Well we have established several criteria so far:
1. Been around a while.
2. Givers.
3. Experienced and successful (not just volunteers with opinions).
4. Good reputations for honest dealings.
5. Varied types of friends (money friends, attorney, CPA, real estate broker, Landlord, Creative Investors with experience in many types of deals, etc…
6. Who are willing to do deals with you in a mutually beneficial relationship (can you say 50-50%?).
So let’s talk about why many of us stick with one friend for a particular part of real estate investing such as an attorney or a real estate broker or a property manager or lender. Let’s take the real estate agent (or if you want the best, a Realtor) first:
The real estate broker/agent is the person that helps you find properties to buy, gives you good comparative market analysis data on the market conditions and value so that what you buy makes basic sense. Of course, the real estate agent is not responsible for you making a good deal as that is the investors responsibility but they will provide you a lot of the data and assurance that you are not making a really bad investing deal (if you have a good agent). So how do you tell the difference you say? One way is to always ask the various real estate professionals you are considering dealing with what rental real estate do they own and how long have they owned it? The ones that are not investors will have a harder time being good advisers as they do not put their money where their advice (mouth) is! I also want an agent that did not just show up in the past 5 years of easy money selling (well not the last year or so but 2002-2006 anyway) so that you know you have a real agent that has seen and knows what to do in different markets. “Ya gets what ya pay for” when you decide to go with the newest/cheapest out of the box agent with a quick smile – buyer beware! In my area I strongly recommend Tracy Boswell, Broker-Owner of Sea Shore Realty (757) 301-8550 as she is an investor, has been the Vice-President and/or Secretary of the local investor group since 1997 or so and has been full time in this business since 1991. Tracy is also my good friend - Call her or take your chances elsewhere…
Attorney – This is the person that can get that HOT deal done for you this week when it just has to close or the foreclosure will happen. The fastest one my attorney did for me was 36 hours and the check I got when I sold this property was $55,000. Simply put, your attorney has to be able to know what you the investor are doing in your different real estate ventures and the attorney has to be able to move fast so great deals do not get away. I use Steve Gunther for all of my closings (757) 671-3352. He is also the person that succeeded me as the President of the local real estate investor group and is a great guy who went to bat with me in our state capital earlier this year to fight (and win) against bad legislation that would have hurt all investors in Virginia.
Property Manager – I do not know a good one except me . I am a natural landlord and have many rentals myself. We also manage other investor’s rentals so they can concentrate on finding and buying good deals. An interesting thing I hear from investors looking to replace themselves or a bad property manager is “what does it cost?”. A simple question but not always a simple answer if you understand that not all property management companies make their profit in the same way. How’s that you say? Doesn’t everyone charge 10% management fee, a one month lease-up fee to fill vacancies and a 10% surcharge for maintenance activities? No, some PM companies charge less up front but make their profit from charging their owners a lot of maintenance fees. My thinking on this is simple – Use strict tenant screening procedures to only accept the ones that will pay on time and maintain the property themselves and also use a tight lease that puts the majority of the “work responsibility” onto the tenant so that costs are minimized. Accordingly, we operate in a transparent manner with 10% per month management fee (but only off of rents actually collected), a ½ month’s rent lease up fee for vacant units needing new/good tenants and almost no maintenance fees to the owners as the tenants are responsible for most of the maintenance. We always win when we are compared apples to apples – Call us to smooth out your cash flow and fire your tenants – (757) 301-3395. By the way – I only use National Tenant Network to screen my tenants (Skip and Mary Saylor – Past President of our investor group/TRIG) and they can be reached at (757) 827-5775. They have been investors for over 30 years and have over 70 rentals themselves.
By the way - I just took over a 5 property rental portfolio in May 2008 and am in discussions on taking over management of a 6 property group and a 21 property group as of 30 June 2008. The reason? One - The owners and I have known each other for years and they know me as a good landlord for my own rental properties. They also apreciate the fact that unlike most of the other property managemnt companies out there that I first go after the tenant for the cost of the repairs before coming to the owner to have them pay for the repairs. Most of the other property managers just seem to take the path of least resistance and have the owner pay for all repairs.
And the lender - Of course, I am not talking about the bank, I am talking about private money whether of a short term hard money loan nature, an equity partner or a self directed IRA from a financial friend. So why is it important to have "friendly lenders"? For one thing the lenders that are also your friends will help keep you from making a mistake on a deal that institutional lenders will not. Friendly financial friend lenders can also trade favors back and forth using their personal and their families self directed IRA's to fund each others deals (i.e., the way to take institutional lenders out of your life) . And your private money lender is also the person who can move fast to fund a deal or become part of a deal when time is of the essense. And while I have several of these financial friends they will have to remain nameless in this Blog for obvious reasons of their privacy.
So who are your real estate and financial friends?
What have you done to meet and cultivate these type friends? Remember, it is a two way street!
Are there also others out there that are also good people in real estate? Yes, there obviously are other good investors who also have a real estate business that they run for cash flow and fun… Some of us just see the situation in more of a long term sense rather than just trying to make a quick buck off of the people we know in real estate. Your decision...
In summary – We all should have someone that we seek out when we are doing a new type of deal or if we are checking out a new potential partner, etc… Just make sure that you do this before you get into the deal and still have a chance to protect yourself, make some money and survive this tough 2008 real estate year. The good buying time is coming, get ready...
Call me anytime…
Best wishes for your Great Investing!
Mike Cheatwood
(800) 269-9416
mcheatwood@cox.net
Monday, May 26. 2008
Holiday's over, it's time to ask "Do you like what you do each day?"
Today’s Blog is written with “recovery” in mind, specifically recovering from too much Memorial Holiday weekend sun, too much fun and too much food at pool-side cookouts, etc… Thank God this holiday weekend has come to an end and I can get back to something fun like real estate! And no, there is nothing strange about a person who loves what they do being ready to get back to doing it after a short break. In fact, really enjoying what you do is probably the number 1 ingredient in anyone being successful in any serious undertaking in life.
So, before we talk about a specific real estate deal, technique or situation, let’s talk about who seems to be best cut for real estate investing in all its different forms. First of all, I want to clarify the difference between the people in real estate that are “transactional” by method of operation (wholesalers, real estate agents, loan officers, rehabbers, hard money lenders, closing attorney’s, etc…) versus real estate investors that are investing long term for positive monthly cash flow without having to keep turning up new deals. Yes, I am talking about investors that like to buy properties and hold them long term. When your houses pay off and your tenants pay you on time each month life can offer you many choices (whether they be real estate related or not).
Let’s talk about the two basic categories of real estate people as to how they relate to this market. First, the transactional types either usually do this as a choice because they need or want the quick cash to get started in the business or they do not see themselves as long term landlords but there are other reasons as well... And just to be clear, I have also completed wholesale deals, made hard money loans and been paid referral fees (all of a transactional nature) but I also knew that I was not investing while doing this activity. The reasons for the hard money lending part should be obvious (5 points, 15% interest) but you may ask why did I wholesale properties for chunks of cash instead of just buying them and renting them out? The simple reason was that the properties were good deals for someone that wanted them in that location but the location was not to my liking due to distance, amount of rehab needed, the neighborhood or the re-sale figure of the house was not going to be in the sweet spot of the local market (i.e., too much risk or inconvenience in all of the above cases).
As a summary – many of the things we do in real estate are not the things we start out to do but are just the things we bump into along the way that have problems and we have the time, talents and foresight to solve (for a profit). Specifically, this example is where I received a call from a motivated seller 47 miles away from me and where it was clear the numbers looked good on the phone, I agreed to meet him the next day. I put the property under contract and sold it the following day for a $10,000 contract assignment fee to another investor who lived in that city (these were also the only two times I went to the property and of which cost me less than one day’s work).
Clearly wholesalers and rehabbers can make large chunks of cash that even after the larger tax burden should give them the funds to get into long term investing. Of course market forces also come into play and while it is a lot riskier in current real estate markets to try to buy, rehab and flip houses, wholesaling offers nice chunks of cash without the risk of ever owning the house in the first place. In any event, whether or not wholesalers and rehabbers become long term investors or not they should still enjoy what they are doing or they should find something else to enjoy doing in life..
The second type of people are the long term investors that can operate in either a buyers or a seller’s market simply assuming the investor buys the property very low and can also rent the property out for positive monthly cash flow without having to put down a sizeable down payment (i.e., more than 5%). Long term is defined by IRS tax code as more than one year but in reality is many more years than that as having your tenants fully pay for your houses is both the plan and the goal.
So, let’s start talking about some specific real estate investing techniques and goals that can lead either the transactional real estate person or the long term investor to the common goal of retiring from real estate without needing to continue to do deals. Specifically, I am talking about the investor’s ability to open a self directed Individual Retirement Account (IRA) and use it to make long term profits in real estate without having to be a landlord or do any real work. I am also teaching how to use a self directed IRA with $5,000 or less total put into the IRA by the investor (ever) on Tuesday evening (27 May, 7-9pm) at the Crowne Plaza Hotel in Virginia Beach, VA. The investing techniques I am referring to the investor using in their IRA are Options and Mortgages. These techniques also allow the transactional real estate person to invest as a long term investor without the incurring the effort required of a landlord.
Ready for the details? Well, the specific details will be put out tomorrow in a 2 hour teaching session but the basics are as follows:
1. Options – If you can find good deals, place them under an option-contract at a great price or terms, and then assign the option-contract to a self directed IRA, the IRA will then hold the Option as a long-term asset. The IRA will then control the upside on a nice property for the next 5-10-15 years or so in a situation where the homeowner still owns the home, has to make the payments/repairs and do everything that sounds or looks like work as regards the house. You generally have to put out about 1-2% to get the homeowner to sell you the option but this is a way to capture appreciation without actually owning real estate or managing tenants or doing work.
2. Mortgages – Once the investor has built up their IRA to a sufficient funding amount, they can then put some of their IRA’s excess cash to work by lending the money back out to other investors (secured by real estate) on a short time basis to keep it working and growing.
In summary – Self directed IRA investing is fairly simple but does have more (government) rules to follow and where the investor may decide to take more risks in their usual investing opportunities, they should be much more careful to follow the rules in self directed IRA investing. Additionally, if you have already been investing and may have bent some rules, there will also be an advice-Q&A session tomorrow night on how to best protect your IRA assets based on the actual rules that may have been bent.
In closing, it should be obvious that everyone should only do those things that make them money AND that they enjoy in life so they do not burn out too quickly, etc… And whether or not you are a transactional player or a long-term buy-hold investor, both types can also have a self-directed IRA to still capture long term investment profits so that retirement is within everyone’s reach.
See you 27 May at 7pm…
Best wishes for your Great Investing!
Mike Cheatwood
(800) 269-9416
So, before we talk about a specific real estate deal, technique or situation, let’s talk about who seems to be best cut for real estate investing in all its different forms. First of all, I want to clarify the difference between the people in real estate that are “transactional” by method of operation (wholesalers, real estate agents, loan officers, rehabbers, hard money lenders, closing attorney’s, etc…) versus real estate investors that are investing long term for positive monthly cash flow without having to keep turning up new deals. Yes, I am talking about investors that like to buy properties and hold them long term. When your houses pay off and your tenants pay you on time each month life can offer you many choices (whether they be real estate related or not).
Let’s talk about the two basic categories of real estate people as to how they relate to this market. First, the transactional types either usually do this as a choice because they need or want the quick cash to get started in the business or they do not see themselves as long term landlords but there are other reasons as well... And just to be clear, I have also completed wholesale deals, made hard money loans and been paid referral fees (all of a transactional nature) but I also knew that I was not investing while doing this activity. The reasons for the hard money lending part should be obvious (5 points, 15% interest) but you may ask why did I wholesale properties for chunks of cash instead of just buying them and renting them out? The simple reason was that the properties were good deals for someone that wanted them in that location but the location was not to my liking due to distance, amount of rehab needed, the neighborhood or the re-sale figure of the house was not going to be in the sweet spot of the local market (i.e., too much risk or inconvenience in all of the above cases).
As a summary – many of the things we do in real estate are not the things we start out to do but are just the things we bump into along the way that have problems and we have the time, talents and foresight to solve (for a profit). Specifically, this example is where I received a call from a motivated seller 47 miles away from me and where it was clear the numbers looked good on the phone, I agreed to meet him the next day. I put the property under contract and sold it the following day for a $10,000 contract assignment fee to another investor who lived in that city (these were also the only two times I went to the property and of which cost me less than one day’s work).
Clearly wholesalers and rehabbers can make large chunks of cash that even after the larger tax burden should give them the funds to get into long term investing. Of course market forces also come into play and while it is a lot riskier in current real estate markets to try to buy, rehab and flip houses, wholesaling offers nice chunks of cash without the risk of ever owning the house in the first place. In any event, whether or not wholesalers and rehabbers become long term investors or not they should still enjoy what they are doing or they should find something else to enjoy doing in life..
The second type of people are the long term investors that can operate in either a buyers or a seller’s market simply assuming the investor buys the property very low and can also rent the property out for positive monthly cash flow without having to put down a sizeable down payment (i.e., more than 5%). Long term is defined by IRS tax code as more than one year but in reality is many more years than that as having your tenants fully pay for your houses is both the plan and the goal.
So, let’s start talking about some specific real estate investing techniques and goals that can lead either the transactional real estate person or the long term investor to the common goal of retiring from real estate without needing to continue to do deals. Specifically, I am talking about the investor’s ability to open a self directed Individual Retirement Account (IRA) and use it to make long term profits in real estate without having to be a landlord or do any real work. I am also teaching how to use a self directed IRA with $5,000 or less total put into the IRA by the investor (ever) on Tuesday evening (27 May, 7-9pm) at the Crowne Plaza Hotel in Virginia Beach, VA. The investing techniques I am referring to the investor using in their IRA are Options and Mortgages. These techniques also allow the transactional real estate person to invest as a long term investor without the incurring the effort required of a landlord.
Ready for the details? Well, the specific details will be put out tomorrow in a 2 hour teaching session but the basics are as follows:
1. Options – If you can find good deals, place them under an option-contract at a great price or terms, and then assign the option-contract to a self directed IRA, the IRA will then hold the Option as a long-term asset. The IRA will then control the upside on a nice property for the next 5-10-15 years or so in a situation where the homeowner still owns the home, has to make the payments/repairs and do everything that sounds or looks like work as regards the house. You generally have to put out about 1-2% to get the homeowner to sell you the option but this is a way to capture appreciation without actually owning real estate or managing tenants or doing work.
2. Mortgages – Once the investor has built up their IRA to a sufficient funding amount, they can then put some of their IRA’s excess cash to work by lending the money back out to other investors (secured by real estate) on a short time basis to keep it working and growing.
In summary – Self directed IRA investing is fairly simple but does have more (government) rules to follow and where the investor may decide to take more risks in their usual investing opportunities, they should be much more careful to follow the rules in self directed IRA investing. Additionally, if you have already been investing and may have bent some rules, there will also be an advice-Q&A session tomorrow night on how to best protect your IRA assets based on the actual rules that may have been bent.
In closing, it should be obvious that everyone should only do those things that make them money AND that they enjoy in life so they do not burn out too quickly, etc… And whether or not you are a transactional player or a long-term buy-hold investor, both types can also have a self-directed IRA to still capture long term investment profits so that retirement is within everyone’s reach.
See you 27 May at 7pm…
Best wishes for your Great Investing!
Mike Cheatwood
(800) 269-9416
Thursday, May 22. 2008
Final Exams are coming – Will you pass or fail?
This evenings Blog takes its theme from the college and high school kids who are now dealing with “final exams” of a particular part of their lives to see how well they are expected to do in the next phase, the workforce. Accordingly, I would like to ask each reader to consider where they are as regards their upcoming final exams, which for the sake of this discussion we will call preparing for retiring from the full time job as an investor and landlord. The thought process that I am sharing with you tonight is that almost everything in life has a final exam and the easiest path to success is to realize what the end point is so that you can prepare yourself to reach it in the best manner/quickest time.
A quick story to explain my meaning - Years ago (when I was Chief Engineer Officer of a US Navy Warship) I used to fill up my shipboard classroom by promising to teach the final exam of a coveted job qualification (Engineering Office of the Watch/EOOW). Persons that reached this qualification level ran the engineering department of 130 persons while at sea and they stood a much better chance of being promoted to a higher rank/pay-grade. And I did start off by teaching the final “oral” exam (usually 3 hours long) and which included hand written out diagrams and other specific “tests” of knowledge that could be used at any time to see how well someone understood the operation of all the steam, water, electrical and control systems for a major steam power and propulsion plant. The amazing thing was that over the first year we qualified 11 new EOOW’S which was just a huge and unheard of number. The feedback was that while the exam was very complicated, by starting off with showing everyone what the final product was, it became a known quantity that was much easier to deal with and was therefore much less intimidating.
Some of you may also be wondering what I am referring to as concerns many investors being put out of the investing game, so let me share an example of what has happened to some of the recent crowd of new investors that got into real estate in the last 5 years (with my point being that many are no longer in the game anymore and most of them are not retired where they are out sipping a cool drink on a sandy beach on a small island either…). NOTE - I am not trying to pick on newer investors as anyone can at anytime fail to make those necessary "updates" to their game-plan and wind up out of the investing game. I am just pointing out that more newer investors are having problems adjusting to today's market (rather than those of us that have seen it before).
So, enter the new investor in the BIG "up" appreciation years of 2003-2004-2005, who found out how to buy houses and then quickly re-sell the houses for a profit. They probably made several nice checks of $20,000+ each but they also paid a lot of taxes by “flipping” properties instead of investing for the long term. Additionally, when the easy money buy-sell house market dried up, where did that leave these investors (speculators actually)? Simply put, if these investors did not learn a new trade (such as landlording, short sales, wholesaling, master leasing, etc…) they were out of business. Obviously many investors did in fact hit this very same wall over the past 2 years or so and are no longer full time investors, if investors at all...
As I have been saying for some time now, when the market is changing the investor needs to learn new skills and not only change with the market but embrace the change so they can get out in front of the event and not be beaten and battered by being dragged into the new market as unwilling participants. Did I say unwilling participants? No, I meant as landlords because that is the number one skill that investors have had to learn or choose to partner with someone that has the skill if they want to survive a market where houses do not sell but still have mortgages that must be paid (usually by renters).
Before we get to the actual final exam questions that each of us must successfully answer to make it to the “end game” as a successful investor, let me first review some of the dangers along the road that the educated and wary investors should be on the look-out for so you do not go down with the ship (or property) if the market shifts and you cannot make the house work out profitably.
Dangers you say? So are they like those fabled Lions, Tigers and Bears we have heard about?
No, not really but they are real dangers none the less. Let’s take them one at a time and remember, that to some extent they will change as the market changes:
1. Signing and personally guaranteeing loans. Yep, this means bank loans, hard money loans, assumable-qualifying loans. The problem being that if the property deal does not work out your credit and other assets are personally liable for any deficits or judgments. Why not just buy via a subject to the existing mortgage arrangement or otherwise take control using an Option instead of going on title?
2. With gas headed to $4.00 a gallon you sure do not want to be a HUMMER Dealer and you may want to rethink buying those country houses way out away from most of the jobs, malls, schools, etc… Simply put, when people start making choices on what is really important to them they may choose the house closer into town/city than the long commute house considering gas prices. Just try not to get stuck with houses in those locations/situations unless you can buy them really, really low so you can afford to re-sell or re-rent them low/under the market.
3. Buying with too much leverage and not looking/buying those "middle of the road properties" where you made your profit when you bought it. Let’s break this down for a moment:
a. Too much leverage (i.e., no money down) sounds great and I did it 37 times of the first 44 properties I bought. But I also negotiated owner finance terms on these properties that gave me positive cash flow from day 1 assuming I properly “landlorded” them to the bank each month. The point being that too much leverage without getting the proper loan terms and/or a low price usually means negative cash flow for your rentals. And unless you make wads of money from your day job, negative cash flow is the kiss of death in business (beware!).
b. Buying properties outside of the “sweet spot” of your local market – Every market has a price range that the local economy and public considers to be affordable = find it and stay there unless you are planning on moving into that expensive house. You then have the widest range of potential tenants and buyers as multiple options for your future exit strategy.
c. Buying right – Simply put, you must buy right to set everything else up as having positive cash flow, potential partners and eager lenders are all good indications that you contracted-bought the property right. Just do not pay too much!
4. Government action – You say you are not political and this does not bother you? Hmmm…. Perhaps you are missing my point so here goes a little story that I have told before but seems to bear repeating here. Not that long ago but a long ways away there was a group of very happy investors who had made good deals, had fixed up their houses, had then rented their houses out to good tenants and they averaged $200/month positive cash flow on each house. One of them had 22 houses of this type and in this situation. Then along came the big bad wolf (Florida Legislature in this instance) and they raised property taxes rates 500% in one year (2006). The incomes of the Florida residents did not go up 500% and the smart investor-landlords could not raise rents fast enough to keep up with this mandatory property expense. Most of these landlords had a $100/month negative cash flow per property and were going broke. What had they done wrong? Not a thing except to not keep their eye on the politicians so their position could be properly heard and considered. Oh, by the way, Florida home owners insurance also went up approx. 400% during the period 2005-2007.
5. Government action part 2 (Obama/Hillary effect) - Does anyone remember when President Bush got the capital gains rate lowered to 15% in May 2003? And what was the result? Well, for one thing, many owners that had been sitting on properties for years and who were unhappy with the thought of selling at the old 28% long term capital gains rate started selling. Now what do you think will happen when Obama or Hillary gets elected and they return the capital gains rates to the 28%+ range? Yes, properties will not sell as well and will in fac
A quick story to explain my meaning - Years ago (when I was Chief Engineer Officer of a US Navy Warship) I used to fill up my shipboard classroom by promising to teach the final exam of a coveted job qualification (Engineering Office of the Watch/EOOW). Persons that reached this qualification level ran the engineering department of 130 persons while at sea and they stood a much better chance of being promoted to a higher rank/pay-grade. And I did start off by teaching the final “oral” exam (usually 3 hours long) and which included hand written out diagrams and other specific “tests” of knowledge that could be used at any time to see how well someone understood the operation of all the steam, water, electrical and control systems for a major steam power and propulsion plant. The amazing thing was that over the first year we qualified 11 new EOOW’S which was just a huge and unheard of number. The feedback was that while the exam was very complicated, by starting off with showing everyone what the final product was, it became a known quantity that was much easier to deal with and was therefore much less intimidating.
Some of you may also be wondering what I am referring to as concerns many investors being put out of the investing game, so let me share an example of what has happened to some of the recent crowd of new investors that got into real estate in the last 5 years (with my point being that many are no longer in the game anymore and most of them are not retired where they are out sipping a cool drink on a sandy beach on a small island either…). NOTE - I am not trying to pick on newer investors as anyone can at anytime fail to make those necessary "updates" to their game-plan and wind up out of the investing game. I am just pointing out that more newer investors are having problems adjusting to today's market (rather than those of us that have seen it before).
So, enter the new investor in the BIG "up" appreciation years of 2003-2004-2005, who found out how to buy houses and then quickly re-sell the houses for a profit. They probably made several nice checks of $20,000+ each but they also paid a lot of taxes by “flipping” properties instead of investing for the long term. Additionally, when the easy money buy-sell house market dried up, where did that leave these investors (speculators actually)? Simply put, if these investors did not learn a new trade (such as landlording, short sales, wholesaling, master leasing, etc…) they were out of business. Obviously many investors did in fact hit this very same wall over the past 2 years or so and are no longer full time investors, if investors at all...
As I have been saying for some time now, when the market is changing the investor needs to learn new skills and not only change with the market but embrace the change so they can get out in front of the event and not be beaten and battered by being dragged into the new market as unwilling participants. Did I say unwilling participants? No, I meant as landlords because that is the number one skill that investors have had to learn or choose to partner with someone that has the skill if they want to survive a market where houses do not sell but still have mortgages that must be paid (usually by renters).
Before we get to the actual final exam questions that each of us must successfully answer to make it to the “end game” as a successful investor, let me first review some of the dangers along the road that the educated and wary investors should be on the look-out for so you do not go down with the ship (or property) if the market shifts and you cannot make the house work out profitably.
Dangers you say? So are they like those fabled Lions, Tigers and Bears we have heard about?
No, not really but they are real dangers none the less. Let’s take them one at a time and remember, that to some extent they will change as the market changes:
1. Signing and personally guaranteeing loans. Yep, this means bank loans, hard money loans, assumable-qualifying loans. The problem being that if the property deal does not work out your credit and other assets are personally liable for any deficits or judgments. Why not just buy via a subject to the existing mortgage arrangement or otherwise take control using an Option instead of going on title?
2. With gas headed to $4.00 a gallon you sure do not want to be a HUMMER Dealer and you may want to rethink buying those country houses way out away from most of the jobs, malls, schools, etc… Simply put, when people start making choices on what is really important to them they may choose the house closer into town/city than the long commute house considering gas prices. Just try not to get stuck with houses in those locations/situations unless you can buy them really, really low so you can afford to re-sell or re-rent them low/under the market.
3. Buying with too much leverage and not looking/buying those "middle of the road properties" where you made your profit when you bought it. Let’s break this down for a moment:
a. Too much leverage (i.e., no money down) sounds great and I did it 37 times of the first 44 properties I bought. But I also negotiated owner finance terms on these properties that gave me positive cash flow from day 1 assuming I properly “landlorded” them to the bank each month. The point being that too much leverage without getting the proper loan terms and/or a low price usually means negative cash flow for your rentals. And unless you make wads of money from your day job, negative cash flow is the kiss of death in business (beware!).
b. Buying properties outside of the “sweet spot” of your local market – Every market has a price range that the local economy and public considers to be affordable = find it and stay there unless you are planning on moving into that expensive house. You then have the widest range of potential tenants and buyers as multiple options for your future exit strategy.
c. Buying right – Simply put, you must buy right to set everything else up as having positive cash flow, potential partners and eager lenders are all good indications that you contracted-bought the property right. Just do not pay too much!
4. Government action – You say you are not political and this does not bother you? Hmmm…. Perhaps you are missing my point so here goes a little story that I have told before but seems to bear repeating here. Not that long ago but a long ways away there was a group of very happy investors who had made good deals, had fixed up their houses, had then rented their houses out to good tenants and they averaged $200/month positive cash flow on each house. One of them had 22 houses of this type and in this situation. Then along came the big bad wolf (Florida Legislature in this instance) and they raised property taxes rates 500% in one year (2006). The incomes of the Florida residents did not go up 500% and the smart investor-landlords could not raise rents fast enough to keep up with this mandatory property expense. Most of these landlords had a $100/month negative cash flow per property and were going broke. What had they done wrong? Not a thing except to not keep their eye on the politicians so their position could be properly heard and considered. Oh, by the way, Florida home owners insurance also went up approx. 400% during the period 2005-2007.
5. Government action part 2 (Obama/Hillary effect) - Does anyone remember when President Bush got the capital gains rate lowered to 15% in May 2003? And what was the result? Well, for one thing, many owners that had been sitting on properties for years and who were unhappy with the thought of selling at the old 28% long term capital gains rate started selling. Now what do you think will happen when Obama or Hillary gets elected and they return the capital gains rates to the 28%+ range? Yes, properties will not sell as well and will in fac