Real Estate Investing Soft Skills

Two Legs of the Table in Placeâ€¦

Falling prices and rising rents in some areas mean good news for real estate investors ready to buy property. This also means short-term resale prospects are brightening, especially if the purchase price is low enough.

But investment capital is still scarce. Unless you’re Warren Buffet, there is a finite amount in your mattress stuffed with cash, and you need other people’s money to do additional deals.

Even if you have good credit, cash strapped and failing banks are unlikely to look at your deal twice, especially if you are a full-time investor.

With one in five homeowners underwater (according to Zillow), owner financing can be tricky to pull-off. Sellers with equity are stressed and skeptical, many would rather take their market discount, cash out and be done with it.

The majority of hard money lenders are done licking their wounds, and we are starting to see a resurgence of expensive money coming into circulation. Well, at least it’s available…

Everybody is looking for the golden goose: “long-term” private money. By “long-term,” I mean longer than a rehab and cash out, maybe a year or two, so you can hold until everyone can actually make a decent profit on the deal.

But how in demand are these rare birds? In this economy, people are clutching onto whatever they have for dear life, fearing the worst. Retirement accounts and home equity are shrinking. If you have investment money in spite of all this, you can dawdle and cherry-pick your way through countless prospects.

Conditions are improving, but for now just a word of caution to the dreamer investor who thinks their deal will turn private money heads. Get in line, and you better have a honey.

What Does it Say When the Good Ones Go Bad?

Before the crash, I sold a house FSBO on owner financing to a wonderful couple who always paid their mortgage on time. Never missed a payment or were even late. Then one day in October of last year, I got an e-mail asking, “What would happen if we gave you the house back?” In response, I counseled them on the best way to market it for sale and offered to help them. They told me they were moving out of state in a week. I barely had time to grab a quitclaim deed from them before they drove off.

Meanwhile, I had a fully renovated home for sale that I would not take a bottom of the market price for, so I decided to rent it. I rented on a one year lease it to a lovely woman and her brother who always paid their rent on time. Never missed a payment or were even late. She was a graduate student who was so in love with the house she gushed in her e-mails about how much she adored living there, and about the wonderful neighbors who brought her cookies. Six months later I got an e-mail. “We both lost our jobs. What would happen if we moved out?” In response, I offered to work with them until they could secure new employment. In fact, the woman had moved in with her boyfriend and left me to deal with the brother, who turned from the charming individual I met six months ago into a surly jerk who threatened to sue me. In spite of him, I found a new tenant and released them from the remainder of their lease obligation.

I sold another house FSBO on owner financing around the same timeframe to a hardworking contractor and his cousin who always paid their mortgage on time. Never missed a payment or were even late. Then in January of this year, I got a phone call. “What would happen if we gave you the house back?” I counseled him on how to sell it, even offered to reduce my equity interest to make the sale happen in the tough market. The contractor quitclaimed his share of the house to his cousin, then moved out of the country. The cousin never lived there and had helped the contractor purchase the property as a favor. The house was essentially abandoned. So I agreed to let the cousin quitclaim the house to me, and I rented it out.

I expect to have turnover in improving neighborhoods, especially since those are the first to go soft in a market like this. But there is something especially difficult when you get blindsided by buyers/tenants with perfect track records.

Times must be tough if the good ones are going bad. For some reason it seems worse. Is it because it raises deeper implications about the market?

Any thoughts?

True Stories of Real Estate Investing - the Case of the Drunken Foreclosure

There is no substitute for real life stories when it comes to avoiding the curve balls you encounter as a real estate investor. This story is one of those that taught me a lesson, and I figure others could maybe learn from it too.

It's about a deal I did with my accountant of many years that went wrong, and how I salvaged it. Hopefully you'll find it entertaining: True Stories of Real Estate Investing - the Case of the Drunken Foreclosure

Hungry Contractors Don't Always Mean Low Prices

I have been getting higher prices from my regular contractors lately. You would think that with fewer jobs available, they would charge even less to keep my business. That's not the way it always works.

In fact, I have found that contractors feeling financial pressure may actually charge more. As their obligations mount, contractors may increase their rates in order to capitalize more on every call.

This forces me to cultivate more new contractors than usual. I'm looking for the hungry new contractor that wants to court my long-term business. This is his chance to become my regular go-to guy.

Not all new contractors will submit discount bids, because their first priority is to solve today's problems. If they can get you to hire them, they'll try to charge the max and worry about repeat business some other day.

My regular contractor can only pull a surprise bill on me once. He'll actually get the wrong result after that. He won't hear from me for a while, which means less money, not more. That turns out to be expensive markup on that one job. He's also driving me to find his replacement, which is his worst case scenario.

For more on how I handle these situations: Does a Slow Real Estate Market Mean Contractor Bargains?

What About Short-Term Resale â€“ Part II

To recap, if you get hold of a bargain, that’s half the battle. Short-term resale is the other half.

The way to handle it is the way it’s always been done - buy it right to begin with. The perfect deal would be a long DOM FSBO in a good neighborhood, negotiated for owner financing with minimal fix-up to sell at a discount in the competitive market. In short, you have to steal the house. You also have to work fast before the mainstream investors wake up.

The scarier the market the better, because the homeowner will already be psychologically broken. Basically, if you can’t swing a dead cat without hitting a foreclosure (which is everywhere), you’re in the right place. Buyers are just starting to get that, “I’m going to miss the bottom,” panic we’ve all been waiting for. Once the stampede starts, it will be too late to leverage seller malaise.

Pretty? No sir. Is this where short-term money is made in this market? Absolutely.

This is tough to do, and you may be better off waiting until the pulse of the resale market quickens. For more on the wisdom of waiting: You've Waited This Long...Why Rush to Buy?

Late Rent? Try Tenant "Rehab"

When your tenant becomes behind on the rent, you enter his world of financial dysfunction. I’m not talking about the transient sector of the tenant population - the folks who are just passing through (students, relocating business people, young couples getting their first apartment together, etc.) – I’m talking about perpetual tenants, those who are destined to always rent.

These are the regular customers of the rental world, and this type f tenant may occupy a good percentage of your rentals. By their very nature, these tenants can’t manage their money. Think about it, if they were responsible with money, they’d have become homebuyers a long time ago.

You can kick them out, or maybe they can be salvaged. Remember, turnover is expensive too. You might try putting the tenant into “rehab.” Once a tenant gets behind in the rent, you can become his "rehab doctor," by helping him through this period of bad “habit.” He’s “using” (his creditors), and actually working harder at dodging his bills than just getting a job and paying them. You need to do him a favor and help him kick the “stuff.”

This step-by-step rehab process is pretty simple, and it works: Turnover is Expensive - Try Tenant "Rehab"