Last week, in part 1 of this article,  I gave an overview of the steps to conduct a round robin auction to sell an investment property (particularly beautifully rehabbed homes) quickly. In part 2, I will give you some specific advertising ideas and also answer a possible question/concern you may have: What happens if my highest bid is for less than I owe on the home?

Advertising Methods

A week prior to the auction, you have a few different advertising methods that you can and should focus on:

• Set up a quick free Wordpress website specifically for your 2-Day Auction that provides the date of the auction and opening bid price, a couple photos of the home, a detailed written description of the home’s features, an FAQ about the auction process, your contact information, and an “About Us” and link to your company website if you have one. A quick word about photos…don’t provide too many!  Just one or two nice photos that will draw people in.  Make them come to your home to see the rest of your beauty!
• Post a free Craiglist classified ad each day – make sure you mention a few key points in your ad: Your starting bid price (that’s a huge draw because of how low the amount will be), the address of the home, the dates the auction, and a link to the Wordpress site you put together. If you have an inexpensive local paper, you can do a small classified ad in there as well, but don’t expect it to generate a ton of interest. For a small cost, it can certainly be worth it though.
• Postcard mailing to 500-1000 people who live in single family homes surrounding the home. Use Click2Mail.com to print and mail the postcards to keep it simple. You can buy the mailing list from a source like ListSource.com or Melissa Data.  Make sure to get this set up in plenty of time such that the postcards arrive to the homes 2-3 days before the auction. This is actually the most expensive item out of all the things you would do to advertise, but its great for getting the neighbor’s attention and having them be mouthpieces to people they know.

On the days of the auction, there are also a couple advertising methods that can be highly impactful.

• Bandit Signs work in great to get people interested.  People are driving by quickly so it can only really give a few key points. Private Home Auction – TODAY!, starting bid price, the times of the auction, and an address.  That’s it!  Keep in mind your city ordinances when putting up bandit signs.  For me personally, the city that I had my auction in does NOT tolerate bandit signs even on the weekends!
• Having people hold large directional signs that promoted the auction to those driving by was a big winner for us.  We paid a few guys by the hour to stand out on the side of the road at the closest street with good traffic and probably a third of the people who came to the auction were a result of seeing those signs.

Finally, to cover yourself in an event that the bids simply aren’t high enough for you to break even or profit, its really important for you to understand (and share with your bidders) that you are not locked in to your bids and neither are the bidders.  Have your attorney review the language, but you can say something like this in your auction FAQ:

Are my bids legally binding?

No, absolutely not.  The most important thing to understand about your bid is that it is not binding.  You can back out of your bid until you sign an actual contract.  Equally important is that you understand bids can be cancelled by the Seller at any time without cause or reason as well.  The contract will be signed on the Monday following the private auction.

There are several other ways of wording this, but you get the idea.  The bids are essentially the equivalent of a verbal offer.  It’s vitally important that you have the auction rules on a paper that everyone receives when they walk into your house and make sure they review it prior to writing down a bid. This way you have fully disclosed the rules and also provide potential bidders with an opportunity to ask you questions or choose not to bid if for some reason they don’t like the rules (which did happen with a couple of my potential bidders).

If for some reason, you don’t get the results you needed with the auction the first time — but you got lots of traffic — you may want to strongly consider waiting a couple weeks and then doing it again and making a few tweaks in your advertising.

I hope this helps!

P.S.  I have a bonus random tip that didn’t really fit anywhere else, but wanted to share it.

On the days of the auction, take yellow Post-It Notes and write great features/info on them and place them in strategic areas of the home. For example, on the appliances, on storm-impact windows (big in Florida!), on the cabinet that opens up to have a trash can inside, basically on anything that is special but may not be obvious to a casual observer.  This was really helpful for us!  You don’t have a chance to be standing next to everyone and talking to them while they are viewing the home, and these post it notes deliver your message in an easy and impactful way!

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

How to Use Round Robin Auctions to Sell Your Investment Properties Quickly (Part 2)

What do these projects have in common?

• Replacing zone valves (not just the heads) for forced hot water heating
• Installing a 220-volt outlet for an oven
• Installing a hot water heater

The common bond between these projects is that I won’t do ‘em. It’s not that I don’t have handyman skills – I do. But these are all projects that if I do, and do badly, can cost me a fortune (think a fire or flood). I won’t have an unlicensed handyman take on tasks like this either – I’ve seen a lot of handymen who were no more handy than I am. No, for projects like this, I want a professional licensed contractor.

I want to have a really good professional relationship with my electricians, plumbers, and HVAC guys. I want to be one of their best customers, somebody they respect and want to please. I want to be the guy they help first on a busy night when they have a dozen people calling for assistance.

At the same time, I don’t want them to take advantage of me, thinking I’ll overlook unprofessional behavior because I’m such a friendly guy. I’m not looking for friendship, but for mutual respect. I show my respect for my contractors in three ways – by recognizing their financial needs, the value of their time, and their professional abilities.

Recognizing Their Financial Needs

I have a friend who buys bulk quantities of computer components for resale. He knows what his suppliers must charge in order to make a profit, and never asks them to charge less. He also pays promptly for every shipment.

On the other hand, I’ve heard many stories of landlords who make a game of trying to shaft contractors, squeezing every penny and delaying payment as far as possible.

Your contractor is a small businessperson, who depends on his earnings to run his business and feed his family. Recognizing financial needs means settling on a fair price for the work to be done, and making prompt payment when the work is finished. I hear so many appalling stories about landlords who delay payments to their contractors, or try to avoid payment altogether. These people congratulate themselves on their smart business sense, but are destroying vital business relationships for the sake of a couple of dollars. Not only that, they may get an unofficial blackball from their contractors – making it difficult to find anyone willing to do work for them. We pass the word about bad tenants – don’t you think these guys pass the word about bad customers?

Recognizing the Value of Their Time

Your contractor sets a value on his time pretty simply. Officially or otherwise, he bills for each hour he works for a customer. Four hours at $60 per, that’s $240. Simple as that. How do you recognize the value of his time? By helping reduce the amount of time he wastes. There are many ways to do this, but one big one is by combining jobs.

Let’s suppose you have three jobs that will each take an hour. It takes your contractor 20 unpaid minutes to travel from his shop to your property. If he can do the three projects together, his ratio of paid to unpaid time is 4.5 to 1 (180 minutes work, 40 minutes travel). If he has to do them separately, his ratio is 1.5 to 1.

Your contractor will also appreciate it if you show up on time and don’t cancel appointments. If you can, try to use the same contractor for all of your jobs that fit his skills. You’re increasing his business, reducing the time he must spend on marketing, and making him more dependent on keeping you satisfied.

Recognizing their Professional Abilities

It’s not easy to become a master electrician! Here in New Hampshire, it takes five years of work experience, an associate’s degree in Electricity, and the passing of two exams. This means my electrician knows a heck of a lot more about his trade than I can.

Therefore, I’m not going to nitpick every decision he makes or denigrate his abilities. I’m going to work on the assumption that he knows what he is doing and treat him as a professional.

I Don’t Have to be a Sap

All this talk of respect does not mean I’ll roll over for bad work. Certainly there are bad contractors! We know them by the work they do and the way they do it. If my contractor does shoddy work, misses appointments, is consistently late, or overcharges, he doesn’t deserve my respect. I have two very effective ways of dealing with these situations.

Perhaps the problem is not with the contractor (the master plumber, electrician or whatever who owns the company) but with one or two employees. In that case, the boss needs to know about these bad guys. “Joe, Pete and Aaron really didn’t do good work for me, and you need to talk to them.”

On the other hand, perhaps the problem is with the contractor. In that case, don’t use him again, and let him know why.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Finding Happiness with Contractors

With home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties. Unfortunately, they’re also finding it harder to get approved for a home loan.

After getting stung by defaults, conforming mortgage standards for non-owner occupied home loans tightened dramatically last quarter.

One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.

Prior to the chance, the number of financed properties could be as high as 10. Today, that number is 4, stinging investors with large real estate portfolios. Going forward, buying properties isn’t the problem; financing them with conforming mortgage money is.

Another guideline change mandates larger downpayments.

Versus early-2008, when a real estate investor could buy a home with 10 percent down, today’s investor is required to pay 15. But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore, rendering the 15 percent downpayment insufficient. The de facto requirement, therefore, is now 20 percent down.

And then came the fees.

As part of its “pay-for-risk” pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year. Based on loan-to-value, the fees are:

* 75% LTV or less: 1.750 percent of the borrowed amount
* 75.01 – 80.00% LTV : 3.000 percent of the borrowed amount
* Greater than 80% LTV : 3.750 percent of the borrowed amount

So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.

All things considered, now may be a good time to make that rental property bid. Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.

Don’t let this deter you from investing in real estate though. There are some very clever ways that you can creatively finance your investment properties. Seller financing, subject to financing and private money lending are just a few of these options. To your success in 2009!

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

For Real Estate Investors, Finding Good Loans Is Tougher Than Finding Good Deals

I have the worksheet I use of a ‘quick and dirty’ hard money purchase analysis and I thought I’d share it with you…download here! First if you don’t know much about worksheets, don’t worry; you simply input a few numbers at the top, and the worksheet automatically calculates the fields without your assistance. You just get to read the output.

Why I Use Hard Money: My Theory

Let me explain why I call this my “Hard Money Buying” worksheet. First, I hate putting my own money in purchases, since I’m already putting in my valuable time I feel adding my money to boot is too much to ask. With hard money or what some call private investor funds (rich guys that have more money than time) I seek to borrow not only the acquisition funds but the rehab funds and all the carrying costs including interest payments for 6 months. This is more than enough time to bring the property back to market either as a rental or a sale opportunity.

The Hard Money Worksheet

There’s a screen shot below…and then I’ll give a tour of what’s on it.

First, the grey fields are the only fields that you use to input data. Everything else is auto populated off of those data fields. The “yellow highlights” are there so your private lender gets an eye-full of the good news! As I get “more serious” about a property, I’d do more “complex” calculations, but this worksheet is the basis for my private lender to make his decision from…after all if they won’t lend, I’m not buying.

For example of how I use this worksheet, the screen shot shows my Acquisition Cost at 61.54% and 65.24% after 6 months…if my lenders cutoff is 65%…I’m asking for an exception to the rule. They may say “OK” or they may not. I may have to fax “this deal” to a number of private or hard money lenders to see which one accepts my exception.

Private funds in my experience want about a 12% nominal rate and worse case, 5 points…so the worksheet reflects this. The worksheet reflects the 6 months of turnaround time and tracks the carrying costs over that time. Private funds usually won’t lend if they are letting you in with “none of your own money” at a LTV of greater than 65%. The worksheet gives me two looks at LTV…one before 6 months of holding costs…and one after. This gives me the options with my private money loan request.

Next you’ll see the output for when I sell, the worksheet spits out gross profits for sales prices of 80% of appraised value growing in 5% steps up to 100%. So I can see what my profit potential is if I “hold out” for a higher sales price…or cut the home for a quick sale.

Now depending on the deal, I want to see a monthly cash flow projection as well. So there are inputs for annual property tax and hazard insurance estimates, as well as a 10% estimate for “management expenses”. Feel free to add any addition expenses the cost of a property manager, advertising, vacancy, and collection losses, etc. over the 10% I impugned in the “Est. Insurance” field until you feel you’ve adequately represented the “outflow” and then estimate your potential rent keying that in in the appropriate field as well.

For debt service, it is assumed a 90% loan at 8% amortized over 30 years on the 100% Sales Price figure. If these terms are too generous for you, feel free to calculate the final cash flow by hand using your own figure for monthly debt service…if they feel right…you’re in luck because the worksheet cranks out a lovely “Est. Cash Flow for you!

There are some fields that are nice to show private investors like “cost per square foot” and “rent per square foot”…but they are more for “them” than for you.

NOTE: This worksheet is equally useful for a “fix and flip” scenario using 100% hard money…or a monthly cash flow analysis to help you make long term hold decisions.

Have fun…and happy investing!

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

My Hard Money Buying Worksheet – Yours Free!

It’s 3am and you are wide-awake.  You are feeling the burden of too many bills and not enough income.  You want so badly to get ahead yet can’t seem to find a way out of your financial dilemma. Firmly in the grips of insomnia, you turn on the TV and the answer to your prayers appears in front of you!  There on the screen appears a figure in an Armani suit with perfectly styled hair, and a diamond studded Rolex watch – the epitome of success.  His voice booms “Earn millions performing brain surgery!  For only $995 my six CD set will show you how to become a neurosurgeon in just four weeks!”

Would anyone believe that?  Of course not.  Yet thousands fall for the modern day snake oil salesmen peddling various get-rich-quick schemes.  We see it constantly, “trade stocks using our proven system”, “earn your fortune in gold”, “make millions with oil futures”, and the all-time classic “make a fortune in real estate with our no-money-down strategy!”  People know that to be a doctor, lawyer or other highly compensated professional takes years of schooling and training.  Yet somehow they think that they can make a fortune with real estate or other investments by reading a book or listening to a tape set. 

The Overnight Success

People love stories of people who made it big with little or no effort.  They hear a hot new singing sensation on the radio and assume that this person stepped into a recording studio, cut a record and zoomed to the top of the charts.  What they don’t see is the years spent on the road performing in seedy bars, being rejected by record labels time and time again and only after much frustration and undying dedication, they finally find someone who will give them a chance. People see the success, they don’t see the work that went into it.

Success in real estate investment isn’t easy either.  You may see someone who is fabulously wealthy and want that kind of success for yourself.  Undoubtedly, that person worked very hard to attain that level of success, is it fair to think that you won’t have to?

 Searching for the Secret

Newcomers and wanna-be investors are constantly asking “what book can I read or what course should I take?”  Reading investment books or taking a course can be a great way to expand your knowledge and enhance you chances for success, but it isn’t enough.  Gurus are out there peddling their courses and boot camps to people who are looking for the magic formula.  They know they have a huge market in the people who want to believe that they just need to know the secret and they too can be as wealthy as Bill Gates. 

News Flash: There is no secret!

If there is anything close to a secret it is hard work and learning from your mistakes.  Think about how you learned to ride a bicycle.  Did you read a book or go to a seminar?  NO, you hopped on and peddled.  You fell down and skinned your knees then got up and did it again.  Eventually you learned and it was easy.  Sure you had training wheels and someone to help you, but soon you reached a point where you could do it on your own.  In real estate the books and courses may be your training wheels and mentors may guide you at first, but your own hard work will be the secret to your success.

 I’m a great believer in luck and I find the harder I work, the more I have of it.Thomas Jefferson

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Seeking Real Estate’s Magic Bullet

You may have heard recently that this is a great time to purchase investment property. One reason for this is because you can now “cash flow” them again. That sounds like a pretty good idea, but what does that really translate into? What really makes this a better time to buy and hold investment property rather than 18 months ago?

I would like to give you a brief overview on the two major concepts of making money on investment property, and why it is a perfect time to acquire and hold an investment property.

Fix & Flip

I am sure many of you have heard of the term “fix & flip”. This is a good money making technique when the real estate market is steady and the volatility is predictable. The concept is to buy a property that is undervalued compared to the other homes in the area and fix it up. The typical targeted repairs are items like new floors, carpet, paint, window treatments, landscaping, kitchen & bathrooms cabinets, etc.. Ideally, these repairs take only 1–3 months, and then you list the property for sale at a much higher price. The goal is to make enough to cover your repair costs, the temporary mortgage payments, and walk away with $20K – $60K profit on that property. The key to success is to have the right property and to turn the property as quickly as possible.

Obviously, this doesn’t always work as planned, and sometimes you lose money on the deal. Factors that contribute to losing money on a Fix & Flip property are the repair costs being too high, the repairs taking way too long, or the property not selling quickly. Sadly, some Fix & Flippers got stuck with property over a year ago when the market turned, and either took a loss selling it below cost or turned it into a rental property. This is not the ideal strategy to own rental property, because most of these people are still taking a monthly loss renting these properties today. I feel that I am an authority on this topic, because I own one of these types of properties myself.

Cash Flow

This is the concept used to identify property that will make good rentals. The word “cash flow” refers to the amount of cash a rental home generates and uses on a monthly basis. Cash flow can be used as an indication of a rental home’s financial strength. When it comes to renting out your investment property you would prefer it to have a positive cash flow, whereas you are making a profit on a monthly basis. Due to the high price of housing in some Metro areas it is more difficult to find homes with a positive cash flow, but it is not impossible. Here are some of the factors we look at to determine a property’s cash flow.

You should first calculate the monthly cost of the property (sometimes called the nut). You need to consider all costs associated with the property including the Mortgage Payment (Principal, Interest, Taxes & Insurance), Property Management Fees, HOA Dues, Pool Service, Home Warranty, Etc. This monthly cost will not only be covered by your renters, but will also have to be covered by you during times when the property is not rented. Also, take into account if you need immediate repairs to the home to make it ready for renters.

Next, you have to calculate how much you can rent the home for. I highly suggest using a seasoned property manager to help you in this analysis. Not only can this person help you identify the right rental rate, but can also help identify the current occupancy of rentals within the area. That should give you an idea of how long it will take to rent your property.

When you subtract the monthly cost (nut) from your potential rent you will get that property’s monthly cash flow number. Most people will gravitate towards properties with a positive cash flow – but some people will also consider properties that simply “break even” with the intent of selling them in a few years at an appreciated value.

Why is this a Good Time to Buy??

One of the biggest factors in finding property with good cash flow will be in the price of the home. Being that the mortgage payment on the property will constitute the largest portion of your cost, you want to find rentable property at a low purchase price. This sounds like common sense (Duh!), but a cheap list price doesn’t always mean it’s a good deal.

Today’s housing market has a record number of short sales, foreclosures, pre-foreclosures, distressed, and bank owned property! Some home prices in some areas are down over 30% from where they were 18 months ago. This could easily mark the low price point for home sales for the next few years. When you see the following scenario you might think that those properties are not really available. To that I can honestly say,… have you really looked? Because, you only need to find one property that works!

Example:

Here is a single family home (3bd/2ba) in Tempe, AZ near the light rail. It is bank owned and they are asking $150K (appraises at $205K) and they will pay all of your closing costs with a full price offer. The property is basically move in ready and needs a little paint. You pay 20% down ($30,000) & finance 80% ($120,000) on a 30 year fixed (6.75%).

The principal & interest payment is $778/mo + $50/mo home owners ins. + $92/mo property taxes = total PITI = $920/month. You also decide to have a property manager (a good idea) for $65/month, and you find no other monthly costs. Your net cost is $985/mo.

Your realtor does their research, and informs you that rent on a 3 bedroom within 2.5 miles of ASU should rent for $1,130/mo. And if you get it listed before August 20^th, you should be able to rent in within 2 weeks.

$1,130 rent – ($985) cost = $145/ month in positive cash flow. This seems to be a pretty good scenario worth exploring. Here are the positives:

• You have the potential to make $145/month cash flow.
• You have a 30 year fixed loan, so every month your principal balance goes down.
• You have an great source of Tax deductions at the end of the year
• You have just acquired a property with $55,000 of equity in it.

The above example is simply one basic scenario out of thousands that exist. Investors can find the same scenario in most college towns. There are going to be plenty of properties that have a negative cash flow after thorough analysis. But, the key to finding the right cash flow property begins in the act of building a team and looking for them.

Conclusion

Investment property is not everybody’s cup of tea. However, if you have thought about it in the past, today’s housing market provides great opportunities to buy properties that “cash flow”. If you are waiting for the housing market to reduce inventory and “tighten up” to buy an investment property – you are missing the boat.

There are many other concepts and techniques that I did not touch on today that I will be happy to share with you if you have interest

• Buy investment property as a primary residence (2% – 5% down)
• Buy investment property as a second home (5%-10% down)
• Buy a multiplex (2 – 4 units)
• 8 creative ways to find your 20% down payment
• Purchase an investment property that needs rehab for 10% down
• Buy a new home and use your current home as a rental

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Real Estate: Flip or Rent?

People invest in real estate for a myriad of different reasons. Some people have a very clear plan for what they want to accomplish, while others jump in on a whim. It can be very seductive to see the amount of wealth that can be created in real estate. With so many different avenues available to a new investor, which one is right for you?

Do you start by being a bird dog or wholesaler? Many people choose this road because they do not have the access to capital that is required to follow other paths. Do you try your hand at being a landlord? This can be a fantastic way to amass wealth over the long-term but it can be a source of frustration as well. Perhaps you are looking to flip-and-grow-rich. There are a plethora of great deals to be had. The obvious challenge is being able to flip them to a willing buyer at a decent profit.

My Chosen Route

My path was to follow the rehab road. I was led in that direction by circumstance, not by an overwhelming desire to find my fortune in real estate. I was at a point in my life when I was looking to purchase a home for myself. I bought a “fixer” because I was able to buy a house in a better neighborhood by using my own sweat equity. I soon discovered three things about rehabbing houses:

Do What you Enjoy

With so many different aspects of real estate investing, there is sure to be something that you are good at and enjoy. Many people who invest in rental properties find that they are not cut out for it. Dealing with tenants can be very difficult and stressful. You can avoid a lot of that by using a property manager, but that has its own set of problems. Then you have to deal with repairs and vacancies. However, many others have no problem with those issues.

Nothing in life is perfect, but you need to choose what is best for you. Spend time investigating different aspects of investing until you find something that you think you would enjoy. Proceed slowly until you find out if you are suited to that particular investment style. When you discover your niche, run with it.

Finding Your “Why”

In order to achieve any significant goal in life it has to have meaning. New Year’s resolutions are a great example. Most people who make resolutions at the start of the year will break them quickly. They stop smoking for a short time, stick to a diet until they get a whiff of a fresh sticky bun, or they work to get out of debt until they see something on sale that they absolutely have to have.

If you are able to get in touch with your “why” you have a much greater chance of reaching your goal. You may think of investing as a great way to make money, but what will that money do for you? Perhaps it means more time with your family or time to pursue activities that you enjoy. Maybe you have a desire to get out of the rat race that is your typical 9-5 corporate job. Whatever it is, if you keep sight of why you are doing something, you have a much greater chance of following through with it.

What you get by achieving your goals is not as important as what you become by achieving your goals. – Zig Ziglar

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Finding Your Niche In Real Estate