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The Benefits of Multiple Exit Strategies for Real Estate Investors

June 30th, 2009 by Ryan Moeller | No Comments | Filed in Real Estate Tips
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With so many ways to make money in real estate, how are you going to choose to make your money?  Investors can make loads of money in residential flips or rehabs or commercial buildings, apartments, self storage, mobile homes, even vacation property.  There are even different ways to profit in each of these asset classes, it just depends on how you wish to exit.

Here is a list of different exit strategies

  1. Flip
  2. Rent and Flip
  3. Rent and Hold
  4. Lease Option
  5. Wholesale
  6. Refinance
  7. Sell the entity that holds title to the property

 

So which one do you choose?  Many investors do not wish to use any of their own money or take any risk and they wholesale deals.  Others flip or rent and hold for positive cash flow even lease option or refinance.  But what if you run into an unpleasant surprise or your exit strategy does not work?

Items that could ruin your exit strategy

  1. Tenant issues - a bad tenant trashes the place and does not pay rent
  2. Cannot flip - demand does not exist, or escrow falls out because the buyer cannot close, lender backs out of the loan, etc
  3. Unexpected maintenance – surprises and maintenance can add up and cancel out profits
  4. Poor property management – vacancy, bad tenants and poor operations can diminish value and hurt cash flow
  5. Depreciation – the value of a market is out of your control, recently dropped in half in some areas

These are just a few reasons why savvy investors avoid losing money on deals by having multiple exit strategies. If you are unsuccessful flipping a property you may be able to rent, lease option and even get a lower payment or take cash out with a refinance. Or if you cannot find good property management or good tenants then you can flip the property.  Multiple exit strategies give investors backup plans if your 1st exit is unsuccessful.  Most investors that have done enough deals have run into surprises or exit strategies that did not go as planned.  Avoiding loses is crucial, you may ruin credit, ruin good relationships with investors and integral parts of your team, even end up bankrupt.  Avoiding the valleys will also allow your portfolio to grow more over time.

Simply put, multiple exit strategies will lower risk, not to mention, let you sleep at night. My advice, always have multiple exit strategies.

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Revisiting Your Business Plan

June 22nd, 2009 by Richard Warren | 4 Comments | Filed in Real Estate, Real Estate Investing, Real Estate Tips, Starting Out

Remember those days when you had the first ideas for your real estate CB022164business? For some that seems like eons ago while others may just now be in the beginning stages of their business. For many those ideas never escape the confines of the cranium and some will scribble ideas on a napkin as they sit at their favorite watering hole. Hopefully those plans eventually made it to paper or, better yet, became a formal business plan.

Unfortunately for many, those plans that were so carefully crafted are soon forgotten. The mission statement, goals and objectives, strategy and such are collecting dust somewhere. Unless it is needed for some proposal or financing it is never looked at again. What happened?

Reality Strikes

People will often start out methodically following the steps in their business plan. They begin with the ultimate goal in mind and set off on the journey to realize their dreams. If they are committed to their goals they keep going while experiencing the ups and downs and challenges that come their way. Things move along as expected for a time but soon enough something happens. Reality enters the picture.

Somewhere along the line we seem to go from the relentless pursuit of our goals to putting out the little fires that pop up at every turn. Those fires are simply the reality of everyday life. They have always been there and will always be pulling you away from your intended path. In the recent real estate environment those fires have been roaring blazes. Foreclosures, falling prices, and difficult to obtain credit have wreaked havoc with business plans everywhere. What now batman?

Reevaluate & Revise

A good business plan is not a static document, it is a living, breathing organism. As such it needs to be nurtured, fed and cared for. If you have a written business plan, take it out and look at it. Have your goals and objectives changed? Odds are that your strategy has, have you adapted your strategy to fit today’s reality? If you haven’t put a plan to paper what are you waiting for?

A typical plan has the following elements:cg99

  • Mission Statement
  • Executive Summary
  • Goals & Objective
  • Market Analysis
  • Strategy
  • Financials

Without a doubt the most important step is taking those elements and implementing them. If you don’t put the plan into action it’s just a bunch of wasted ink and dead trees.

You’ve got to be very careful if you don’t know where you’re going, because you might not get there. - Yogi Berra

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Where to Search for Commercial Real Estate Online

June 12th, 2009 by Ted Karsch | 5 Comments | Filed in Commentary, Commercial Real Estate, Cool Stuff, Property Listings, Real Estate Market, Real Estate News, Real Estate Resources, Real Estate Technology, Real Estate Tips, Real Estate Websites, Realtors, real estate marketing

  1. Loopnet.com - Loopnet is probably the largest and most well-known commercial real estate listing site. They claim to have over 630,000 active commercial real estate listings on their website. It costs $24.95 a month for visitors to have access to all of the property listings. The free membership for visitors allows full search capability, however, only a limited number of results are shown.
  2. Realup.com - Realup is brand new to the market and officially launched on May 17, 2009. It appears that all of the memberships for both buyers and sellers are free. The website says that “our property listings are charged based on a pay-per-results pricing model, setting us apart from our competitors and providing the greatest value to our partners and clients.” So, they are basically charging for the traffic or leads that your listing generates. This sounds good in principle but from my experience the technology for these “pay for the lead” type of systems is usually too weak to determine what a valuable lead is.
  3. Costar.com - Costar offers the ability to search for all commercial property types. Basic listings are free for real estate professionals and property owners. It costs $24.95 a month for visitors to have access to all of the property listings. The free membership for visitors allows full search capability, however, only a limited number of results are shown. They offer information on “space available for lease, comparable sales information, tenant information, properties for sale, property information for clients’ web sites, industry professional directory, analytic information, data integration, property advertising and industry news–throughout the United States as well as in the United Kingdom and France.”
  4. Lead-Trac.com - Lead Trac is designed to give investors and commercial real estate professionals access to following data about commercial real estate: property data, owner data, phone numbers. They also offer direct mailing and marketing tools within the website. Pricing starts at $69/user/county/month.  In addition to the monthly plans, they have an unlimited access plan that they sell on a per county basis.  This plan ranges from $1500 to $3000 per county per year.
  5. CIMLS.com - What makes CIMLS different than many other similar sites is the fact that visitors can search listings for free while realtors and property owners can also post their listings for free. Realtors and property owners have the option to upgrade to a Gold account for added exposure. The Gold account costs $14.00 a month for the first month and $20.00 a month for every month thereafter.

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A Home Buyer’s “Fair” That Had Much To Reveal–And It Is Not So Good!

April 21st, 2009 by Charles Feldman | 3 Comments | Filed in Commentary, Real Estate, Real Estate Tips
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This past weekend, I dropped in at the Second Annual Home Buyer’s “Fair” at the Los Angeles Convention Center. It was billed as a two day event, complete with seminars and other educational opportunities for the would-be home buyer.

Because of recent speculation–and some actual facts–indicating a slight upturn in the real estate market in some parts of the nation, I expected to find throngs of people eager to take advantage of the fairly low mortgage rates currently available, not to mention the relatively low home prices here in Southern California, which was one of the epi-centers of the subprime mortgage bust.

I didn’t find that, though.

Yes, there certainly were people there–though, at times, it appeared there were far more exhibitors than actual attendees; and, those who were not there in bank or real estate booths hawking information, seemed mostly to be other real estate professionals looking to network before jumping back into the investment market.

I did come across some people who actually went to the Home Buyer’s Fair because they were seriously looking for info and contacts so that they might buy a home, but they were relatively few and, when questioned, expressed a great deal of anxiety about whether or not they would actually go ahead and make the plunge.

In short, the “fair” was not exactly over- flowing with people excited about a mending economy (probably because it is not actually mending in most key areas)–which made me that much more attentive to news over the past few days that the next big shoe waiting to drop will be the bursting of the credit card bubble.

Defaults on plastic are way up..and banks are doing the one thing that could make matters worse than they already are–they are cutting some people’s credit limits, raising some people’s interest rates and shutting some people’s credit down totally!

And, this is expected to get worse as bankruptcy rates approach levels not seen since before the bankruptcy laws were tightened a few years ago.

All this is bound to decrease the average credit score that much more…which reminded me of what one agent told me at the fair at the Convention center…He said that , depending upon the mortgage, you may be able to pull it off with a credit score in the 650 range (700s were the norm before)…

And yet, because things continue to decline in the economy over all, that 650 score may soon look like a lofty goal for many!

That is not the best way to get the real estate market back on its feet…..Banks seem to be going out of their way to screw up people’s credit scores which, in turn, will make it more difficult for these same people to get mortgages since even a 650 credit score will be harder and harder to achieve (unless the banks grade on a curve, much like colleges do in order to inflate the averages of students in order to make it look as if they are actually learning something!)

My guess is, this soon to come credit bubble burst will have to be addressed in some way before we will see a significant improvement in the real estate market not just in a few areas but nationwide..and not an “improvement” based on super low prices because the properties selling nowadays tend to be ones that have been foreclosed upon.

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The Cost - Price - Value Trifecta

April 10th, 2009 by Tom Koziol | 2 Comments | Filed in Real Estate Tips
DENVER - APRIL 02:  (L-R) Prospective home buy...
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I must be in a cost/price/value mindset since my last post dealt with replacement cost should a disaster befall one or more of your properties. Today I will attempt to make the point that cost and/or price doesn’t always equal value.

Most of us understand this truism but every once in awhile we encounter people who go gaga over a piece of property. They usually go gaga because they are buying at a very low price in comparison to the price it was offered before the crash. And, almost invariably, these people are nice people but have very little financial education. This isn’t a negative all by itself since if they take the time to talk to someone with experience in real estate, they most likely will receive a quick and dirty on cost/price/value.

Here is an example from my backyard. One of my wife’s lady friends was all bubbly about a property on which she had just submitted a bid. She was telling my better half that before the crash this same house was offered at $750,000 and she was bidding the ludicrous price of $200,000. She added that now she could afford to pay for the property.

On the surface, this looks like one hell of a deal especially if the market actually rebounds in 2010 or 2011. However, cost doesn’t always equate to value. Almost all of us who have been in this business for more than a week know this intuitively. After all, the price is $200,000 but she doesn’t actually know the real cost. Real cost could be a completely different animal, right?

To complicate the scenario, value is a factor that has to be considered. $200,000 could be the value or could not be the value.

The Rest of the Story

Here is the rest of the scenario so we can look at cost/price/value for the home this lady wanted to buy. We have junky neighborhoods in our area just like you have junky neighborhoods in your area. The house she wanted was in a neighborhood on the down side of the S curve. The local park was less than kept up, the streets had more traffic than the freeway, the school in this “hood” could be called dangerous and the night roamers abound.

Abandoned Car at Millner Swamp
Image by ozjimbob via Flickr

There were other negatives but these four are enough to scare even the most heartiest. At least I think so since I know the neighborhood.

Regardless of my opinion, these factors make the price too high and the value too low because the real cost could be a whole heck of a lot more than 200K. Basically it appears she was attempting to buy on the cheap. We all want to buy on the cheap side of the price curve but most of us spend a few minutes and try to put real numbers on cost/price/value. At least I think we do. That way we know if cheap is really cheap.

She was turned down for the loan which was a blessing in disguise. I don’t know why she was turned down but does it really matter? In her case cheap may have meant disaster from day one.

Advice Sources

Had my wife’s friend asked questions from an informed advice source, she may not have even put in an offer. By proper advice source, I don’t mean the sales agent. In this case, it was abundantly clear the sales agent had only commission on the mind. I believe this particular agent should have done more due diligence for his client. It was the wrong house for the wrong person. It is the right house for the right person and I bet he has the ability to find that “right” person.

My wife’s friend also is responsible because she didn’t take a few minutes to speak with someone who has real estate investment knowledge. I know this lady knows people who have invested in real estate and I don’t necessarily mean me. The circle of friends we have in common include several investors.

She also happens to have a job that puts her in contact with people who possess finance/investment savvy. I feel certain at least one of them would have taken the time to explain cost/price/value to her. After all, she is a likeable type who listens and has the capacity to comprehend.

Just so I don’t get nasty letters, I am not in anyway disparaging that class of people known as real estate agents. I singled out one in particular because of the factors in this lady’s circumstance. So, if you feel the need to let me know about the honesty and integrity of real estate sales people, hang on to it for another day. I let my broker’s license expire years ago and while I held it, I heard everything that could be said about RE agents.

Lessons Learned

This story does have a happy ending because the lady did take the time to do some research after she was turned down. She also started asking questions and paying attention to the finer details involved in buying a home.

I also learned a lesson in that while cost/price/value is intuitively obvious to me, it isn’t to everyone. The lesson I learned was to not be afraid to offer advice to my clients who were contemplating buying or selling property. They don’t have to listen and can even tell me they aren’t interested. But, I do put out my 2¢ to anyone who cares to spend a few minutes listening.

Cost/price/value - one hell of a trifecta, isn’t it?

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Creating Equity Where There Is None

April 6th, 2009 by Richard Warren | 4 Comments | Filed in Blogs, Foreclosures, Real Estate, Real Estate Investing, Real Estate Tips

We are constantly hearing about homeowners who are upside-down on their homes. The only hope that they seem to have is doing a short-sale, or getting the foreclosurebank to agree to take less than the amount owed. Frequently no buyer can be found and the home winds up in foreclosure. That is especially true here in Las Vegas where we have been at or near the top of the foreclosure statistics for a long time.

With so many homes having negative equity it would seem to be enormously difficult for a real estate investor to have success here. At real estate club meetings I constantly hear investors talking about the difficulty of just finding a deal, let alone closing one. The strategy for most is to let the properties become bank-owned and them try to buy them. That’s the strategy for most, but not all.

A Different Approach

Brian is a Las Vegas real estate investor that I have come to know over the last couple of years. While many complain about the inability to find deals or raise funds when they do, Brian is absolutely thriving. He doesn’t complain about funding because he uses very little of his own money. Instead of complaining about the lack of equity he creates it. Huh?

Brian has been specializing in pre-foreclosures since the Las Vegas market was hotter than a two-dollar pistol. He had a much harder time then than he does now. Back then homes typically had equity and were easy to sell. Today when a homeowner winds up on a Notice of Default (NOD) list he will be inundated with calls offering various forms of assistance. However most of the callers will wind up telling the homeowner that they can’t help him because there is no equity. But that’s the kind of homeowner that Brian loves.

That’s not to say that every upside-down homeowner can be helped because many cannot be. However many people are in that situation because they have a second or even third mortgage in addition to the first. That is Brian’s bread and butter.

Pulling A Rabbit Out of the Hat

The first step is to find a property where the first mortgage is low enough that there would be plenty of equity if not for the second and/or third mortgage. At this point you work to strike a deal with the homeowner to purchase the home subject-to the first mortgage. (For more on subject-to investing search Jason Hanson’s posts) The key here is to make that deal contingent upon being able to purchase the second and/or third note on favorable terms. At this point the homeowner has generally resigned himself to the fact that he is going to lose the home and is willing to take any deal.

Once he has the home locked up, Brian contacts the junior lien holders (2nd and/or 3rd mortgage) and offers to buy the notes. The junior lien holders are aware of the fact that the home is in foreclosure and they know that when the sale takes place they will lose everything. When Brian calls to offer pennies on the dollar they are frequently willing to take the deal. After all, something is better than nothing. Are all lenders willing to settle? Surprisingly no, many will let the foreclosure happen and wind up with nothing.

The end result is that equity has been created in a property that once had none. The house can now be sold at a profit or held as a rental.

The Cat’s Out of the Bag

You might think that Brian would be upset with be for sharing his secret. The truth is that Brian shares his techniques willingly. He has created a real estate club in Las Vegas that holds a monthly meeting at his office. The club charges no membership fees, has no dues nor do they sell anything or promote gurus. By sharing his method he has created an army of bird dogs who are out hunting for deals. Quite often some the novice investors will bring a potential deal to him and they work out a split arrangement. It’s a case where everybody wins.

So the next time that you find yourself complaining about how tough things are or how it’s impossible to do a deal, ask yourself a question instead. What could I do differently or what is it that nobody else is doing? Get creative!

Chaos in the world brings uneasiness, but it also allows the opportunity for creativity and growth. – Tom Barrett 
  

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Adding Value To Make The Sale

March 23rd, 2009 by Richard Warren | 1 Comment | Filed in Blogs, Real Estate, Real Estate Investing, Real Estate Tips, real estate marketing
   cg1e4 
A few short years ago you could sell anything in the hot markets. Before you finished putting the sign on the lawn you had multiple offers in your hands. Competition for properties was so fierce that it wasn’t necessary to spend money or waste time fixing up a house because the buyers didn’t care. My, how times have changed.  
                
Talk about a pendulum swinging the other way! Today you have so much competition when you are trying to sell a house. You have to compete with both retail sellers and bank foreclosures. With such a glut of houses for sale it frequently takes more than price to sell a house.         
                  
Standing Out In A Crowd
                  
In any competitive sales environment, real estate or otherwise, your product needs to stand out. In this case the product is the house you are trying to sell. Put yourself in the buyer’s shoes, why should he or she buy your property instead of one of the many others available? If you can’t easily answer that question it’s time to get to work.
                 
It’s common knowledge that your typical homeowner is often emotionally attached to the house they are trying to sell. To them it is unique and therefore more valuable than other homes on the market. They have a tendency to get offended when someone points out that competing homes are in better shape or that they are asking for more money than the house is worth. Unfortunately investors frequently have this kind of tunnel vision as well.                 
                          
Make It An Easy Choice        
                              
When a potential buyer walks in to a home they immediately begin looking for things that need to be repaired, replaced, or otherwise changed. A retail buyer will be looking at the cost of changes and an investor will be thinking in terms of both money and time. An investor needs to know how long it will be before the rent starts flowing.              
                        
By doing things to make a home ready for a homeowner or tenant to move in you are tipping the scale in your favor. Taking care of all the little repairs, painting, cleaning or replacing the carpet can make a huge difference. I learned this lesson on one of my earliest rehab projects. A couple walked in to look at the home and the wife remarked that she wouldn’t have to do a thing. They put in a purchase offer and ultimately bought the house. There were several homes for sale in the same price range, but it was the move-in condition that made the sale.             
                        
Incentives
                             
Many sellers today are offering incentives to entice buyers to consider their property. You have the standard things like paying for closing costs or offering seller financing for all or part of the purchase. What about offering things like a gift certificate to an appliance store or furniture store? How about a weekend getaway for the lucky buyer? A new home is a big deal to most people, how about arranging for a caterer to throw a house-warming party for the purchaser? The point is that it is a difficult market. Thinking outside the box may be just what you need to stand out in the crowd.
                         
 A house is not a home unless it contains food and fire for the mind as well as the body. - Benjamin Franklin
 
 

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