I’m on week three of my marathon training, but it might as well be week 123. I still think running is a terrible idea. Every time I see someone running now, I actually get angry and wonder why in the world are they doing it and I want to run them over (I guess it’s my inner O.J. coming out, however if someone does get run over, I will be the first one to search for the “real” killer.) Anyway, now that you know that deep down I have serial killer tendencies (and what entrepreneur doesn’t? We’re all crazy) let me give you some information that will fatten your bank account and make you filthy stinking rich…because I love the smell of capitalism in the morning!

When you are talking with a seller, whether it’s on the phone or in person, there is one single question which can make the difference between millionaire status and non-millionaire status (or as I like to say being a “player” or a “tire kicker”). Write these words down and send my royalty checks to 123 Main St… Alright, here is the question “Mr. Seller, what do you need?” Not, “Mr. Seller, how much are you asking for the house, or how much are you looking to get for the house or how much do you want for the house.” Everyone wants $50,000 in cash, but what do they need? Usually this question will quickly drop that $50,000 to a much lower number. So if it drops from $50,000 to $25,000, then ask why they need $25,000. They will usually tell me it’s for moving expenses or to rent an apartment, and together we realize they actually only need about $5,000 or so. The beauty of this question is that it helps sellers come back to reality and realize that they only need $5,000 to move to Florida to be with their grandkids or $5,000 to get an apartment in another state to be closer to their relatives.

When you are meeting with a seller in person, the best way to “show” the seller what they need is using the pen and pad approach. When the seller wants $50,000, take our your yellow legal pad and show them what they need…$1,500 for a moving truck, $2,000 for the first months rent and security deposit on a new apartment, $500 to pay off some utility bills, etc.

Make sure you remember to ask this every time you talk with a seller and when they tell you some ridiculous number, make sure you question them and ask why they need that much money. So, I thought I would end this week with a very important scientific discovery that was passed onto me by a friend: Scientists have discovered that there is one food that drastically reduces a woman’s sex drive…………………WEDDING CAKE!

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Tags: Buying real estate, negotiation, real estate investing, real estate investor

I’ve got good news and I’ve got bad news. The good news is that food is the way to a seller’s heart and the bad news is that sex isn’t (sorry fellas).

One of the strategies that I always use when meeting with a seller is to bring them food. I usually end up bringing some type of pastry such as a pie or muffins. There are two very important reasons that I do this.

First, almost everyone loves food. It’s a very polite gesture to show up at a seller’s house with something to give to them. I am always harping about how you need to stand out and be different from your competition. How many other investors out there do you think bring a delicious apple pie to their seller’s house?

Not too long ago, I had a meeting with a seller about a lease option deal. I was running behind that day, so on my way to his house I quickly ran into the grocery store to get him something. I was in such a hurry that I grabbed the first thing I saw in the bakery section and it was some type of twisty looking pastry with a fancy sounding name (to this day I have no idea what in the heck I bought.) When I arrived at the seller’s house I handed him the pastry and told him “I thought you might enjoy these” (even though I didn’t know what these were). He took the pastry from me, we walked into his kitchen and I ended up doing the deal with him. Later that week, as we were going over some of the details, he commented to me how generous it was that I brought him the pastry and how good they tasted. Now of course that wasn’t that only reason I got the deal, but every little bit helps.

The second reason that you need to bring food to the seller is because it will lead you to the kitchen table. When you give someone a gift of food they almost always take it to the kitchen and put it on the counter or the kitchen table. This is exactly what you want to happen. You want to sign the paperwork (remember it’s always called paperwork, never a contract) for the deal at the kitchen table. For many families the kitchen table is a “happy place” where people sit, chat, relax and enjoy each others company–it is their comfort zone. You want the sellers to be relaxed and in a familiar setting when you sign the paperwork. It is also a much easier place to sign everything. If you have ever tried signing paperwork while leaning forward and writing on a coffee table it’s not a comfortable position whatsoever.

What do you do if the seller heads into the living room with your pastry or somewhere else besides the kitchen? You simply ask them to go to the kitchen. Say “Mr. Seller would you mind if we went to the kitchen table, that way I could easily lay out the paperwork for you, so I don’t forget to go over anything?” The majority of the time they will say yes.

Decide now, that you will not go on any more visits without bringing food. You want every advantage when trying to close a deal don’t you?

Tags: Buying real estate, closing deals, real estate investing, real estate investor, real-estate-deals

The Investor Buying Process

1. Build your TEAM
If there was one thing that will make a difference between a good experience/deal or a bad experience/deal…it is your team. Your team could consist of a Real Estate Agent, Mortgage Broker, Title/Escrow Agent, Insurance agent, Home Inspector, General Contractor, Real Estate Attorney, and the list can go on. We are going to start with the most important…and that is your Real Estate Agent and Mortgage Broker.

So how do you know the difference between a good team member and a bad one…we recommend the book Rich Dad’s Real Estate Advantages …in chapter 5 it covers some of the questions to ask and what to look out for. We have listed a few of these questions for you….

2. Your Exit STRATEGY (& Credit) = Loan Options

You need to start with your exit first. If we break down your exit strategies, they will fall into 2 categories…cash flow or capital gains. What is the difference? My parents have a ranch and they raise cattle for beef. They raise the cattle and sell it for a profit (hopefully) and get that profit only once. Had they chosen to be a diary farmer, the cattle would continually produce milk which equals a profit. Real Estate is the same way, I can sell it for a 1 time gain (or loss) or I can us it for a monthly income. All of the real estate investing strategies fall into 1 of those 2 categories…cash flow or capital gains.

Most mortgage brokers focus on your credit as the key factor in placing you into a certain type of loan. While your credit is important…It is your intended exit of the property that will define your loan options. If you are looking to hold this property for the long term then you may be looking for a 30 year fixed loan that is paid off within the 30 years or sooner. If you intend to only keep this home a few years, then an interest only loan may make the most sense. Why, because it will keep your monthly payment low.

No matter what your exit is, there is a loan program for everyone. The problem, most people look for the ‘best deal’ instead of the loan program that is the ‘best fit’.
Team Members Needed - Mortgage Broker, Credit Repair specialist
Tools - Mortgage Calculators , Online Mortgage Application

3. FIND a Property

So here comes the step of going out and finding a property. One of the most important parts of this process is managing your emotions. Yes, the purchase of a property can be an emotional decision…lets just be aware of that. To give you a different perspective though, it is important to understand the difference between a consumer and investor. Consumers make decisions based on emotions while an investor makes decisions solely by the numbers.

My recommendation is be both a consumer and an investor, get what you want (emotions) yet make sure it makes financial sense. So how do we make sure that a deal makes financial sense? Well that is entirely based on your exit strategy that we discussed in step #2. But lets talk about the 2 different tracks that you may look at…Cash flow vs. Capital Gain. If you want cash flow you will need to evaluate the income of the property…if you want capital gains you want to evaluate the future value of the property. Lets break these 2 elements down. Cash flow is a relatively easy formula…

income – expenses = cash flow

So why do so many people end up with negative cash flow? Simple answer…they don’t use the formula. They so often mistake different numbers for different things or don’t use the formula at all. An example of this…your real estate agents tells you the Cash Flow is $800 on a 3/2 single family home. The problem is, this number didn’t include the largest expense…your mortgage. So you got a great deal, unfortunately your mortgage turned out to be $1000 a month so you are losing $200 a month. The other problem is that so called investors are using the wrong formula…they use the formula for capital gains to evaluate cash flow. I will hear from people that the property is 20% below market value…problem is it is still over priced from a cash flow perspective. Capital Gains. How do you predict the future value of a property?

Do you have a crystal ball?

I don’t…but if you do let me know as I will pay you a lot of money to use it. So lets get real, to invest in capital gains you are not going to use a crystal ball and predict where the market is going, you have to base your decisions on where the market is today. The key with capital gains is to build in your profit before you buy. So how does this look, another simple formula of addition and subtractions.
ARV – Expenses – Profit = Your Highest Offer

1. ARV = the appraised value after repairs made or what you think you can sell the property for. In a down market you may consider lowering the price to sell.
2. Possible Expenses (repairs, money costs, closing costs when you buy and sell, real estate agent commissions when you sell, carrying costs – HOA, utilities, insurance.)
3. Profit – how much money you want to make If you use this formula you can see where emotions may play into this. You offer may be a significant discount to make the deal work for you. But if you can not make a profit, should you do the deal?

Team Member Needed - Real Estate Agent
Tools - Real Estate Listings

4. CONTRACT

When in doubt, tie up the property by getting the property ‘under contract’ and just ensure that your escape clauses are in place. Earnest money…it is important to know ‘how much’ earnest you need to put down. Truth is, all that you need to put down is $1 to $100, whatever amount is required by your title/escrow company to open an escrow account. Real Estate Agents will tell you they like 1% or some other amount because it show that you are a ’serious’ buyer. Point is…earnest money is negotiable. Everything is negotiable.

Quick Contract tips…if you want something, be specific. If you want an ‘escape’ be broad. Two examples, I want the Viking Refrigerator so in my contract I am going to add the serial number and photograph…or; This deal is subject to my partners approval. You may not want that Viking to be replaced by a GE (no offense GE) and for the other example I never said that my partner was my dog and the property didn’t pass the sniff test.

Team Members Needed - Real Estate Agent…getting into serious contracts, use a Real Estate Attorney.
Tools - Your real estate agent will have a standard purchase agreement. In case of you are looking for other legal forms click here.

5. ANALYSIS of the Property

There are 2 areas of property analysis to consider: Property condition and property value.

Property Condition- Do you know if you are buying a dog? Do you want to buy a dog? (Believe it or not some people do as they love the concept of fixing a property up.) The point is do you know what needs to be ‘fixed’ or ‘updated’ on the home prior to purchasing. A good home inspector will identify issues or problem areas throughout the entire home. If your home inspector does identify issues, then you will want to bring in specialists to quote the work and evaluate what it will take to handle the work.

Property Value - When buying a home there is one primary number that you want to be aware of…The Appraised Value of the property. You will get this from an appraiser, but one tip…ask for (and review) a copy of the appraisal before you close.

Team Members Needed - Real Estate Agent (introduce you to an appraiser and home inspector), Appraiser, Home Inspector, any other specialists required.
Tools - Sample Appraisal

6. LOAN Analysis

Below is a quick checklist of items that you will want to know concerning your loan. You will want to compare this information to your current financial situation and your exit strategy to ensure that this loan fits your needs. It is always recommended that you talk to at least 3 mortgage brokers about your deal, as every mortgage broker may have access to a different loan program.

Here is the hit list of what should be included in a Good Faith Estimate:
-Interest Rate
-Monthly Payments
-Taxes and Insurance
-Loan Amount
-Pre-payment Penalties
-Fixed or Variable Rate
-Term (Length)
-Amount of money needed to close (your check to bring to closing)
Team Member Needed - Mortgage Broker

7. CLOSE on the property

Closing takes place at a title/escrow company. As we discussed in step 6 - Loan Analysis, you will need to know how much money to bring to the closing table. There are a lot of documents, take the time to make sure you know what you are signing. If you don’t know what a document is for, ask the title agent for clarity. While all of the documents are important, the HUD 1 is very important to review. This outlines who (seller, buyer) pays what and who (mortgage broker, Real Estate Agent, Title, etc.) gets paid what.

Take a friend, spouse, therapist, family member to closing with you. Remember this can be a very emotional experience, so if you need to have some ’support’ with you, take it.
Team Members Needed - Title/Escrow Officer, Mortgage Broker
Tools - Sample HUD 1

8. Execute your EXIT

Now that you have closed and own the property it is time to execute your exit. Is your plan to hold the house for a few years and then sell it? If so, you will want to talk to your CPA to discuss when to sell. Owning the property for 1 year and a day could be the difference between paying 30ish% tax (taxed as ordinary income) or using a 1031 exchange to roll the profit into another property, tax deferred. If you own and have lived (occupied) in the property for 2 out of the last five years, you could take the profits with no tax hit. 1 day could be the difference between thousands of dollars that you may need to pay in tax.

Maybe your plan is to accelerate your loan pay down? Your mortgage broker should have tools to help you take what is normally a 30 year payoff to a 10 or 11 year payoff by using a combination of increased monthly payments and utilizing a HELOC (home Equity line of Credit).

Team Members Needed - CPA, Mortgage Broker

9. EXPAND - What’s Next

No matter where you are starting from, there are tremendous opportunities in real estate to create and make money…even in an up and down market. It often starts with your first home, and then you build from there.

So what resources are available to you get the education and find the right team members…

1. Join a Real Estate Investors Club - National REIA Website
2. Attend seminars in your area - you can find these in your local newspaper.

Tags: Buying real estate, find real estate, how to buy real estate, Real Estate Investing, real estate investing. real estate, real estate investor

The other day I went to a listing appointment and gradually asked enough pointed questions and did enough research that I passed on listing the property. Upon first glance the lot seemed simple, but I noticed some odd layout to the side of it that made it unclear where the property lines ran. After doing research I found that the lines were absolutely crazy. This is an old section of town and the agreements through the years with neighbors left the property legally with no ownership to the side of the house and half the front yard.

It was the oddest example I’d seen. The property had all kinds of gentlemen agreements about who could use what piece, and the house is owned by someone who’s had it 25 years. I could see someone buying it and all the agreements not known, then the buyer having to face litigation problems in the future if anyone came to claim their piece of the property.

Perhaps the attorneys would discover it doing a title search, perhaps it could be missed because of all the convoluted arrangements. The point is that while doing inspections get a survey done so that you have all the information. Coordinate all inspections, physical inspection of a building’s systems and structure, with inspection of all leases, with title search, with special environment inspections for that area, with a survey. Then do a little snooping.

When problems, or red flags, occur, check them out thoroughly. I was once representing a buyer back when seller’s were responsible for termite inspections before closing. I convinced the buyer to have someone go by and inspect the home on the buyer’s dime to double check. I had received a clearance from the seller that no termite infestation was present and had a letter from the termite company. While the buyer’s inspector was not looking for termites, he did notice signs of infestation. I called the listing agent and the listing agent said that she trusted the termite company and that my guy was not experienced to determine infestation. On my dime, I had another pest control company go out with the buyer’s inspector, and they found infestation – I went over and saw the termites with my own eyes.

Stay alert and be thorough with all inspections and at any sign of trouble go into detective mode and bulldog the problem until you are satisfied you understand the full extent. Too many times people ignore red flags and pay dearly later. We’ve had flooding problems in Savannah, so I started the practice of going around asking neighbors whether water drains or stands in that area – I often get a different response from neighbors, especially if they are renting. Sellers will sometimes fudge and if water has never actually flooded the building they report no flooding problems. However, if you are going to start a restaurant and the parking lot holds water, even though it doesn’t come into the property, then you would probably want to find a higher, drier location.

As stated in a previous post the contract should allow you to easily walk away if the problems mount and the seller is uncooperative, or seems to be hiding information. Be a detective, follow leads thoroughly – hear loud warning sirens at every sign of a problem.

I would also ask that you consider something that seems out of place here, but I feel is very important, the psychological factor. Sometimes we get bogged down in nuts and bolts and miss some obvious parts of every process. One of my first posts here talked about the excitement of investment and how the excitement can cloud judgment. What happens in the inspection process is minimization of problems due to the excitement of finding a “good deal”. You might say – “oh, I can fix that” – or, “that won’t cost much to remedy.” As someone who’s underestimated repairs before, I urge you to overestimate repairs, especially on older properties, because what seems like an easy fix can turn out to be more complicated and costly once you’ve gotten into it. What you thought you could do yourself winds up something that requires an expert’s knowledge and skill, then you wind up spending in the thousands when you estimated in the hundreds. Don’t underestimate the repairs and don’t overestimate your ability to fix them.

It would pay to have an experienced, objective tradesman give you a good estimate, then if you can save money doing some of the repairs yourself, fine, but at least you will have the correct estimate with which to negotiate.

Tags: buyer, Buying real estate, flooding, inspections, inspector, real estate, real estate inspections, real estate investment, seller

The real estate investing craze that falls just behind the business of buying directly from the bank with Short Sales or REOs is buying “subject to.” This non-traditional method is simply purchasing real estate subject to the existing financing. The financing that is held by the seller stays in place, the mortgage on the property stays in his/her name, and the title to the property is transferred to the investor’s name or company. With a swift transfer of title to the investor, there is an even larger transfer; the seller’s shift from dependency on self to dependency on the investor to make on time payments for the period agreed upon.

Everyday investors ask themselves, who would do this?

Apparently a lot of sellers are ready to move and don’t have time to wait around for traditional financing programs to fund the sale of their homes. As investors, we become so anxious to get deals that we overlook very MAJOR details when it comes to buying subject to.

What is the #1 question that an investor should ask when considering purchasing a property subject to the existing financing?
Is your mortgage fixed or adjustable? Bingo.

Believe me, this question doesn’t get asked enough because deals are being made in haste. The deals will be there because houses don’t have tires and they can’t run away. We must look thoroughly at our real estate dealings to ensure a smart acquisition and a healthy return on our back end.

So here is a quick story all about how a colleague of mine’s life got flipped up side down.

It is a very exciting day when you get your first real estate investment deal that you decide to HOLD. It is a big deal. You may have started in the business of wholesaling to build up the cash reserve to finally own something of your own and profit like the investors you have been selling to. If that was you then you are no different from my friend, Investorina (for the sake of the story). Investorina picked up a single family home subject to the existing financing and didn’t bother to pay attention to whether the mortgage was fixed or adjustable. In all of the excitement, it never dawned on him that a $400,000 home should never have a mortgage of $1,800. Hey sometimes we all make mistakes.

Well the property was purchased and payments to the lender were being made automatically through the business checking account of Investorina. Because of the preference for a paperless lender/investor relationship, the Investorina was a bit out of the loop when it came to the changes occurring on the adjustable mortgage product that he took over. While Investorina was paying $1,800, the mortgage rose to $2,200 and been that way for over 8 months. With the late fees, financing charges, and attorney billing; the outstanding balance on the account was all of the sudden $11,000. WOW!

A foreclosure date has been set for the 14^th of March 2008. Because Investorina’s name is not attached to the property in any way nor to the mortgage product, it is character that urges him to contact the seller and alert them that the house will be going to foreclosure sale on the 14^th of March.

In our real estate investing businesses, lacking attention to detail can hurt our business and it can ruin others’ credit and livelihood. Investorina is going to do a listing forbearance with the lender to save what can be salvaged of the seller’s credit. Remember that sometimes buying subject to existing financing can leave your seller subject to foreclosure if you don’t pay attention to the details of your investments.

Blessings to your Real Estate Investing Business,

Milton B. Yates.

Tags: adjustable rate, Buying real estate, creative, foreclosure, mortgage, real estate financing, real estate invest, real estate investing, REO, subject to