I have always wanted to get into photography. It has always seemed like an interesting hobby to me. What I have found most fascinating when I look at photography books or see pictures on-line is that a simple change of perspective, direction, lighting or angle can produce two different images of the same subject. I have become very involved recently with different philanthropic real estate ventures and have been mentoring some real estate entrepreneurs as well. Through these new ventures my eyes have been opened to the fact that much like photography, subtle little changes in the way we view real estate can completely change the picture. I am going to offer some of those insights and even a few suggestions along the way.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Investment Real Estate From A Sellers’ Perspective
No matter how we view it, when buying a piece of real estate for investment, there is always a seller on the other end. It is human nature to what to squeeze the highest price out of a sale. As an investor, it is always good to keep this in mind when negotiating a buy. It is very easy to lose sight of the fact that a seller has a reason for their actions just like we have a reason for our actions as a buyer. Sometimes there are circumstances that tell a seller to take what they can get and move on down the road of life.
In cases of divorce or a probate sale, you have a seller who may be going through a very difficult decision and yet, they simply want to get rid of a piece of property as soon as possible. Many properties today are being sold our of an REO status where you have an institution as owner. They too often want to get rid of a property as they have already booked their loss on a particular home and are ready to move it off of their books. It will be interesting in the next two years as the market moves away from REO and back to more traditional sales with home owners selling their homes. This will naturally happen in many markets as foreclosures wind down. In these cases, many investors are going to have to adjust and either learn or re-learn how to deal with an individual seller.
Sometimes sellers in these scenarios are very easy to work with and other times they are not. Being able to quickly understand their motivation for selling – seeing the process from their perspective – will be a paramount ability for an investor to make purchases. No longer will investors be dealing with a quick sale, but instead will have to work with a seller who can be looking to secure a quick close transaction with an investor, but waiting for a full price offer. This can be very frustrating and I have seen many investors make mistakes in this process because they fail to consider that the seller has their reasoning. Sometimes they walk away when a deal is very close and other times investors settle for a higher price than they should because they really want the property and afraid of losing the deal. It is our job as an investor to think about the sale from a different angle and get to the bottom of what the seller wants and needs. This will help an investor get to the bottom line quicker and either make a deal or move on.
Investment Real Estate From An Agent’s Perspective
This is a really broad perspective because there are so many different ways that an agent can come into play on an investment deal. Let me first be clear that I am not an agent although I am a partner in ownership of a realty firm in Memphis and will start one in Dallas when the time comes for that step. That puts me in close proximity to several agents and they serve the investment community in many different ways.
- When an agent is listing a property for a bank or other institution they are listing it under a contract with that institution for their services. As part of that service not only are they listing the property for sale, but they also are providing the bank or owner with an approximate value before listing. This is called a B.P.O. or brokers price opinion. Then the property is listed by the seller with the agent at or near their BPO price. As soon as the property is listed, the clock starts for that agent. It is quite common for a score card to be kept on each listing agent detailing their success and ability to get properties sold once they have them listed. That can be very motivating. Of course, if the property is sold well below the BPO, the agent can be wondering how that makes them look to the bank or owner. Keep this in mind when you are negotiating. This can make for a very sticky situation for a listing agent as the dynamics of making a deal – list price, sales price, speed of sale – all collide to create competing forces.
- When an agent is making offers for an investor, they will generally want to make all the offers for an investor as a way to compensate for what can be a lot of work with a low percentage of payoff. I am sure you have heard it said that investors can make hundreds of offers to get one deal. It is no wonder many agents have no desire to work with real estate investors. At the same time, an agent wants to represent the investor on each deal as well to make sure they get paid. What about their own listings? Agents want to represent the buyer on their own listings as well so they can get both sides of a commission. Anything wrong with that? Not at all. But it does create a scenario again where the investor is in the middle of what can be competing interests from a listing agent and a buyers agent. Instead, create a scenario where an agent makes offers in your name and you pay them for every deal you buy. At the same time, have them allow the listing agent to represent you as a buyer and therefore keeping both sides of the transaction. Now you have a licensed agent making sure all of your offers meet the proper legal guidelines and a listing agent who is happy to accept each of those offers. If you are buying correctly, you should have the ability to pay the extra 3% commission to your agent who prepares all of your offers.
Investment Real Estate from a Tenants’ Perspective
Not all real estate is purchased as a long-term investment so not all investors have to deal with tenant issues. However, whether it is a tenant or a retail buyer, there is always one more person in the equation that will help determine if you are making good decisions as an investor. In some respects, it seems easier to prepare a property for retail sale. Although there is the fine line of not “over-rehabbing” your property based on its’ location and eventual value, as an investor the general rule of thumb is that you want to make your property really shine among any others that may be for sale. Upgrades in appliances, finishes, flooring and finishing effects seem to be easy answers for an investor who wants to sell a property fast to an end-user buyer. But, what about a tenant in a long-term buy & hold?
Too often a tenant is a complete after-thought when it comes to investment rental properties. Assumptions are made that as long as the property is “rent ready” a tenant can be found or that if it takes a little while to get a property occupied, you can just reduce the rent and that will take care of it. That is not the case at all with single-family rentals and investors have to take the time to consider their property from the perspective of a tenant. LIttle adjustments and subtle finishes to your property can not only be the difference between higher and lower monthly rent, they can be the difference in the length of stay and the condition of the property when the tenant moves out.
Long-term buy & hold investors need to consider what their future tenant is going to want in a property. More and more tenants want small luxuries such as blinds, ceiling fans, glass security doors, electric garage doors, basic cable, 24-hour maintenance hotlines, online payments options and human interaction when they make a request just to name a few. These are not terribly expensive things for an owner and while most are small selling features, they are features that can give you an advantage over the property down the street that may be listed $100 lower per month that your property. It is amazing how low tenants place the bar when it comes to feeling like a property management company cares about their needs. If they feel like their needs are being met, what is even more amazing is the amount of time they are often willing to stay at one location. Reducing vacancies, the number of times a renter moves out and the costs of renovation between tenants are all benefits of thinking about your investment through the eyes of your future tenant when you are buying.
Much like taking a picture from a different angle or with a different filter can create a different image, considering your investment purchases from a different perspective can have tremendous benefit. Not only can it help you to improve your negotiation skills, but it can also help you to win more deals and help you to create more demand for you properties. For an investor it is always about the numbers. No question about it. But if you can improve your numbers by taking the time to learn how to view properties from all angles…well, that could be all the tweaking your business needs to lead to monumental changes!
I would love to read how you approach your investments from a creative point of view…
Photo: Franco Folini