I love Options. I definitely believe that more people involved in Real Estate should learn and use the power of Options. Unfortunately, not too many are bold enough to try anything beyond the old methods of putting Real Estate Deals together.
Well, one of my readers is venturing further into the creative world of Deal Structuring. I recently received the following message, which I am condensing somewhat: “Hello Jack, I need a little guidance. I have a question about using a Rolling Option. I am a realtor representing a seller who owns abut 30 acres in Florida. we have a buyer who wants to buy 4 acres now, but he also wants to buy the remainder of the land later, in portions. To exercise the Option, can the Option money be made in payments? Does it have to be paid in one lump sum? Also, the seller has a loan on the entire 30 acres and is reluctant to sell of a portion, which might trigger the bank to call the loan due. Because of this, the seller would like to have some kind of ‘Lease Agreement’ on the balance of the land.”
My response to his message was:
“Exercise of the Option can be as agreed by the parties – Examples:
a. Each time a parcel is bought, could be with cash – or
b. Could be by Note & Deed of Trust – Secured by the parcel being bought payable as agreed by the parties.
How is the buyer paying for the Option – Could be
a. Purchase of the portion taken down, keeps Option alive on the remainder of the land – or
b. A consideration could be paid up front for the entire 30 acres, or as agreed by the parties.
If the initial 4 acres are not being released from the bank, then you might want to use a Lease with Option. You could do a Lease with Option for the entire parcel.
If existing loan does not have release provisions, the Owner might want to negotiate with the Lender to create release provisions. For example: Let’s say the loan is $120,000 or $4,000 per acre. The Owner might offer the Lender 125% of the loan amount per acre to obtain release.
Owed portion of loan on 4 acres = $12,000
Offer to pay $15,000 (125%) to release the 4 acres
The release price might also be affected by the lay of the land. If some portions of the land are more valuable than other portions, it would probably affect the release price of the portion being released. For example: Let’s say that part of the 30 acres fronts on a highway or street. The frontage land will be more valuable than the back portions of the land.
Is the buyer going to borrow money to do his Development/Building?
I would like to help you on this; however, not knowing all the variables, it is difficult to make specific recommendations. If you would like to call me to get more specific, please do.
Whatever you do, Good Luck and keep learning creative ways to put Real Estate deals together. It will set you apart from the crowd and will prove to be very lucrative for you.
Jack”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, December 30, 2010
Monday, December 27, 2010
Options Education
What and how much does the average Real Estate Investor or Real Estate practitioner know about Options? Even though there is a fair amount of general educational information and material available on the subject, it is surprising that so few Options are being used. Part of the reason for this is probably due to a shortage of specific, ["This is how you do it"], information and even more so, a shortage of Real Estate practitioners (Brokers, Lawyers, CPAs, etc.) who are knowledgeable enough about Options to give advice and guidance.
If these practitioners, and especially Real Estate Brokers, were to glean the education necessary to become knowledgeable in the use of Options, it would set them apart from the crowd and prove to be very lucrative for them.
I do not know of any Real Estate technique that compares with the “Option” when it comes to Leverage, Profit, Potential, Minimum Risk, Simplicity, Tax Benefits, and Flexibility.
Options can be used in almost any Real Estate situation; such as, investment properties and speculative endeavors. An old friend and mentor, Jack Miller, taught an exhaustive course on Options and their uses. Jack has since passed away; however, one might be able to obtain his instruction material from Common Wealth Press, P.O. Box 24837, Tampa, Florida 33623.
I think what I will do in a few Blog posts is show you some case studies of Options in action. The first one involves a 43 acre parcel of land which my company owned, fronting on Copano Bay in Rockport, Texas (on the Texas Coast). We had owned the property for some time and had anticipated developing it ourselves, at some point, but never seemed to get around to it. [You know what a Round Tuit is, don't you? We are all going to do something when we get one.]
Anyway we were approached by a Developer through a realtor who wanted to make an offer to purchase the property. This Developer planned to develop a mobile home park. Mobile Home parks do very well in this part of the country due to the thousands of “Snowbirds” that fly South in the winter. The Developer’s offer asked for a six month closing date with return of the Earnest Money if the Developer was unable to close due to financing or other problems. He also wanted the 6 months to do his Feasibility Study, and Engineering, etc.
We didn’t have any other potential buyers at the time so we decided to try to work with the Developer; however, we were unwilling to tie up the property for six months with no compensation. After some negotiation we agreed to give the Developer a six month Option to purchase the property. The Option fee was $10,000. In addition, if the Developer failed to exercise the Option, he agreed to turn over to us all his Engineering Work, Feasibility Study, Plats, etc., that he had done on the property.
The end of the story was that the Developer did not exercise the Option, therefore he forfeited the $10,000 plus the work he had done.
If you have some Option case histories, I would like to hear about them. Also, I would appreciate any other comments you would like to share with me.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
If these practitioners, and especially Real Estate Brokers, were to glean the education necessary to become knowledgeable in the use of Options, it would set them apart from the crowd and prove to be very lucrative for them.
I do not know of any Real Estate technique that compares with the “Option” when it comes to Leverage, Profit, Potential, Minimum Risk, Simplicity, Tax Benefits, and Flexibility.
Options can be used in almost any Real Estate situation; such as, investment properties and speculative endeavors. An old friend and mentor, Jack Miller, taught an exhaustive course on Options and their uses. Jack has since passed away; however, one might be able to obtain his instruction material from Common Wealth Press, P.O. Box 24837, Tampa, Florida 33623.
I think what I will do in a few Blog posts is show you some case studies of Options in action. The first one involves a 43 acre parcel of land which my company owned, fronting on Copano Bay in Rockport, Texas (on the Texas Coast). We had owned the property for some time and had anticipated developing it ourselves, at some point, but never seemed to get around to it. [You know what a Round Tuit is, don't you? We are all going to do something when we get one.]
Anyway we were approached by a Developer through a realtor who wanted to make an offer to purchase the property. This Developer planned to develop a mobile home park. Mobile Home parks do very well in this part of the country due to the thousands of “Snowbirds” that fly South in the winter. The Developer’s offer asked for a six month closing date with return of the Earnest Money if the Developer was unable to close due to financing or other problems. He also wanted the 6 months to do his Feasibility Study, and Engineering, etc.
We didn’t have any other potential buyers at the time so we decided to try to work with the Developer; however, we were unwilling to tie up the property for six months with no compensation. After some negotiation we agreed to give the Developer a six month Option to purchase the property. The Option fee was $10,000. In addition, if the Developer failed to exercise the Option, he agreed to turn over to us all his Engineering Work, Feasibility Study, Plats, etc., that he had done on the property.
The end of the story was that the Developer did not exercise the Option, therefore he forfeited the $10,000 plus the work he had done.
If you have some Option case histories, I would like to hear about them. Also, I would appreciate any other comments you would like to share with me.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, December 3, 2010
Packaging Your Project For Your Private Lender
You have found a private Investor who has agreed to consider funding your first Real Estate project. The investor has informed you that he has to be very comfortable with the deal and is utmost concerned that his interest is well secured at all times.
So, let’s say that you have located and negotiated a purchase price on a vacant Single Family Residence (SFR) that needs considerable fixing-up. Let’s take a look at some of the details.
1. The house has 3 bedrooms, 2 baths and has approximately 1400 square feet of living area plus a 2 car garage.
2. You have done your homework and based on comparable sales the house, after it is put back in good shape, should sell for approximately $75.00 per square foot of living area which computes to $105,000.
3. You have negotiated a purchase price of $35,000. You have also received bids from three different contractors to complete all necessary repairs in order to make the house totally ready for the resale market. The average bid comes to $21,000 or $15.00 per square foot. The estimated time to complete the repairs is one month.
4. Because of current resale market conditions being slow, you are considering offering Owner
Financing. Having met several Note Buyers at The Real Estate Investors Association Meetings, you determine that if you financed the sale yourself, you could expect 80% to 85% on the dollar of the face amount of the Note if you sold it for cash.
5. Financing details and costs- Your investor has agreed that if he/she finances the deal for you,
he/she will give you a 6 month loan at 10% interest which can be paid along with the principle due in six months. If for any reason the investor extends the loan he/she will charge an additional 2% of the loan balance.
6. Let’s summarize your anticipated costs to determine if this project would appear to be profitable:
Purchase Price……………… ………………..$35,000
Fix Up (Rehab) Costs………………………….$21,000
Hazard (Fire) Insurance………………………..$600
Title Insurance For Investor…………………..$625
Appraisal Fee…………………… ………………..$300
Other Purchase Closing Costs…………………$300
Interest Expense……………………………….$3,000
Miscellaneous Expenses………………………$2,000
TOTAL………………………………………. …..$62,825
The investor will also require a minimum of 4 months interest, even if you sell the property earlier than that. This will reimburse him/her with cost & inconvenience of transferring funds from other sources.
7. Now, let’s look at your anticipated proceeds from your resale. You may be able to sell the house to a buyer who can qualify for a bank loan: however, let’s look at a worse case scenario and anticipate that you will finance for the buyer and sell the Note:
Sales Price………………………………………..$105,000
Down Payment…………………………………..$10,000
Note back from Buyer payable at………..$95,000
$697.08 per month including 8% interest amortized over 30 years
SUMMARY
Cash Down Payment…………………………..$10,000
Sale of Note (80%)……………………………….$76,000
TOTAL CASH PROCEEDS………………………$86,000
Less
*Closing cost to sell………………………………$9,000
Pay-off loan……………………………………….$60,000
6 months interest………………………………..$3,000
TOTAL……………………………………………….$72,000
*Closing costs include Real Estate Commission of 6% of Sales Price which you won’t
have if you sell the property yourself, which you should do.
NET PROFIT……………………………………….$14,000
Also other things to consider -
If you sell in less than 6 months, which you should be able to do with Owner Financing, you
will save interest costs. Also if your buyer has bank financing, you will save $9,000 in Note
discount. From the information provided, I would say this is a “Go” deal. The better you perform, the more it will enhance your relationship with your investor.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
So, let’s say that you have located and negotiated a purchase price on a vacant Single Family Residence (SFR) that needs considerable fixing-up. Let’s take a look at some of the details.
1. The house has 3 bedrooms, 2 baths and has approximately 1400 square feet of living area plus a 2 car garage.
2. You have done your homework and based on comparable sales the house, after it is put back in good shape, should sell for approximately $75.00 per square foot of living area which computes to $105,000.
3. You have negotiated a purchase price of $35,000. You have also received bids from three different contractors to complete all necessary repairs in order to make the house totally ready for the resale market. The average bid comes to $21,000 or $15.00 per square foot. The estimated time to complete the repairs is one month.
4. Because of current resale market conditions being slow, you are considering offering Owner
Financing. Having met several Note Buyers at The Real Estate Investors Association Meetings, you determine that if you financed the sale yourself, you could expect 80% to 85% on the dollar of the face amount of the Note if you sold it for cash.
5. Financing details and costs- Your investor has agreed that if he/she finances the deal for you,
he/she will give you a 6 month loan at 10% interest which can be paid along with the principle due in six months. If for any reason the investor extends the loan he/she will charge an additional 2% of the loan balance.
6. Let’s summarize your anticipated costs to determine if this project would appear to be profitable:
Purchase Price……………… ………………..$35,000
Fix Up (Rehab) Costs………………………….$21,000
Hazard (Fire) Insurance………………………..$600
Title Insurance For Investor…………………..$625
Appraisal Fee…………………… ………………..$300
Other Purchase Closing Costs…………………$300
Interest Expense……………………………….$3,000
Miscellaneous Expenses………………………$2,000
TOTAL………………………………………. …..$62,825
The investor will also require a minimum of 4 months interest, even if you sell the property earlier than that. This will reimburse him/her with cost & inconvenience of transferring funds from other sources.
7. Now, let’s look at your anticipated proceeds from your resale. You may be able to sell the house to a buyer who can qualify for a bank loan: however, let’s look at a worse case scenario and anticipate that you will finance for the buyer and sell the Note:
Sales Price………………………………………..$105,000
Down Payment…………………………………..$10,000
Note back from Buyer payable at………..$95,000
$697.08 per month including 8% interest amortized over 30 years
SUMMARY
Cash Down Payment…………………………..$10,000
Sale of Note (80%)……………………………….$76,000
TOTAL CASH PROCEEDS………………………$86,000
Less
*Closing cost to sell………………………………$9,000
Pay-off loan……………………………………….$60,000
6 months interest………………………………..$3,000
TOTAL……………………………………………….$72,000
*Closing costs include Real Estate Commission of 6% of Sales Price which you won’t
have if you sell the property yourself, which you should do.
NET PROFIT……………………………………….$14,000
Also other things to consider -
If you sell in less than 6 months, which you should be able to do with Owner Financing, you
will save interest costs. Also if your buyer has bank financing, you will save $9,000 in Note
discount. From the information provided, I would say this is a “Go” deal. The better you perform, the more it will enhance your relationship with your investor.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, November 19, 2010
Finding And Developing Trust With Your Private Lender
So, you want to do Real Estate projects; however, you don’t want to finance your deals through Conventional Lenders, banks, or other Institutional Lenders. Even though you may be financially able to borrow from banks, you prefer Private Lenders for many reasons; such as:
1. They will make loans on properties and projects that banks will not.
2. They are more aggressive and will fund deals much quicker than banks.
3. They will do small loans.
4. you will have more control with your project.
Now, how do we find these Private Lenders? They are everywhere, if you look around. Let’s consider some of the sources.
1. Friends and relatives. You would probably be surprised at the number of people you know who would invest in IRAs, CDs, Money Markets, etc., and who have the funds in which to do it. Most of these people would like to have better returns on their money. So, if you can convince them that you can provide them with better and SAFER yields; some will be interested.
2. Professional people you know who may have funds available. Doctors, lawyers, dentists, CPAs, etc., usually earn very good incomes; however, most don’t have time to personally pursue investing and therefore depend on other people, stockbrokers, etc. Again, if you can get their attention long enough to explain your program, some will be interested.
3. Newspaper ads – Look for ads such as: “Money To Loan”. Also, you can place your own ads ; for example: “Investor needed for local Real Estate Loans” or “Real Estate note For Sale – Excellent Return” NOTE: You may not have a note For Sale now, but your intention is to create one.
4. Talk to Title companies, attorneys who do Real Estate closings, and CPAs who have investor clients for leads to Private Investors.
5. Join local Real Estate Investment Clubs and meet other people who are doing what you want to do. Investors also belong to these clubs.
6. Consider offering classes to Private Investors or “Would Be” Private Investors to explain your program.
NOTE: Be careful with any advertisement you may place in the newspaper. Do Not propose any specific yield in your ads. Do Not ever Guarantee anything in your ads.
Once you have found an investor who expresses an interest in funding your Real Estate projects, you need to develop rapport and an element of trust with that investor. In other words, you have to prove to the investor that you know what you are doing. This is where your written business plan with referrals (if you have them) comes in. If you are new at this and don’t have business referrals connected with Real Estate, get referrals from friends, attorneys, CPAs, bankers, and anyone you know who has some stature.
The main thing to the investor is, as stated before, is your plan and attitude. Don’t be a beggar and don’t be a “Know It All” either. Just lay things out as they are. The investor, who most likely has financed Real Estate deals before, will sense that you are for real. Then you must demonstrate that he is in fact correct; You are for real.
If you need help preparing for this, get help from other Real Estate Club members or seek out someone who is doing these kinds of projects. You can also talk to Realtors, Title Companies, etc.
I would appreciate any comments you may have to this and any other Blog Posts we may write.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
1. They will make loans on properties and projects that banks will not.
2. They are more aggressive and will fund deals much quicker than banks.
3. They will do small loans.
4. you will have more control with your project.
Now, how do we find these Private Lenders? They are everywhere, if you look around. Let’s consider some of the sources.
1. Friends and relatives. You would probably be surprised at the number of people you know who would invest in IRAs, CDs, Money Markets, etc., and who have the funds in which to do it. Most of these people would like to have better returns on their money. So, if you can convince them that you can provide them with better and SAFER yields; some will be interested.
2. Professional people you know who may have funds available. Doctors, lawyers, dentists, CPAs, etc., usually earn very good incomes; however, most don’t have time to personally pursue investing and therefore depend on other people, stockbrokers, etc. Again, if you can get their attention long enough to explain your program, some will be interested.
3. Newspaper ads – Look for ads such as: “Money To Loan”. Also, you can place your own ads ; for example: “Investor needed for local Real Estate Loans” or “Real Estate note For Sale – Excellent Return” NOTE: You may not have a note For Sale now, but your intention is to create one.
4. Talk to Title companies, attorneys who do Real Estate closings, and CPAs who have investor clients for leads to Private Investors.
5. Join local Real Estate Investment Clubs and meet other people who are doing what you want to do. Investors also belong to these clubs.
6. Consider offering classes to Private Investors or “Would Be” Private Investors to explain your program.
NOTE: Be careful with any advertisement you may place in the newspaper. Do Not propose any specific yield in your ads. Do Not ever Guarantee anything in your ads.
Once you have found an investor who expresses an interest in funding your Real Estate projects, you need to develop rapport and an element of trust with that investor. In other words, you have to prove to the investor that you know what you are doing. This is where your written business plan with referrals (if you have them) comes in. If you are new at this and don’t have business referrals connected with Real Estate, get referrals from friends, attorneys, CPAs, bankers, and anyone you know who has some stature.
The main thing to the investor is, as stated before, is your plan and attitude. Don’t be a beggar and don’t be a “Know It All” either. Just lay things out as they are. The investor, who most likely has financed Real Estate deals before, will sense that you are for real. Then you must demonstrate that he is in fact correct; You are for real.
If you need help preparing for this, get help from other Real Estate Club members or seek out someone who is doing these kinds of projects. You can also talk to Realtors, Title Companies, etc.
I would appreciate any comments you may have to this and any other Blog Posts we may write.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, November 16, 2010
Grow Your Own Investment Money Tree
OK, so now you have made the decision to become more active in investing in Real Estate; however, your funds are limited, plus your credit may not be too good. You don’t want to have to depend on the fickle banking industry to provide you with funds to do your investing. You know the old story of who a banker is, right? “A banker is a person who will lend you an umbrella; however, he wants it back if it starts raining.”
So, where are you going to get the money to do your investing? Ask yourself a question. Where do the banks get their money to lend to you or other investors? Mostly from private parties; deposits, CD buyers, etc. Well, why don’t you go to the same parties to find the money you need to do your investing? How much do you think the banks are paying people to put money in the bank? Regular depositions? – Nil. CD Buyers? (by the way, that’s Certificate of Deposit, NOT Compact Disc) – maybe 2% to 3%. Hard to get rich on a 2% or 3% Return.
Speaking of 2%, I’d like to break for a humorous story. Back when I was selling Real Estate as a broker, I met a crusty, older investor who eventually became my partner & dear friend. When I first met him I asked him what kind of Return he wanted on his money. His reply was “Two percent”. I repeated to him, “Two percent?” “Yeah”, he said, “If I invest one dollar, I want two dollars back; 2 for 1. Two percent!”
OK, back to more serious stuff. You then, are going to go to these folks who are putting their money in the bank and show them how they can work with you and get a much better Return on their money and do it safely. First though, you must develop a business plan and put it in writing. You are going to have to show these parties (potential investors) what you will do and how you will do it to earn them better yields on their money.
Your plan must be realistic and it must be specific. For example, let’s say that you are going to buy houses that need some fixing-up. After you fix them up and resell them at a profit, your plan should include the following:
1) A Mission Statement as outlined above, of all that you are going to do and how.
2) How the investor will always be protected in that he/she can always have more than
enough security for their investment – i.e.
a. They will hold a First Lien on the property they are lending on.
b. They will always have Title Insurance and Hazard Insurance.
c. They will never be more at risk than a safe percentage of the property value,
say 60% to 75% max.
3) You need to be able to answer questions, such as, “What happens if you can’t pay
me back when the loan is due to be paid off?” Your answer might be, for example:
a. I will pay you a bonus to extend the loan.
b. I will make a new loan with another investor and pay you off. And then,
the ULTIMATE answer,
c. If I can’t pay you off, then you will own the property at 65% – 75% of it’s resell
value, and it will be fixed up and ready to sell.
If you have a specific property picked out which you want to borrow on, bring complete details on that property to present to the investor. Give him/her an inspection tour of the property. If you have details on other properties which you have bought, fixed-up and sold, be sure to present these case histories to the investor. Also, if you have positive references as to your past work, achievements, etc., present those as well – Even if they do not relate to this specific kind of project. What you are doing in these initial meetings is building confidence and trust with the investor.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
So, where are you going to get the money to do your investing? Ask yourself a question. Where do the banks get their money to lend to you or other investors? Mostly from private parties; deposits, CD buyers, etc. Well, why don’t you go to the same parties to find the money you need to do your investing? How much do you think the banks are paying people to put money in the bank? Regular depositions? – Nil. CD Buyers? (by the way, that’s Certificate of Deposit, NOT Compact Disc) – maybe 2% to 3%. Hard to get rich on a 2% or 3% Return.
Speaking of 2%, I’d like to break for a humorous story. Back when I was selling Real Estate as a broker, I met a crusty, older investor who eventually became my partner & dear friend. When I first met him I asked him what kind of Return he wanted on his money. His reply was “Two percent”. I repeated to him, “Two percent?” “Yeah”, he said, “If I invest one dollar, I want two dollars back; 2 for 1. Two percent!”
OK, back to more serious stuff. You then, are going to go to these folks who are putting their money in the bank and show them how they can work with you and get a much better Return on their money and do it safely. First though, you must develop a business plan and put it in writing. You are going to have to show these parties (potential investors) what you will do and how you will do it to earn them better yields on their money.
Your plan must be realistic and it must be specific. For example, let’s say that you are going to buy houses that need some fixing-up. After you fix them up and resell them at a profit, your plan should include the following:
1) A Mission Statement as outlined above, of all that you are going to do and how.
2) How the investor will always be protected in that he/she can always have more than
enough security for their investment – i.e.
a. They will hold a First Lien on the property they are lending on.
b. They will always have Title Insurance and Hazard Insurance.
c. They will never be more at risk than a safe percentage of the property value,
say 60% to 75% max.
3) You need to be able to answer questions, such as, “What happens if you can’t pay
me back when the loan is due to be paid off?” Your answer might be, for example:
a. I will pay you a bonus to extend the loan.
b. I will make a new loan with another investor and pay you off. And then,
the ULTIMATE answer,
c. If I can’t pay you off, then you will own the property at 65% – 75% of it’s resell
value, and it will be fixed up and ready to sell.
If you have a specific property picked out which you want to borrow on, bring complete details on that property to present to the investor. Give him/her an inspection tour of the property. If you have details on other properties which you have bought, fixed-up and sold, be sure to present these case histories to the investor. Also, if you have positive references as to your past work, achievements, etc., present those as well – Even if they do not relate to this specific kind of project. What you are doing in these initial meetings is building confidence and trust with the investor.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Private Financing For Your Real Estate Investments
Flipping houses for fun and profit?
THE BAD NEWS (For Some): The inventory of houses that are available for purchase is at an all time high. These houses range from older homes that may need remodeling to new or almost new homes. This situation has been created by: 1) The previous several years of selling and financing homes for buyers who could not afford them, resulting in record foreclosures at an all time high. And in addition, 2) The present unemployment situation has forced many people to give up their homes to move to lesser expensive lodging, and in extreme cases, resulting in homelessness.
THE GOOD NEWS(For Others): Anytime there is a situation as described above, it is bad news for many people. Conversely, at the same time, it is good news for others because of the opportunities created by the particular situation – In this case, INVESTING IN HOUSING.
Because of the glut inventory of product (houses) available, prices are down from the previous market period; the old “Supply and Demand” syndrome. Therefore, it is a great opportunity for investors, entrepreneurs, etc. to make profits by taking advantage of these favorable circumstances.
So, let’s assume you are or would like to be one of those who takes advantage of the situation. You have some experience in residential housing or you have a mentor to help you make good decisions whenever you may be buying, selling, and/or rehabbing houses.
There are basically two types of investors who would be interested in the housing market:
1. Those who buy for resale later at a profit (hopefully) or,
2. Those who buy to hold for rental income.
Of course an investor could, and many do, fill both roles.
Now, let’s assume you have the knowledge, experience or mentorship to become involved in the housing market that we are discussing. One more thing we need is the funds necessary to buy, fix-up if necessary, and sell the houses. Also, if you intend to hold houses for rental income, you will need long term financing. So, if you have funds of your own, good credit with banks and other commercial lenders, you are all set – AS LONG AS THEY ARE LENDING. BUT,
What if you don’t have your own funds, and you don’t have good credit, or for whatever reason you are unable to obtain institutional funding? What to do then? AND,
Even if you do have good credit with the banks, that could change tomorrow with the whim of the banks and/or government.
Therefore, let’s consider your options: What if you could create a scenario where in you could conduct unlimited business in this and other markets, and not have to contend with banks and other institutional lenders? What if you could depend on always having financing available, short term and long term, even if your credit was not that great?
Well, you know what? You can do that! How can you do that? With Private Financing. This Private Financing will be from Private Investors and individuals who are looking for better and safer investments than they now have access to.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
THE BAD NEWS (For Some): The inventory of houses that are available for purchase is at an all time high. These houses range from older homes that may need remodeling to new or almost new homes. This situation has been created by: 1) The previous several years of selling and financing homes for buyers who could not afford them, resulting in record foreclosures at an all time high. And in addition, 2) The present unemployment situation has forced many people to give up their homes to move to lesser expensive lodging, and in extreme cases, resulting in homelessness.
THE GOOD NEWS(For Others): Anytime there is a situation as described above, it is bad news for many people. Conversely, at the same time, it is good news for others because of the opportunities created by the particular situation – In this case, INVESTING IN HOUSING.
Because of the glut inventory of product (houses) available, prices are down from the previous market period; the old “Supply and Demand” syndrome. Therefore, it is a great opportunity for investors, entrepreneurs, etc. to make profits by taking advantage of these favorable circumstances.
So, let’s assume you are or would like to be one of those who takes advantage of the situation. You have some experience in residential housing or you have a mentor to help you make good decisions whenever you may be buying, selling, and/or rehabbing houses.
There are basically two types of investors who would be interested in the housing market:
1. Those who buy for resale later at a profit (hopefully) or,
2. Those who buy to hold for rental income.
Of course an investor could, and many do, fill both roles.
Now, let’s assume you have the knowledge, experience or mentorship to become involved in the housing market that we are discussing. One more thing we need is the funds necessary to buy, fix-up if necessary, and sell the houses. Also, if you intend to hold houses for rental income, you will need long term financing. So, if you have funds of your own, good credit with banks and other commercial lenders, you are all set – AS LONG AS THEY ARE LENDING. BUT,
What if you don’t have your own funds, and you don’t have good credit, or for whatever reason you are unable to obtain institutional funding? What to do then? AND,
Even if you do have good credit with the banks, that could change tomorrow with the whim of the banks and/or government.
Therefore, let’s consider your options: What if you could create a scenario where in you could conduct unlimited business in this and other markets, and not have to contend with banks and other institutional lenders? What if you could depend on always having financing available, short term and long term, even if your credit was not that great?
Well, you know what? You can do that! How can you do that? With Private Financing. This Private Financing will be from Private Investors and individuals who are looking for better and safer investments than they now have access to.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, November 9, 2010
If All Banks Close Tomorrow
You pick up the morning paper and read the headline, “Government directs that ALL BANKS will invest all deposits in Government Securities. NO MORE REAL ESTATE LOANS to private companies or individuals!” You are in the business of acquiring Real Estate, houses, apartments, land, etc. for resale or for long term investment. Will this news TOTALLY shut you down? OR what if the banks are going to continue to make Real Estate Loans; but not to you? This could be for any number of reasons; too many loans all ready, marginal credit, bad location of Real Estate, etc., etc., etc. OR what if you’re just tired of jumping through hoops, kissing the banker’s rear end, and in general going through the hassle of dealing with banks.
There are great opportunities in our current economy for acquiring Real Estate at prices not seen in years. Bad times for some, good times for others. Therefore, for the Real Estate investor, entrepreneur, developer, etc. success will depend a great deal on being able to have or obtain funds with which to acquire said Real Estate.
So, what do we do if the banks are off limits to us? PRIVATE LENDERS ! Create your own funding sources with Private Lenders. There is an unlimited number of individual people and organizations that have funds available to invest. Most of these people and organizations are receiving low returns on their funds. They would obviously like to increase the return on their investments; however, either they don’t know how or they are afraid to invest their money wherein they have no say as to how the money is used. Examples: Stock Market, Mutual Funds, REIT’s, etc.
Investing in these ventures is, in my opinion, a sophisticated “Crap Shoot”. You roll the dice and sometimes win, but mostly lose. Investor’s would like a better way; however, they don’t have the time or knowledge to do better. You can educate these investors and convince them that you can show them how to dramatically increse their returns.
By being diligent, knowledgeable, and honest you can make them feel comfortable at investing with you in Real Estate. You can develop both short term and long term investment funds from these investors. You want to develop a “partnership” and feeling of trust between you and the investor. Once you are able to do that, the news will spread to other investors and you will not have to worry about the banks again.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
There are great opportunities in our current economy for acquiring Real Estate at prices not seen in years. Bad times for some, good times for others. Therefore, for the Real Estate investor, entrepreneur, developer, etc. success will depend a great deal on being able to have or obtain funds with which to acquire said Real Estate.
So, what do we do if the banks are off limits to us? PRIVATE LENDERS ! Create your own funding sources with Private Lenders. There is an unlimited number of individual people and organizations that have funds available to invest. Most of these people and organizations are receiving low returns on their funds. They would obviously like to increase the return on their investments; however, either they don’t know how or they are afraid to invest their money wherein they have no say as to how the money is used. Examples: Stock Market, Mutual Funds, REIT’s, etc.
Investing in these ventures is, in my opinion, a sophisticated “Crap Shoot”. You roll the dice and sometimes win, but mostly lose. Investor’s would like a better way; however, they don’t have the time or knowledge to do better. You can educate these investors and convince them that you can show them how to dramatically increse their returns.
By being diligent, knowledgeable, and honest you can make them feel comfortable at investing with you in Real Estate. You can develop both short term and long term investment funds from these investors. You want to develop a “partnership” and feeling of trust between you and the investor. Once you are able to do that, the news will spread to other investors and you will not have to worry about the banks again.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, September 24, 2010
Opportunities To Buy Good Paper Are Here Now
Tough economic times in the 1980′s produced a lot of paper. The paper I’m talking about is Private Mortgages, Trust Deeds, Land Contracts, etc. This type of paper is created when one entity (person or company) sells Real Estate to another entity and carries back a mortgage from the buyer payable to the seller, also known as “Seller Financed Paper”.
During tough economic times you will see much more of this type of paper created. The 1980′s was such a time. Many of the holders of this paper (the sellers) didn’t really want the paper; however, it was the only way they could sell their property. In addition, in tough times is when people’s credit gets hurt and they can’t get regular bank or Mortgage Company financing, thus another reason for Seller Financing. Therefore, an abundance of paper was created during this time.
The 1990′s saw Institutional Investors discovering this multitude of paper and becoming involved in very aggressive buying of this type of paper. Private investors were buying it as well; however, the institutions (with more money and willingness to buy at lower yields) made it more difficult for the private investors who found fewer amounts of paper that they could buy.
For example, during the 90′s and early 2000′s, my company bought and sold over 200 million dollars in paper. Then in the late 90′s and early 2000′s Congress pressured the banks and Mortgage companies into making home loans almost to anyone who could fog a mirror. The result = The Sub-Prime mess funded by Fannie-Mae and Freddie-Mac. This affected Seller Financing greatly. No longer were buyers hard to find who could qualify for a bank loan, so sellers didn’t have to finance the property for the buyers. So what happened? You all know; Foreclosures by the millions and the creation of another severe economic downturn. THANKS, CONGRESS.
So, the cycle has come full circle. There is an abundance of paper being created. Just check the “Homes For Sale” in your local newspaper, and see how many ads offer Seller Financing. Now we have, and are going to have, more and more Seller Financed paper available for investors to buy.
The prudent paper investor, who does due diligence, can buy paper to produce 10% – 14% Yields. Compare this to 2% of whatever the banks are paying.
So, I would advise that if you are an investor or have investor clients, consider getting in the paper buying business. Sure beats the crap-shoot in Wall Street.
If you are interested, review some of my earlier Posts about doing diligence and how to find good paper @ www.RealEstateJack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
During tough economic times you will see much more of this type of paper created. The 1980′s was such a time. Many of the holders of this paper (the sellers) didn’t really want the paper; however, it was the only way they could sell their property. In addition, in tough times is when people’s credit gets hurt and they can’t get regular bank or Mortgage Company financing, thus another reason for Seller Financing. Therefore, an abundance of paper was created during this time.
The 1990′s saw Institutional Investors discovering this multitude of paper and becoming involved in very aggressive buying of this type of paper. Private investors were buying it as well; however, the institutions (with more money and willingness to buy at lower yields) made it more difficult for the private investors who found fewer amounts of paper that they could buy.
For example, during the 90′s and early 2000′s, my company bought and sold over 200 million dollars in paper. Then in the late 90′s and early 2000′s Congress pressured the banks and Mortgage companies into making home loans almost to anyone who could fog a mirror. The result = The Sub-Prime mess funded by Fannie-Mae and Freddie-Mac. This affected Seller Financing greatly. No longer were buyers hard to find who could qualify for a bank loan, so sellers didn’t have to finance the property for the buyers. So what happened? You all know; Foreclosures by the millions and the creation of another severe economic downturn. THANKS, CONGRESS.
So, the cycle has come full circle. There is an abundance of paper being created. Just check the “Homes For Sale” in your local newspaper, and see how many ads offer Seller Financing. Now we have, and are going to have, more and more Seller Financed paper available for investors to buy.
The prudent paper investor, who does due diligence, can buy paper to produce 10% – 14% Yields. Compare this to 2% of whatever the banks are paying.
So, I would advise that if you are an investor or have investor clients, consider getting in the paper buying business. Sure beats the crap-shoot in Wall Street.
If you are interested, review some of my earlier Posts about doing diligence and how to find good paper @ www.RealEstateJack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, September 9, 2010
Buy Income Property With Shared Equity - Part II
WHAT TO DO? WHAT TO DO? Mr. Investor listed his property with commercial real estate broker, Charlie. Charlie, being a very conscientious & knowledgeable broker, got the word out that he had a great property available that needed a “hands on” type of investor/landlord. Someone who had the skills and drive to turn a property that was in vacancy trouble around.
Charlie received several responses to his marketing efforts. After interviewing the prospects, and selecting Mr. Eager, he proposed that he and Mr. Eager meet with Mr. Docile to see if a mutually agreeable solution could be worked out.
Mr. Eager was an experienced Landlord/Manager who already owned several income properties. He had sufficient income from his other properties to cover the “eat” on Mr. Docile’s property. A problem was that his cash resources were limited and with the negative cash flow on Mr. Docile’s property, everyone knew it would be difficult to obtain new financing from an institutional lender to pay off Mr. Eager’s loan.
Mr. Eager felt that his property had a value of $1,200,000, which might have been true with 90% or better occupancy; however, based on the current income and the current economy certainly was not valid now. After considerable brainstorming, broker Charlie proposed the following as a possible solution to give Mr. Docile his price and still make it workable for Mr. Eager.
1. Mr. Eager will Master Lease the property from Mr. Docile for a period of 5 years. (If this time length would violate the current loan terms, then lease for 2 or 3 years with options to renew.) The lease payments would be $4,800 per month. Mr. Eager would be responsible for taxes, insurance, and all other operating expenses.
2. Mr. Docile will grant Mr. Eager a 5 year option to purchase the property at a price of $1,200,000. The option consideration is $10,000. To exercise the option Mr. Eager would pay Mr. Docile $522,912 (Today’s Equity) plus 25% of the appreciation of value above $1,200,000 when the property is sold by Mr. Eager in the future.
*NOTE: The objective is to sell the property in the future when the market has turned around. To protect himself, Mr. Eager should have the option to renew or extend the option period.
BENEFITS - Let’s look at the benefits to each party of the transaction, Mr. Docile, the owner; Mr. Eager, the potential buyer; and let’s not forget Charlie, the broker. He was probably the most important factor in putting this deal together.
1) Benefits to Mr. Docile, the owner:
a – He solves his negative cash flow problem.
b – He retains all the tax benefits on the property.
c – He gets his full price plus shares in the appreciation of the property value.
d – Instead of receiving monthly interest which would be taxable, he defers the receipt
of income to the future.
e – He does not have to sell in a depressed market wherein he would not have received
a good price.
2) Benefits to Mr. Eager, the potential buyer:
a - He acquires control of excellent property without putting up much cash or having
to qualify for a new bank loan.
b – With his expertise he can get the vacancies leased-up and enjoy a positive cash flow.
c - If he exercises the option and resells the property after 5 years, he will receive $50,647
in reduction on the existing loan principal plus 75% of the appreciation above $1,200,000.
d - If for some reason he is unable to turn the property around, he can walk away.
If this happens he would lose his option consideration of $10,000 – However, better
to lose a finger than your whole hand.
3) Benefits to Charlie, the broker:
a - Receives $9,600 leasing commission (two months rent) up front.
b - Receives five percent of the sale price when Mr. Eager resells the property.
Seller & Buyer to each pay half.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Charlie received several responses to his marketing efforts. After interviewing the prospects, and selecting Mr. Eager, he proposed that he and Mr. Eager meet with Mr. Docile to see if a mutually agreeable solution could be worked out.
Mr. Eager was an experienced Landlord/Manager who already owned several income properties. He had sufficient income from his other properties to cover the “eat” on Mr. Docile’s property. A problem was that his cash resources were limited and with the negative cash flow on Mr. Docile’s property, everyone knew it would be difficult to obtain new financing from an institutional lender to pay off Mr. Eager’s loan.
Mr. Eager felt that his property had a value of $1,200,000, which might have been true with 90% or better occupancy; however, based on the current income and the current economy certainly was not valid now. After considerable brainstorming, broker Charlie proposed the following as a possible solution to give Mr. Docile his price and still make it workable for Mr. Eager.
1. Mr. Eager will Master Lease the property from Mr. Docile for a period of 5 years. (If this time length would violate the current loan terms, then lease for 2 or 3 years with options to renew.) The lease payments would be $4,800 per month. Mr. Eager would be responsible for taxes, insurance, and all other operating expenses.
2. Mr. Docile will grant Mr. Eager a 5 year option to purchase the property at a price of $1,200,000. The option consideration is $10,000. To exercise the option Mr. Eager would pay Mr. Docile $522,912 (Today’s Equity) plus 25% of the appreciation of value above $1,200,000 when the property is sold by Mr. Eager in the future.
*NOTE: The objective is to sell the property in the future when the market has turned around. To protect himself, Mr. Eager should have the option to renew or extend the option period.
BENEFITS - Let’s look at the benefits to each party of the transaction, Mr. Docile, the owner; Mr. Eager, the potential buyer; and let’s not forget Charlie, the broker. He was probably the most important factor in putting this deal together.
1) Benefits to Mr. Docile, the owner:
a – He solves his negative cash flow problem.
b – He retains all the tax benefits on the property.
c – He gets his full price plus shares in the appreciation of the property value.
d – Instead of receiving monthly interest which would be taxable, he defers the receipt
of income to the future.
e – He does not have to sell in a depressed market wherein he would not have received
a good price.
2) Benefits to Mr. Eager, the potential buyer:
a - He acquires control of excellent property without putting up much cash or having
to qualify for a new bank loan.
b – With his expertise he can get the vacancies leased-up and enjoy a positive cash flow.
c - If he exercises the option and resells the property after 5 years, he will receive $50,647
in reduction on the existing loan principal plus 75% of the appreciation above $1,200,000.
d - If for some reason he is unable to turn the property around, he can walk away.
If this happens he would lose his option consideration of $10,000 – However, better
to lose a finger than your whole hand.
3) Benefits to Charlie, the broker:
a - Receives $9,600 leasing commission (two months rent) up front.
b - Receives five percent of the sale price when Mr. Eager resells the property.
Seller & Buyer to each pay half.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Buy Income Property With Shared Equity Appreciation Program
What is Equity Sharing? My definition is the sharing value of a property less any loans owed on the property. It is, in effect, a partnership wherein two or more parties own a portion of the equity in the property. Maybe we should also define equity. Equity is the value of a property less any and all loans owed on the property; sometimes known as “The Broadbent Formula”.
In my daily travels I see numerous commercial properties, especially Strip Centers, with several or many vacancies, and from what I hear there are quite a few vacancies in Office Buildings as well. This situation creates a problem for many owners of these properties because of lower or even negative cash flow. We call negative cash flow an ALLIGATOR. It eats your cash flow and profits. It could even cost the owners their property!
The flip side of this situation is that it creates opportunities for buyers who may not have large amounts of cash to put down or may not be able to get new financing. Institutional lenders are somewhat reluctant to make loans on income properties that have little income.
Many of the true values of these properties, based on current market conditions, has diminished considerably from what they were a few years ago. However, owners tend to want to hang onto those old values, not desiring to take a loss.
Lets see if we can put together a hypothetical transaction wherein with a little “creative” structuring we can get a sale and still preserve some of the owners pride.
SITUATION
1. A 10 unit Strip Center located in Anytown, U.S.A.
Gross Income when it was fully occupied was $15,000 per month or $180,000 per year.
2. Currently there are 5 vacancies, reducing the monthly gross income to $7,500.00
3. There is a loan on the property with 4th National Bank of $677,088 payable at $4,657 per month.
Operating expenses (management, taxes, insurance, maintenance, etc.) averages out to approx. $4,205 per month.
4. Base on these figures the monthly cash flow is <$1,362.00> negative. That’s a full grown ALLIGATOR.
The owner of the property is primarily an investor who does not have the time or expertise to work at solving the problem. The negative cash flow is unbearable and is affecting his other business.
What to do? What to do?
Comments? Ideas? Solutions?
Continued In Next Post
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
In my daily travels I see numerous commercial properties, especially Strip Centers, with several or many vacancies, and from what I hear there are quite a few vacancies in Office Buildings as well. This situation creates a problem for many owners of these properties because of lower or even negative cash flow. We call negative cash flow an ALLIGATOR. It eats your cash flow and profits. It could even cost the owners their property!
The flip side of this situation is that it creates opportunities for buyers who may not have large amounts of cash to put down or may not be able to get new financing. Institutional lenders are somewhat reluctant to make loans on income properties that have little income.
Many of the true values of these properties, based on current market conditions, has diminished considerably from what they were a few years ago. However, owners tend to want to hang onto those old values, not desiring to take a loss.
Lets see if we can put together a hypothetical transaction wherein with a little “creative” structuring we can get a sale and still preserve some of the owners pride.
SITUATION
1. A 10 unit Strip Center located in Anytown, U.S.A.
Gross Income when it was fully occupied was $15,000 per month or $180,000 per year.
2. Currently there are 5 vacancies, reducing the monthly gross income to $7,500.00
3. There is a loan on the property with 4th National Bank of $677,088 payable at $4,657 per month.
Operating expenses (management, taxes, insurance, maintenance, etc.) averages out to approx. $4,205 per month.
4. Base on these figures the monthly cash flow is <$1,362.00> negative. That’s a full grown ALLIGATOR.
The owner of the property is primarily an investor who does not have the time or expertise to work at solving the problem. The negative cash flow is unbearable and is affecting his other business.
What to do? What to do?
Comments? Ideas? Solutions?
Continued In Next Post
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, September 3, 2010
Create Your Own Private Money Source
This article is prompted by a question posed to me by a contact through eRealEstate Social Network.
The contact wrote, “Where can I find Private Lenders who are willing to work with Real Estate Investors? I have found a hard money lender, but it is very expensive. I could use some private Private Funds to help my purchases move faster. I am feverishly looking for houses to buy, fix up, and resell; however, often times I am beat out by someone who has Private Money readily on hand. I appreciate any help, direction, or referrals you may bring.” Jim Well Jim, you can develop your own Private Money source(s). However, it will take a little time, but if you treat them right (in fact, a little more than right) after a while you will have them calling you asking if you need to borrow some money.
Have I been on both ends of this Scenario? Yes, I have.
1. I have been the rehabber who borrowed funds from investors or partnered with investors. I haven’t done this
for a while; however, as mentioned above, I still get calls from some of those Investor-Lenders wanting to know
if I want to borrow some money.
2. Conversely, I have been the Lender-Investor who made loans or partnered with the rehabbers.
The key to success with these programs or any other partnered, is it has to be good for both parties. I could also write a book on failed partnerships.
Anyway, back to creating your own Private Money Source. I will list a couple of methods I have used to find Private Money Sources. First you should prepare a simple business plan to present to prospective Private Lenders. They will want to know how you plan to acquire, rehab and most importantly, sell the homes you wish to borrow funds on. If you have references or previous successful projects, put those as appendices to your plan. In any case, the Lender is going to want to feel comfortable that you know what you are doing.
1. Simply place an ad in the Classifieds, “Money wanted to finance a Purchase & Remodel of Real Estate
properties”, or “Experienced (if you are) Home Buyer, Rehabber needs funds for future projects”.
2. Talk to Title Companies, Escrow Companies, and Real Estate Attorneys for leads to Investors who loan to
rehabbers, like you.
3. If you know of other rehabbers who are closing deals, go to County Clerks and review the Deed of Trust or
Mortgages that were recorded on the property. These are Public Records that will reveal who the Lenders were.
Ads in the newspaper is the method that has worked best for me. With this Ad you should get a good response. Don’t try to make the loan over the phone. Set up a Face-to-Face meeting with your prospects. They will want to meet you before they get serious about lending you money. Set up the meeting in your office, a restaurant for coffee, lunch or whatever.
Have a copy of your plan to give to the Investor plus samples of some of your previous projects, if you have them. Be sure you can explain to your prospects how they will be protected by such as:
1. First Lien on the property
2. Title Policy
3. Hazard Insurance
If you have a specific property in mind, bring a presentation on that. Information like:
1. Purchase Price.
2. Rehab Costs – Include all costs, closing, Title work, and contingency amount; like 10%.
It seems like all projects overrun.
3. Details on the house – Bedrooms, baths, size, construction, etc. -
Pictures; inside and out.
4. Information on comparable Sales to reinforce your expected Sales Price after rehab.
The more prepared you are and the more detailed,
the more the prospects will be impressed.
You will have to offer a good return to your Investor Lender, say 10% to 12% interest, perhaps with a bonus after resale; either points or percentage of the profit. You may think this is expensive; however, consider this from the Investor Lender perspective. Most of these loans are short term so even though the interest rate may be high to you, the investor sees it as some type of administrative expense; taking their funds out of where they are invested in now, and getting interest for only 3 to 6 months on your deal. Also, once you have done a few successful projects with a Private Lender you can better negotiate on rates. Also, the word will get around that you are doing deals and other Private Lenders will be more inclined to want to do business with you.
This is getting a little long, so I will stop for now. However, I want to show you how you can use and lock-in these Private Lenders to longer range Investments for them. This will also help you sell your finished projects faster, which means greater profits.
NEXT EPISODE WILL BE COMING SOON.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
The contact wrote, “Where can I find Private Lenders who are willing to work with Real Estate Investors? I have found a hard money lender, but it is very expensive. I could use some private Private Funds to help my purchases move faster. I am feverishly looking for houses to buy, fix up, and resell; however, often times I am beat out by someone who has Private Money readily on hand. I appreciate any help, direction, or referrals you may bring.” Jim Well Jim, you can develop your own Private Money source(s). However, it will take a little time, but if you treat them right (in fact, a little more than right) after a while you will have them calling you asking if you need to borrow some money.
Have I been on both ends of this Scenario? Yes, I have.
1. I have been the rehabber who borrowed funds from investors or partnered with investors. I haven’t done this
for a while; however, as mentioned above, I still get calls from some of those Investor-Lenders wanting to know
if I want to borrow some money.
2. Conversely, I have been the Lender-Investor who made loans or partnered with the rehabbers.
The key to success with these programs or any other partnered, is it has to be good for both parties. I could also write a book on failed partnerships.
Anyway, back to creating your own Private Money Source. I will list a couple of methods I have used to find Private Money Sources. First you should prepare a simple business plan to present to prospective Private Lenders. They will want to know how you plan to acquire, rehab and most importantly, sell the homes you wish to borrow funds on. If you have references or previous successful projects, put those as appendices to your plan. In any case, the Lender is going to want to feel comfortable that you know what you are doing.
1. Simply place an ad in the Classifieds, “Money wanted to finance a Purchase & Remodel of Real Estate
properties”, or “Experienced (if you are) Home Buyer, Rehabber needs funds for future projects”.
2. Talk to Title Companies, Escrow Companies, and Real Estate Attorneys for leads to Investors who loan to
rehabbers, like you.
3. If you know of other rehabbers who are closing deals, go to County Clerks and review the Deed of Trust or
Mortgages that were recorded on the property. These are Public Records that will reveal who the Lenders were.
Ads in the newspaper is the method that has worked best for me. With this Ad you should get a good response. Don’t try to make the loan over the phone. Set up a Face-to-Face meeting with your prospects. They will want to meet you before they get serious about lending you money. Set up the meeting in your office, a restaurant for coffee, lunch or whatever.
Have a copy of your plan to give to the Investor plus samples of some of your previous projects, if you have them. Be sure you can explain to your prospects how they will be protected by such as:
1. First Lien on the property
2. Title Policy
3. Hazard Insurance
If you have a specific property in mind, bring a presentation on that. Information like:
1. Purchase Price.
2. Rehab Costs – Include all costs, closing, Title work, and contingency amount; like 10%.
It seems like all projects overrun.
3. Details on the house – Bedrooms, baths, size, construction, etc. -
Pictures; inside and out.
4. Information on comparable Sales to reinforce your expected Sales Price after rehab.
The more prepared you are and the more detailed,
the more the prospects will be impressed.
You will have to offer a good return to your Investor Lender, say 10% to 12% interest, perhaps with a bonus after resale; either points or percentage of the profit. You may think this is expensive; however, consider this from the Investor Lender perspective. Most of these loans are short term so even though the interest rate may be high to you, the investor sees it as some type of administrative expense; taking their funds out of where they are invested in now, and getting interest for only 3 to 6 months on your deal. Also, once you have done a few successful projects with a Private Lender you can better negotiate on rates. Also, the word will get around that you are doing deals and other Private Lenders will be more inclined to want to do business with you.
This is getting a little long, so I will stop for now. However, I want to show you how you can use and lock-in these Private Lenders to longer range Investments for them. This will also help you sell your finished projects faster, which means greater profits.
NEXT EPISODE WILL BE COMING SOON.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, August 31, 2010
Investing In Mortgages: Questions and Answers
During my approximately 40 years of investing, buying and selling Mortgages, Deeds of Trust, Land Contracts, etc., I have encountered many different and varied situations, problems and surprises. I have also discovered that when you get one of those surprises, it is almost never good. So, what we need to do is protect ourselves from those surprises as much as we can. I am going to list some questions and answers which, if adhered to, will eliminate some of those unpleasant surprises. To make it a little easier, we will refer to Mortgages, Trust Deeds, Land Contract, Contracts For Sale, etc., as “Mortgages”.
1. Q: What determines if a good investment in a Mortgage?
A: A good investment is when you get your invested capital back plus all the Interest or Yield due on the investment.
The following Q’s & A’s will help you to be sure you have a good investment.
2. Q: Is investing in Mortgages a “Safe” investment?
A: There is no such thing as a 100% safe investment. There is always some risk involved. That’s why we have interest. The return of Interest or Yield should be commensurate with the risk, i.e. more risk – more interest. However, if an investor does his due diligence which includes having ample Equity in the property, which secures the mortgage, it is my opinion that this would be a very “safe” investment. If the Mortgage should go into default, the property (upon sale) would return the principal, plus maybe more, to the investor.
3. Q: What are some of the risks, and what can an investor do to minimize the risks?
A: As state previously, any investment entails some risks. However, these risks can be greatly reduced if the investor does his/her due diligence. Some of the things the investor can do include:
(1) Verify the Real Market value of the property that secures the Mortgage. This can be accomplished by the investor obtaining an independent appraisal of the property. The investor or someone he/she trusts should select the appraiser. I recommend that you do not use an appraiser recommended or provided by the borrower.
(2) Be sure you use a professional Escrow Company, Title Company, or in some cases an Attorney to prepare the documents and close the transaction.
(3) Be sure you get Title Insurance. This is referred to as Mortgagee’s Title Insurance which insures the Mortgage you are buying as opposed to Owner’s Title Insurance which insures the property. BE SURE you, as the investor, get Mortgagee’s Title Insurance.
(4) If it is an improved property which secures the Mortgage, be sure you get a Fire (Casualty) Insurance policy insuring the property, naming you as additional insured. If it happens to be land, you won’t need Fire Insurance.
4. Q: How do I protect myself to ensure that I will get my investment back if the borrower doesn’t pay?
A: You have to be sure that there is enough value in the property over and above the amount of the loan (this is called Equity) so that if you have to foreclose and sell the property, you get your investment back plus costs.
There is a saying that the 3 most important things to determine the value of a property is Location, Location, Location. Well, when you are investing in a Mortgage, the 3 most important things are Equity, Equity, and Equity!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
1. Q: What determines if a good investment in a Mortgage?
A: A good investment is when you get your invested capital back plus all the Interest or Yield due on the investment.
The following Q’s & A’s will help you to be sure you have a good investment.
2. Q: Is investing in Mortgages a “Safe” investment?
A: There is no such thing as a 100% safe investment. There is always some risk involved. That’s why we have interest. The return of Interest or Yield should be commensurate with the risk, i.e. more risk – more interest. However, if an investor does his due diligence which includes having ample Equity in the property, which secures the mortgage, it is my opinion that this would be a very “safe” investment. If the Mortgage should go into default, the property (upon sale) would return the principal, plus maybe more, to the investor.
3. Q: What are some of the risks, and what can an investor do to minimize the risks?
A: As state previously, any investment entails some risks. However, these risks can be greatly reduced if the investor does his/her due diligence. Some of the things the investor can do include:
(1) Verify the Real Market value of the property that secures the Mortgage. This can be accomplished by the investor obtaining an independent appraisal of the property. The investor or someone he/she trusts should select the appraiser. I recommend that you do not use an appraiser recommended or provided by the borrower.
(2) Be sure you use a professional Escrow Company, Title Company, or in some cases an Attorney to prepare the documents and close the transaction.
(3) Be sure you get Title Insurance. This is referred to as Mortgagee’s Title Insurance which insures the Mortgage you are buying as opposed to Owner’s Title Insurance which insures the property. BE SURE you, as the investor, get Mortgagee’s Title Insurance.
(4) If it is an improved property which secures the Mortgage, be sure you get a Fire (Casualty) Insurance policy insuring the property, naming you as additional insured. If it happens to be land, you won’t need Fire Insurance.
4. Q: How do I protect myself to ensure that I will get my investment back if the borrower doesn’t pay?
A: You have to be sure that there is enough value in the property over and above the amount of the loan (this is called Equity) so that if you have to foreclose and sell the property, you get your investment back plus costs.
There is a saying that the 3 most important things to determine the value of a property is Location, Location, Location. Well, when you are investing in a Mortgage, the 3 most important things are Equity, Equity, and Equity!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, August 26, 2010
"Ultimate" Residential Rental Property
What is the “Ultimate” Residential Rental property? Many experienced investors might well say, “Apartments”. This can range from a Duplex to hundreds of units in a Complex. In my “Illustrious” Real Estate career, I have been involved in ownership of various sizes of these complexes.
However, today I still own several Residential Rental properties, of which none are apartments. I believe for the “Average” (if there is such a thing) investor, the ULTIMATE Residential property is the Single Family House. “Well, Jack”, you say, “Why do you make a statement like that?” Let me count the reasons why.
1. The Single Family House (SFH) is easier to manage. One unit – One tenant.
2. The SFH is easier to finance or refinance.
a. Institutional Lenders much more are inclined to loan on a SFH than a
Multi-Unit property.
b. Private Investors also will usually favor lending on the SFH. This is especially
beneficial for rehabbers.
3. The SFH is much easier to sell than larger properties. The demand for SFHs far
exceeds Multi-Unit. More buyers who can afford to buy.
4. The SFH is easier to maintain because there are fewer things that will require repairs.
5. Greater choice available in SFHs for investors who want to get involved in Rental Property.
6. The SFH offers a greater Tax Advantage for the Investor. If managed by the Investor,
things like interest paid, taxes paid, and depreciation can create tax deductions.
7. The SFH is easier to understand, especially for the newer or beginning Investor.
This is true because most people already know a lot about SFHs because they have been
living in one for most of their life, up to now.
Acquiring and holding single family houses as rental property is a great way to set up one’s retirement plan. If a person, say at age 30, 40, or whatever acquired just one house a year by the time they reach retirement time, they should have a good steady income from the houses.
A good thing about rental income is that in the event of inflation, the rents will go up along with everything else. One question a person might ask is, “How am I going to buy a house a year? Where am I going to get the money to do that?” The answer is you do that by acquiring financing for the purchase. If you have good job income and good credit you look to your bank or other Institutional Lenders.
If this is not the case or if you would rather just not use Institutional Lenders, there are many houses you can finance with the seller or private investors. If you doubt that just look at your newspaper in the “Houses For Sale” section and you will find houses that offer Seller-Financing, often with the statement “No Credit Check”.
Another good way to find houses to acquire is to look for those that are in need of repair. Often these houses are vacant. If you happen to be handy with fixing-up, you can often acquire a house with “Sweat Equity”. If not, you can look for a handy man who can help you get the house fixed up and ready to rent.
One final comment: If you own a house free & clear, or with a lot of equity, you can always raise cash if you need to by selling or borrowing from an Institutional or Private Lender.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
However, today I still own several Residential Rental properties, of which none are apartments. I believe for the “Average” (if there is such a thing) investor, the ULTIMATE Residential property is the Single Family House. “Well, Jack”, you say, “Why do you make a statement like that?” Let me count the reasons why.
1. The Single Family House (SFH) is easier to manage. One unit – One tenant.
2. The SFH is easier to finance or refinance.
a. Institutional Lenders much more are inclined to loan on a SFH than a
Multi-Unit property.
b. Private Investors also will usually favor lending on the SFH. This is especially
beneficial for rehabbers.
3. The SFH is much easier to sell than larger properties. The demand for SFHs far
exceeds Multi-Unit. More buyers who can afford to buy.
4. The SFH is easier to maintain because there are fewer things that will require repairs.
5. Greater choice available in SFHs for investors who want to get involved in Rental Property.
6. The SFH offers a greater Tax Advantage for the Investor. If managed by the Investor,
things like interest paid, taxes paid, and depreciation can create tax deductions.
7. The SFH is easier to understand, especially for the newer or beginning Investor.
This is true because most people already know a lot about SFHs because they have been
living in one for most of their life, up to now.
Acquiring and holding single family houses as rental property is a great way to set up one’s retirement plan. If a person, say at age 30, 40, or whatever acquired just one house a year by the time they reach retirement time, they should have a good steady income from the houses.
A good thing about rental income is that in the event of inflation, the rents will go up along with everything else. One question a person might ask is, “How am I going to buy a house a year? Where am I going to get the money to do that?” The answer is you do that by acquiring financing for the purchase. If you have good job income and good credit you look to your bank or other Institutional Lenders.
If this is not the case or if you would rather just not use Institutional Lenders, there are many houses you can finance with the seller or private investors. If you doubt that just look at your newspaper in the “Houses For Sale” section and you will find houses that offer Seller-Financing, often with the statement “No Credit Check”.
Another good way to find houses to acquire is to look for those that are in need of repair. Often these houses are vacant. If you happen to be handy with fixing-up, you can often acquire a house with “Sweat Equity”. If not, you can look for a handy man who can help you get the house fixed up and ready to rent.
One final comment: If you own a house free & clear, or with a lot of equity, you can always raise cash if you need to by selling or borrowing from an Institutional or Private Lender.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, August 19, 2010
Substitution Of Collateral
An extremely valuable and strategic tool to use when acquiring Real Estate is the “Substitution Of Collateral”. As you know, if you have been reading my articles, I am a strong proponent of acquiring (and sometimes selling) properties wherein I can obtain Seller Financing. This tool could also be effective if you, as a buyer, are obtaining Private (other than seller) financing. It probably would be difficult, but not impossible, to obtain this substitution from an Institutional Lender. OK, so what am I talking about with this “Substitution Of Collateral”? Let me give you an example or two. I believe learning sticks better if you can tie it to an example of how something works.
Charlie Barrow is a budding Real Estate entrepreneur who has a mentor. Charlie has a good paying day job; however, he is looking to acquire, hold and manage Rental houses to supplement his income when he retires. Charlie finds a single-family house For Sale wherein the seller, R. Bishop, has already stated that he would consider financing the house for a buyer.
The house needs some repair and Charlie is confident that he can handle that for about $3,000. The estimated value of the home, after repairs are made, is $125,000. The house will rent for $1,100 per month.
So after conferring with his mentor, Charlie makes Mr. Bishop an offer to buy his home. After negotiating, Charlie and Mr. Bishop agree to the following terms:
Sales Price $90,000.00
Down Payment $5,000.00
Seller Financed Loan $85,000.00
Monthly Payment (P&I) $565.51
Estimated Taxes & Insurance $167.00
Total Monthly Payment $732.51
Following his mentor’s advice, Charlie also negotiates the “Right of Substitution” of the collateral for the Loan. The seller agrees that in the future Charlie may move the Loan from the house to another property. The other property would need to have an appraised value of at least as much as the value of the house. The seller further stipulates that the appraised value of the new collateral must be at least $15,000 more than the sales price of the house he is selling.
OK, so they close the deal. Charlie makes the repairs and the house now has an appraised value of $125,000. Charlie has received approval from his bank for a future loan of 80% of the appraised value, payable over 30 years at 6% interest. His monthly payments, PITI, would be $766.55 giving him a positive cash flow of $333.45 per month.
Charlie, feeling very confident now, is looking for another house. He soon finds one somewhat similar to the one he just bought from Mr. Bishop. This house is owned by a Mr. & Mrs. Clarke who are asking $100,000 for the home. The house has been on the market for over 6 months. The Clarkes have indicated they might finance; however, they need at least $40,000 as they are moving to be near their children and need as much cash as they can get.
Sensing an opportunity here, Charlie asks Mr. & Mrs. Clarke what the price would be if he paid ALL CASH. After some negotiating, Charlie offers the Clarkes $85,000 cash for their home. They accept the offer from Charlie for that amount.
Charlie now goes to Mr. Bishop and tells him that he wants to move his loan from the house he bought from Mr. Bishop to the house he is buying from Mr. & Mrs. Clarke. They agree and hire an appraiser for the home. The appraisal comes in at $105,000.
Now Charlie goes to his bank and obtains the $100,000 loan on the house he bought from Mr. Bishop. The loan will close simultaneously with the purchase of the Clarke house and the movement of Mr. Bishop’s loan to the Clarke house.
So, after the smoke clears, let’s see what happened:
1. Charlie obtains a loan from the bank for $100,000.
2. Mr. & Mrs. Clarke receive $85,000 cash for their home.
3. Mr. Bishop’s loan is now secured by the house acquired from the Clarkes.
4. Charlie now has approximately $700 per month cash flow from both houses.
5. Charlie also has $15,000 cash left over from the bank loan. This will repay the repairs on Mr. Bishop’s house and leave more for repairs on the Clarke house.
Now Charlie can repeat this process over and over again. Isn’t this Real Estate business a fun thing?
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, August 17, 2010
Joint Ventures To Create Wealth
What is a Joint Venture? Wherein two or more entities (people, corporations, etc.) work together to accomplish a mutual goal; that is a Joint Venture. As for our discussion here, we are talking about one party (the investor) who provides the necessary funds to acquire a property, and a second party (the entrepreneur) who will provide the management and expertise necessary to accomplish the mutual goal. Let me give you an example that I have used many times. This will be an example wherein I was the entrepreneur, although I have been the investor also in many transactions.
Charlie Harris, the entrepreneur, has located a nice house in a middle class neighborhood which is for sale by owner. the owner is really motivated to sell the house and has even indicated that he would be willing to finance the purchase with at least 10% down. Charlie has established that the house’s fair market value , if in good condition, would be $120,000. also, the house should rent for about $1,100 a month.
The house has some minor repairs that need to be made. Charlie has a bid of $3,000 from an experienced handyman to make all the repairs. Charlie has negotiated with the owner for a purchase price of $80,000 with $8,000 down. the owner will finance the balance of $72,000. The loan will be amortized over a 30 year period (with no pre-payment penalty) with payments of $479.02 per month, including interest of 70% per annum.
Charlie obtains information from the County that the annual Real Estate taxes are $1,800 per year. Fire & Casualty Insurance will be $800 per year. Both added together and amortized would be $216.67 per month. This amount added to the loan payment ($479.02) and subtracted from the Fair Market monthly rental amount ($1,100) indicates a positive cash flow of $404.31 per month.
With this information packaged, Charlie, who lacks the needed up-front cash to close the purchase, looks for an investor to Joint Venture the deal with. Through research with Realtors that he knows, newspaper ads, and referrals, Charlie finds Janice Ellis who has done Joint Venture investments before. Janice has an excellent high salary job with A.T.&T. She also pays considerable income taxes each year which is one reason she is always looking for opportunities to grow her wealth and get some tax benefits.
So, after making initial contact with Janice, Charlie proposes the following:
1. Janice will contribute $15,000 to the Joint Venture which will pay the down payment ($8,000); pay for the needed repairs ($3,000); and leave $4,000 for reserve and unforeseen contingencies, which always come up.
2. Charlie will manage the property; although he may hire a Property Management Firm to find and manage tenants. The cost is 10% of the rental income or $110 per month, per tenant.
3. My recommendation is that Charlie let’s Janice have ALL the tax benefits; interest, taxes, maintenance, insurance, etc., deductible to Janice.
4. Both parties would equally share the monthly cash flow of $294.31 per tenant.
5. When the property is sold at a later date, Janice will receive her $15,000 back FIRST, then the balance of profits are equally divided between the parties.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Monday, August 16, 2010
Lease And An Option To Buy With A Twist
In most areas the market for the resale of homes is either slow or extremely slow. This is especially true of more expensive homes. In fact, many home owners are faced with the reality that if they don’t sell soon or receive some good financial windfall, they may be forced to give up their home. The flip side of this story is that there are many potential buyers of homes who may have some cash and an adequate income to pay monthly for a nice home; however, they don’t have a large amount of cash or for whatever reason they can’t qualify for a new loan to purchase a home.
One Solution a home owner might consider is to lease their home to a potential buyer as described above with a separate option to buy agreement. First lets discuss the lease. The existing mortgage loan on the property should be reviewed to determine if there is a clause pertaining to the owners of the home leasing to a third party. Some mortgages state a maximum length of time a lease may be written for. If such a statement is in the mortgage, (and most of the have it) then the lease should be of a lesser time than the maximum stated. Most mortgages I have seen state three years.
For this same reason, I recommend that the option to buy be a separate, so as not to disturb the lenders. I recommend that the option be long enough to give the property time to appreciate in value. For example, 3 to 5 years with possible extensions. In exchange for the ample time for the option to be exercised, the owners (sellers) could share in the accrued appreciation.
A Hypothetical Transaction:
1. Owners asking Full price for home = $250,000
Existing loan on home = $150,000
Somewhat inflated equity = $100,000
2. Existing monthly loan payments, PITI (principal, interest, taxes, insurance) – $1,250
3. Lessee/Potential Buyers and owners execute a 3 year lease for $1,500 per month.
4. Potential buyers & owners execute a 5 year Option Agreement giving potential buyers the option to buy the property at any time during the 5 years for $250,000. The owners agree to give potential buyer a credit of $200.00 for each month’s rent paid during the term of the lease.
~ The option could also contain an agreement that the potential buyers could extend the
lease agreement to coincide with the term of the option.
~ In exchange for the rent credits the owners might receive 25% of the appreciation
~ In exchange for the rent credits the owners might receive 25% of the appreciation
over $250,000 when the house is sold.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Should You Pay "All Cash" For Your Home? Pros & Cons
An “All Cash” situation does happen quite often. For whatever personal reasons, some people desire to own their home free and clear. The psychology of cash, or course, gives the buyer a negotiating advantage in the acquisition process; but like all other situations, it does have its Pros and Cons. Let’s take a look at some of these.
PRO – Benefits of Owning Your Home Free and Clear:
1. It does give people a sense of security. While you can’t put a dollar figure on this benefit, it is a motivating factor.
2. It eliminates the necessity of making payments on a mortgage. This, of course, means that there is no reverse cash flow in owning the home with the exception of maintenance, insurance and taxes.
These benefits have many side effects, but they all seem to basically relate to security and cash flow. Because it’s people that really count, the above mentioned benefits may outweigh all of the economical benefits that point to a direction other than owning one’s home free and clear.
CON – Basic Leverage in Owning Real Estate That is Not Free and Clear:
In looking at this side of the picture, we are going to compare to owning a house which is free & clear of encumbrances. For purposes of our comparison let’s assume that you are going to buy a $200,000 home in which to live. And let’s assume that you have the $200,000 and can pay ALL CASH – $200,000.
Let’s also assume that we have appreciation taking place in your area which is a constant 6% per year. So, your home would be worth $212,000 at the end of one year. If instead of buying the home for “All Cash”, let’s say you purchase it with 20% down or $40,000 and you owe $160,000 on a 5% mortgage. The interest would be 8,000 for the first year. If your house increased in value $12,000 in the first year, your earnings for the first year would be $4,000. If you paid $8,000 in interest and you house appreciated $12,000, the difference is $4,000. In addition, your equity (the Loan less Loan Reduction) increase the first year would be $2,360. Your total earnings the first year would be $6,360.
Remember, of the original $200,000 in capital, you have only used $40,000. You can now take another $30,000 and buy a home valued at $150,000 for rental purposes. Now you would owe $120,000 at 7% (probably higher than 5% for income property), which is $8,400 in interest per year. If you are a reasonably good business person, you should be able to buy a house of this value that you could rent for at least $100.00 more than it takes to make the monthly payments which would be $1,200 profit per year. In addition to that, you would have the same $9,000 appreciation or 6% of the $150,000 value of the house. so, the appreciation plus the $1,200 from the rental would get you $10,200 per year. You deduct the $8,400 interest you pay on the $120,000 loan and find that you earned $1,800. that first year on the rental house. In addition, your equity increase (loan balance reduction) would be $1,219 making your total earnings for the first year $3,619.
Remember, you only used $30,000 of the $160,000 that remained of your original capital. Let’s assume that you could buy five of these rental houses with $30,000 down in addition to the home you bought for yourself. If you purchased five of these rental homes similar to the example, each of them earning you $3,619 per year, you would receive $18,095 in earnings per year from your rental houses. In addition to that, you had $6,360 earnings from your own home that you purchased which would deliver then a total of $24,455 in earnings per year on the $190,000 cash investment, or a return of 12.2% per year -vs- 2% you had on purchasing one home for ALL CASH. * And you have $10,000 cash left over for reserve.
In addition, you would have other benefits, such as tax shelter on your investments, which can be expressed in dollars. We are not attempting here to analyze this situation. Our purpose is to show the use of leverage in its simplest form. This is an EXAMPLE of the use of the money in other than a cash sale.
The above, of course, is merely a cursory exploration of the benefits of leverage versus the ALL CASH purchase. The benefits in each person’s mind would dictate their choice. This comparison merely develops both sides of the question for your perusal.
This is not to be considered to be investment advice. Any person considering investing should communicate with experienced investment advice from competent people in their own geographical area.
Some of the information for this article was excerpted from Robert W. Steele’s book “50 ways to Acquire Real Estate”.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
PRO – Benefits of Owning Your Home Free and Clear:
1. It does give people a sense of security. While you can’t put a dollar figure on this benefit, it is a motivating factor.
2. It eliminates the necessity of making payments on a mortgage. This, of course, means that there is no reverse cash flow in owning the home with the exception of maintenance, insurance and taxes.
These benefits have many side effects, but they all seem to basically relate to security and cash flow. Because it’s people that really count, the above mentioned benefits may outweigh all of the economical benefits that point to a direction other than owning one’s home free and clear.
CON – Basic Leverage in Owning Real Estate That is Not Free and Clear:
In looking at this side of the picture, we are going to compare to owning a house which is free & clear of encumbrances. For purposes of our comparison let’s assume that you are going to buy a $200,000 home in which to live. And let’s assume that you have the $200,000 and can pay ALL CASH – $200,000.
Let’s also assume that we have appreciation taking place in your area which is a constant 6% per year. So, your home would be worth $212,000 at the end of one year. If instead of buying the home for “All Cash”, let’s say you purchase it with 20% down or $40,000 and you owe $160,000 on a 5% mortgage. The interest would be 8,000 for the first year. If your house increased in value $12,000 in the first year, your earnings for the first year would be $4,000. If you paid $8,000 in interest and you house appreciated $12,000, the difference is $4,000. In addition, your equity (the Loan less Loan Reduction) increase the first year would be $2,360. Your total earnings the first year would be $6,360.
Remember, of the original $200,000 in capital, you have only used $40,000. You can now take another $30,000 and buy a home valued at $150,000 for rental purposes. Now you would owe $120,000 at 7% (probably higher than 5% for income property), which is $8,400 in interest per year. If you are a reasonably good business person, you should be able to buy a house of this value that you could rent for at least $100.00 more than it takes to make the monthly payments which would be $1,200 profit per year. In addition to that, you would have the same $9,000 appreciation or 6% of the $150,000 value of the house. so, the appreciation plus the $1,200 from the rental would get you $10,200 per year. You deduct the $8,400 interest you pay on the $120,000 loan and find that you earned $1,800. that first year on the rental house. In addition, your equity increase (loan balance reduction) would be $1,219 making your total earnings for the first year $3,619.
Remember, you only used $30,000 of the $160,000 that remained of your original capital. Let’s assume that you could buy five of these rental houses with $30,000 down in addition to the home you bought for yourself. If you purchased five of these rental homes similar to the example, each of them earning you $3,619 per year, you would receive $18,095 in earnings per year from your rental houses. In addition to that, you had $6,360 earnings from your own home that you purchased which would deliver then a total of $24,455 in earnings per year on the $190,000 cash investment, or a return of 12.2% per year -vs- 2% you had on purchasing one home for ALL CASH. * And you have $10,000 cash left over for reserve.
In addition, you would have other benefits, such as tax shelter on your investments, which can be expressed in dollars. We are not attempting here to analyze this situation. Our purpose is to show the use of leverage in its simplest form. This is an EXAMPLE of the use of the money in other than a cash sale.
The above, of course, is merely a cursory exploration of the benefits of leverage versus the ALL CASH purchase. The benefits in each person’s mind would dictate their choice. This comparison merely develops both sides of the question for your perusal.
This is not to be considered to be investment advice. Any person considering investing should communicate with experienced investment advice from competent people in their own geographical area.
Some of the information for this article was excerpted from Robert W. Steele’s book “50 ways to Acquire Real Estate”.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, August 13, 2010
Bartering Back In Style
Personal property can often be used as down payment or part down payment to buy Real Estate. Hypothetical Situation: Mr. & Mrs. Weaver want to purchase a new home in ABC Corporation’s Subdivision. This builder, as many others over the last few years, is over-stocked with already constructed homes.
The builder is asking $210,000 for the home that the Weavers would like to buy. He has a construction loan on the home (with his bank) for $170,000 that he needs to pay off when he sells the home. Because of the slow market, the construction loans on these unsold homes are quickly eating up the profits; therefore, the builder is motivated to sell these existing homes. The builder can be flexible to a point; however, he has to have cash to pay off the loan to the bank for each home he sells.
The Weavers really want the house but they have a problem. They have been pre-approved for a loan up to $190,000. The Weavers happen to own a very nice 22 foot fishing boat. The boat is in great shape and Mr. Weaver had it appraised at $20,000. It happens to be in the Winter time when the demand for boats is not too great. I has been said that the two happiest days in a boat owner’s life is the day they buy the boat and the day they get rid of it.
Mr. & Mrs. Weaver made an offer to purchase the new home with a loan of $190,000 cash to go to the builder plus their boat as $20,000 down payment. After a short consideration period the builder accepted the offer. Even the builder may not have need of a boat, but the deal gets the builder’s $170,000 loan paid off to the bank, plus he get $20,000 cash from the buyer’s loan. He can market the boat and probably sell it in the Spring to make some boat buyer’s FIRST happiest day.
Lesson Learned. When potential buyers are short on cash, they should look for other assets they may use as part or all of the cash requirement. It could be a boat, a car, an airplane, motorcycle, Jet Ski, etc. Afterall, this is nothing in the world but using barter to make transactions and the Barter System has been around a lot longer than money. The way our money is being devalued, more bartering may be in the Vogue.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
The builder is asking $210,000 for the home that the Weavers would like to buy. He has a construction loan on the home (with his bank) for $170,000 that he needs to pay off when he sells the home. Because of the slow market, the construction loans on these unsold homes are quickly eating up the profits; therefore, the builder is motivated to sell these existing homes. The builder can be flexible to a point; however, he has to have cash to pay off the loan to the bank for each home he sells.
The Weavers really want the house but they have a problem. They have been pre-approved for a loan up to $190,000. The Weavers happen to own a very nice 22 foot fishing boat. The boat is in great shape and Mr. Weaver had it appraised at $20,000. It happens to be in the Winter time when the demand for boats is not too great. I has been said that the two happiest days in a boat owner’s life is the day they buy the boat and the day they get rid of it.
Mr. & Mrs. Weaver made an offer to purchase the new home with a loan of $190,000 cash to go to the builder plus their boat as $20,000 down payment. After a short consideration period the builder accepted the offer. Even the builder may not have need of a boat, but the deal gets the builder’s $170,000 loan paid off to the bank, plus he get $20,000 cash from the buyer’s loan. He can market the boat and probably sell it in the Spring to make some boat buyer’s FIRST happiest day.
Lesson Learned. When potential buyers are short on cash, they should look for other assets they may use as part or all of the cash requirement. It could be a boat, a car, an airplane, motorcycle, Jet Ski, etc. Afterall, this is nothing in the world but using barter to make transactions and the Barter System has been around a lot longer than money. The way our money is being devalued, more bartering may be in the Vogue.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How To Find Good Mortgages To Invest In - Part II
What makes a GOOD Mortgage Investment? One that returns ALL of your principal and all of your interest as agreed. The best way to insure this happens is to make sure there is plenty of equity to protect your position.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How To Find Good Mortgages To Invest In - Part II
In Part I we discussed some of the ways to find “Mortgages”, but we didn’t get to the “Good” part. Once the word gets around, AND IT WILL, that you have money to invest in mortgages, you will have several to choose from. “WORD OF WARNING”: Don’t get too eager just because these are the first ones and you are excited to buy a mortgage. You MUST do your Due Diligence or your career as a ‘Mortgage Investor’ will quickly change to ‘Owner Of Real Estate You Don’t Want’.
Just like other investment opportunities, be it Stock Market, Commodities, etc, there are good and bad investments in mortgages. However, there is one GREAT difference. If you do your diligence, you will be able to know you made a good investment and not have to depend on speculation. That’s one of the main reasons I like mortgage investing as opposed to many other investments. “YOU ARE IN CONTROL OF YOUR MONEY”.
OK, lets talk about Due Diligence and other factors when analyzing a mortgage. The note broker calls and tells you he/she has a mortgage for sale; or, maybe you located a private party through the newspaper who has a mortgage for sale. NO DIFFERENCE IN DUE DILIGENCE. My point is: No matter where or how you find the note, you still use the same safety precautions.
If I could pick out one single area that has caused investors the most problems, it would be greed. Trying to get the highest dollar return and not checking out either the property securing the mortgage and/or the party making the payments on the mortgage. This includes pressure such as, “You have to act fast or this deal will be going to somebody else.” If this situation arises, my advice is to say, “Well that’s too bad, but I’ll have to let it go.”
Mortgages available for sale are kinda like buses – “If you don’t get this one, there will be another one along in a little while.”
A good place to start is to check out the broker or the party that brings you the opportunity, unless of course, it is a mortgage for sale you located yourself.
The next party I would check out (as much as is practical), is the party selling the note.
Is this a “Mom & Pop” type deal wherein a private party has sold probably the only Real Estate they will probably ever sell and carried back a mortgage?
Or, Is the seller a “Flipper” who buys mortgages and resells them to investors?
Or, Another kind of “Flipper” who buys a property and does nothing to it and flips it to another with a marked-up price with nothing down?
Or, A rehaber – a party that buys property in need of repair, fixes it up and resells it to another party?
The point is – There are all kinds of people who sell property and finance it for the buyer. Also, there are many buyers who want a home and don’t really care about price or interest rate. They are more concerned with; how much is the down payment, and how much are the monthly payments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Just like other investment opportunities, be it Stock Market, Commodities, etc, there are good and bad investments in mortgages. However, there is one GREAT difference. If you do your diligence, you will be able to know you made a good investment and not have to depend on speculation. That’s one of the main reasons I like mortgage investing as opposed to many other investments. “YOU ARE IN CONTROL OF YOUR MONEY”.
OK, lets talk about Due Diligence and other factors when analyzing a mortgage. The note broker calls and tells you he/she has a mortgage for sale; or, maybe you located a private party through the newspaper who has a mortgage for sale. NO DIFFERENCE IN DUE DILIGENCE. My point is: No matter where or how you find the note, you still use the same safety precautions.
If I could pick out one single area that has caused investors the most problems, it would be greed. Trying to get the highest dollar return and not checking out either the property securing the mortgage and/or the party making the payments on the mortgage. This includes pressure such as, “You have to act fast or this deal will be going to somebody else.” If this situation arises, my advice is to say, “Well that’s too bad, but I’ll have to let it go.”
Mortgages available for sale are kinda like buses – “If you don’t get this one, there will be another one along in a little while.”
A good place to start is to check out the broker or the party that brings you the opportunity, unless of course, it is a mortgage for sale you located yourself.
The next party I would check out (as much as is practical), is the party selling the note.
Is this a “Mom & Pop” type deal wherein a private party has sold probably the only Real Estate they will probably ever sell and carried back a mortgage?
Or, Is the seller a “Flipper” who buys mortgages and resells them to investors?
Or, Another kind of “Flipper” who buys a property and does nothing to it and flips it to another with a marked-up price with nothing down?
Or, A rehaber – a party that buys property in need of repair, fixes it up and resells it to another party?
The point is – There are all kinds of people who sell property and finance it for the buyer. Also, there are many buyers who want a home and don’t really care about price or interest rate. They are more concerned with; how much is the down payment, and how much are the monthly payments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How To Find Good Mortgages To Invest In
No Question, buying and holding (reselling) private Real Estate Mortgages can be a very lucrative investment or business. By “private” we mean mortgages, (Trust Deeds, Land Contracts, Contracts For Deed, etc.) that wherein one party, the Seller (not a Bank or other Institutional Lender) has sold a Real Estate property to another party and has taken back a mortgage from the second party or the buyer.
Now there are other types of “Paper” or Notes that fit the above description that may be secured by collateral other than Real Estate. Mobile homes, business fixtures & equipment, inventory, cars, boats, phone, etc. We are not going to discuss these here, however, we may do so at a later time because investing in these types of notes can also be very profitable, sometimes more so than Real Estate Notes because of the greater risk. When the risk is greater, the possible profits are also greater as are the possible losses.
So, back to the question; How do we find “Good” Mortgages to invest in? There are a number of ways to do this. If you get active in buying private Mortgages or lending direct, the word will quickly get around and you will have more deals to look at than you can probably handle. Let’s discuss some of the ways to start finding those Mortgages.
* Check ads in the classified section of the newspaper – Look in “Money Wanted”, “Mortgages
For Sale”, or “Investor Needed”.
* Run your own ad: “Mortgage Buyer”, or “Money To Lend On Real Estate”.
* Develop a relationship with a Real Estate Broker that has access to Multiple Listing Service
“MLS”. The Broker can access MLS and find out sales that were made wherein a seller
financed the property. Contact the seller to see if he wants to sell the Mortgage.
The best bet, in my opinion, is to contact a “Note Broker”. This is a person who specializes in finding Mortgages for sale. The Note Broker finds a buyer for the Mortgages and charges the mortgage owner a commission. Or, the Broker may buy the Mortgage himself to resell it to an Investor. You can find these Brokers in several ways, such as:
a. Check the Yellow Pages for Mortgages, or Note Buyers.
b. Check ads in the newspaper which may read: “We Buy Mortgages”, “Mortgages For Sale”,
“Top Dollar For Your Note”, etc.
c. Ask among Real Estate Brokers if they know of any other Brokers who buy Notes.
If you can’t locate a good source, check with the following reference:
Bill Mencarow
The Paper Source
317 S. Sidney Baker, PMB 304
Kerrville, TX 78028
www.PaperSourceOnline.com
email – info@papersourceonline.com
Phone: 830-895-5025
Bill publishes a monthly Newsletter called “The Paper Source”, which is a Newsletter about the Note Business. Bill has a registry of Brokers all over the country. He could probably refer you to someone. You might even want to subscribe to the Newsletter to learn more about the business. If you contact Bill (or Allison, his wife & partner) tell him I referred you!
We have just scratched the surface here. We will continue next time on “How To Find Good Mortgages To Invest In - Part II”. I would appreciate your comments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Now there are other types of “Paper” or Notes that fit the above description that may be secured by collateral other than Real Estate. Mobile homes, business fixtures & equipment, inventory, cars, boats, phone, etc. We are not going to discuss these here, however, we may do so at a later time because investing in these types of notes can also be very profitable, sometimes more so than Real Estate Notes because of the greater risk. When the risk is greater, the possible profits are also greater as are the possible losses.
So, back to the question; How do we find “Good” Mortgages to invest in? There are a number of ways to do this. If you get active in buying private Mortgages or lending direct, the word will quickly get around and you will have more deals to look at than you can probably handle. Let’s discuss some of the ways to start finding those Mortgages.
* Check ads in the classified section of the newspaper – Look in “Money Wanted”, “Mortgages
For Sale”, or “Investor Needed”.
* Run your own ad: “Mortgage Buyer”, or “Money To Lend On Real Estate”.
* Develop a relationship with a Real Estate Broker that has access to Multiple Listing Service
“MLS”. The Broker can access MLS and find out sales that were made wherein a seller
financed the property. Contact the seller to see if he wants to sell the Mortgage.
The best bet, in my opinion, is to contact a “Note Broker”. This is a person who specializes in finding Mortgages for sale. The Note Broker finds a buyer for the Mortgages and charges the mortgage owner a commission. Or, the Broker may buy the Mortgage himself to resell it to an Investor. You can find these Brokers in several ways, such as:
a. Check the Yellow Pages for Mortgages, or Note Buyers.
b. Check ads in the newspaper which may read: “We Buy Mortgages”, “Mortgages For Sale”,
“Top Dollar For Your Note”, etc.
c. Ask among Real Estate Brokers if they know of any other Brokers who buy Notes.
If you can’t locate a good source, check with the following reference:
Bill Mencarow
The Paper Source
317 S. Sidney Baker, PMB 304
Kerrville, TX 78028
www.PaperSourceOnline.com
email – info@papersourceonline.com
Phone: 830-895-5025
Bill publishes a monthly Newsletter called “The Paper Source”, which is a Newsletter about the Note Business. Bill has a registry of Brokers all over the country. He could probably refer you to someone. You might even want to subscribe to the Newsletter to learn more about the business. If you contact Bill (or Allison, his wife & partner) tell him I referred you!
We have just scratched the surface here. We will continue next time on “How To Find Good Mortgages To Invest In - Part II”. I would appreciate your comments.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, August 10, 2010
Big Bucks With Options - Part II
A quick review: Mr. Adams purchased an Option for $450 to buy 40 acres of land for $40,000. He then did research with County Planning & Zoning, utility companies, and an engineer. He then determined 1) The 40 acres could be developed into 40 one acre lots, the size of the lots, 2) The close proximity of the property to the city and 3) Assurance that zoning would allow manufactured homes to be place on the lots. Doing the math shows the following:
Gross Sales proceeds from 40 lots @ $32,500 per lot is $1,300,000
Less: Cost for streets & other off-sites $160,000
On-site improvements for 40 lots $400,000
Cost for sales commission (20%) and other overhead $260,000
TOTAL ESTIMATED COST TO DEVELOP & SELL is $820,000
NET ESTIMATED PROFIT…………$480,000
Mr. Adams compiled the above and other promotional information into sales presentation brochures and presented them to several developers already experienced in developing and selling lots for manufactured home owners.
Mr. Adams decided that a 100% Gross Profit would be a fair return on money that he didn’t even have to pay. Therefore, he asked $40,000 for his Option to purchase the land. Hardly had he made the presentation to the first developer when his offer was accepted. As stated before, lots acceptable for mobile homes were in short supply. The developer could see a quick profit of $400,000 as soon as he could get the site work done.
So our hero, Mr. Adams, with a little research work was able to make a profit of $39,550 in a few weeks. Not bad!
There are deals like this available in any market at anytime. It takes a little knowledge about the Real Estate market. Even if you don’t have this knowledge, you can find assistance. Ask around for a good Realtor who knows the market. Many of them do.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Monday, August 9, 2010
Big Bucks With Options
As we left off in our last post, Mr. Adams has obtained an Option from Mrs. Walters to purchase 40 acres of land on the outskirts of the city. In doing a little homework, Mr. Adams has discovered there is a shortage of lots that allow manufactured homes. In discussing this situation with dealers of manufactured homes, Mr. Adams has also obtained the names of developers who have been selling developed lots to buyers of homes from these dealers. They have explained to Mr. Adams that the majority of buyers of manufactured homes do not usually already have land or a lot to put the mobile home on. Some of these home buyers have the home placed in a mobile home park wherein they rent the space for the home. However, many of these buyers would rather have their own land to place the home on.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, August 5, 2010
Want To Invest In Real Estate With Limited $$$ ?
If I wanted to invest in Real Estate today and had little or no money, one place I would look at would be single family houses in NICE neighborhoods. I would find houses that would fall into any of the following categories:
Houses that are vacant, probably with a “For Sale” sign in the yard.
Houses wherein the owners are having trouble making their loan payments.
Houses listed “For Sale By Owner” in the newspaper. Don’t forget to look in “The Shoppers”, “Thrifty Nickle”, etc.
Houses that have signs or are listed in the paper “For Rent”.
I might even run a little ad myself reading “House Wanted For Rent”. How do I contact these owners? If they are still living in the house I would arrange a meeting, preferably in the home where I could sit down with the owners and negotiate a deal.
Houses that are vacant, probably with a “For Sale” sign in the yard.
Houses wherein the owners are having trouble making their loan payments.
Houses listed “For Sale By Owner” in the newspaper. Don’t forget to look in “The Shoppers”, “Thrifty Nickle”, etc.
Houses that have signs or are listed in the paper “For Rent”.
I might even run a little ad myself reading “House Wanted For Rent”. How do I contact these owners? If they are still living in the house I would arrange a meeting, preferably in the home where I could sit down with the owners and negotiate a deal.
In my discussion with the owners I would try to find out what the REAL situation is.
For Example:
Why do they want to sell or rent?
How much is owed on the property?
How much are the monthly payments?
Are the monthly payments current?
How much does average utilities cost monthly?
Are there any other expenses such as Homeowners Association fees, etc.?
Based on how I felt after gleaning this information, I would make the owners an offer to lease their house with lease payments equal to the current monthly payment. This offer would grant me the right to sublease the property. I would also require a 2 year option to buy the property for an amount equal to what they owe on the property now. The “Option Agreement” would contain a clause stating that I could renew the option for an additional 2 years with a payment of $500.00 at the time the option was renewed. Then, additionally, I would make the contract contingent upon me finding a tenant to sublease the property within 60 days.
I would then advertise "Lease With Option To Buy" (in such and such neighborhood) "Credit No Problem" in the local newspapers and in any freebies I could. I am confident I would receive many responses to my ad. (If I don’t, no big deal, my 60 days expire and all I have lost is my time – which is valuable).
There are many people with some cash who want a home to own; however, they have bruised credit or some other reason why they can’t qualify for a loan to buy a home. I would require an option fee of $2,000.00 (or more, depending on the ability of my party) and also a rent amount of at least $100.00 above the amount I am paying. The sale price would be at least $5,000.00 above the current mortgage balance ($5,000.00 more than my option price is.) Then I would give a credit of $100.00 per month for each month that the rent is paid on time. My experience has been that lease options really are motivated by applying a credit from part of the rent towards the purchase price.
I am confident that in today’s market, I could repeat this process over & over – (I have done it when the market was not as bad as it is now). In San Antonio we have over 1,500 properties posted for Foreclosure in January 2010; the MOST in 20 years.
THE DEALS ARE OUT THERE! As an old highly respected investor, entrepreneur, and builder Bill Zeckendorf said, “You make money when the blood is running in the streets.” Well friends, it’s running in the streets now.
By the way, if you are an investor or want to be, I recommend the book “Zeckendorf” – You may find it on Amazon. This man, William Zeckendorf, was the innovator of many things we have today – Shopping Malls, Condominiums, etc.
OK, back to our homeowners who we wish to contact. How do we find them? You can do this online; go to your County Tax Appraisal website. By entering the address, you should be able to find the owner of that property.
Finally, I know I ramble a lot, but if you have any questions about any of our information, please contact us – NO CHARGE!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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