In our last article we talked about one way of creating cash flow without using cash. I told you how Bob and Greta used “Sweat Equity” to acquire income properties and generate cash flow. Let’s look at another “Formula” that could have worked just about as well and probably even better for the seller.
To refresh your memory, here was the situation: Bob and Greta found this duplex consisting of 2 apartment units. Each unit contained two bedrooms, and both units were vacant. The units needed some minor fix up, and more clean-up, to make them ready for rent.
The owner/seller did not want to manage the units anymore. He was sick and tired of tenants and toilets, and he wanted “out” of the property. He was asking $30,000 (Remember this was back in the 1960′s, but the formula still works today – Just add more zero’s). Bob and Greta bought the property for $25,000 plus their down payment; which was the work to get the units ready for rent. The terms were $150 per month including 6% interest, with the first payment being due when the first unit was rented. Bob and Greta quickly rented the cleaned up units for $300 per month (each), and after all expenses, generated a nice $300 per month Cash Flow. They later repeated this formula to create multiple Cash Flows.
Now, let’s discuss another way this could have been done to realize pretty much the same profit for the parties, and maybe even better for the seller. Let’s say that Bob & Greta offered to lease the property with the right to sub-lease to other parties. Again, there would be no money up front because Bob & Greta still had to do the fix up and clean-up. They would negotiate a 10 year Lease with the owner; with Lease payments of $250 per month. Bear in mind that the owner/seller still has to pay Insurance and Taxes; however, he also still retains all the tax benefits of ownership.
Bob & Greta rented out the units for $300 per month each, realizing a $350 per month Cash Flow. So let’s take it a step further. Let’s say that Bob and Greta want to spend their time finding more properties and not be bothered with managing the units. So here’s something they might consider: Sub-lease the property to another party; probably someone who is already managing other rental property. They could sublease the units to the third party for say $450 per month, which leaves immediate profit in the deal for the third party who can raise the rents as time goes by.
This technique is known as a “Sandwich Lease”. This benefits both parties in that Bob and Gretta can go and do what they would like to do, rather than manage property, and it also gives the experienced property manager, who is already in the business, immediate Cash Flow without having to find a tenant. To make this a sweeter deal for Bob and Greta when they negotiate the deal with the owner/seller, they should obtain an “Option” to buy the property for $25,000 at any time during the Lease period.
Now, let’s see what Bob and Greta realized from this deal:
1. They acquire and control a property without putting up any cash.
2. They created a “Sandwich Lease” which gives them $200 per month Cash Flow without any management on their part.
Note: This “Sandwich Lease” position could be sold to another party or used as part purchase price to buy another property – $200 per month for 10 years = $24,000.
3. They have an “Option” to buy the property for $25,000 which they can exercise at any time or they can sell or trade the “Option” to another party.
Not bad – with NO CASH and a little INGENUITY!
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, January 13, 2011
Monday, January 10, 2011
Building Cash Flow Without Cash - Formula #2 Sweat Equity
Many people would like to get involved in investing in Real Estate. However, most are limited with funds with which to buy properties. The myth that most people believe is that if you want to make money in Real Estate you have to have substantial cash to begin with. As I said, this is a myth because it is UNTRUE. There are MANY ways you can buy, sell, hold , or control income producing properties with little or NO CASH. I know and have known several people who have built substantial Real Estate portfolios who started with no cash.
I’m going to tell you the story of Bob and his wife, Greta. I first met Bob when I was a Broker in Arizona. Bob had just moved to Arizona from Florida. He owned a good amount of Mortgages secured by properties he had sold in Florida. He wanted to use these Mortgages to acquire income properties in Arizona. I worked with Bob to help him accomplish his objective. We became close friends and eventually partners in several Real Estate ventures.
But, back to the story - When Bob was in his 50′s he lived in Florida and owned three shrimp boats, with which he made a good living. Then there was a storm which destroyed all the shrimp boats. Bob had NO insurance on the boats. Very shortly Bob and Greta were broke. Bob was definitely an “Entrepreneural” kind of guy. The next part of the story proves it. So to make ends meet, (You may not believe this), Bob and Greta went into the wig business. Most of you won’t remember this but wigs became very popular back around the 1950′s or 1960′s, especially among the ladies.
So, Bob and Greta established a weekly wig route. They would buy these wigs in bulk wholesale for, say $2.00 a piece. On the routes they established they would sell the wigs for, say $20.00 with $5.00 down, then the balance payable at $1.00 per week. Greta would style the wigs for their customers. OK, back to the Real Estate part.
Bob happened to run across a duplex consisting of 2 bedroom units for sale. Both units were vacant, and they needed minor fix-up to make them presentable. The owner was sick and tired of tenants and was a real “Don’t Wanter”. Bob was confident that he and Greta could do the work needed to make the units presentable to tenants. The owner was asking $30,000 for the units (remember this was back in the 1960′s). Bob made the following proposal which was accepted so fast Bob knew he had offered too much.
Here’s the deal:
Bob & Greta bought the units for $25,000 with their work to make the units ready to rent as their down payment (That’s called “Sweat Equity” folks). Then the balance was payable at $150.00 per month to include 6% interest. The first payment was not due until they had rented the first unit. They soon had both units rented at $300 per month each. So – after Note payments, Insurance, and Tax escrows, Bob and Greta’s Net monthly income was $350 a month, not bad for a little “Sweat Equity”.
Well, needless to say Bob knew that he had struck gold. He began looking for properties that someone didn’t want anymore. There are always those around. you just have to look. Over the next 10 years or so, Bob & Greta acquired several properties. When they decided to move to Arizona they sold and financed these properties themselves. When I met Bob he and Greta owned several hundred thousand dollars in Notes and Mortgages. We then used these notes to acquire for them income producing properties in Arizona.
The moral of this story is that there is always plenty of good Real Estate deals out there that can be done without cash; however, you have to look for them. They will seldom come looking for you, EXCEPT when the word gets out that you are looking; then they will even come to you.
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.
I’m going to tell you the story of Bob and his wife, Greta. I first met Bob when I was a Broker in Arizona. Bob had just moved to Arizona from Florida. He owned a good amount of Mortgages secured by properties he had sold in Florida. He wanted to use these Mortgages to acquire income properties in Arizona. I worked with Bob to help him accomplish his objective. We became close friends and eventually partners in several Real Estate ventures.
But, back to the story - When Bob was in his 50′s he lived in Florida and owned three shrimp boats, with which he made a good living. Then there was a storm which destroyed all the shrimp boats. Bob had NO insurance on the boats. Very shortly Bob and Greta were broke. Bob was definitely an “Entrepreneural” kind of guy. The next part of the story proves it. So to make ends meet, (You may not believe this), Bob and Greta went into the wig business. Most of you won’t remember this but wigs became very popular back around the 1950′s or 1960′s, especially among the ladies.
So, Bob and Greta established a weekly wig route. They would buy these wigs in bulk wholesale for, say $2.00 a piece. On the routes they established they would sell the wigs for, say $20.00 with $5.00 down, then the balance payable at $1.00 per week. Greta would style the wigs for their customers. OK, back to the Real Estate part.
Bob happened to run across a duplex consisting of 2 bedroom units for sale. Both units were vacant, and they needed minor fix-up to make them presentable. The owner was sick and tired of tenants and was a real “Don’t Wanter”. Bob was confident that he and Greta could do the work needed to make the units presentable to tenants. The owner was asking $30,000 for the units (remember this was back in the 1960′s). Bob made the following proposal which was accepted so fast Bob knew he had offered too much.
Here’s the deal:
Bob & Greta bought the units for $25,000 with their work to make the units ready to rent as their down payment (That’s called “Sweat Equity” folks). Then the balance was payable at $150.00 per month to include 6% interest. The first payment was not due until they had rented the first unit. They soon had both units rented at $300 per month each. So – after Note payments, Insurance, and Tax escrows, Bob and Greta’s Net monthly income was $350 a month, not bad for a little “Sweat Equity”.
Well, needless to say Bob knew that he had struck gold. He began looking for properties that someone didn’t want anymore. There are always those around. you just have to look. Over the next 10 years or so, Bob & Greta acquired several properties. When they decided to move to Arizona they sold and financed these properties themselves. When I met Bob he and Greta owned several hundred thousand dollars in Notes and Mortgages. We then used these notes to acquire for them income producing properties in Arizona.
The moral of this story is that there is always plenty of good Real Estate deals out there that can be done without cash; however, you have to look for them. They will seldom come looking for you, EXCEPT when the word gets out that you are looking; then they will even come to you.
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, January 7, 2011
Building Cash Flow Without Cash - Formula #1 Motivation & Education
My little granddaughter just got her first bicycle this Christmas. Now, she lives in the country with limited paved roads or places to make bike riding easier. So when my son and his family came to our house for Christmas they brought along the bike. (We have paved streets in Texas, believe it or not) My son, grandson, and others went out with my granddaughter to get her started learning to ride. They didn’t have training wheels so they would walk/run along side to keep her from falling. Watching this really brought back a memory.
I was twelve years old before I learned to ride a bicycle. There were several reasons for this. One was that we lived in the country on a farm; no paved roads. Very few other kids around had bicycles, in fact, at this point in my life I can’t remember anybody who had one except town kids. I rode the school bus to town where there were paved streets and kids who had bikes, and believe me, I really wanted to have a bicycle and ride it like those town kids; however, that didn’t happen.
Then, when I was 12, my dad moved the family to Liberal, Kansas – a town with paved streets and millions of sand burrs (grass burrs to some). One of our neighbors was a lady who had a bicycle, which I don’t think she rode anymore.
Anyway, she let me ride her bike. I was elated, however I didn’t know what was coming. So I started trying to ride that bike by myself. No training wheels and no one to hold me up & push me along. I don’t know how many times I fell, but as I remember, every time I did, I came up with sand burrs in my hands. That, along with skinned knees and elbows, made me question the wisdom of continuing to accomplish this bike riding. However, I was determined. I finally got to the point that I could stay up; as long as I went straight. It seemed like my hands froze and would not guide the bike left or right. I remember riding straight into a telephone pole. I did learn to ride that bike, then eventually got my own bike. Had a paper route and many other things to go with bike riding.
The point I am trying to make with this boring story is that motivation, which includes persistence, is necessary to reach any desired goal. Nothing good comes without dedicated effort. So how do we apply this to building cash flow without cash? If you are trying to get started in the Real Estate business, or even if you have been in it for awhile, I strongly recommend that you get all the education you can about Real Estate, then apply that education. So were do we get this education?
There is an abundance of material available; books, seminars, etc. However, I recommend two things to help you get started. One, if you have a Real Estate Investment Club or group near you, I suggest that you join and attend every meeting that you can. You will find these clubs in most major cities and most of them meet monthly. You will find at these meetings, all kinds of expertise in different aspects of Real Estate. Rehabbers (property fix-up, repair people), Private Lenders, Builders, Appraisers, etc…etc. You can go online to find the location of many of these clubs.
Now if you can’t find a club, I suggest that you visit Barnes & Noble and look for books on Real Estate. Here, as in the clubs, you will find many various subjects on Real Estate. I also recommend that if you are new or having trouble getting started, try and find yourself a mentor who will help you; someone with experience in the field in which you are interested.
If you do find a mentor, I suggest that if you are going to use a good amount of their time - that you offer to pay them a fee for that time. I think a good way to do this is to offer them a percentage of the profit you make on any deal that they help you with. This is a great way to go, especially if you are short with funds, which most people will be when they are starting out. So, where do we find a mentor?
The Investment Clubs will have people who are very experienced in Real Estate and they will have people who are just starting out and those in between. I suggest that you watch and listen for awhile and you will find the person you are looking for.
Also, it is mandatory that you stay motivated. This is something that requires frequent, if not daily, refreshing. There are several books and other material you can find that provide great motivation; ONLY IF YOU READ THEM. To name a few:
“Think & Grow Rich”, by Napoleon Hill – The first book I read; it is a classic.
“The Richest Man in Babylon”, by George S. Clason
Or anything by Zig Ziglar.
If you are interested in a case history of mentoring, please contact us and we will send you “The Eddie Nivens Story”. This short story is fictional; nonetheless, it is very feasible – especially in today’s housing market.
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.
I was twelve years old before I learned to ride a bicycle. There were several reasons for this. One was that we lived in the country on a farm; no paved roads. Very few other kids around had bicycles, in fact, at this point in my life I can’t remember anybody who had one except town kids. I rode the school bus to town where there were paved streets and kids who had bikes, and believe me, I really wanted to have a bicycle and ride it like those town kids; however, that didn’t happen.
Then, when I was 12, my dad moved the family to Liberal, Kansas – a town with paved streets and millions of sand burrs (grass burrs to some). One of our neighbors was a lady who had a bicycle, which I don’t think she rode anymore.
Anyway, she let me ride her bike. I was elated, however I didn’t know what was coming. So I started trying to ride that bike by myself. No training wheels and no one to hold me up & push me along. I don’t know how many times I fell, but as I remember, every time I did, I came up with sand burrs in my hands. That, along with skinned knees and elbows, made me question the wisdom of continuing to accomplish this bike riding. However, I was determined. I finally got to the point that I could stay up; as long as I went straight. It seemed like my hands froze and would not guide the bike left or right. I remember riding straight into a telephone pole. I did learn to ride that bike, then eventually got my own bike. Had a paper route and many other things to go with bike riding.
The point I am trying to make with this boring story is that motivation, which includes persistence, is necessary to reach any desired goal. Nothing good comes without dedicated effort. So how do we apply this to building cash flow without cash? If you are trying to get started in the Real Estate business, or even if you have been in it for awhile, I strongly recommend that you get all the education you can about Real Estate, then apply that education. So were do we get this education?
There is an abundance of material available; books, seminars, etc. However, I recommend two things to help you get started. One, if you have a Real Estate Investment Club or group near you, I suggest that you join and attend every meeting that you can. You will find these clubs in most major cities and most of them meet monthly. You will find at these meetings, all kinds of expertise in different aspects of Real Estate. Rehabbers (property fix-up, repair people), Private Lenders, Builders, Appraisers, etc…etc. You can go online to find the location of many of these clubs.
Now if you can’t find a club, I suggest that you visit Barnes & Noble and look for books on Real Estate. Here, as in the clubs, you will find many various subjects on Real Estate. I also recommend that if you are new or having trouble getting started, try and find yourself a mentor who will help you; someone with experience in the field in which you are interested.
If you do find a mentor, I suggest that if you are going to use a good amount of their time - that you offer to pay them a fee for that time. I think a good way to do this is to offer them a percentage of the profit you make on any deal that they help you with. This is a great way to go, especially if you are short with funds, which most people will be when they are starting out. So, where do we find a mentor?
The Investment Clubs will have people who are very experienced in Real Estate and they will have people who are just starting out and those in between. I suggest that you watch and listen for awhile and you will find the person you are looking for.
Also, it is mandatory that you stay motivated. This is something that requires frequent, if not daily, refreshing. There are several books and other material you can find that provide great motivation; ONLY IF YOU READ THEM. To name a few:
“Think & Grow Rich”, by Napoleon Hill – The first book I read; it is a classic.
“The Richest Man in Babylon”, by George S. Clason
Or anything by Zig Ziglar.
If you are interested in a case history of mentoring, please contact us and we will send you “The Eddie Nivens Story”. This short story is fictional; nonetheless, it is very feasible – especially in today’s housing market.
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, January 4, 2011
Building Cash Flow Without Cash
The economy today is somewhat stagnant. This is especially true with the Real Estate Housing market. As we are aware there are several factors which have contributed to this current situation, e.g. sub-prime mortgage collapse, government intervention, overbuilding, etc., we don’t really need to discuss how we got to where we are, because we are here. So now we need to address how we, in the Real Estate business, or those who would like to be in the Real Estate business, are going to react and respond to this current situation.
Anytime there is a major action that takes place, there is a reaction. Anytime there is a major action in the Real Estate market that is bad for many, it creates good opportunities for others. For example; in the early 2000′s the Housing market was booming. New construction everywhere demanded land to build on; therefore, owners who had land in the right places received premium prices for their land.
Investors who bought houses in the late 1980′s and early 1990′s sold these homes during the boom for huge profits. Now things have reversed again and we are back to the late 1980′s situation. OK, so enough of the history lesson, except to say that people who become involved in Real Estate would be well advised to consider the past when planning for future.
So, here we are today. Many people who own Real Estate are in trouble. The Real Estate is not in trouble, the owners are in trouble. Real Estate does not have problems, the owners of Real Estate have problems. Therefore, if a person wants to find and take advantage of the current market, that person needs to become a Problem Solver.
In this series of articles pertaining to “Building Cash Flow Without Cash”, I am going to direct my ideas and comments to people who would like to get involved in investing in Real Estate but are short on cash or borrowing power with which to purchase property. Believe it or not, opportunities abound out there for people who have the desire and a little ingenuity, and are not afraid of a little work.
I am going to give you some real Live case histories to prove my point. Some of these will be from my personal experiences and others from previous clients or various other people whom I have come to know in 40 years of experience in the wonderful business called Real Estate.
I’m not so much going to tell you about the great profits of the people involved in my stories, as I am about how they got started by generating positive Cash Flow which allowed them to have living money while making their investments. In order to do any business, a person needs operating or “Living” money; therefore, that will be the thrust of these articles.
The biggest hurdle in any project is getting started. If we can get that round boulder sitting on top of the hill, moving just a little bit, it will generate tremendous momentum going down that hill.
Now, I’m going to give a title to these subsequent articles pertaining to the specific technique that was used in that situation to create Cash Flow; however, remember what I said about problem solving. Most of these techniques worked because the investor solved a problem for someone, usually the property owner.
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.
Anytime there is a major action that takes place, there is a reaction. Anytime there is a major action in the Real Estate market that is bad for many, it creates good opportunities for others. For example; in the early 2000′s the Housing market was booming. New construction everywhere demanded land to build on; therefore, owners who had land in the right places received premium prices for their land.
Investors who bought houses in the late 1980′s and early 1990′s sold these homes during the boom for huge profits. Now things have reversed again and we are back to the late 1980′s situation. OK, so enough of the history lesson, except to say that people who become involved in Real Estate would be well advised to consider the past when planning for future.
So, here we are today. Many people who own Real Estate are in trouble. The Real Estate is not in trouble, the owners are in trouble. Real Estate does not have problems, the owners of Real Estate have problems. Therefore, if a person wants to find and take advantage of the current market, that person needs to become a Problem Solver.
In this series of articles pertaining to “Building Cash Flow Without Cash”, I am going to direct my ideas and comments to people who would like to get involved in investing in Real Estate but are short on cash or borrowing power with which to purchase property. Believe it or not, opportunities abound out there for people who have the desire and a little ingenuity, and are not afraid of a little work.
I am going to give you some real Live case histories to prove my point. Some of these will be from my personal experiences and others from previous clients or various other people whom I have come to know in 40 years of experience in the wonderful business called Real Estate.
I’m not so much going to tell you about the great profits of the people involved in my stories, as I am about how they got started by generating positive Cash Flow which allowed them to have living money while making their investments. In order to do any business, a person needs operating or “Living” money; therefore, that will be the thrust of these articles.
The biggest hurdle in any project is getting started. If we can get that round boulder sitting on top of the hill, moving just a little bit, it will generate tremendous momentum going down that hill.
Now, I’m going to give a title to these subsequent articles pertaining to the specific technique that was used in that situation to create Cash Flow; however, remember what I said about problem solving. Most of these techniques worked because the investor solved a problem for someone, usually the property owner.
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
More On Options
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.
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.
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.
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