Nationwide, 1 in 4 mortgages were underwater by the end of 2009.  Recent research suggests when a negative equity hits 25% (i.e., the borrower owes 25% more than the market value), borrowers tend to walk away from their mortgage, even if they are perfectly capable of making the payments. These two trends, taken together, can spell disaster for real estate values.

It does not take a genius to figure out that when foreclosures become increasingly common, there is a kind of “contagion” effect of cascading foreclosures, because every additional property thrown onto the market negatively affects all others. This is particularly the case when distressed property is sold, because the departing homeowner typically leaves the property is poor condition, and, very likely, after a prolonged period of deferred maintenance. Once these foreclosures sell, that becomes the new comp for the neighborhood, dragging down the prices of even non-distressed property. For an example of this, look no further than Fort Myers, Florida. Go to Realtor.com and punch up single family homes. When I did it recently, there were 53 houses on the market for less than $20,000. The cheapest one priced at $1,000. Or check out Las Vegas – almost as grim.

It has taken quite some time, but it appears that lenders are finally waking up to the fact that foreclosure will cost them a large amount of money in the short term – to say nothing of the detrimental effect on the neighborhood, and, on other loans in their portfolio. One consequence of this is the increased popularity of the short sale (when a lender avoids having to foreclose, by accepting less than the amount of the note, once the borrower finds someone to pay something close to market value for the property.) When short sales began to show up in great numbers, banks were famous for making them almost impossible to close. In many cases, no decision would be made by the bank until so much time had passed that the property (given the steep downward trajectory of the market) was no longer worth what the prospective buyer had offered. So no sale would take place, and the bank would dump another foreclosure onto the market. The banks’ stubbornness and simple failure to make a decision became something of a Catch-22 (and still is in many cases.) However, the signs all point to an increasing flexibility and acceptance of short sales by the lending community.

This is not done for altruistic purposes: in Las Vegas, for instance, “banks make $80 per square foot on foreclosures but $130 per square foot on average in short sales.”

Thus, the latest news from Nevada is that Las Vegas may move from the country’s foreclosure capital, to the capital of short-sales. Wishful thinking perhaps, but let’s all hope more lenders get on board and put an end to the vicious circle.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Foreclosure Alternatives are Gaining Steam

It is important to learn and stay sharp as a real estate investor.  Learning theory is great, but applying by doing is the best way to learn and retain.  Here is the 2nd of a series of exercises that new and existing real estate investors must do to hone their craft.  Hopefully you had tremendous success during the Buy Right exercise.  Your second exercise is to Sell an item on Craigslist for more than an item is worth and fast, with favorable terms.

Sell an item on Craigslist – The goal here is to get people to fight over your item and bid up the price and get better terms – just like when you sell an investment property — you want to market this item to maximize exposure, leads and offers, then negotiate up the price, close quick and get favorable terms.  There are a few tips I want you to try, to create competition and achieve these goals.  First, find out how much the item is worth and post ads on Craigslist, including pictures and a description explaining why this is the one the buyers should buy.

Try these tips:

1. Advertise for a really low price and negotiate – If the item is worth $200, advertise it for half or $100.  In this exercise you should get a ton of offers.  What I want you to do is tell them the response has been so overwhelming that you got an offer(s) for what it is worth or in this case $200.  If they are willing to pay more and pick it up now, it is their item.  You will not only get more than it is worth, but good terms and a quick sale.
2. Write a good ad – Include nice pictures as most buyers will be able to visualize it as their item.  Tell them why it is the item they must buy. Promote features such as: Perfect condition, barely used, like new, best item for the money, worth $X but selling for less.  Put in false time constraints and create competition such as:  Will go fast, yours if you can pick up within 2 days; if not bought in the next couple days I have a family member who wants it; was going to sell it for more to someone but did not want to drive an hour to them to drop it off; etc.
3. Ask for more than it is worth and negotiate – This will work best on hot items with lots of demand.  If the item is worth $300, list it for $400 and let them know that you are really motivated to sell this hot item.  Write a good ad using what you learned from #2 above.  If the best offer is $280, tell them you have another interested party that has offered $360.  But, tell them if they pick it up now you will sell it to them for $320, which is meeting in the middle.  If they accept, then you just sold it really fast for more than it is worth.  They may try to negotiate you down, so let them negotiate you down to $300.  Worst case, you still sell fast for what it is worth.
4. Use the midpoint in negotiations – When negotiating put the amount you want as the midpoint in your negotiations.  If they offer $200 and you want $250, ask them if they will pay $300.  If they say no, either the buyer or you can ask to meet in the middle.  I recommend that you ask, so you can tell them you will sell it for $250 if they come immediately.  That way you get your price and terms.

My results:

1. I Sold my Jeep in one afternoon – I bought a Jeep for $6K and drove it for 4.5 years.  At 144,000 miles, it was overheating, needed new tires, a new catalytic convertor to pass e-check and many additional items where close to going wrong.  Jeeps hold their value well and it was summer when I listed it, so it was a good time when people want a convertible Wrangler for cheap. I used tip #1 and #2 and listed it low at $1500 and wrote a great ad with a good looking picture.  I would have accepted anything around $1500.  I received approximately 20 calls in an hour and had about 5 people come to take a look.  I do not advise this but I actually took the ad down because I was only able to answer about half of the calls, the other half went to voicemail.  They were all bidding over my asking and I told a guy if he comes with $2000 cash now, it is his.  It was sold, as is, in about 3 hours for $2K cash.  Looking back on it now, I would have told the buyers due to the overwhelming demand and thanks to some research that I was going to list it for $3,500.  If they would have gone up to $3,000 and showed up right away, it would have been their Jeep.  They likely would have refused but, they would then likely have given me the max they would have paid, and maybe I could have gotten $2,500.  I was happy with $2K, but I learned from this experience.
2. Surfboards – I upgraded my surfboard and sold my old ones.  Both where nicked up but usable, and perfect for beginners.  I used tip #2 and #3.  I wrote good ads and provided pictures.  “Perfect surfboard for beginner for cheap”.  I asked $100 for both and would have taken $40 for each which is all they were worth.  I negotiated one guy up from $50 to $75 which is halfway and he came immediately.  On the other one, I got an offer for $60 and took it since he came the same day.
3. Still to come – An out of town friend wants me to sell his surfboard, and what better way to keep my skills sharp, right?  I also have some old bikes that are now expendable.  I will post my results.

What you will learn:

1. Marketing techniques – Exposure is vital. You must market often, to the right target and with a message that will get them interested and making an offer.  Maximize potential buyer leads.
2. Negotiation and closing techniques – Create competition and use false time constraints to increase the sale price, get favorable terms for a quick sale.  Use the midpoint when negotiating.
3. Write great ads – Write compelling ads that make you stand out.  The ad cannot blend in with the rest of the ads — it must stick out like a sore thumb.  A well written ad will sell your item for more and faster than other ads for the same item.  Tell them why it is the best, and most importantly, have an extremely engaging ad title to get them to read more.  Finally, get them to contact you so you can engage negotiations.  Leave a little teaser that will require them to contact, then negotiate away!
4. Play the numbers game – The more interest and offers, the higher you can bid the price.  Get exposure and as much interest and as many offers as possible.  Then use that competition to negotiate a higher sales price, better terms and faster sale.

Additional Tasks:

1.  Research auctions – Research and learn about silent and round robin auctions.  These are great ways to sell a property fast and if done right, for a great price.
2. Create a marketing campaign – Create a marketing campaign using $500 to get as many people as possible, to a one day auction where they submit a bid and you later you conduct a round robin to bid up the price.  You should include, signs all over the neighborhood, mailers to the neighborhood, craigslist & MLS listings, and newspaper ads.
3. Backup Plans – You must always have backup exit strategies and the ability to rent and hold properties.  Write up a plan for all exit strategies in case the strategy you are focused on doesn’t work.
4. Property Management – Locate five property management companies and evaluate three of these companies.  Give them 1-3 property addresses and get their feedback on the home, vacancy in the area, rents they would charge, if they recommend the area, etc.

Final Step:

Comment and tell us about your results.  Feel free to ask any questions before, during and after.  This is an incredible exercise that will pay huge dividends to your business.  You should be comfortable selling a property fast, for a nice profit, and be comfortable with your backup plans. 

Best of luck!

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Learn by Doing, Exercise 2 for Real Estate Investors – How to Sell

Congratulations!  You are pursuing a career in the lucrative world of real estate investing.  The sky’s the limit.  Isn’t it? We are all bound by the same 24 hours in each day.  Our current unique lifestyle is a result how each one of us has used this precious time.

Here are a few tactics, out of many, that will help you to multiply your efforts every day.

1. Don’t sweat the small stuff: A properly worded agreement which rewards your renters for not calling you throughout the month can free up hours per week.  Close your eyes and imagine your tenants fixing their own clogged toilets, leaky sinks, burnt light bulbs, cracked windows and other small mishaps that are destined to occur.  Offer a discount of a few dollars for each month the tenant doesn’t call you to fix minor maintenance issues.  This gives your tenants a reason NOT to call you over the minor issues that may arise.

2. Meet your neighbors: Whenever you get a new property, whether you plan on fast-turning or holding it, meet your new neighbors.  There are three main reasons to do this.  The first is to see if they know anyone that may want to move in or buy your property.  The second is to see if they know of anyone else in the area that may be interested in selling or if they know of any vacant properties nearby.  The third critical reason is to ask them to call you immediately if they notice anything suspicious on or around your property.

3. Use Technology. It is your friend: Before I got myself an automated voicemail system I can’t tell you how many hours I wasted every week talking to wannabe buyers/sellers.  Describing the property, price, terms, directions, etc. can be done automatically by a recorded message you provide.  Get yourself a free or cheap voice mail system that can screen out the time wasters before you talk to them.  A perfectly worded message can drive more buyers to a property than you ever could alone.

4. Add me as a friend: Before Facebook and Linkedin we actually had to network with people in real life.  Looking for leads does not and should not be done solely by you.  Multiply your efforts looking for potential slam-dunk deals; let everyone know the type/price/condition/area of properties you are currently seeking.  Remember to excite the new bird-dog’s greed gland by telling him/her how much they will make if they send you information that leads to an executed deal.  Bird-dogs should collect as much information off a FSBO sign as possible, take pictures if needed, or grab the address if property looks abandoned. People to tell: tenants, sellers, buyers, friends, family, mail men and women, city workers, fedex drivers, trash men, everyone and everyone.

*Important note:  Depending on your area it may be illegal to give a commission or cutback to someone other than a licensed Realtor.  So be aware of legal loopholes around this obstacle.

Remember don’t just stay busy; use your time effectively.  As human beings it is so easy to get tied up doing mundane tasks that distract can you from your real money making agenda.  It’s amazing that making just a few tweaks to your routine/system can free up so much time and attract tons more qualified leads.

- J. Fed

Photo: adactio

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Improve Your Productivity: 4 Great Ways to Clone Yourself While Real Estate Investing

I’ve been curious lately about the end of the Mortgage Backed Security (MBS) purchases by the Federal Reserve in March.  The Fed is planning to end the program in less than 60 days on March 31^st.  Currently they stand at about 94% having purchased 1.17 trillion of the 1.25 trillion allocated to purchase these securities.

So while they’ve nearly fulfilled the entire program, I did some digging and found there’s starting to be some chatter about them extending the program.  We, of course, can recall to the first-time buyer credit extension being announced just as the initial credit was expiring.  The Fed states rates will remain unchanged over the course of the next 6 months meaning they believe the next 2 quarters are critical to gauge if the economy strengthens.   The MBS program has been keeping consumer mortgage rates low and many fear a full 1% rise in rates when the program expires.

Although the Fed recently restated its intent to cease the program on March 31^st, there are multiple opinions amongst the Fed Presidents.  During an interview with Nightly Business Report, New York Federal Reserve President William Dudley said, “Obviously, if mortgage rates were to back up a lot and if that had big consequences for the economy, the we very well could rethink the issue about whether or not we wanted to buy more mortgages.”  In a separate interview with the Associated Press, Dudley liked the situation to the Fed driving a car.  “If there’s a sharp turn in the road the Fed will adjust course.  Nothing is on auto-pilot,” he said.

Dudley believes there is a good amount of liquidity in the marketplace now which will step in when the program expires.   Whether you are for or against government intervention, there is obvious stimulation of the lending markets by this program.  The larger banks are shoring up their balance sheets and paying back TARP funds.  Last week PNC Bank just announced it was paying back its $7.6 billion dollar loan.  Bank of America, Citibank, and Wells Fargo have paid back their TARP loans already with interest.   As the liquidity increases within the banks, they’ll start buying the mortgage securities again which should help maintain low rates.

Interest rates crept over 5% last week according to Freddie Mac’s mortgage survey.  That was the first increase in mortgage rates in 2010.  With the Fed being concerned about the rates, any extension in the MBS purchasing program will likely have to do with where rates are in 60 days.   For real estate investors the value in the low rates is not only cheap money but ensuring certain types of loans, particularly non-seasoned rate and term refinances, continue to be available.  Many investors are currently using this loan to take out bridge financing or hard money when they purchase foreclosures and fix them.  This 2 structure loan allows them to do these transactions with less than a traditional 20% down payment.

Whether you buy and hold, wholesale, or broker investment transatctions, what the Fed does on March 31^st can impact your business significantly.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Fed Leaving Door Open to Extend Mortgage Backed Security Purchases

When you’re driving on the highway, have you ever noticed that anyone who drives slower than you is a moron and those who drive faster are maniacs? It’s human nature to think that there is something wrong with those who don’t act the way we think they should. It’s certainly true in real estate.

Today I saw an online status update from a friend who is a short sale specialist. She was lamenting a deal lost to a “greedy” lien holder. To be fair, she is very intelligent, hard working, and a good person – she was merely venting some frustration. However, “greed” is a word that has crept into the vernacular and is used to symbolize the economic ills of today.

Everyone’s Greedy

Think about how often the word greedy is thrown around today. We have greedy bosses, greedy bankers, greedy lenders, greedy investors – let’s not forget the greedy landlords! From the lowly janitor lamenting the fact that his greedy boss wouldn’t give him a ten cent raise, to the President of the United States scolding the greedy executives on Wall Street, everyone is getting in on the act. But is it fair?

Isn’t everyone just trying to protect his or her own interests? It’s a jungle out there and it certainly is survival of the fittest. The investor wants to get the best deal on a property, the seller wants to get the best price he can, and the banker wants to get the best terms on the money he is about to lend. Does that mean they’re all greedy?

The Front Lines

The foreclosure crisis has certainly seen its share of greed. You had hordes of novice investors trying to make a fast buck as the bubble inflated. Now you have all of those trying to do the best they can as the bubble deflates. Those involved in the short sale arena are on the front lines of this battle. The crux of the problem is that a short sale can’t take place without the cooperation of the lien holders.

From a real estate agent’s perspective it is stupidity and greed that keeps them from cooperating. Sometimes they’re right, but not always. There could be other factors at play besides greed. Sure, a lien holder may be wiped out in foreclosure if they hold a junior position. What if they feel they can get a better deal or that they may have a chance of recovering some of their investment by not agreeing? A lender in first position may be protected by private mortgage insurance and do better in a foreclosure than they would in a short sale.

The very basis of capitalism is that people are motivated by profit. That also means it is important to minimize loss. It is incumbent on everyone to protect his or her own interests. That often means that someone doesn’t get what they want. Does that make the other party to the transaction greedy? If it does, so be it.

The point is ladies and gentlemen that greed, for lack of a better word, is good. – Gordon Gekko in Wall Street

Image: Annie Mole

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Those Greedy SOBs!

I love landlords. I get the majority of my deals from landlords who are sick of dealing with tenant hassles. The biggest payoff comes when you get a call from a landlord who wants to sell you multiple properties, such as 3, 10, 20 and maybe even 50 houses at once.

So what do you when a landlord calls and has several houses to sell at once?

Well, last week this happened to me and a partner. We got a call from a landlord who had four properties he wanted to sell. The guy is older and he just doesn’t want to deal with them anymore. The first thing to do when you get a call like this is to evaluate each property at a time.

So, we talked with the seller and got the complete details on all four properties on four deal sheets. Now, once we had the complete information on these four properties, we had to evaluate them and run the comps and the rental comps. On three of the properties there is plenty of cash flow and the numbers look good. However, the fourth property has negative cash flow of about $100 a month.

What to do with this negative cash flow property?

When talking with the seller about this he basically said, “overall, on the four properties you get a lot of cash flow.” He’s right. But once again, I evaluate each property individually. Just because three properties cash flow, that doesn’t mean I should take on one property with negative cash flow. To me, that’s nonsense.

I don’t care if I’m buying one property, or a package of four. Every property I buy must meet the same rigorous standards and must have cash flow and a certain amount of equity. The investors who don’t do this and who aren’t “ruthless” when it comes to evaluating a property are the ones who complain that this business is difficult and it’s tough to make money.

Remember, you always make your money going in.

So with this particular landlord we are still in the negotiating phase and inspecting the properties. We plan to buy three of the properties subject-to and get several hundred dollars a month in cash flow.

That’s the beauty of this business. Just one phone call from a landlord with multiple properties could take you from zero deals ever done, to four deals done and a positive cash flow of $900. And I think all of us could use an extra $900 a month.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

How to Handle a Landlord with Multiple Properties for Sale

Superbowl Commercials are the probably the most watched commercials year round.

Superbowl Sunday is the day people can’t help be excited about: from the fans, to the players, to the coaches, and yes, even the Sponsors…

And that’s exactly who I want to talk about this year… The Sponsors!

After doing a little bit of research, I found out that each Superbowl Spot (Ad)  for 2010 will cost anywhere between 2.5 Million and 2.8 Million…EACH! 30 to 60 seconds to “sell” america on a product or service doesn’t seem like much time, but if the ad is compelling and can generate a significant response, then time doesn’t really matter. It’s all about the delivery.

You see, when you throw up an ad on craigslist to advertise your real estate services or maybe a property you’re trying to sell, it doesn’t matter how long or how short the ad is. What matters is if the ad is able to convert (generate a response).

I’ve seen 3 line ads pull 10 times better than 3 paragraph ads and vice versa.

Would you pay $3Million to air your ad during the Superbowl…for one second? Miller Did…

I’m not sure how many sales this ad helped bring Miller, but I’d imagine it helped alot. Because this was a really short ad, it went completely viral and people kept talking about…even to this day. Not only that, but of course, Miller is already a recognizable brand.

“Miller High Life is all about high quality and great value, so it wouldn’t make sense for this brand to pay $3 million for a 30-second ad,” said High Life senior brand manager Kevin Oglesby, in a press release. “Just like our consumers, High Life strives to make smart choices. One second should be plenty of time to remind viewers that Miller High Life is common sense in a bottle.”

If people talk about you…and it’s in a good way…expect a boost in your business!

If you’re going to watch the Superbowl, I want you to take notes while watching the commercials, and look closely for what really grabs your attention.

• What stands out in any given ad that would make you respond and why?
• Did the ad “wet your toungue” enough to leave you wanting more? (more information or the product itself)
• Did the ad make you curious?
• Was it funny? (This alone devlops interest)
• What special offers did they make that you think people would go crazy for?

I mention that last question because I believe that Dennys had the best special offer for 2009. Watch the video below to see what I mean.

Why would they do that? It’s simple…they wanted business. Sure everyone that went got a free meal, but at the end of the day, they could easily make money from drinks, desserts, extra orders, tips, etc… and they may have even gotten some repeat business.

Their response to this was so great that when I went there on Tuesday to claim my free grand slam, they had lines out the door and handed many of us a coupon for a rain check (same free offer of course).

Overall, as you take notes, I want you to see how you can begin implementing these concepts in your own advertising.

• What can you say in your ad that will cause people to flock to your website or blow up your phone?
• What can your subject line or headline say that will grab the most attention?
• Will the ad serve its purpose
• How much curiosity or “toungue wetting” can you sprinkle in your ad to make people click or call ASAP?

It’s kind of along the same lines as what Winston Westbrok wrote about when it comes to learning from Junk Mail.

Don’t you think there’s something to gain from an ad that someone litterally paid millions of dollars for?

When it comes to marketing, you must put sincere thought into each ad that you write. The better the ad, the better the conversion. Plain and Simple!

Make sure to split test your ads against one another. You could really love the ad, but the response could be horrible. You could have negative or mixed feelings about the ad, but the leads just pour in as a result of it. Your personal feelings about the ad don’t matter as much as the response by others and the leads you generate from it.

Have a great day!

To Our Success,

J. Lamar Ferren
New Breed Investor

ps. What helps your ads to convert the best? Have long ads performed better for you or short ones?

PPs. Who do you think will win the Superbowl…Saints or Colts?

Photo: JohnSeb

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Superbowl Commercials 2010 | Why You Should Take Notes