REAL ESTATE INVESTOR

Owner Financing Installment Sale

2007-09-10T23:41:00.000-07:00

There are many benefits for doing an owner-carry installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages inure to the benefit of one or the other, but in most cases the transaction is “Win/Win” for both parties.

Most sellers of real property insist on the highest price and all cash. Sellers want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. Let’s look at these needs one by one.

1. Highest Price. There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for non-qualifying financing.

2. Cash. Nearly ever seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees and the balance of the existing financing. In addition, there may be capital gains tax due to Uncle Sam. In many cases, the sale of a property by an installment sale (particularly a "wraparound") will net the seller more future yield than any source from which the cash proceeds were reinvested.

3. Fast Closing. Nothing holds up a sale more than new lender financing. In some areas of the country, it can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify. Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars in paint, new carpet and landscaping just getting the house ready for the market.

There are very few "assumable" loans and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other nonsense involved. In many cases, you will be able to sell the property yourself, saving thousands in real estate broker’s fees.

4. Tax Savings. On an installment sale, so you only pay gains to the extent you receive payments each year. This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. §1031 Tax-Deferred Exchange for further savings.

As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.

Advantages for the Buyer

1. Easy Qualification. The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional bank income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lender guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit. Furthermore, few conventional lenders offer fixed interest rate loans to people with a poor credit rating.

As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional bank loan. The installment sale becomes the perfect solution for him.

2. Credit Rating. An installment sale may give the buyer a chance to improve his credit rating by owning a home and making payments timely.

3. No Loan Costs. One of the biggest benefits for the buyer is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other "junk" fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.

4. Fast Closing. A buyer can close and move into a property within days, since there is no third party lender holding up the transaction.

Despite the elevated purchase price and interest rate, there are many benefits to a buyer who engages in an installment sale transaction.

How to Create Wealth Through Lease Options

2007-09-09T16:07:00.000-07:00

The current real estate climate is an exciting one. It is because, arguably, more wealth can be created now using less cash than in the past year or two. Many sellers and landlords who wouldn't even listen to a creative way to do a real estate transaction six months ago are now eager to hear how creative you can be.

Those who have followed my writing and coaching know that I'm a big proponent of a lease/option method of controlling real estate. "Controlling real estate" is the operative word here. Why not control it rather than own it? "But," you protest, "I thought I had to own real estate to benefit from it." Not so!

The real estate market in general is full of empty homes in which the owner is making payments. We have a window of opportunity that can result in huge financial gains for the investor who'll work and think outside the box. Consider the following questions:

Q - Why should I buy property via a lease/option?

A - You can create wealth and positive cash flow. Owners of empty homes are eager to fill their homes. They are tired of making payments on something that may be, in their eyes loosing money and value. You are their savior.

For as little as $100 for option consideration on a two year option period (the least amount of time you prefer to negotiate) you can control a house. I have protégées who have secured a one year option for the grand total of $1. One person in my real estate investment club will give $1,000 option consideration for a five year option.

If you are wondering if that is a good deal for you, consider how much that property may increase in five years. As you will read below in a following answer, the $1,000 option consideration (or however much you spend) should be returned to you soon after you have given it.

Q - Why would a seller give you a lease with option to buy?

A - You offer to take care of his property, maintain it properly, pay your payment on time and have a buyer ready to finance the property at the end of the option period. If you have two to five year option (negotiate the longest term possible) he retains all the tax benefits of owning the property and he doesn't have to pay a real estate broker fee. In real estate broker fee savings alone he will realize many thousands of dollars.

Q - How and when do you make money?

A - Money is created for the investor at three different points in the process. You, the investor, will sublet the house with an option to purchase to a Tenant/Buyer and create cash income. Your two year option consideration was $100. You will receive $5,000 on a one year option you negotiate with your Tenant/Buyer. You have created $4,900. That amount will be deducted from the sale price if the Tenant/Buyer exercises his option and purchases the home. Here's some great news: You will not have to claim the $4,900 on your income tax until the option of your buyer is exercised or expires.

If you negotiate a rental fee of $1,200 per month from your seller (part of which will be credited to you later) and you find a Tenant/Buyer who will pay you $1,400 you have created positive cash flow of $200. If you control ten properties in this manner you'll enjoy a monthly passive income of $2,000. It is also possible to offer your Tenant/Buyer an incentive for giving you additional money income. For example, you can offer him a $200 credit for each $100 he pays extra each month. He makes money and you increase your monthly cash flow.

The third way you can make money is by negotiating an option price of, for example, $250,000 and selling to your Tenant/Buyer for $270.000. If you do this you will have created $20,000 plus at least $2,400 per house for the year. And you did it with

Q - How do you find motivated sellers?

A - Marketing is the key to any business. There is no exception. You must have contacts in order to stay in business. You can make a lot of money if you will spend a minimum of one hour each day to work your marketing plan.

Lease/option sellers can be found by going to the library and looking back two or three months in the real estate classifieds for houses for rent. If a property owner has been making payments on an empty house for that long, you may have a motivated seller.

Call the number of the owner (I skip the property management companies but they might be open to a call as well) and ask if the house is still available for rent. If it is, have him tell you about it. Then, tell him that you are interested in a long term lease of at least two years. Ask if that is that something that may be of interest to him.

If he is not interested in leasing for two years, thank him for his time and wish him well. If he is interested, tell him you are an investor and ask if you pay your rent on time and take care of his property, would he be willing to sell it to you when the lease is up?

If he answers in the affirmative you may have a lease option. You then meet him and look at the house. If the house will serve your purpose negotiate a lease option arrangement that benefits you.

Here are some other ways to find motivated seller:

If you see an empty house, note the address and contact your title company or county clerk for ownership information. Write a letter to the owner offering to lease option his house. Do some research in writing sales letters and make a compelling argument. Be sure to explain how he will benefit. He must clearly understand what's in it for him.

If you have real a estate broker team member (your success team), have him send you the daily list of expired listings. Write each one a letter using the formula in the above paragraph. Be sure your broker is compensated in some manner. Most real estate brokers will jump through hoops for you if they know they will get paid at some point.

Real estate brokers are also a great source for finding motivated sellers. Educate your broker(s) on the subject of lease options and how they could benefit. A payday several months away is much better than no payday at all.

Q - What kind of documents should I use?

A - If you are buying on a lease option, you need a simple one page lease option form. Keep it simple and to the point. You can buy on online, at my office or have your attorney draw one up for you. Just make sure the document is buyer friendly.

When you're selling use a much more comprehensive lease and option agreement. The one I use (you can purchase and download it at www.RealCashFlow.net and go to "Products") has many protections for the seller. These two documents (the lease and option) have taken away all my landlord headaches. I don't have any calls for repairs or complaints.

Q - How do I safeguard myself?

If you're going to buy with a lease option here is a list of things you may need:

1. A signed Authorization to Release Information form for the lender. You want to know that your seller is making his payments each month. You don't want to discover the house is in foreclosure.

2. You may want to set up an escrow account. The escrow company will collect the payment and disperse the funds. If you set up an escrow account be sure to have the seller sign a Warranty Deed and place it in escrow to be released when you are ready to exercise your option and purchase the property. If the seller is vacationing in China when you get ready to close your loan you won't have to go look for him.

3. Your option agreement should include provisions describing what happens if your seller fails to make a payment or pay the property taxes. The document I use states that I have the option of making his payment. If I do make the payment my option agreement states I will be credited $3 (it could just as easily be $4 for every dollar) I spend on his behalf. In other words, if he doesn't make his $1,500 per month payment and I do, $4,500 will be credited to me when I exercise my option to purchase. Not a bad return on my $1,500 and he is motivated to keep his payment current. If my landlord is late on ten payments I may be able to deduct up to $45,000 off the price of the house.

There is money to be made using lease options. If you haven't already explored this option for controlling property you should. Think outside the box and let the deals happen. You will be pleasantly surprised at what you can do.

Short Sale Fundamentals

2007-09-07T00:25:00.000-07:00

In these difficult financial times, more and more sellers are finding they need to sell their homes for less than they owe on their mortgages, known as a "short sale ." This can be a good deal for you as a buyer, as long as you're aware of the extra time and work required to make it happen.

The Mortgage Lender's "Short Sale" Factors

The seller's mortgage lender will be considering many factors in deciding whether to approve a short sale, including:

Whether the seller is deserving of a break, due to financial hardship caused by unforeseen circumstances such as layoffs, divorce or illness
Whether it would be cheaper to simply repossess the house, make any necessary repairs and sell it through a real estate agent
How many other properties the mortgage lender currently has in default
Whether there are co-signors who can be held responsible for the balance owed on the mortgage

The Short Sale Process

Your chances of success with the seller's mortgage lender improve if your communication with them is organized and complete. Your first contact with the seller's mortgage lender's "loss mitigation department" is crucial in making a good impression. You'll want to send them what's called a "Release" or "Authorization to Release Information" already signed by the seller, which allows the mortgage lender to talk with you about the seller's mortgage.

In your first talk with the mortgage lender's loss mitigator, you'll want to find out:

Whether they think a short sale might be a possibility
What information they'll need to complete the process

Loss mitigators sometimes receive bonuses based on how many defaulted loans they can clear up, so they're more likely to pay attention to your sale if you can show them you're taking care of as many details and objections as possible.

It will be necessary to be specific about the seller's financial difficulties with what's called a "hardship letter." The mortgage lender may also require paystubs, copies of medical bills, checking account statements and other appropriate evidence from the seller. The seller's mortgage lender will look at the seller's credit reports to verify the seller's financial predicament. This will all take extra time.

Broker's Price Opinion

The mortgage lender will order what's called a "broker's price opinion," which gives the mortgage lender some idea of what the property is actually worth in the current market. A broker's price opinion will be based on:

the value of comparable properties in the same neighborhood
the general condition of the neighborhood
the condition of the specific property in relation to neighboring houses

If the person who is inspecting the property needs to look at the interior of the house, you'll want to be sure someone is there to let him or her in. You may also want to provide the inspector with copies of low comparable houses in the neighborhood, and high estimates on any needed repairs. The lower the broker's price opinion, the more likely the mortgage lender will approve a short sale.

Settlement Statement Scrutiny

The seller's mortgage lender will want to have an advance look at what's called the " Settlement Statement" or "Settlement/Disbursement Estimate." The mortgage lender will be carefully reviewing:

Commissions going to real estate brokers
Where your financing is coming from (Cash? A loan?)
Payments to cover outstanding liens and taxes
Approximate date of the closing
Any cash to the seller (a definite no-no)
Any other expenses which may raise a red flag

While buying a home on a short sale can be frustrating and time consuming, your hard work can pay off in a home that's worth considerably more than you paid for it.

SHORT SALE BASICS

2007-09-05T11:40:00.000-07:00

If you are new to real estate investing and wondering what a short sale is: A short sale means getting the bank to accept less than what is owed as payment in full.

For example: You find a homeowner in distress who owes $100,000 on a property that is worth $100,000. What do you do? Most real estate investors walk away--unless they know how to use a short sale.

Using our short sale secrets, you get the bank to accept $55,000 as payment in full. You now have equity in a deal that had none. The homeowners are ecstatic, since they can move on with their lives, and the bank has a defaulted loan off its books. Real estate short sales are win/win for everyone.

Once you have your homeowner under control and your short sale package together, you are ready to deal with loss mitigation. When making the initial phone call to the bank, ask for the loss mitigation department.

Some customer service reps may say that the bank does not have a loss mitigation department. Keep trying! Ask if the bank has a work-out department, foreclosures department, short sale department, loan modification department, or reinstatement department.

The reason we ask for different departments is many times a new person is working the customer service phone and may have no clue what you actually want. By using a term he is familiar with, you will eventually get to the right person.

You have loss mitigation on the phone; it's time to get to work. This person will make or break your deal, so be very nice. Your initial conversation should go something like this:

�Hi, my name is [your name here], and I am calling on behalf of Bob and Sally Smith. I have an 'authorization to release information' form I'd like to fax to you. What is your fax number? Great, I'll send it right over."

Stay on the phone while the rep retrieves the form from the fax machine. The rep gets the authorization and returns.

"As you know Bob an Sally are in foreclosure. I recently met them, and they seem like sweet folks. When I found out about their dilemma, I said I'd try to help. They would like to sell their property and move on with their lives.

"I own several rentals in the area and am willing to purchase Bob and Sally's property. However, we have a big problem. I called a real estate agent friend of mine and asked her to run comps for me. Based on her comps and based on what I know about the area, Bob and Sally owe much more than their property is worth.

"As I said, I'm willing to help them out of foreclosure as well as helping you get a defaulted loan off your books, but I can't possibly pay the mortgage balance. Will you entertain some sort of short payoff or something along those lines? Great! What do you need from me?"

As you can see in our conversation, we do not come across as professional real estate investors out to make a killing on the bank's loss. We have much more success as a friend trying to help poor Bob and Sally. Use whatever approach makes you feel most comfortable but, don't lie to get the deal.

We did recently just meet Bob and Sally; we do have rentals; we do have a real estate agent friend; and we are willing to purchase the property.

In your conversations with loss mitigation, be certain to refer to your distressed homeowners by name as often as possible. This makes them seem more real to the rep. We are trying to get a banker to make an emotional decision as well as a business one.

Once you build rapport with the loss mitigation rep, send your short sale package. We call our reps at least once a day to follow up. Always ask the reps how the day is going, how the weather is where they are, how the kids are, and so on. You want the rep to look forward to your calls, not dread them.

Find out who makes the actual decision, how long it typically takes, how long the rep can give you to close once your deal is accepted, etc. With a helpful attitude from you, your loss mitigation rep will push your deal through quickly.

Once your deal is accepted, get it in writing immediately. Find your buyer or arrange financing and get the deal closed. You don't want anything to happen between the acceptance and the closing to make you lose your deal.

Once the deal is closed, send the rep flowers or a gift basket and write a letter to the rep's boss. The rep will remember you and the next time you call about a short sale, the rep will be more than willing to help you again.

Real Estate Marketing Plan

2007-09-04T14:32:00.000-07:00

You are a Real Estate Entrepreneur or Investor, and you’re out there in the market place looking for deals. I have a question for you.

Are you doing a bit of advertising and just hoping that a deal will fall in your lap, or are you operating in a way that makes certain it will happen. If you don’t have a process for making sure deals happen, you don’t yet understand the importance of having a marketing plan.

The sad fact is that even after all their training, less than one percent of all real estate entrepreneurs and investors actually have a marketing plan. Even though it’s very simple, don’t underestimate its power.

The Most Important Thing About Marketing is to Have a Marketing Plan!
1) It’s a concrete result you put out for your mind to seize on and strive to achieve.

2) It allows you to clarify exactly what you want to achieve in the coming 30 days.

3) It allows you map out the activities needed to achieve that plan.

4) It allows you to plan in advance to delegate off the lower paying activities, so you don’t end up doing them.

5) It allows you set time deadlines, to hold others accountable so everything gets DONE!

6) It results in you being free to concentrate on your highest payoff activity: Making Offers on Great Deals!

7) You have a business that operates consciously, not by accident.

More people fail in real estate because they simply do not have a plan or goals. You should have a detailed marketing plan of what you want to accomplish and how you are going to accomplish it.

And, don’t be vague, either. Things like, I want to make more money than I can ever spend, and I want to be rich, and I want to make $10,000 a month, are not plans. They are too vague, and they won’t help you get there. Be as specific as you can possibly be.

In planning for monthly revenue, try to put your money goals in cash income, not gross revenue. I know gross revenue is what you’re used to thinking in, but cash is obviously more important. It’s what you take to the bank, and it’s what pays bills.

First, examine your current numbers. More than 80 percent of all real estate entrepreneurs know how many houses they are buying each month, but they don’t know where those houses came from and how many leads they had to process to develop them into the single deal. And, this is a deadly sin.

You Simply Must Know How You Are Currently Doing
You should know:

1) The total leads that call each month (each week is more manageable),

2) Where those leads come from,

3) How many “qualified” seller prospects (i.e. those that you are willing to invest follow-up in if they don’t sell now; they have motivation, you are interested in the house.) you get each
month,

4) The ratio of total to qualified,

5) The number of deals you close,

6) The ratio of closed deals to qualified leads – for each lead source

7) How much you make from each seller,

8) How much it cost you to acquire a new seller.

With this information you can look at your current resources, look ahead, and then plan out what you want to have happen. The number of deals you want to do, the amount of money you want to make.

For example, let’s say you are bringing in around $10,000 a month and your average deal gives you $5,000. Yes, I know that’s low, but for the sake of example. That’s two deals a month. These are cash proceeds and after expenses you net 50 percent of your gross or $5,000 a month. And let’s say that you want to double your net income next month.

You will have to get twice as many deals to double your business. Goal? Four deals a month, or one a week.

Let’s say you currently get one deal a month from a classified ad, and one deal a month for mailing expired listings. But, you get ten qualified calls a month from his classified ad and 10 qualified prospects calling a month as a result of mailing expired listings. So, you currently close ten percent of your prospects.

First, you can improve on this situation by improving that twenty percent closing ratio. By improving your closing ratio by things like more precise targeting, the present lead-flow would stay the same, you’ll get your same twenty real prospects and achieve your goal of doing four deals next month.

But assuming that’s not something you have control over right now, the other way to double your income in the next month is to double the number of qualified prospects you talk to and make offers to. So instead of getting 20 qualified leads to call, you would need 40.

Your plan to get forty qualified prospects would need 10 to come from expired listing mailings, 16 to come from flyers in target neighborhoods, 4 from business cards handed out everywhere, 6 to come from signs placed in the ground at high traffic count intersections, 10 to com from classified ads that drive people to the website. Total: 46 prospects. Cool! That’s six to spare.

With this number of leads coming in you have what is needed closed four deals and reach your goal of doubling your net income. Actually, it’s more than doubling because your fixed expenses don’t increase with the income.

You should have a monthly plan. Schedule thirty or forty minutes out of one day to make up your monthly plan and see how you did last month. Schedule this time and keep to it. Don’t do any work or take any calls during this time. Keep it strictly for planning. If you do this and you allow yourself to get into the whole spirit of planning, and making things happen on purpose, you will easily double your income in twelve months.

Your Monthly Plan Should Include The Following

1) A goal for total net income.
2) A goal for number of deals signed up
3) A goal for number of appointments made.
4) A goal for number of qualified, interested sellers.
5) A goal for total number of leads.
6) Average net income from each deal.
7) The number of prospects you have to generate to reach your goal.

A detailed plan to generate the number of prospects you need. Your plan doesn’t have to be typed out or put into a computer. It can be handwritten on paper. It doesn’t have to be pretty.

Scratch pad plans are good enough. The important part is that you do a plan every single week and keep on top of things.

This is a simple thing to do, but it is just as easy to not do. Blowing it off is the equivalent of you absolving yourself of responsibility for your business. On the other hand, taking the time to think through your goals each month, both for income, and marketing activity, then committing them to paper will make things start happening by plan and put you in control of your business.

Real Estate Investor Marketing Mistakes

2007-09-04T14:30:00.001-07:00

What I would like to address in this article is something that is disturbing to me. Over the past few years I have seen how many investors after a real estate seminar or buying a new course would jump on the band wagon of the usual marketing strategies we are all familiar with. You know, bandit signs, classified ads and postcards too just name a few. Now, these marketing strategies in themselves are not bad but it is sadly the method how these marketing activities are applied where investors get into trouble.

Not Having a Marketing Strategy At All

Just placing bandit signs in neighborhoods and intersections without planning, testing and reviewing the quality response rate from your signs is a sure recipe for failure.

Not Identifying Strategies That Work and Sticking With Them

There are many ways to skin a cat. Some ways are better than others. It is the lack of not knowing what works and not knowing what works well that leads many astray and cost them a lot of money in the process.

Not Staying Within a Budget and Wasting Your Money

If you only have $10 or $100 per month or more that you can spend on marketing then you need to stick to that amount and use strategies that fit into your budget otherwise you might soon be distracted from your real estate investment business by facing a cash crunch.

Having No Competitive Advantage Above Other Investors

I have a personal bias towards attorneys and using free publicity as my competitive edge. What is yours? If you don't know, develop one.

Not Being Persistent.

Sadly many quit with a huge database of leads they accumulated from haphazard marketing efforts not realizing they have unrefined gold in their hands. All it asks is some nourishment and follow up.

Following the Herd and Using the Same Marketing Strategies

Ask yourself, with all the same strategies used by fellow investors in your market, why would a seller call you ? If you can't answer this then you need to think of a different strategy like marketing to attorneys. When you market to attorneys there is no competition and no negotiation. What I like about this approach is that the attorneys may times would send pre-qualified leads your way which makes negotiations much less stressful and complicated.