Real Estate Negotiating – Harnessing the power of questions.

January 30, 2009



Harnessing the power of questions


by James Miller

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Did you ever notice how the cops on the police dramas get so upset when the person they are interrogating asks them a question?

Who hasn’t heard a TV cop yell “I’ll ask the questions around here!”?

Ever wonder why it was so important that he ask the questions?

Asking a question gives you an advantage in three ways:

1) It causes the other person to come up with an answer.
From very early on we are taught to answer questions.  Throughout our years of schooling, there were always people of authority, mostly teachers, and parents, who required us to answer a question. If we gave the right answer we received praise, if we answered incorrectly, we heard a “no”. This incessant questioning, while forcing us to learn, also ingrained a deep-seated need to be right.

It is this “need to be right” that drives us to answer questions today.

As soon as we hear a question, there is a reticular activation mechanism in our mind that starts searching for an answer. This focuses the mind to find an answer and detracts you from things such as creating a question of your own.  It stops us from thinking outwardly and causes us to search inwardly for an answer.

If you want to see how motivated we are to answer questions, try this game:

You and a friend take turns asking each other questions as fast as possible. The questions don’t have to relate, or even make sense, but you can only ask a question. As soon as someone says anything other than a question, they lose.

Try it, you will see that this game shows how difficult it is to not answer a question that is asked of us.

2) Questions direct and control the conversation.
Questions require us to explain, which directs the flow of information. Once a topic has been changed it is awkward to change it without using some sort of segue.

In order to control and redirect the conversation you should get good at using a segue to transition to another topic.

Some of the segues I use most often are:

“I know this is off topic but,…..”
“By the way…”
“Before I forget….”
“I hate to interrupt but….”
“I’ll get to that in a second, but the first thing I need to know is…”

These phrases lighten the blow by acknowledging the impending change in topic.

The interesting part is that you can use them in lieu of answering a question to ask your own. This has the double impact of deflecting their question and redirecting the topic of conversation.

3) Questions buy you time.
When the other party is scrambling to put their information together in order to answer your question, you can be using the time to do your own due diligence.

One of my favorite Donald Trump stories is how he did this during negotiations on a building purchase.

Donald realized that he didn’t have all of the information he needed to continue with negotiations. Instead of revealing this point and asking for more time, he challenged the other party, asking if the knew the true history of the building they were trying to sell. The other party quickly ended the conversation and asked to get back to him at some other time.

Donald had no knowledge of any problems with the history of the building, and didn’t specifically state that he did, he just asked a question that gave him the time he needed to get his ducks in a row.


How to use Real Estate to get an infinite return on your money.

January 29, 2009

How to use Real Estate to get an infinite return on your money.


by James Miller

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I am going to start off by pulling back the curtain on the great OZ of “infinite return”.

An infinite return on your money can happen when you have nothing in an investment. While “infinite return” sounds like a large amount of money- after all infinity is a really big thing– the way the math works out, it doesn’t have to be large at all.

For example, if you get a dollar back from an investment that you have no money in, you have received an infinite Return on Investment or ROI.

In fact I really think it should be called a “division by zero” rate of return on your money, as that is what the calculator tells me if I try to calculate it.

We have gotten an infinite return a few times with Real Estate.

Here is an example of one method we used on a property we bought a couple years ago.

We bought a fixer upper house for $50,000. We got the sellers to give us a second mortgage for $10,000 which the bank treated as a down payment. We left the closing with a net of $800 being deposited into our account.

As sexy as that was, it still didn’t give us our “infinite return”.

The house needed to be repaired before anyone could live in it. We spent about $5000 on fixes like new windows, carpeting, and replacing the radiator hose that they had used on the bathtub drain instead of the proper fix – a $2 PVC elbow.

Once fixed up, we sold the three bedroom one bath house on a Lease Option, or “rent to own” contract, we let the buyer in light, allowing them to put down only $3000.

We held the property a year this way, netting about a $100 per month cash flow. After one year, the fist mortgage was “seasoned”, and the value of the property had increased due to the repairs we made. Because of these two factors, we were able to refinance everything we owed into a new first, paying off the original first and  second, the repair bills and were able to take out an additional $3,000 to put in our pocket.

While our cash on cash ROI for the first year was only around 60%, $1200 annually on the $2000 we had left in the property, the cash on cash return became infinite once we pulled out the remaining money we had invested in it.

I should take a moment to let you know how that deal worked out:

The tenant buyer we put in the house did not exercise their option to purchase in the allotted two year time frame. This worked out ok for us as he forfeited the $3000 he put own, and became a tenant only. We raised the rent from $600 to a market rate of $650.00 per month.

We would have every right to kick him out, as our intention was to sell and he had two years to get financed, but we don’t like to do that if we don’t have to.

If they so desire, we try to let the person living in a lease option home stay on as a tenant, if they miss the exercise date.

It also very hard to kick a young couple out who have paid diligently over the past two years, and it really doesn’t hurt us to let them stay.

If they ever want to buy the house from us we would honor that as well, but at a new higher market rate and not at the price we would have let have it for a few years ago.

Here are the steps to receiving an infinite return for the example I just described:

1) Locate a fixer upper type property.  Make sure that 70% of  after repaired value of the property is enough to pay off everything you will invest in it.

Example:  Property acquisition cost is $50,000. Repairs and holding costs total $20,000. After repaired vale of the property should be at least $100,000.

Try to get a seller second on the place for a minimum of one year, negotiate for no interest, and no payments if possible.

Make sure the property will net positive cash flow by at least 15% of the monthly income.  Monthly income will typically need to be at least 1% of loan against the property in order to just squeak by cash flow wise.

2) Repair the property, put a tenant, or tenant buyer in place.

3) After holding the property for one year refinance the property  paying off everything that you have invested in it and possibly taking cash out.  Be careful not to take too much out as the more you take out, the more you will cut into the monthly cash flow.

You should have a positive cash flow with now money invested, giving you an infinite return.

As a final thought you should note that you can also have negative “infinite returns” if you lose money each month on an investment.

Leverage works both ways.


The first time I made $4800 in three weeks.

January 28, 2009


The first time I made $4800 in three weeks.

by James Miller

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We secured an accepted offer to purchase on a two bedroom one bath fixer upper located in Dodgeville Wisconsin for $50,100.  Our initial intention was to fix it up and rent it out.  We could have probably pulled around$600/mo. in rent from it.

My brother and I had talked about letting this deal go as the place needed some work and the cash flow would be close to a break even after the time and money we had to put into it getting it up to snuff for a tenant.

We instead found that we had locked into one of the most inexpensively priced houses in town.  Word had gotten around that we had a contract on the property and we learned from some Real Estate Agents that there were a few different people interested in properties in this price range.

We negotiated with one agent to work with his buyer to buy the place from us after we had closed on it.  Two weeks after we bought the house, we resold it for $57,000.00. We ended up netting $4843.87 in profit.

We let our bank in on what was going on and we were able to minimize a lot of the closing costs.

Here is how the deal went down:

We bought the property through a real estate agent on July 27th,  we went to the bank, put $9160 down as a down payment for a short term loan on it, got the title work done, got an appraisal, and purchased the property.

We immediately signed a contract with another agent to resell to his buyer for $57,000,  and closed with them on August 19th.

I thought we had found the Holy Grail of Real Estate Investing.

In just under three weeks we were able to get almost $5000 on a low priced deal by flipping a property…all without pounding a nail.

I know now that we could have done so much better.

Double closing comes to mind, so does assignment of contract.

(Here is a link to a good article by James Orr that discuses them both)

Here is an example of a recent deal my partner put together for us which illustrates what I am getting at:

My partner assigned a contract to an investor for a home on the river that has an approximate value of $110,000,  she had negotiated the seller down to $47,500, with terms of 1/2 up front and the balance in two years with no interest and no payments.

The assignment fee to the investor who bought this contract from us was $8,500.

Can you already see how this deal was so much better?

Just to get a few things out of the way before I discuss the finer points.

The assignment was done in late 2008, basically right now, when things are tight and “nobody” is buying.  The first deal was done in the summer of 2005 when everybody was buying.

The prices of the properties are relatively the same, $50,100 and $47,500.

We didn’t do any work to either property.

Here are the reasons that the assignment was a much better deal:

We made more money on the assignment than on the flip.

Here’s why:

1) There was more room in the deal….  About $55,000 more.

2) My partner was able to negotiate for great seller terms.  Making it easy for an investor to finance.

3)  There were no Real Estate Agents involved.  I really don’t have anything against Real Estate Agents, it is just that the more people yo uhave involved, the more times you have to slice the profit pie.

I also find that negotiating creative financing terms through most Real Estate Agents can be difficult, as people tend to say “no” to something they don’t understand.

We didn’t have to take any money out of our own pocket.

Well, except for a $10.00 earnest money deposit… But that is light years better than having to put don $9160.00 for a down payment like we did in the first deal.

It didn’t require our credit.

No bank loan on our part, so no credit needed.

In the first deal, we had actually purchased the property and held it while waiting for the second closing.  We were exposed to the fact that the second buyer could have walked away.

We did have a plan to rent the property out, if our buyer walked.  In that market we could have even spent a bit to throw on a coat of paint and resell the place to someone else, but we were tied to a mortgage and our credit was on the line.

In the second example all we had on the line was $10.00


There are only three ways to buy Real Estate

January 26, 2009


There are only three ways to buy Real Estate.


by James Miller


Yes there really are only three ways to buy Real Estate.

When you get started in Real Estate investing it can seem like there are hundreds of buying techniques you need to know.  In reality there are only three ways and every other method you think you know is just a variation of these three.

1) You pay the seller cash

2) You get terms from the seller.

3) You and the seller agree on some combination of cash and terms.

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Cash
You pay the seller cash.  It doesn’t have to be your cash, you can borrow if from a bank, a hard money lender or from an individual.  You can partner up with someone in either a debt or equity financing position.  You can borrow from your 401K.

It doesn’t matter where the cash comes from, it just means that the seller is getting completely paid off at the time of closing.

Cash is one of my least favorite ways to buy, unless I can use an all cash offer to drive the price down through the floor.  I am talking 30 cents on the dollar kind of thing.

Terms
You buy the property from the seller “subject to” the existing financing, by using a wrap around mortgage, land contract, or rent to own/lease option type purchase, or by having them carrying the whole first mortgage.

Most of these will require some small outlay of money, but in Real Estate terms I consider anything costing you under a few thousand to get into a property “no money”.

Terms means that the seller (or his lender) is not paid off when you take over the property, and that there isn’t any sort of significant down payment being transferred to the seller.

Terms from the seller is one of my favorite ways to buy property.

Combination of Terms and Cash
You pay the seller a portion of the purchase price in cash and they finance the rest for you in some way.  It could be that they carry back a first mortgage, a second mortgage,  use a land contract, lease option, wrap around or even “subject to”.

This is the most frequent way that I purchase property.  Sometimes I decide to catch up a mortgage in order to take over a property “subject to”. Other times the sellers want a down payment to feel comfortable carrying back a first mortgage on the property.

Buying property really is just this simple.  Don’t let the details of the multitudes of creative techniques confuse you.

It always comes down to one of these three ways.


How to avoid arguments over security deposits

January 26, 2009


How to avoid arguments over security deposits

By
James Miller


It is no secret that property managers are one of the most sued professions. As landlords and investors we need to be able to reduce the possibility of this any way we can.

It is my contention that most arguments that ultimately lead to court actions stem from some sort of miscommunication.

While there are people out there who try to sue for just about anything, I think most people who end up in court feel that they have been wronged by someone, but have not been able to work it out with that party.

For landlords and property managers, having a good explanation of what is expected will help to reduce the possibility of arguments and court.

I found that repairs cost me much more than tenants expected and I was constantly getting challenged on the costs.

My answer to this problem was to create a schedule of fees for security deposit withholding.  Here is what I came up with:

Schedule of fees for security deposit withholding

This is the general guideline used to determine what charges to hold against a tenants security deposit. It should be noted that this is a general guideline and charges are determined on a case-by-case basis and may be higher depending upon the situation. It should also be noted that we have 21 days by law to return your security deposit. We will do everything we can to speed up the process.

We are fair in our evaluation of what to withhold from a tenants security deposit and do not treat it as a way to profit from the end of a tenants lease. A large amount of effort is needed to turn an apartment, and money is only withheld to cover any excessive damage that is beyond what is normal wear and tear.

Time for our personnel is expensed out at $50/hour.

Materials are expensed pass through.

Light Carpet Cleaning $25 per room, no remaining or difficult stains

Heavy Carpet Cleaning $50 per room, stains remain or are difficult

Extra Heavy stains in Carpeting that require replacement of the carpeting will be charged on a time & materials basis.

Light wall patching (larger than pencil eraser, smaller than quarter) $15 per occurrence

Medium wall patching (larger than quarter, smaller than baseball) $30 per occurrence

Heavy wall patching (Baseball size & larger) minimum $50 per occurrence, or time + materials

Cleaning toilet $25 (as evidenced by remaining stains, dirt, mildew or hair)

Cleaning tub $25 (as evidenced by remaining stains, dirt, mildew, or hair)

Cleaning sinks $25 (as evidenced by remaining stains, dirt, mildew, or hair)

Cleaning Windows $10 per window

Missing/damaged outlet or switch plate $5 (plate plus installation)

Removal of trash/debris $45 per garbage bag full. Large items such as furniture and appliances the size of a microwave or smaller at $75.00. Large appliances and furniture at $150 per item.

Property damage: I.E. broken fixtures, windows, appliances Etc. charged at time plus materials. Any cost for outside labor for repair will be passed through with a $15 up charge.

Light bulbs: All lights were supplied in working order with light bulbs. It is the tenants responsibility to provide the apartment to us in the same fashion any missing/out bulbs will be charged at $5.00 per for normal 40-60 incandescent. (bulb + installation) Special bulbs

Fire alarms: Were supplied in working order with fresh batteries. Will be charged $20 per missing/broken alarm.

Unusual odors: If deemed caused by the tenant (pets, spills, left out food) damage will be charged on a time and materials basis.

Lost/damaged Keys $40 per key

Thelpa.com, a landlord protection agency has a great settlement charges guide, as well as a ton of other free landlord forms.

I also created the next document to give tenants as a map to work toward getting as much of their security deposit back as possible.


Hints for getting your security deposit back.

We take photos for our files before and after you move, so we do know what was there before you moved in. Anything unusual or excessive should have been noted on the move-in/move out form. These will be the two major things we use for comparison to determine what charges to apply.

Let us know of any items that need to be repaired or taken care of before you move out. If we can plan for it, it will cost us, and you, less.

Leave all hardwood and vinyl floors in a broom swept condition. Vacuum and Shampoo all carpets.

Use 409 or other cleaner to remove any stains or marks from walls. Check heavy use areas such as switch plates and cupboard handles.

Open a couple boxes of baking soda and put it in the refrigerator and freezer.

If you know you have marks that will need to be touched up, ask us for some paint. In most cases we have the color on record and can provide you with a small amount to touch up any marks.

If you would like to try to fix any holes in the walls, drywall patching compound can be bought in small inexpensive containers. You can save the expense of a putty knife by using an old plastic credit card or ID as a spreader. Just make sure you don’t make the problem worse by leaving a rough surface.

Switch plates and outlet covers are inexpensive; In the large chain stores you can buy a package of ten for under $5. If you have more than one that is damaged it may be worth your time to replace them yourself.

Vinegar and Newspaper works well to clean windows.

Make sure any utility bills, (especially water and sewer if you are responsibile for it) is up to date and paid. Providing us a copy of a last billing statement is a good way to help ensure quick return of your deposit.

Remember to return any loose items such as remote controls, keys, etc.

If you have a difficult stain or other damage you are trying to repair before we go through, call us, as we have seen a lot of situations and have many helpful hints for removing difficult stains and fixing items in a cost effective way.

Our focus is to turn over an apartment with minimal time in between. Any effort on your part to go the extra mile will be noted and taken into account when looking at what we need to withhold from your security deposit.

Both documents are given to the tenants as they move in and when they move out so they know what to expect.


Getting the most from your Contractor

January 25, 2009


Getting the most from your contractor.
by James Miller

1) You must accurately communicate the work to be done.

I always do this in writing, unless I am working with someone who has a proven track record with me.

While it isn’t a contract or true “specification”, I usually work up a word document that I later print out, or turn into a PDF if I am e-mailing it. I use a lot of pictures and text box call outs on these pictures to indicate what I want done.

See this Adobe PDF example of a siding project we contracted out.

I find that this document clearly outlines what we want to accomplish and eliminates the confusion that can often times happen when you try to verbally describe the work to be done.

It takes me a bit more time to create a document like this, but I can only imagine the costs it has saved me by not having to stop the contractor’s crew and ask them to rework something.

Please keep in mind that the above example document is not a contract, but rather an outline of the way we want the work preformed. I have no idea how much merit it would carry if you end up in court with a contractor, but I am guessing it is better than nothing at all.

2) Always use a contract.

I have to admit I do break this rule if I have a some proven experience with a certain contractor and the job to be preformed is relatively small, like fixing a stoop, or putting on a screen door.  If the job is larger, like building a deck, or pouring a foundation, I will certainly use a contract, regardless of my history with the contractor.

TIP: The contract you use should contain incentives for finishing on time or before, and penalties for each day, after the completion date, that they are late.

3) If it is not working out with the contractor, get rid of them.

Before the siding job on the 602 W. Division property, I had a different contractor wrap the windows in aluminum. The bid came in at $1200, which was a very good bid for the amount of windows we had (28 I believe).  He didn’t really have a contract, but instead tried to get me to sign a one page document which only outlined the terms of payment and not the work to be done.

I wrote up my own contract for the window wrapping and agreed to his unheard of 50% down payment requirement, mainly just to get him to use my contract.

This was a mistake my part as he wrapped about 25% of the windows, and then the started finding excuses to not do the rest.

I personally think that he just didn’t like the cold weather.

I should have gotten rid of him and moved onto the next guy, as it took him four months to finish a job that most other contractors could pull of in a weekend.

He also used my dumpster to get rid of building materials from a project that he was working on at home.  It was easy to figure out who had done it as he was stupid enough to throw away his junk mail which had his name and home address,  along with his construction debris.

I am a pretty generous guy. If someone asks to throw something in dumpster we have, I will usually let them throw away just about anything.

This guy threw away a large amount of material, without asking, and when I called him on it he lied and said it wasn’t his.

Not exactly a class act if you ask me.  It also pissed me off.

I could have saved myself a lot of pain if had I gotten rid of him right away.

Instead, I held out hope for his reassuring promises that were continually punctuated with excuses.  He eventually stopped taking my calls and only finished the work when I filed a small claims action against him.

When the work was done, he demanded payment the same day he finished.

I am certain, if I had not had a contract he would have never completed the job.


How to Market your property in this Market

January 23, 2009


How to market your property in this Market
by James Miller

I am assuming that you are in the same boat as a lot of Real Estate Investors. There are plenty of deals out there to buy, but how do you unload the ones you already have.

Here are a few of the techniques I use for unloading properties in this market.

Tip#1:   You have to make it easy to buy your property.

If you try to sell your home or investment property traditionally, and by that I mean looking for offers that completely pay you off the day of the closing by being either the all cash, or bank loan types.  you will have severely limited the market that you can sell to.

Things have already gotten tougher as 720+ FICO’s and 20% down are now virtually standard. You can also bet that appraisers are not as lenient with their property valuations as they once were.

Here is a list of my alternative selling methods.

Lease Option
You can think of this as a rent to own type program where you get a substantial down payment as option consideration and in exchange you agree to sell the property to the buyer at a given price within a certain time frame.
The tenants are buying the home and tend to take better care of it. You can also get higher than market rents, by agreeing to put some of their monthly payment toward equity build up.
Since the Deed does not transfer until they cash you out with a bank loan, you get the added benefit of being able to write off the depreciation.

Carry back a Second
In this scenario you agree to hold a note for some portion of the purchase price.  This amount can often times be credited toward the down payment amount that they need to bring to closing table making it easier to buy.  The amount of a seller second is often limited by the lender of the first mortgage to a certain percentage, typically 5%, or 10%.
The Deed will transfer so getting your money back if the sellers default can require a foreclosure action. You are also second in line behind a lender who may eat up all the equity in the property in a foreclosure.

Carry back a First Mortgage
If you own a property free and clear, or if the buyers are putting down enough to eliminate any mortgage you have on the property you can hold a mortgage in first position, essentially becoming the bank for the seller.
The Deed will transfer so getting your money back if the sellers default can require a foreclosure action. You are in much better position by holding the first.

Land Contract, or Contract for deed

Similar to a rent to own scenario, but the buyer has a much stronger ownership position.  Many banks will allow a Refinance after a buyer has proven himself or herself under a land contract. The deed does not immediately transfer, but you may need to bring a foreclosure action in the event of a default sue to a stronger ownership position.


Tip #2: Your property needs to have an edge

Anything you can do to differentiate yourself from the competition will help in this respect.  This is kind of like my “why houses need a hook” post.
One of the properties we rehabbed started as a four bedroom one bath home.  We decided to turn one of the bedrooms into two bathrooms making it a three bedroom three bath home. While losing a bedroom is not something you typically want to do, I knew the three bathrooms would give us an advantage over other homes of the same caliber when listed on the MLS.

There are a lot of three bedroom two bath homes out there, but not nearly as many three bedroom three full bath homes.

Tip #3: You will need to spend more on marketing
It is easy to sit back and blame the down market for a lack of results, but the truth is that we are still getting calls on our advertising and the number of calls is always a direct result of how much advertising we do.
It doesn’t feel good to be less results for the same amount of money, but advertising is a cost that directly relates to sales. If the sales numbers for the same marketing dollars spent are dropping,  it is harder and more of a waste of time to try to come up with better, more creative advertising, when you know that increasing your marketing budget will bring you the traffic you need to sell a property.