A Letter from Eric – Pricing the assignment of contract.

June 12, 2009

Hello sir.

I was wondering if you could give me a little bit of information referencing assigning contracts. Can you please let me know how to do this correctly. I think I get the gist of it I am just confused in one area. What if the seller talks to your investor about the original purchase price?  Next I wanted to know how you find your investors? And lastly how much should the whole transaction cost, and what is average profit? I notice that some say 1 to 3k but I have heard of 10-20k.

Best Regards

Eric

Hi Eric,

The basics on assigning a contract is that you are selling your position in a real estate deal for a sum of money. Setting that price really depends on how sweet the deal is and as they say in Economics class…” what the market will bear”

If you can put yourself if the position of the seller and it seems to be a great deal, then you should have no problem commanding a  premium for it.

As an example I have a blog post on a deal that one of my partners did where she got great terms on a property that had quite a bit of equity in it. The sweet part was that the seller was carrying back financing at zero interest.  In that instance, she was able to command $8500 for assigning the contract.

In essence, the better the deal is the more you should be able to get for it.

On your question as to what happens if the seller talks to the investor on the original sale price, I think you are getting at one of two things:

1) Can they go around me and make a deal without my help?

The answer to that is “no”, not while the property is under contract. However, they may try to wait you out, hoping that you won’t find an investor, or close on the property yourself. Once you fail to make deal, they can then go back to the original seller and do the deal themselves.

This is why you generate the buyers list first and have a ton of people that are ready and waiting for you to find them a house.

Or else you must mean

2) Won’t they be upset when they see how much money I am making off of them.

This is really a moot point as if you are assigning a contract, the buyer of the contract will certainly know what the original price is.  It also really doesn’t matter what you paid as long as the new buyer sees the value in the deal for themselves.

Now you may be talking about creating another contract to sell the property at a higher price, but this would ultimately involve two closings or a compressed closing,  the simplest and most straightforward way is to assign the existing contract you have with the seller to the investor/buyer and walk away. Let them worry about financing the deal, inspections and closing dates.  You just take the check and hand over your position in the deal you have created.

There is some legal jargon for a general assignment of contract found at: http://www.lectlaw.com/forms/f203.htm

Keep in mind that I am not an attorney and I recommend that you use one whenever possible. Getting connected with the right attorney will save you more money than they ever cost.

Wikipedia has a good section on assignment of contracts:

http://en.wikipedia.org/wiki/Assignment_(law)

As for finding deals….

I have a few posts under “finding deals” and “marketing” at the right, but the best one is probably the “finding deals on Craigslist” blog post  post  at:

Take care,

James

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The Art of Patience in Real Estate Investing

February 18, 2009


The Art of Patience in Real Estate Investing
by James Miller

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I have a friend who is working on buying his first property. Besides looking for his own personal residence, he wants it to be a good investment.  He is looking for a deal.

He is looking at a REO (Bank Owned) property that has been siting for a while. The condition was pretty rough, so the bank decided to put about $5000 into it to replace carpet and paint the place. A surprisingly good move on the banks part.

The fun part for me is that I see a lot of what I felt and did when I was looking for my firs investment property. I see his excitement and energy.  I also see how he is too close to the deal and starting to justify things.

Today he called me and told me that they are only off by $1400 in price, and that he is feeling a lot of temptation to call up the broker and tell him that he will accept the banks last offer.

I preempted my next statement by telling him that it really comes down to how badly he and his girlfriend want the property. Since they are also looking at if for a residence, there can be some emotion involved.  And I would hate to see him lose the property if he really wanted it.

As I had walked through the property for him, I then followed up with these two thoughts:

“It is a good deal, but not a great deal.”

And

“Banks are a lot more flexible than they let on.”

He had told me that the lender claimed that under no circumstances can they come down that extra $1400, they are already at their bottom dollar.

If this was an individual, I may be more inclined to believe it, but in reality nobody understands the time value of money more than a lender. They have to know that the longer they sit on a property, the more it is costing them.  When given the choice between a $1400 hit and waiting another six months before getting a seller, I have to believe that the bank will eventually cave in.

There is always the chance that my friend will miss out, that some other investor or individual will decide on buying the property at that price, but if you can position yourself so that you are ok with any outcome, you will always do all right.

Patience is the real key to buying, especially when starting out, where everything looks like a deal and you are so hungry to start investing , you can barely stand it.

Here are the basic steps to placing an offer on a property so that you can rest at night.

1) You need to quickly evaluate a property as best you can.
2) Set the price/ terms you are willing to buy it for
3) Negotiate to do better than the Price and terms
4) Be ok if you get an accepted offer, and willing to walk away if you don’t

I also noticed that my friend was commenting on how his Realtor was pretty close with him and he felt comfortable that he was looking out for his best interest.

He then later told me how the Realtor had commented that $1,400 was only going to be an extra X number of dollars per month on a payment.

This is a common technique that is used to sell. Taking a number that seems large and breaking it into terms that seem smaller. We have all heard some advertisement that talks about how something only costs “31 cents a day” or “less than your daily cup of coffee each morning”.  This technique is used to break down our barrier to a pricing objection, by making it seem to be an insignificant amount.

When I heard that the Realtor did that, I told him that he might want to be wary about whose side the Realtor was really on.

I can only imagine how the enticement of a commission in these slow times can be tempting, maybe even to the point of bending morals.


Cash on Cash Return vs. Internal Rate of Return

February 2, 2009



Cash on Cash Return vs. Internal Rate of Return

by James Miller

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Cash on Cash
Cash in Cash return, or Return on Investment (ROI)  is the easiest Rate of return to calculate. It is also the one I use the most often as it tells me what the money is generating with regard to actual cash I can put in my pocket today.

To calculate it you take the amount you are getting from an investment, typically on an annual basis,  and divide it by the amount you have invested. Multiply this number By 100 and you have a percentage representing Cash on Cash Return.

For example if I have $10,000 in a property that is netting $100 per month, I am getting $1200 per year on my $10,000.

I divide the $1200 by $10,000 to get .12   I multiply this number by 100 to get my percentage of 12%

As you can see, cash on cash is a pretty simple and straightforward calculation. But what if we want to take into account the amount we are paying down on the loan each month, or the appreciation of the property?

Internal Rate of Return
Internal rate of return (Sometimes called Annual percentage yield) is the total true return on an investment taking into account depreciation, appreciation, and equity gained from paying down the debt.

It is much harder to calculate, as items such as depreciation depend on your taxable income. You also have to make some assumptions with regard to appreciation until a property is actually sold and that number is known.

This calculation is typically done over a holding period of 3 to 7 years. The period is usually fairly short since IRR typically decreases as time goes on.

If we take the example above assuming the following:

1) Home is worth $100,000.
2) I can depreciate 3% of its value the first year,
3) I am in a 35% tax bracket.
4) That property values have appreciates at 6% that year
5) I am paying down $100 per month toward the principal on my mortgage payment.

We get the following:

$1200   Cash on Cash return from above
$1050    Depreciation ($3000 Depreciation X 35% tax bracket)
$6000   Appreciation ($100,000 X 6%)
$1200   Principal Pay Down ($100 X 12 Months)
_______
$9,450   Total Internal Return

As a percentage:

$9450 first year IR divided by $10,000 initial investment = 94.5% IRR the first year.
Keep in mind that this is not spendable cash. Appreciation was our biggest number and it won’t be realized until we sell the home.

I have found that if I am doing well with regard to cash on cash return, my IRR Is going to be a better number. This assumes that there are no deferred maintenance issues and that I am not going to sell the property at a loss.


How to search for a property deal on Craigslist

February 2, 2009


How to search for a property deal on Craigslist

By
James Miller

Craigslist is great for searching for just about anything, but the problem Real Estate Investors face is that Craigslist is divided into Cities.  If I want to search for homes for sale I have to check four different cities in my area.

The tools:

I stumbled on a web site that allows you to search multiple cities at one time on Craigslist. This site is Craigshelper.com.

Besides searching for items on Craigslist, you are able to see what is availible on Ebay as well.  As of this writing it looks like there are plans for them to add functionality to the site so that you are able to search Kijiji and Backpage.

Craigshelper has a location for you to type in the zip code that you want to search around and a cool little slider you can use to specify the radius of the search.

As powerful as Craigshelper is there is another Craigslist tool called Ad Notifier for Craigslist that will alert you  the moment someone posts something on Craigslist that fits the criteria you have entered.  There is a video on the site that shows the software in use.

Here is a link to a screenshot of someone who has used it to search for anything with the word “free” in it.

You can even configure Ad Notifier for Craigslist to text your cel phone when a match is posted.

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Search terms are vital.

Instead of using generic terms like “homes for sale” or “ranch home” that focus on the properties,  I use search terms that locate the motivated sellers.

The follow search terms may be useful for finding people that need to sell their property:

“Motivated seller”

“will finance”, or “Owner will finance”

“seller will carry second” , or “Seller second available”

“Take over Payments”

“Owner Desperate”, You may get more than just property with this type of search.

“Homeowner must sell”

“house must go”

“All offers welcome”, or “considering all offers”

“will sell on terms”, or “terms available”

“will sell subject to”  although this is rare to find.

“OBO”, or “Or Best offer

“below appraised value”

“will sell for what I owe”, or “will sell for what is owed”

“Assumable”

“flexible seller” , or “Flexible terms”

“creative financing ok”

“please help”

“Lease Option”

“rent to own”

This is not an all inclusive list of terms to search for motivated sellers but will certainly get you started.