Using the new tenant’s Security Deposit to pay off the last guy

March 24, 2011
1967 Elcona Mobile Home

Image via Wikipedia


My friend and I were looking through a group of very low end mobile homes in a rural setting. These homes were for sale dirt cheap but had great cash flow numbers to back them up. How great?  On the order of 60% cash on cash return before expenses.  I say before expenses because the guy who was selling the homes had no real records to speak of.  Just a hand written rent role on the back of an envelope.  It appeared to be the kind of thing he may have whipped up ten minutes before we got there so that he had something to show us.

It was clearly not enough to gather any sort of fiscal assessment.

The best I could do was to take a reasonable guess at what the expenses might be and interview a few tenants to see what they pay for.   I wasn’t really interested in using these as rentals, but instead my idea was to start getting tenant buyers into the mobile homes. Instead of $200/month in rent, I could likely get $1000 down and $300 per month for someone who wanted to buy the home.

Since the buying mindset is different than the rental mindset, I could also make the new tenant buyer responsible for maintenance.   Homeowners always take care of their own repairs, but renter will look for the landlords phone number at the first sign of a problem.

The opportunity, something you should always be looking for with a real estate investment, was that I thought I could increase the income and nearly eliminate the expenses by getting in “Buyers” instead of “Renters”

I then asked the seller how much money he was holding for security deposits. I use this seemingly innocuous question to verify how much income he is actually getting, as landlords typically set the security deposit at about one months rent.  I also ask  “so security deposit is usually one month’s rent then?” as a follow up question later on.

What he came back with surprised me:

“I just use the security deposit from the guy who moves in to pay off the guy who moves out.”

It was a great example of the old phrase robbing Peter to pay Paul.  Of course, you can see the problem with this – what if you can’t find a new tenant?

It also told me that he was running his business really tight, or possibly had the habit of blowing any cash he got in his hands.

In my mind security deposits are funds that you should never touch, but instead set aside in a separate account.  By spending the funds he was supposed to hold this guy was breaking a level of trust that could get him into trouble later.

If , for any reason , you find yourself dipping into the security deposit’s you are holding, it is a warning sign that your business, and possibly your moral fiber, is in trouble

We eventually passed on the group of mobile homes, mainly because there was too much deferred maintenance and they were a bit too far from where we like to operate, but the lesson has stayed with me.

Advertisements

The Art of Patience in Real Estate Investing

February 18, 2009


The Art of Patience in Real Estate Investing
by James Miller

.

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.


The “right” Real Esate Investing system

February 11, 2009


The “right” Real Estate Investing System
by James Miller

.

.

One of the confusing parts of getting started in Real Estate investing is that there are so many different ways to do it and so many guru’s out there touting why their way is the best.

I am going to let you in on something it took me a while to discover.

It all works.

Yep. Just about everything you see out there every one of the late night infomercials, every guru you have ever hear talk at a seminar and fought the urge to run to the back of the room to buy their CD’s or Boot camp. All of their stuff works.

But it doesn’t work for you.

Here is the difference:

It doesn’t work because you are doing something wrong.

I run under the assumption that there is a way to make just about every money making opportunity I  have ever seen work, but the limiting factor is me.

As an example, I had a hard time getting used to the idea of putting up “I buy houses” signs and ads all over the place. It just seemed too cheesy to me.  One of my partners was fully on board with this phrase.  She took the time and money  to have vinyl letters made with this phrase and her phone number on it and placed them on her car.

I could barely ride around with her in that car I was so embarrassed by it.  I was wondering what people must think.

She had spent $60 on those letters and gets an average of three calls a week from someone wanting to sell their house.  There are also people who come up to her at gas stations asking about it.  She has even been pulled over by a police officer who wanted to sell his house.

Because I wasn’t comfortable with the idea of that cheesy phrase,  “I Buy Houses” didn’t work for me.

Guess what most of my house buying advertising says now?

Too often we get in the way of our own progress by wanting to change a proven system, or not following through with what we are supposed to do because we don’t feel comfortable with it.  Often we want to save some money by changing things.

If we try something and then later give up. It is very easy to blame the system or the person who taught us, but the true nature of why we aren’t successful is that we have done something wrong.

We are the ones to blame, yet we never do see ourselves as the culprit.

If you look at Real Estate, there are thousands of people who are successfully short selling, successfully flipping, successfully assigning contracts, lease optioning and buying using land contracts.  People have been using creative techniques to make money in this business for decades.  So there is a way to do it.

There is a path to follow to get the goal you want.

But you will never get there is your focus is on finding the “right” program.

They all work. You just need to make sure you take the one you have and do it the right way.


The Real Estate Investor mindset.

February 10, 2009


The Real Estate Investor Mindset
by James Miller

.

Eliminate the entitlement mentality.

If you are the type who thinks that you deserve certain things just for existing, you should stick to a day job.

We don’t deserve anything.

Please understand that everything we have, has come to us  either as a gift or in exchange for some service.   We need to be grateful for what we have.

It is also good to keep in mind that, from here on out, everything you will receive in your life is owned or controlled by some one else at this very moment.

Understand that everything is your fault.

With very few exceptions, I am certain that everything bad that has ever happened to me can be linked back to something I did that I shouldn’t have, or something I didn’t do that I should have.

Even if you are in a car accident that is caused by someone else, I hear that insurance companies consider you 10% at fault just for being there.

You take control of your life when you realize that you are responsible for the outcome. I honestly feel sorry for people who continually feel taken advantage of, or that they have been victimized.  How little control they must feel they have over their lives.

In high school my car had broken down and the stereo and musical car horn (yeah, I was that cool) had been stolen out of it.

I was very upset.

I vowed to find out who did it. I reported it to the police. I watched everybody and anybody with the suspicion of a tv police detective, I even eventually accused innocent people of the crime.

In reality, I was at fault for not locking the car after it broke down. Even though I lived in a small town, it was an obvious and completely irresponsible thing to do.

I could also say that I was responsible for choosing such a faulty car, or not maintaining it. You see, there are lots of significant points that lead up to any given event, and if you can accept looking at it this way, “blame” and “fault” become a very slippery words.

Mindset of Service

There is a saying that goes “you can get anything you want by helping others to get what they want.”

This is vitally true for Real Estate Investors. Our job is to help people to buy and sell their homes. We use the knowledge we have to make this happen for people whom, most of the time, cannot get it done in any other way.

We are at their service.

If we keep in mind our service to others, great things can happen.  For one, you stand out.

I remember a guy who had called me about an apartment.  I didn’t have what he was looking for, but made some calls to other landlords on his behalf and gave him the names and numbers of a few more landlords that I knew.

He was so grateful he stopped by the house I was working on and told me “Thanks so much, you are the nicest guy I know.”  While I didn’t get him as a tenant, I could tell his compliment was genuine, and for me, was reward enough.

If you do this with enough people, word gets around that you are the person who will go out of your way to help someone, even if you have nothing to sell them directly.

Have a thick skin.

You will especially need this when starting out. Creative Real Estate Investing seems to have a bipolar distribution of proponents that love it and those that think people using these techniques are financial scoundrels,  scamming people out of their home equity.

It is only fair to assume that there will be those close to you who feel the same way.  As Jesus said “Only in his hometown, among his relatives, and in his own house is a prophet without honor.”

You will need to have particularly thick skin with the people closest to you. It is probably best to wait to tell them anything until you have what Ron Legrand calls the “shut up check”, from the bank or title company.

Ready- Fire-Aim.

In this business you can’t wait for all of the lights to be green before pressing on the gas, because the lights will never all be green at the same time.

The best you can do is to start out with low risk ideas, things like Bird-dogging, Assigning contracts, or working leads for another investor.  As you gain confidence and experience you can go onto bigger and better opportunities.

You need to be like an airplane in flight, start off in the right direction, build up speed to get off the ground, and once in flight, continually reevaluate where you are at and what you are doing to best align with your target destination.

Self Motivation

In this business, you are accountable only to yourself. Know your limitations and find people to partner up with to compliment what you lack.

I learned this lesson when I partnered up on a deal with my friend who is a banker, besides getting us a great deal on the interest rate for our loan, he keeps simple yet immaculate records of everything that is going on in that LLC.

I had no idea how bad I was at this until I did this deal with him.  I just knew I didn’t like it.

As a Real Estate Investor, you are also the only person who is going to get the things done that you need done. There is no boss to be accountable to in this business. Only yourself.

Patience and Persistence

Getting something going with real estate can take a long time. In order to find the killer deals you have to kiss a lot of not-so-pretty frogs. Some of these frogs will swear to you that they will turn into a Prince despite the warts.

Every seller I have ever talked to has some reason that his or her house is a great deal. Some actually get me believing it for a while, but very few actually are.

It can be a hassle screening through property after property, but eventually you find the one that is worth it.

Continual learning.

There are a lot of things to learn and some can only be understood by doing them.

One example I can think of is going to the closing for your first bank loan.  Nothing written can precisely, and fully, prepare you for exactly what you will think, see, and feel during the closing.  The party of players sitting around the large conference room type table, the nervousness in the air. the large amount of paperwork you resolve to sign, without fully knowing the meaning of.  The realization that everyone there is getting a piece of you via your bank note.  Nothing can educate you to that experience that  actually sitting in that chair can.

Accept that you will make mistakes.

This is really part of the learning process.  You can’t get around it. Accept mistakes when they happen, and take with it the associated learning experience.

You will have likely paid dearly for it.


Why would any one want to be in Real Estate?

February 8, 2009


Why would anyone want to be in Real Estate?
by James Miller

This question is particularly pertinent right now.

Here are my top reasons for investing in Real Estate… especially now.

1) Real Estate is on sale.

Houses all over the country are selling at a discount from the sellers themselves, from the lenders, or even the US government.

2) I love the Write offs

Real estate allows me to depreciate about 3.3% of the value of the property the first year.  It is a declines after that amortized over 27.5 years. But this is a phantom loss that I can hold against my earned income. Sure I have to realize that deprecation when (or if ) I sell, but the dollar I can write off today is worth much more than the dollar I have to pay back in the future. this is the whole time value of money thing.

Since my real estate is set up as a business, there are plenty of write offs we get to take in our daily real estate routine.  Things like computers, printers and digital cameras are necessary for the work we do on our rental and rehab properties.  So are the tools I pick up at Home Depot, and many other things.

This is essentially a discount from what I would have to pay if I used these things for personal use.

I currently have so many write offs (and I am so underpaid at my current job) that I have not had to pay in income taxes in the past several years.

3)  I can get into a property cheap.

No other time in my investing career has it been so easy to buy a property from a seller with so little out of pocket.  I have literally had sellers pay me to take their house.  I have others where my net out of pocket was only a few hundred dollars and several more where the cash outlay were limited to just a few thousand dollars.

These are small sums that allow you to take control of an asset easily worth 100 times the amount you have into it.

4) Property appreciates in value.

No, I swear it really does. We have had a bumpy ride over the last few years, but when the fear is over and common sense comes back to the market, we will again see the slow steady rise in real estate values that we have been accustomed to over the past 100 years.

I am not saying that there won’t ever be bumps in the road again. I am just saying that what we have seen is an anomaly due to overzealous investing from abnormally easy loans.  Everybody got spanked.  We’re sorry and we promise not to let it happen again…. even though it eventually will.

5) Property provides cash flow.

I am making reference to rental property as rehab property can cost you money until you sell it.  I am in a particular pinch right now as I have three vacant homes we are in the process of selling that have created a net negative cash flow.

I took my eye off the cash flow ball and focused a bit too hard on the speculative rehab profit.  The market tanked and  I am in line with a lot of other investor and developers…. trying to sell ice to the Eskimos.

How can you learn from this lesson?  Always keep your eye on cash flow. As Billionaire Bill Bartmann says, the most important number in your business is the amount in the checking account. When that  goes to zero, everything stops.

If you always have a positive cash flow, your checking will never go empty.


Real Estate Investing – The Greater Good

February 6, 2009


Real Estate Investing – The Greater Good
by James Miller

So much of the focus on Real Estate Investing seems to be on making money. That is the first and truest motivation for what we do.  I feel that there is nothing wrong with this. Being a capitalist, I think anything that gets the Money moving in our economy actually does us good.

But before I turn this into  Gordon Gekko’s Greed is good speech, I want to talk about the other side of what we do, when we buy or sell a place using creative real estate techniques.  I want to talk about how it helps people and the overall good it does.

Think of the benefits to our local economy and community when we do the following investing action:

When we buy a fixer upper, repair it, and resell it with seller financing:

1) We are saving this home from further ruin that time can create. At some point homes become so deteriorated that after enough time only the only choice is the wrecking ball. By saving these homes we are indeed recycling them and keeping a large amount of material out of the landfill.

2) We raise the property values in the local neighborhood. This may or may not happen to any significant degree, but it makes it easier to sell your house if it is sitting next to a freshly  restored Victorian, as opposed to being next to something that looks like a haunted house.

3) We increase local tax revenue. While we never like to see it coming, we benefit the community by creating more assessed value in a home that benefits the tax roles.  This is a dollar savings that  minutely lowers everybody elses taxes.

4) We minutely lower the cost of housing by providing another viable living space.

5) We give hope, usually to a family that is transitioning from renting to the American dream of home ownership.  We are providing renters a way to start building equity in their home even though they may not be able to qualify with a bank right now.

6) We give hope, to the seller we buy from who could not move their home otherwise. This is especially true in this tight market.  I have talked to Realtors who have sold nothing over the past six months.

With our ability to sell via lease options and other creative means, we are constantly and consistently able to sell homes.

7) We are good for the economy. I believe that if there were a massive push from our government to educate it’s population on the ways of creative Real Estate Investing we could pull out of this economic slump without the need for huge bailouts.

The banks would still have to take a hit, but a nation of savvy and creative Real Estate Investors and home buyers could eliminate the inefficiencies in the market.

If you think about all of the people out there right now who would gladly rent or sell their property with creative financing, just to get out of it, but they don’t know how, so they are letting it go into foreclosure.

Compare that against the amount of people that are ready, willing, and able to come up with a little money down and make the monthly payments in order to get into a home of their own… but they don’t know these options exist.

If you compare these two things then we know that there is room for us to make a difference in our economy without a huge infusion of bailout cash.

…..Then again, maybe I am just an idealistic dreamer.

Since posting this I have read Francine Hardaway’s open letter to two mortgage companies. In her blog, she talks about how much better things would be for her and her lenders if  they would accept a reduced interest rate as opposed to her only other option…Foreclosure.


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.

.

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.