Real Estate Investing – The father figure.

August 6, 2009

Dealing with the father figure
by James Miller

.

.

I have seen it over and over again, and here is how it works:

You show an apartment or a house to a young couple, they love it and are anxious to rent or buy, but they want to bring their dad, step father, father in law, or other paternal type figure over to take a look at it. 90% of the time, this blows the deal. Here’s why…

We all play roles in our life, mother, daughter, teacher, golf pro, author, etc. When the young excited couple bring Dad over to see the place, he knows he is being brought over to evaluate, as he is the “expert” on such things. Even if he is not at all qualified, he is placed in this role, and feels a strong need to live up to it.

While the young couple is doing this to feel as though they are covering their bases and being as careful as possible, the truth is that they have already made their decision. What they really want Dad to do is to tell them what a great place they found, what a great deal it is and how smart and lucky they are for finding it.

Dad’s role is not one designed to placate. He instead feels a need to critically evaluate the place, point out any and every little issue he finds.  This action, while making the young couple feel less secure about their decision, serves to validate his role.   By it’s very nature, his role needs to be contrasting to theirs. He needs to serve as devils advocate.

For the Real Estate Investor or Landlord, the father figure is one of the worst characters to introduce late in the game.  At best, they create points of contention, about the property, which easily turn into negotiating points.  The father figure is not really objective, but critical, as for him to go into a place an not find anything means that he isn’t really serving a purpose. After all he if he doesn’t find anything, he isn’t doing his job.  Right?

It is a different story if Dad comes along on the initial viewing. His role is on a more even playing field with the young couple.  They are evaluating it together, before they fall in love with it. His role is less of a critical one and more supportive. Often times Dad will be the first one to commit to a place, and once committed, it is hard to change his mind.

Since the young couple has really already decided that they like the place before they bring Dad on the scene, his critical inspection also can cause arguments between them.  This brings a whole negativity into their minds as they stand in the apartment or house. You don’t want their impression and feel for the place biased by the emotions brought out in argument.

How do we counteract the father figure?

Always be around when the father figure is there.
If you are in the apartment or house when the father figure is giving it the white glove treatment, it is much less likely that he will be as forthright in his observations. He will hold some comments back for the car ride home. Hopefully he forgets before they get to the car, but at least that negative impression is happening in the car and not in the home or apartment.

Get them to commit to it before letting Dad have a crack at it.
If you can get a down payment, or deposit from the young couple they will have mentally committed to it.  If Dad later comes through with a bunch of reasons why they shouldn’t buy the place, they will actually respect his opinion less, as they are mentally tied to it.  In psychology this is referred to as cognitive dissonance.

Use the “take away”.
The take away is a sales strategy where you start to tell a potential customer how the product may not be right for them, or how they may not want to go ahead with a purchase.  If you are standing in the home with the young couple, Mom and Dad, and Dad starts going off about how the light fixture needs to be replaced. Just start telling them that if one little light fixture makes that much difference, maybe the place isn’t what they are looking for, and that you do have some other people who are interested.
Watch how fast dad starts back peddling when he realizes he is trashing the deal for his kids.  His role of evaluator evaporates and he quickly starts thinking about how mad they will be at him.

I have to admit it is absolutely magical to see in action.

* I often refer to this role as the father figure, as it is more traditional. In reality it is can be any authoritative figure in the young couples life, regardless of gender.


Renting vs Buying

March 9, 2009


Renting vs Buying

By
James Miller

.

I saw this article on Yahoo about the benefits of Renting over buying a property. This fellow seems to make a broad statement that Renting is better. My take on this familiar argument is that it really depends on your situation.

1. It’s not apples to apples.
You can rent a decent two bedroom in the area where I live for anywhere from $600 to $750 per month.  A small, two bedroom house is going to set you back about $70,000 to $90,000.

Costs will be comparable on both.

But a house is not the same thing as living in an apartment.  Sure they are both “places to live”, but so is a cardboard box alongside the highway. You could argue pretty low living expenses for the cardboard box when compared to a house or apartment, but it’s a lot different.  Human taste and comfort comes into play. How much value do you put on not being packed into a building with other people? How much value on not dealing with a landlord or management company.
These intangibles make a difference too.

2. “Rent instead of Buy” pundits always make this mistake:

As Taken from the Yahoo Article:
“Houses looked like smart investments in 2007. They had returned 9.3% a year for a decade, while stocks had returned just 5.9%. This year, with investors fleeing both houses and stocks, both probably look like a waste of money.”

Sounds reasonable. Until you realize that the return on investment only makes sense if you buy your house all cash.  Since most of us don’t, you have to take into account the return on the amount you have in the house, which is usually the down payment plus some closing costs.  If we use numbers from his example and you are getting 9.3% on your $100,000 home, but only put 10% down You are getting an equity return of $9300, on a $10,000 investment, or about a 93% return.
Try that in the stock market.
I am sure it can be done…..under very speculative conditions.

3. The final thing to keep in mind is that too often people get more house then they need, and as of late can afford.  If you stick to a reasonably sized house for your needs, the payments are often comparable to renting, and the lifestyle is much more comfortable.


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.


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 avoid a Real Estate lawsuit

February 5, 2009


How to avoid a Real Estate lawsuit
by James Miller

.

I have been investing in real estate for 13 years and have not yet been taken to court.  I have had to sue and evict tenants that didn’t pay, but I have never been to court as a defendant over a Real Estate deal.

I have gotten in a  “discussion” on a Real Estate Bulletin board where there seems to be some strong feelings as whether or not to use a purchase and sale agreement when taking over  a property “subject to”.

I have an attorney who  adheres to the KISS principal and that any time you can get by without using a piece of paper, you do so.  He feels this way as any document you create or sign can be construed two ways, for you, or against you. As I understand it, the court looks more critically upon the person who provided or drafted a document.

It occurred to me that the reason that people feel so strongly about their need for legal documents is that they want to feel protected. They are afraid that if they don’t have the right piece of paper someone will get them.

It is my contention that if you focus on helping people, treating people fair and honestly and if you don’t try to take advantage of them then you could get by with very little documentation.  If they are in agreement with what you are doing, there is no reason for them to sue.

Here are the things I try to do to keep that from ending up in court:

1) I don’t make promises I can’t keep.
I certainly don’t sign any agreement where I am agreeing to do something that I don’t think I can do.  I tell people where I sit with regard to the deal and make sure that

2) I make sure my intent is clear.
If I ever end up in court and there is an issue over a series of events, I want everyone to know what I was trying to do.  If possession is nine tenths of the law then intent has to be the other tenth.  It is awfully hard to misinterpret events if the intent was clear.  I will often times use a non-committal letter of intent to fill in the blanks on any understanding that I have with someone on  a  Real Estate deal.

3) I don’t piss people off.
I don’t get in arguments on a $100,000 Real Estate deal over a few hundred dollars.

I seek first to understand what they want to tell me, and then let them know my position.

I try to sandwich bad news with two positive things.

I let them know that we are in it together and I am doing what I can and that I am always going to be fair honest and open with them.

I feel that the main reason that people end up in court is that they get upset because they feel that hey have been taken advantage of, or wronged in some way where the other party will not make it right.

4) If I wrong someone, I make it right.
Often times I will go above and beyond to make it right.  I believe that there is a certain inertia or stickiness to the way a person feels about you.  If they like you it takes a lot for them to not like you, if they don’t like you it takes a greater effort to make them like you again.  By doing more than what is expected to make something right, you can overcome the inertia of dislike.

5) I keep my properties in LLC’s and Hire out much of the work I need done.
In order to be sued, you either need to do something, or have something.  By keeping the properties in separate LLC’s or land trusts I limit the amount of exposure that any one property has. By having others do the work, I limit my own personal exposure to lawsuits, by not creating damages or negligence through my actions.

While nothing can keep you completely safe from getting sued, I think these things have helped to keep me on the plaintiff side of the courtroom.


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.


Five things you need to know before becoming a landlord

January 22, 2009



Five things to know before becoming a landlord

by James Miller


These are things I didn’t really give much credence to until I started investing in Real Estate.  I share them with the hope it will raise awareness for those just starting out.

These five items are targeted to those of you starting out who will become landlords in the process.

Note that if you think that the lease option exit will not make you a landlord, you are mistaken.  While you do seem to get a higher caliber of character as a  tenant-buyer (probably because as they have more money on the line), you still have to do most of the same babysitting duties as you do with a  straight rental unit.

1) If you are going to be a landlord, you will have to evict tenants.

There is no “if it ever happens”. You will eventually have to evict someone.

People who seemed so nice moving in are the very same ones who will be saying how terrible  you and your apartment are to the Judge when you are in court.

I knew this was a possibility when I bought my first property, but by the time I got to 20 rental units, it seemed I had to start the eviction process more often than my lawnmower.

I have really only had to go through with a full blown eviction a few times, but I have had to serve “pay or quit” notices at least 30 times.  As with a lot of things in Real Estate investing, the things you really don’t want to do, are the very same things that you most urgently need to do.

Serving notices and evicting tenants goes with the territory of being a landlord.  You should accept this and start learning the eviction laws and court system in your area.

Getting a good attorney to guide you in this area is crucial.  If you don’t serve papers correctly, or miss a step in the process, they may hold the case over for a later date, costing you money as the defaulted tenants continue to live in your apartment. And once they know you are taking them to court you have zero chance of the tenants willingly paying you anything.

2) Paperwork, bookwork,  and paying bills will take a lot of time.

Before I started obtaining properties, I could bang out my monthly bills in about 15 minutes.   It now takes me over two hours,  just to get bills for the properties written out every two weeks.

I really should be assigning this task to someone else, but never seem to get around to it. I have to admit that part of it might be my controlling nature not wanting to let go of something so integral to the business.

Paperwork and bookwork take a lot of time too,  getting the paperwork done for a new tenant or tenant buyer to move in involves: a lease,lead based paint disclosure, move in move out sheet, welcome letter, and a schedule of security deposit withholding fees.

Most of these I have multiple copies of, but they all need explaining when turn over the keys.

My brother who is my partner in the majority of our properties is in charge of the bookwork. We use Quickbooks as our accountant seems to speak to that software very well.

Even with this premium software package to speed our bookkeeping, I am sure my brother spends no less than five hours a week on entering information. This is mainly due to the fact that we have several rehab projects that generate a lot of receipts.

The properties are  costing us ten hours per week just to keep the papers in order and get bills paid.  This doesn’t even include the periodic phone calls and letters to the tenants.

3) Advertising expenses will be a lot more than you think.

The classified ads we place are a lot more expensive than I thought they might be.  When I have vacancies, it is normal for me to ring up a classified ad bill of over a $100 before we get the right person in.

Now there are a lot of places where you can advertise for free, like posting flyers at the local convenience store, or on Craigslist, but for us the newspaper classifieds out pull the free ads by about 4 to 1

When you have an empty apartment that is costing you $150 a week to hold, you want to generate as many leads as possible as quickly as you can. Newspaper classifieds becomes a necessary expense.

4) You will have to clean and touch up most apartments after tenants move out.

The law allows for “normal wear and tear” to an apartment. What this means to you is that you can’t force the old tenants to make the place move in ready for the new ones.

Some tenants are really good about leaving things in good shape when they leave, but in most cases you will need to have someone go through and clean the apartment after they have left.

In my experience no one ever cleans the stove.

You will be able to deduct for some cleaning and repair expenses, (I do deduct for a stove cleaning) but this is  a built in cost to apartment turn over.

5) You will need to keep a bigger reserve amount than you think.

“Reserves” is the money that is set aside each month for replacement of things like a worn out carpet.   The problem is that the big ones can take a huge bite out of your checkbook.  A water heater will set you back about $300 if you install it yourself.  A furnace can easily be $5000.

Even if if you have  reserve amount of $50 a month being set aside, a new furnace will take over eight years of reserves to pay for it.  This assumes you don’t use the reserves for anything else during that time, which in eight years, is pretty unlikely.


Answers to the three Real Estate questions you are most afraid of.

January 19, 2009


Answers to the three Real Estate questions you are most afraid of.

by James Miller

1) Are you new at this?

The number one mistake you can make when starting in Real Estate investing is trying to come off like you know more than you do.  Experienced professionals will see through it in a minute.

There are a few cases when this will come up most often; First, when dealing with Real Estate Agents, and second, when dealing with sellers.

Real Estate Agents and sellers can be quick to discount the legitimacy of your offer if the sense you are new, but pretending to be more knowledgeable than you are will only get you discredited in their mind even faster.

Much of this is part of the road you have to take to get experienced, and you shouldn’t hide the fact that you are new as the questions you ask are the building blocks to educating yourself.

So how can you be taken seriously when just starting? Let the people you are dealing with know that you are new, and that you don’t have all the answers and could use their help working through this first deal.

Tell them that you are gathering information for an investor you are partnering with.

Here’s a secret: They really don’t care if you are new.

Real Estate Agents and Sellers  just want to make sure the offer you are presenting them is solid and that they will be able to close the deal. They don’t want to waste their time.  Their biggest concern is really whether or not the money is there behind the sales contract.

I am sure the best combination in a sellers mind is a uneducated investor who has a whole bunch of cash.  It’s not the “new” part that scares them, it is whether or not the offer is solid.

The best course of action for new investors? Let the people you are dealing with know you are new and ask them for help.

2) Prequalification letter.

Realtors will often times require a prequalification letter from a bank to accompany any offer.   While some state it as policy on all offers, in my experience this requirement tends to go away after you have closed a few deals.

To a Real Estate Agent a prequalification letter is really more paperwork that they don’t want to have to keep track of,  but many do use it to try filter out those who can preform and those who can’t.

As Real Estate Investors, we know that once we get a property under contract, there are lots of ways that we can make money off of it, and it doesn’t necessarily require that we have a whole lot of money to begin with.

We can assign a contract, do a double closing, or bring on partners to invest with us.  All of these things don’t require money, but they do require us to have a signed Real Estate Contract before anyone will talk seriouly about a deal. Without the contract you have nothing. A verbal agreement can break down at any time, and a hot lead can be snatched up by another investor quickly.   Real Estate Agents don’t always buy into an investors line of thinking, and would much rather know that the money is there, than trust that it will be later on.

Here is how to handle the issue of the prequalification letter.

If you have money, even if it is sitting in a 401k, print off a statement and give it to them. Sometimes this will suffice as many agents will be satisfied with anything that loosely fits the definition of a prequalification, as long as they have some piece of paper to go in that file folder.

I have a generic letter that I had my bank write up early on that seems to pass as a prequalification letter, but has such generic wording as not to commit the bank to anything. In it’s strictest sense a prequalification letter really doesn’t do that either.

The letter we have goes like this:

[lender] will be reviewing your loan request. This letter is not a loan commitment, but only states that we are willing to review your request for the purpose of financing, but are not committed to any potential purchases that [your company or you personally ] present to us.

I used this letter over and over again when we were first staring out and it was only rejected one time as not good enough.

My last thought on this is that when you are staring out, there will be a lot of resistance from those who don’t know what can be done, and a lot of stumbling around until you find the right people to help you.

Don’t let this deter you.

If you find yourself struggling while dealing with someone and the results you are getting are not commensurate with you efforts, get rid of them.  Lif e is too short to bang our heads against the wall dealing with people who aren’t willing to put in the effort to work with us….. Especially if they aren’t fun to hang around in the first place.

3) How much are you looking to invest?

This can also be phrased  “What price range are you looking to invest in?”. Both questions are the same, a nice way of asking how much money you have.  My standard answer has always been the same:

I am willing to look at anything that makes sense.

You will have to define “what makes sense”.

When looking for rental property, I have often described the 1% rule as a general guideline for what I’m willing to look at.  This is where I need to see a gross  income of 1% of the purchase price of the property each month in order to consider it for further evaluation.

If I am looking for a fix and flip project. I will tell Real Estate Agents to find properties for me that when I have them fixed up I will have a total of 70% or less of the after repaired value of the property.  This requires them to evaluate what it will take to fix up a property, but the nice part is that most of them will overestimate repair costs.