Real Estate Investing – The father figure.

August 6, 2009

Dealing with the father figure
by James Miller

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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.


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


Land contracts – A letter from Peter

June 9, 2009

Dear James,

I read one of your articles on Biggerpockets about three ways to buy real estate.  You mention a ‘Land contact’.  I have never used one of these before.  Would you have a sample that you could send me without names and data so that I can see what they are like?  Thanks,  Peter

Hi Peter,

Land Contracts are a bit more popular in certain areas than others. They may also be called something different in other locations, such as “contract for deed”,  “installment sale”, or “trust deed”, etc.

It is essentially and agreement where the seller acts as the bank. The difference between this and simply holding a first mortgage is that the deed stays in the sellers name until a certain equity point has been reached by the buyer (often a complete payoff).

This arrangement gives the seller more protection and control than transferring the deed and just holding paper would.

The seller usually still has to foreclose on the land contract as the buyer does have a level of ownership/equity interest under the contract.

Here are a few sites with good information on Land contracts:

http://www.buyland.com/Land_Contract_Information.htm

http://www.freelegalforms.net/index.cfm?index=forms&filename=form15763.htm

http://www.wisegeek.com/what-is-a-land-contract.html

Take care,

James


Typical issues faced by Real Estate Investors.

April 30, 2009



Typical issues faced by Real Estate Investors.

by James Miller

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These are some typical issues that I am faced with on a normal day and how I chose to handle them.

I grab the stack of papers from my desk on different Real Estate related “issues” I need to review.  I had set them aside last night, so I could focus on them today.

The first issue is my fault since I accidentally overpaid a bill (by $200) for a 20 yard dumpster that we were using at one of the construction sites. I have another account with the same company where I am getting billed monthly for a dumpster that I am providing at a rental apartment. I call to see if they can apply the overpayment to the other account.

I am a little apprehensive as this company has been less than friendly in the past, which has caused me to often wonder about the validity of the myth that the Mob is into waste disposal.  I am also worried that they will not have a record of the overpayment and I will have to prove it.

It turns out that they do have a record of it and they can transfer the balance, no problem.

My second issue is that on one of the properties we picked up “subject to” the existing mortgage, the lender (Wells Fargo) shot out two letters. One letter was about how the amount of hazard insurance coverage wasn’t adequate, and the other letter was about how the deductible amount on the hazard insurance policy was too high.

We have a few different policies for the properties we have, this property was on one of our business owners policy with a bunch of other properties that provides a total coverage of around a million dollars.

Their records indicated that we only have coverage of $2000 on the house, and that the mortgage balance was about $50,000 so we needed at least that much coverage.

My immediate concern was that since we are continually dealing with so many properties, we may have missed something and somehow inadequately insured this property.

The other letter from Wells Fargo indicated that we had too low of a deductible, and with a policy this size needed a deductible of no more than $100,000.  That seemed really odd to me since I would never have a deductible anywhere near that high on any property.  A deductible that high would mean that we would need to cover the first $100,000 worth of damage and their policy would kick in the rest.   Having a deductible that large is really like not having a policy at all.  It was confusing to me at best.

I grabbed a copy of our business owner’s policy and the other papers I needed and headed out the door to lunch with my girlfriend. On the way there we grabbed the mail.  I noticed that I got “proof of service” back on a Tenant-Buyer who was behind on payments to the tune of about $3000. I don’t usually let them get in to me that far, but his business is landscaping, which is seasonal, and he gets paid sporadically. He has been with me for four year and usually makes good on what he owes me when his clients pay him.

This time around he had gotten in too deep and did the worst thing possible, which was to not respond to my calls and letters. When I lose contact with a tenant and they owe me money, I am forced to file a small claims action for eviction and judgment.  The letter I received back from the sheriff indicated he had been served proper notice of his court date, but also told me that he had moved out and they had served him at his new residence.

Unfortunately he could have contacted me to work something out, I may have given him time, hell I may have lent him some moving money. I understand that life can throw you a bad shake. But now, my big concern was to get him out of the place so I can get it bringing in money again.   If we are communicating and on good terms, I find that things usually work out the best for both parties.

Since it didn’t happen that way, I am now worried about the condition that the house is in. My girlfriend and I make a plan to go review it.  I will bring the camera with in case I need to take some photos to tack on damages to the small claims action.

The other problem with the tenant just taking off is that I will still have to go through with eviction.  While I know he has a new place to live and can reason that it is certainly very likely that he doesn’t intend on coming back, I am not in communication with him so I can’t be sure.   This means that I while I can show it, I can’t rent it until the eviction is final.  I plan for a trip to the house and mentally brace myself for the worst.

At lunch I review the Wells Fargo letters and the insurance policy. I quickly realize the problem. The $2000 they have listed as the amount of hazard insurance we have, is actually the amount we have on just the storage shed on the property.  We actually have over $100,000 on the house itself.

I see that we also have a deductible of $250 and not over $100,000 like they had indicated. I make a call to our insurance agent to verify my information is correct (which it is) and to have him send yet another policy declaration page to Wells Fargo.

I then place a call to Wells Fargo to see if I can explain their mistake to them.  I navigate my way through the automated voice system, which makes me wade though an inordinate amount of choices before letting me know to hit “0” for he operator.

Once I get a real person on the line I run into a problem that faces most “subject to” investors. The name on the mortgage is not my companies name or my name, so they can’t talk with me.  I have been down this road a few times before. I let them know that there should be a Power of Attorney and a Right to Release Information on file with my name on it.  They verify that there is, and ask how I am related to the owner.  This is where it gets tricky, if I blatantly state that we have purchased the property, we can start down the ugly road of “due on sale” issues.  Most, if not all, mortgage documents have a stipulation where if ownership interest transfers, the lender can call the mortgage due.  Taking over a property “subject to” flies in the face of this, as the seller’s name remains on the loan, but the deed transfers.

I carefully pick my words and tell her that I am not related to the seller, but “calling on her behalf”.  These are the magic words that allow us to talk freely, but don’t get me transferred to another department because the place has been “sold”.

I explain the mistake that was made to the lady on the other end of the line, and even while we are talking Wells Fargo  receives in a declaration of coverage from my Insurance Agent, which eliminates these two issues.

That night my girlfriend and I make it to the house where the tenant bolted and find that it isn’t totally abandoned. The tenant isn’t there, but lights are on, there is a nice mountain bike on the porch and miscellaneous personal items strewn about.  I resist the urge throw the mountain bike in the back of the car to hold as a hostage, and instead walk around the outside of the place.

As I peek in the windows I can see that the furniture is gone, so no one is likely living there.  They were, however, kind enough to leave at least 30 trash bags full of beer bottles, cans, and junk in the back of the garage, in front of the garage,and strewn about the lawn.

As walk around to the front of the house I see that my girlfriend has already started putting up a “For Sale” sign in the yard.  While I commend her on her aggressiveness, I tell her that it is too early to put the sign up. I either have to get back in communication with the tenant and work something out with him, or wait for the eviction to be finalized.

There is no legal reason we can’t put the sign up, just a practical one. I understand that the tenant is just as unhappy about things as I am, placing a “For Sale” sign there will piss him off, and likely end up damaged or stolen. This guy has lived there for four years.  It has to be hard for him to give the place up, and is probably also embarrassing for him. A sign would just be like slapping him in the face.  The last thing you want to do is to aggravate a tenant while they still have control of your property.

She reluctantly removes the sign and puts it back in the car.

I give the tenant a call and leave a message asking if he would call me to see if we can work something out to possibly avoid court.  It weakens my position a bit to say this to him, but my first priority is to get him to a point where I can work with him so I can fast track new tenants into the place and get it cash flowing.

My idea is to work out some sort of payment plan with him on the money he owes me and get him to move his trash and other stuff out of the place.  In return for this I would lessen the amounts owed, and temporarily fore go court as long as he held up his end of the deal.
This is a great offer for him as he is otherwise facing at least a $3000 judgment and having me garnish his wages for payment.

I would let him know all of this if I could talk with him, but so far he hasn’t called.

In some cases you can’t even get the horse to water, let alone make him drink.


One to watch out for with “Subject To” investments

April 7, 2009



One to watch out for on “Subject To” investments
by James Miller

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“subject to” refers to the purchasing of a property “subject to” the underlying debt.  A great way to purchase, if you can, as the mortgage and note stays in the sellers name, but the property deed transfers to the new buyer.

There are a few tricky parts when buying property using this method; First, the seller has to have a great deal of trust as the buyer holds all the cards  and second, there is a due on sale clause in most if not all of today’s mortgage documents that allow the lender to accelerate the mortgage if equitable interest in the property shifts to a someone other than the person on the mortgage.

In practice, as long as the mortgage is being paid, the last things a lender wants to do is to accelerate the mortgage and turn his performing note into a non-performing one.  It can happen in theory and give the subject to investor some things to worry about when it comes time to communicate with the lender.

Lenders cannot communicate with anyone whose name is not on the mortgage without getting a Authorization to release information and for changing anything like contact information, a Limited power of attorney with regard to the property is needed.

I recently realized a potential mistake I almost made with regard to a subject to transaction.

We purchased a house from a woman who wanted to sell, but her mortgage was already at the market value of the home. She deeded the property over to us “subject to” the underlying mortgage.  Unlike most sellers facing foreclosure who are very grateful that they can sell their property any way possible, she tended to fight us on every little detail of the transaction and generally seemed to be difficult to work with.

I dropped the ball on getting our insurance information to the lender in a timely fashion and the lender placed their own hazard insurance on the property, deducting the double priced premium payment from the escrow account.

I wrote a letter to the lender providing our insurance information and asking that they refund the premium amount to the escrow account, or apply it to the balance of the mortgage.

I then forgot about the situation as more pressing fires caught my attention.

A short while later I received the mortgage statement for the property in the mail from the seller, as the lender had not yet changed over to using our contact information. It often takes them a while to do this.

In with the statement was a letter from the lender acknowledging my letter, and indicating acceptance of our insurance and cancellation of theirs.   However on the mortgage statement I didn’t see where the amount had been credited back to the escrow account, or deducted from the principal the loan.

I thought it was strange that the lender would comment on the situation, but not reflect it on the statement.

I  realized right then where I had created an Achilles heel.

What if the lender sent a check back to the original seller?  The mortgage would still be in her name, so the check would likely be written out to her as well.

She was still receiving and opening the statements from the lender so she could actually remove the check and forward on the rest of the statement to me.

She already seemed disgruntled by the whole process, so I realized that it would be easy for her to justify (and also hard to forward onto me) a check for over a thousand dollars that was made out to her.

My position on it was that I took over the property (including the escrow account) as is. I actually even caught up her back payments and have made a half dozen or so since then, so the escrow money was also money that we put into the account.

Her cashing that check would be no different than her coming back over to the place and removing a few windows.

It’s just a lot easier to cash a check.

Since the property was purchased with her name still on the mortgage, I could, in theory, threaten to stop making mortgage payments until she paid the money back to the escrow account.

This would place her back in the pressure position of again facing foreclosure.

The problem with that ethically questionable tactic was that I had already placed a tenant buyer in the property. I couldn’t risk losing the property to foreclosure and then getting sued by the tenant buyer for not fulfilling my end of the deal.  As long as the tenant buyer was in place and current on their payments  I would have to keep paying the mortgage.

This made that whole idea a non-threat.

I resolved to the fact that I would have to take her to court to try to get the money out of her. I was pretty sure that I could win, given I keep very good records and had been paying the mortgage for so long, but the case would be confusing to the judge as “subject to” is a somewhat atypical transaction in our rural location.

I decided that if she had indeed received and cashed a check I would negotiate to try to get her to keep some and send me the difference.  We would both be better off that way than  if I had to take her to court.  Court would also completely sour our business relationship.

As it turned out, all of my worry was for naught. When I called the Mortgage Company they had already credited the escrow account with the money, it had just not made the last statement.

It was however an interesting (and panic stricken) mental exercise.

With Real Estate it is easy to let something slip through the cracks that can cost you quite a bit.


Renting vs Buying

March 9, 2009


Renting vs Buying

By
James Miller

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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.


Getting people to keep apartment showings

February 27, 2009



Getting people to keep apartment showings

by James Miller

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It happened to me again yesterday.

I had a 5:30 showing set up at one of our vacant apartments. I arrived promptly, unlocked the place flipped on all the lights and set out the applications.

The guy never showed up to look at the apartment.

I waited for him to show for 20 minutes and then decided to take off.

It may or may not surprise you, but the events I just described are not that uncommon for property managers. I am pretty diligent about calling people the day of a showing appointment to remind them, but even with that measure in place, I still get around a 50% no show rate.

It really blows my mind that people will take the time to ask you about a place, set up an appointment and get directions, then decide not to show…or even call.

I have to admit I didn’t call this guy the day of the showing, but I had talked to him the night before.

Here is what I think happens in these situations and some of the steps I am going to take to try to resolve them. If you have any suggestions or ideas, please let me know..

1)The person I am talking to forgot about the appointment… although in this guys case, I doubt that you can forget about it that easily. We set the appointment  just the day before.

2) The person I am talking to is too polite to tell me on the phone that they are not interested in the apartment, so they set up a showing, knowing they will not show.

3) they may have looked at an apartment earlier that day and decided to take that one, blowing off the rest of the showings they had set up.

4) They knew about the appointment, but after a day of work were just too lazy and decided the couch or a trip to the bar sounded better.

There are probably a lot of other reasons that they won’t show as well.

Here are a few of the things I am going to start implementing:

1) I am going to call them back and ask why they didn’t show.My girlfriend was a recruiter for an insurance company. She would have the same problem with potential candidates and it drove her crazy. she would go so far as to call up people who blew appointments (and didn’t call) and tear into them, telling them that they just blew their chance to ever get a job there and that they should have at least called.
While I am not sure that affected her no show ratio, it apparently made her feel better.

2) I am going to start letting them know that I get a no show rate of 50% and if they can’t make it to call me.
I currently tell them to call if they can’t make it, and they have my cel phone number, but it doesn’t seem to make a difference. I will also point out that if they don’t show and don’t call, I will be calling them back to find out what happened.

One part of the problem, as I see it, is that they have nothing to lose by not showing. Since there is no realistic way for me to get a deposit over the phone, the only thing I can leverage against them is their contact information. I am not going to harass them or anything, but I will let them know that I was waiting for them at the apartment and it wasn’t cool to blow me off.

3) I am going to start letting the apartments show themselves.
While I like to meet the potential tenants, I have, in the past, been so busy that I had to unlock an apartment to let people through to see it without me being there. It works pretty well as I let them walk through and grab an application if they are interested and I think people like to be able to take their time when looking at a place.

I have been doing this with a lot of our lease option houses, as before the market slowed we would get so many requests to see the places it was virtually impossible to handle them.

I would like to hear from other landlords, property managers, and real estate agents, or anyone who has to set appointments with the general public. .

What are your no show/show ratios?

How do you prevent people from not showing up?