A Letter from Eric – Pricing the assignment of contract.

June 12, 2009

Hello sir.

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

Best Regards

Eric

Hi Eric,

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

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

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

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

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

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

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

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

Or else you must mean

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

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

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

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

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

Wikipedia has a good section on assignment of contracts:

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

As for finding deals….

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

Take care,

James

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Here’s a Real Estate Marketing Idea…

February 13, 2009


Here’s a Real Estate Marketing Idea…
by James Miller

A few years ago, Luke Ploessl and his wife began to invest in Real Estate in the City of Cassville.  With the current situation on Wall Street, they can no longer afford to keep all their properties. They tried to sell them, but no buyers emerged. So they are giving six of them away to the people who write the best essays.

I am sure that part of the motivation came when the proposed 1.3 Billion dollar Alliant energy plant expansion fell though. The community had high hopes for this plant as the downtown is dying.

I had a lot of four commercial buildings under contract in Cassville late in 2008′ . When the Alliant plant fell through, so did the upside potential of the deal which gave our lender cold feet.

Desperate times call for desperate measures.  Mr. Ploessl certainly has a novel marketing idea.

I am guessing the essay is a requirement to meet some sort of Wisconsin law, otherwise I would think a raffle would have been a bit easier.

Besides generating $100 per entry.  They have already been given coverage on the local NBC affiliate,  Channel 15 .

check out the video coverage here:

http://www.nbc15.com/home/headlines/38828567.html#

I bet this method of marketing their homes is also getting them a pretty big buyers list.  Every entry is a potential home buyer.  He is getting paid to generate a list of buyers.

As the English say:  “Brilliant”.

You can find out about the essay contest here:

http://www.winahouseessaycontest.com/


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 Market your property in this Market

January 23, 2009


How to market your property in this Market
by James Miller

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

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

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

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

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

Here is a list of my alternative selling methods.

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

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

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

Land Contract, or Contract for deed

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


Tip #2: Your property needs to have an edge

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

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

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


What a Real Estate Agent needs to do to sell to me.

January 20, 2009


What a Real Estate Agent needs to do to sell to me.

by James Miller

The best thing I think a Real Estate agent can do is to be in constant contact with their Buy/sell list of clients.

As a Real Estate Investor, a lot of Realtors put me on the auto-mailer that emails me when they have what their program thinks fits my buying criteria. It is usually way off, as they are often just sending me things like “commercial properties over $500,000”. Or any residential income properties in a certain zip code.

Besides being off target with what I am looking for, these e-mails get to be overwhelming, and I tend not to keep up with them.

What is effective is what only Ed, one of the dozen or so Real Estate agents that I have worked with, does.

He calls me on the phone.

It is short and sweet and usually goes something like this:

“I’m not sure if you’ll be interested in this, but I see [some property] has come on the MLS.”

We don’t spend a lot of time on the phone, but he does let me know in a very personal way, that he is still looking for properties for me and what’s out there.  He also always asks me what I have “going on”, or “what’s new”.

I am not even sure If he knows how effective this is for him. Every time he calls (and he has the sense not to overdo it) he forces me to remember that he is a Realtor.

He puts himself in a position to hear about what I have going on and what I am interested in doing at that moment.   If I have a property that I am thinking about selling, I am sure going to tell him. If I have a need for a tenant, he will know right then. If I know of someone who might be interested in buying or selling He will find out about it when were talking.

There is also the possibility that I may like the sound of the property that Ed is calling about.

By taking the time to call me, Ed has positioned himself on the top of a very long list of Realtors I know.

Want to hear a little secret about Ed?

He’s not the best Real Estate Agent that I know.

Don’t get me wrong, he’s a very good Realtor, but he‘s not the best one I know. He doesn’t have a big list of letters after his title  like a lot of Realtors and Brokers. There are questions I ask him that He doesn’t immediately know the answer to. He is consistently at the top of the list for sales, but he is not yet #1.  But none of that matters because he has done the one thing that no other Real Estate Agent does.

He has taken the time to learn about me, and what I am doing, by picking up the phone.


Hedging your bet, multiple exit strategies.

January 18, 2009


Hedging your bet, multiple exit strategies.
by James Miller

When we analyze a property, the emphasis seems to fall heavily on the front end.  We try to figure out if we are getting a good deal.  If we will have some equity, or cash flow left after we spend our hard earned cash on down payments, closing costs and contractors.

This will often revolve around one assumed exit.  If you are buying a fixer-upper it is usually to sell and take a profit, If you are holding for the long term, it is often that we want to use the property as a rental.

My suggestion in this post is that you take the time to learn about and examine all possible exit strategies as you evaluate your purchase.   The reason for this is that when we get into a real estate transaction things rarely, I dare say never, go as planned.

I am currently holding rehab properties (fixer uppers) that I had intended on selling when we were done with the repairs and remodeling. In this market I have had to expand my exit horizons. We are now looking for Lease option tenant buyers for the properties a the next best exit and hav enot eliminated the idea of just renting them out.

If you were a landlord a few years ago when anyone and everyone was getting qualified for a mortgage, you know that the rental market was hit pretty hard.  You waiting list of reasonably qualified tenants disappeared and your found yourself letting in the less than desirable crowd.

Some landlords took a different route and did condo conversions on their properties, taking due advantage by capitalizing the loose lending market. This was an exciting alternative to renting during that time.

Right now we are doing a lot of advertising for homes we have available for sale using a lease option.

A lease option is essentially a “rent to own” agreement in which the seller allows the tenant to purchase at a predetermined price within a predetermined time frame.   We typically allow the potential buyers two years to exercise their option to buy, and get an above market rent and sale price for this privilege.

This also works for the buyers as they are often not able to get into a home otherwise.  This is especially true today in this difficult lending environment where near perfect credit and 20% down are hurdles too high for many new home buyers.

Outside of Lease Options, I am willing to hold a second mortgage on many of the properties I have. This sometimes allows the sellers to come to the table with less of a down payment as the banks’ LTV requirements are still being met.

While I don’t like these as much as lease options, I am also willing to sell on land contracts, or contract for deed.  Very similar to the lease option in that the deed stays with the seller, but it gives the buyer more ownership rights to the property.  In a nutshell, it is harder to evict a land contract buyer than it is a lease option buyer.

Tried and true, renting a property may be a viable alternative to selling. I would surely try one of the two aforementioned alternatives before this, but I can’t deny it as a plausible option.

I should take a moment to mention that many  of these exits where the seller continues to retains ownership for a brief period of time is due to long term capital gains.

If you own a property for more than a year you only have to pay taxes on the profit at a rate of 15% as it is long term capital gains. If you hold it for less than a year, you will have to pay taxes on the profit at the same rate of ordinary income.  This can be as high as 35%.

This reason alone should make you want to make sure you have your property titled in your (or your LLC, or land trust) for longer than a year.

Another viable exit and probably one of the best is the ability to flip a contract. Unless it is otherwise explicitly spelled out in the offer to purchase, you can assign your position in the contract to another party.

This may not be as sexy as rehabbing and reselling the property for the big bucks, but it has the best return on investment, as well as, having the benefit of eliminating your downside exposure.

If you have multiple exit strategies lined up for your property, you have hedged yourself against getting caught in the many potential pitfalls that having only one exit strategy can expose you to.



The +/- theory of showing a home

January 16, 2009


The +/- theory of showing a home

by James Miller

We all hear about how important the first impression of a home is when showing it.

I actually break it down a little further into my own sort of pseudo science.

It is pretty much common sense that when a potential buyer goes through a home everything they notice will be looked at as a benefit or “positive” thing, a determent or “negative” thing, or will have no impact at all on them.

On rehab projects that I take on, I like to keep this theory in mind when I am considering buying a property and I certainly keep it in mind when I am deciding what features to add or fix on a property.

It goes a little something like this:

As I walk through the property I evaluate things that catch my eye.  Is there a chip or crack in a floor tile? (-1 )  Did they just refinish the hardwood floors (+1 for each room).   Are the colors in the bathroom dated? (-2).  Is there a deck on back (+5)

For the most part these numbers are pretty arbitray, but I stick with a few rules:

1) The first thing you notice get weighted by 5. So if you pull up to the property and the first thing that strikes you is an unkempt lawn, then that is a -5.  If the first thing is spectacular landscaping, then it is a +5

2) Most things are a +1 or a -1, unless they strike you as severe, in which case I will assign a somewhat arbitrary point value.  For example a home that has a significant slope in the floor would get much more than a -1, I would probably put that in the -4 or higher category.

3) Things noticed at the end of the walk through are given a weighted value of 2.  So if it is something like a nicely contrasting wall it becomes a +2, if it is a very noticeable crack in the wall it becomes a -2. The thinking on this is that the last things you see, much like the first things you see, will be the ones that are most memorable, and therefore carry much more impact when thinking back on the property.

4) Things of average quality should not be given a value. For example new appliances would be a +1, and damaged or very old appliances would be a -1, but if they are in good condition and acceptable, there is no value to score as there would be no visual impact one way or the other.  You need to score only the things that make you go “Ohhh” or “Ewww”.

You should not only try to come up with a total, but more importantly review the order in which these items are seen.  The most desirable distribution of pluses and minuses is to have the negatives mostly in the middle and most of the positives when first entering the property, and just before leaving so they sandwich the negatives.

This is, of course, a pretty subjective and arbitrary way of evaluating a property.  It should only be used to understand how other people may view it when they walk through.

The highest benefit obtained for doing this evaluation is that you can identify the problem areas of the property and decide how important it is to take care of them.

While It is true that the goal should always be to fix everything until it is perfect, in my experience, there is a sort of triage that sets into a project when there is pressure to start marketing the home, yet not enough time to get everything done. This +/- list can help evaluate what will be most significant in the minds of the potential buyers.

One thing I have to point out is that there will be some people who will feel that the weighting of each item will depend on the route you take when walking through a property, and that each person may choose to walk through it differently.

In my experience, most single family homes tend to have a natural path or flow that is followed as people walk through them for the first time.  You can alter this path, but will only want to do so if you can stack more positive items toward the front or very end of the showing.

Also keep in mind that these numbers are not intended to adequately reflect how easy or difficult  it is to repair an item, but rather the aesthetic aspect of how heavily it will impact a potential buyer.  A deck might be a +5 but it may also be out of the range of the budget.

A good exercise would be to have a partner of friend go through the property with you to compare totals and distribution.

Below are some numbers that I would assign for certain items. This is far from a comprehensive list, but does give a general idea of how I tend to see it.

Remember to weight these items heavier if they are seen at the beginning or end of the walk through.

Dishwasher + 1

Garbage disposal +1

Stained/ dirty carpet -1

Deck +5

Two car or larger garage +3

Fireplace +2

Hardwood floors +1 per room

Tile floor +1 per room

Bad odor/ pet smell -2 (depending on severity)

Clutter -2

Small sized rooms -2

Poor layout -3

Attached garage +1

Any needed small repair ( I.E. drippy faucet) -1

Overgrown landscaping -2

Marks on walls -1

Small crack in window -1

Wainscoating +1

New appliances +1