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

March 24, 2011
1967 Elcona Mobile Home

Image via Wikipedia


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

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

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

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

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

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

What he came back with surprised me:

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

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

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

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

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

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


Getting people to keep apartment showings

February 27, 2009



Getting people to keep apartment showings

by James Miller

.

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?


Why would any one want to be in Real Estate?

February 8, 2009


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

This question is particularly pertinent right now.

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

1) Real Estate is on sale.

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

2) I love the Write offs

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

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

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

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

3)  I can get into a property cheap.

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

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

4) Property appreciates in value.

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

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

5) Property provides cash flow.

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

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

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

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


Real Estate Investing – The Greater Good

February 6, 2009


Real Estate Investing – The Greater Good
by James Miller

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


How to 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.


How to search for a property deal on Craigslist

February 2, 2009


How to search for a property deal on Craigslist

By
James Miller

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

The tools:

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

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

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

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

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

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

.

Search terms are vital.

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

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

“Motivated seller”

“will finance”, or “Owner will finance”

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

“Take over Payments”

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

“Homeowner must sell”

“house must go”

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

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

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

“OBO”, or “Or Best offer

“below appraised value”

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

“Assumable”

“flexible seller” , or “Flexible terms”

“creative financing ok”

“please help”

“Lease Option”

“rent to own”

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


The big picture on how to get property moving

February 1, 2009



The big picture on how to get property moving

by James Miller

.

.

My thoughts on the Real Estate, and economic,  slow down is that people in today’s society are truly only worried about the monthly payments on their obligations.

The amount of debt doesn’t really bother most people as long as they can get what they want and keep up with those payments.

It is my contention that the only real way to trigger the sale of property thus kick start at least the Real Estate economy is be keeping interest rates low.

A low interest rate on a mortgage means a lower monthly payment, and the ability for people to afford a larger home.

We got into trouble with easy mortgages earlier when people were allowed to jump on teaser rates that increased after a short time, or negative amortization loans that deferred interest by adding it onto the principal balance.

When the other shoe dropped and these payments went up, borrowers faced the hard truth that they were unable to afford the home that they had bought, even though they were “qualified” for it.

I am not suggest that we bring back those sort of loan programs, but instead that inroads are made to keep mortgage rates low.

I would much rather see the government spending money and effort to keep borrowing rates low than spending money on a bailouts.

It is an economic fact that home buyers also spend money filling thier homes with durable goods. In this way a home purchase has positive rippling effects through the economy by creating demand for more tangible goods.

I have also heard (but fail to cite reference to)  that a manufacturing dollar cycles through the economy seven times, as the manufacturer of durable goods needs to pay those who make his raw materials and that company must do the same.  This creates jobs in many industries.

Compare that to a “service” dollar that makes only one go around in our economy, right into the pocket of person providing the service.

Think of an accountant or barber.  There are no other materials that go into their product outside of their effort.

It is my hope that the powers that be realize the biggest bang for our buck will be through the continued reduction of interest rates.

Please feel free to share any thoughts you may have with regard to this idea.