Have Cash, Trouble Pulling the Trigger?

Investing in real estate today is NOT simple.  Investing in real estate today IS simple......oops, did I just write two conflicting statements?  Yep, I sure did...why?  Because depending on what you know, the answer could be one or the other.

Here's what I mean:  If you are clear on what the current value is of a property, you will have no difficulty knowing whether you have a great deal or not.  If you are unclear on the current value, then you will spend too much time crunching numbers, looking at all the what ifs, and won't see the value, or if you finally are clear, it's too late and the deal is gone.  You can't afford to waste time in evaluating whether you have a viable investment or not!

There are many investors wanting to jump into today's "distressed" market but they don't know how, or are too scared to pull the trigger simply because they do not understand how to determine today's valuations or project into the future...this is key...you must know what the asset is worth today to be able to judge whether an investment makes sense.  If I buy an asset that I know is 30 cents on the dollar, do I know this is a good deal?  Of course it's a good deal....I can turn around and re-sell it quickly and easily for 50-60 cents on the dollar to the investor who thinks that 50-60 cents on the dollar is a good deal, who in turn can sell it retail for 80-90 cents on the dollar to a retail client who thinks they're getting a discount.  

There are numerous exit strategies, and countless seminars, books, videos, meetings that you can attend, but knowing and not doing is a pure waste of time and money.  Thinking you know and doing is also a waste of time and could be a tremendous waste of money.  Education is great, but this must be applied in any profession.  Poor application creates poor results.  Learn to understand valuations in today's real estate markets, buying so low that you limit your risk to such a minimal amount that pulling the trigger becomes very easy.  This is a tremendous investment philosophy that I learned from a great mentor.  This is what we do every day.  Why do we do this?  Because we don't like risk. We like to limit it to an absolute minimum.  We can never eliminate it (unless we're happy with a 1-2% return), but we sure can control it.

There is so much opportunity out there folks.  Stop worrying about the economy, the negative, and build your future for you and your family. The stock market requires a bias into a rising or declining market.  Real estate if done right, does not matter whether the market is rising or declining.  What matters is the correct investment strategy(ies).

If a screaming deal is staring at you, you should be able to see it within minutes if you have the correct information.  You don't necessarily even need to see the asset prior to determining a potentially viable deal.  Of course if you are buying it, you should always inspect it, but narrowing down your possibilities requires doing your homework and then moving forward, which can all be done from the comfort of your own home or office.  If you find yourself spending hours on analysis, you are not doing it right.  You really don't have a feeling for it.  You will not see the value and hence you will not pull the trigger on the deal.  End result when you have a great deal in front of you:  Fear due to lack of appropriate, intelligent action makes you no money because you didn't pull the trigger as a result of not knowing what it's worth.  

If you want to make money in any investment, you need to know your risk tolerance among other things but most importantly as it relates to risk, you MUST understand valuations.

Don't ever just rely on a "possible" future valuation, as this is a recipe for potential disaster.  You need to know what it's worth today and buy well below that worth.  Once 

you are comfortable in your valuations, you will see how easy it really is to pull the trigger and make plenty of money.  Remember the lyrics from that old Rush song...."If you choose not to decide, you still have made a choice."  

Until next time....

How to Sell Your Property the Right Way

There are plenty of people who claim to have deals but is it really a deal?  For those of us who are seasoned and know our craft well, we always find it interesting when sellers (or those who claim to be sellers) come to us all excited that they have so many deals and that we will be so impressed.  What impresses me is a seller who is a professional, knows what they're doing and can offer us a truly good deal with verifiable value.  Now that's a real deal!  We don't mind digging for the information, but we need to at least see some value before we dig, so help us see that value all of you sellers out there.

I've found that in most cases there aren't good enough numbers to justify an offer and we need to dig to find those numbers, so it's not a deal at all when we find poor numbers; the buck stops there.  To make an objective investment decision we need certain bits of information.  Buyers will not buy something that they cannot determine value to a reasonable degree.  It is a seller's responsibility to highlight value and justify it, and it's a buyers responsibility to verify that value.

There are many sellers who just don't have their act put together.  They send financial reports without thinking about what they're sending and asking if we would be interested in their offering?  Hmm, let me see....I have an asking price, no address and no financials, no comps, no nothing?!!  Now for those of  you who practice this sort of behavior, how can an investor decide if this is something that has value and if they want to invest more time to look into it further?  Let me answer that question for those people: WE CAN'T!  Do not waste investor's time with poorly constructed offerings which have no information, or insufficient information.  Please learn what investors need to see.  If you are looking for a retail sale, then go to a realtor and let them handle it for you.  They will help you get your property sold and help with the marketing. If you're looking to sell to investors privately, please understand what we need to see.  Don't throw all of the due diligence onto your buyers and you should perform it yourself at least minimally so you understand what value it has before you sell it.  It will make your selling life that much easier by doing some work on the front end.  Selling your property is not simply throwing mud against the wall and hoping some will stick.

For multi-family properties, investors need at minimum, NOI (net operating income), occupancy % and at least 2 - 3 years P&L plus the current rent roll.  The P&L should be presented in a trending report (monthly numbers).  If you have repair figures, provide them.  Ideally this should be from a third party.  Don't hide your numbers, be honest and up-front about your property condition.  The more organized your information, the easier your sale.  

Also for those of you multi-family rehabbers / repositioners out there who like buying low occupancy product and "fixing it", plan on keeping your property for at least 6 months past stabilization to get more value out of it.  Don't buy a 20% occupied building, rehab / reposition it and fill it to 85% + occupancy and once you hit that 85% level, put it up for sale.  You won't get your maximum money out of it.  Buyers want to see a history of stable income and so do lenders before they lend, so bear that in mind and plan ahead for it.

For single family home sellers, provide your potential buyers with comps from a third party source, a repair estimate from a third party source and also a subject-to appraisal based on the repairs.  When an investor sees those documents it makes their analysis and decision making much easier.  Yes you need to spend some money on those reports, but it will pay dividends for you.  One more thing on single family homes.....put it under contract and then communicate your numbers to your buyers list.  If you do that, you don't need to really worry about being circumvented because you control the deal.  It'll save you time and it will also communicate to your buyers list that you are a serious seller and should put more money in your pocket when you do close the deal.

Until next time, Happy Fourth of July and Happy Canada Day and  to all of my American and Canadian friends!

What's the Best Exit Strategy Today?

Exit strategy is something that many investors take for granted and unfortunately for many, this isn't a priority before buying the asset they want.  They see what they think is a deal, and then buy.  It's not enough to think it's a deal.  You have to know it's a deal and this has to be based on real facts and not blind faith.  Many investors buy real estate and stocks with this blind faith or gut feeling method and it doesn't work over the long term.  They may get lucky, but then again, that person could just go to a casino instead and have more fun losing their money than losing in real estate or stocks.  Declining markets present opportunities just as rising markets do.  The key is making adjustments to your approach to take full advantage and being on the very right side of the deal, by systematizing it and adhering to those standards.


Let me give you an example:  Time and again, I am contacted by people claiming that they have a deal.  In so many instances, this so-called deal is not a deal because they are looking to sell me on the fact that the pro-forma is such and such!  Ladies and Gentlemen, we do not buy based on some hypothetical future value.  We buy taking into consideration today's value.  What's it worth today?  Then we buy for much less than what it's worth today to ensure that we can make a profit.  If you have a different philosophy, then please tell me how it's better in a declining market?  Buying at or near market value is not a prudent approach and is very risky for the buyer. 


In a declining market, the best strategy depends on what your short and long term goals are.  Buy and hold may not be a prudent idea unless you have a long term strategy that can absorb equity losses in the short term while giving you cash flow.  Standard and Poor's released this article on May 29 that shows facts, and facts are what we need to base our decision making on: 


S&P Indices - Press Release May 29, 2012

According to Standard & Poor's / Case-Shiller Home Price Indices, "...all three headline composites ended the first quarter of 2012 at new post-crisis lows."


Further, Atlanta, Chicago, New York, Las Vegas and Portland all saw average home prices hit new lows.  Three cities...Atlanta, Chicago and Detroit saw annual declines worsen in March, 2012.

Source: S&P Indices and Fiserv - Data through March 2012

Does this mean that those folks in Atlanta, New York, Las Vegas and all the other cities that are seeing price declines can't profit as much as those in other markets?  Well, that depends on your exit strategy.  If you are buying and holding, then in the short term, you may be a loser or a winner, depending on your price to enter and service the deal.  Maybe you are looking to wholesale or a buy-fix-flip?  To successfully do so requires that you buy well below the wholesale level for wholesaling and well below your ARV after taking into consideration your repair and buy costs for flipping.  There is no need to consider deals that do not have sufficient padding for your market, especially in a declining marketplace.  Moving your money by turning it over quickly is a very good philosophy in today's declining markets, but buying right has got to be your primary objective to make this happen consistently and profitably for you.


Regardless of the market you're in, declining or appreciating, exit strategy is of prime importance.  So what is the best exit strategy in a declining market?  This depends on many factors, but the first consideration you need to have is what we have already discussed and that is to buy well below current real market value, regardless of what it is that you're buying...it could be a single family home, an apartment complex, a non-performing note, whatever.  You need to know the real true market value of the asset you intend to buy.  By buying well below market and understanding your market well, you will position yourself with options to exit in whatever manner you decide is best "before you make the decision to buy" and improve your odds for short term and potentially long term profitability.  There are other strategies of course, but I temper this with the fact that they have more risk than our discussion focus does.  


Regardless, real estate is not that complicated.  If you buy low enough, you will be well positioned.  It's more difficult to find these real deals, but they are out there and well worth the expense and effort to find.  




Until next time....

Proof of Funds - What is the deal?

It's a warm and beautiful sunny day outside right now but I am itching to write about this topic!  As we meander our way through our busy days in our real estate investing lives, we routinely run into people who are very focused on receiving proof of funds (POF) almost immediately, before even creating a relationship when discussing assets they apparently have for sale.  Let's examine the purpose of a POF and what the other party claiming to have assets for sale really is accomplishing by requesting this information.

First off, let's be very clear..........real sellers do NOT ask you for a POF immediately before allowing you to examine the asset.  What I mean by this is that if the seller has control of the asset, they will never ask you for a proof of funds up front before you have even had an opportunity to see the address of the asset, let alone the financial details concerning the same property.  In most cases we are asked to sign a non-circumvent, which is completely fine and that in itself should be sufficient to allow one to make a preliminary examination of the underlying asset and it's economic feasibility for potential purchase.  Here's a simple analogy:

You go into the car dealer's showroom to look at a brand new Ford or Honda.  You talk to the salesperson and they say, "Oh, you want to look under the hood of that one there?  Well...you know that you must provide us with a bank statement showing us that you can afford to buy that car before we allow you to open the hood."  What a ridiculous request huh?  Just about everyone would be taken aback by such a request or even offended, and that scenario would likely never happen.

It is exactly the same way with the seller of a real estate asset.  If they own it or control it, they should have absolutely no problem in allowing any potential purchaser to review, analyze and inspect the asset.  If they have a problem with this and are asking for a proof of financial capability up front, then this is the sign of an amateur, not a professional and most likely, they do not control the asset.  That means we are almost certainly wasting our time with that person.  DON'T WASTE YOUR TIME!!!  Time is very valuable and we can't get more of it, so why waste it with someone who is an amateur?  In almost 99.9% of these cases, you will either not see anything worth buying or even not see anything to look at!!  In the meantime, you have potentially shown your cards by offering the proof of funds.....not a good approach.

The purpose of a POF is to show the seller that you are real and can follow-through with the transaction without having to obtain a loan.  With a real seller, POF is never asked for with very rare exceptions, up front.  Typically, an LOI may be necessary to obtain all relevant documents to allow a thorough preliminary due diligence to determine the financial viability of an asset.  In some cases, an LOI isn't needed either, and an open approach to allowing an asset examination takes place.  This is the sign of a professional and real seller.  POF is usually required after the execution of a PSA (Purchase and Sale Agreement).  At that point, there is absolutely no problem in asking for proof of financial capability and it should be made readily available to the seller upon request.

So, the next time you run into someone asking for POF up front before you have even inspected their "engine", tell them that you will provide them with the POF if they will prove to you that they have provided something worthy of purchase and not junk or nothing at all.  They should at least meet you half-way, and if not, then just do the right thing and walk away and save yourself a great deal of wasted time.

Have a productive and amazing week....until next time.

Non-Performing Notes (NPN's) - Where's the money?

After a rather long and successful trip to China, I am back in the saddle so to speak!  I'm glad to be back and wanted to cover a topic that seems to be problematic for people new to real estate investing.  First of all, non-performing notes (NPN's) are non-performing to the financial institution that owns the note.  They can become a star performer for you if you know what you're doing and know where to find good ones.


First off, let's define what a non-performing note is:  It is a note (in this case we are discussing only real property but it can apply to other asset classes such as credit cards, vehicles, other debt etc.) on real property that someone is either not paying according to the defined agreement with the lender and/or the value of the property is LOWER than the current unpaid balance (UPB) of the note.  If the value of the property is less than the UPB, and the property owner is paying as agreed, this is still considered a non-performing note to the lending institution.  


In many cases, in today's economic climate, the property value is lower than the current UPB.  Because lending institutions are hampered by the number of non-performing loans they have on their books, they are in various modes of motivation, interested in selling these notes to investors to "clean-up" their books and will sell for a discount in many cases, especially when they know that the property value is far below the UPB.  This is an excellent opportunity, but you need to understand the financial institution's level of motivation before placing an offer.  


Ideally, going direct to the source is the best option, but this requires extensive marketing, and relationship building.  Can you afford to do that?  Do you have or will you make the time to develop these relationships?  Regardless, you will need to develop relationships with individuals who can assist you in obtaining lists of non-performing notes in states and cities that you are interested in doing business.  These can be remote, or can be in your own backyard.  The financial institution doesn't care where you live, they only care if you have the cash to close.  You have to care whether you can make money on the deal, so do your homework and understand the market you're going into, the lien position of the note (ideally, first position), the underlying asset current market value, and depending on your exit strategy, understanding the background of the borrowers credit rating.  So make sure that you have your financial backing in place prior to jumping in these waters.


Identifying a good note for you requires as mentioned above, an understanding of your market, the neighborhood, and especially current comparable property value.  Do yourself a big favor and do NOT use BPO's (broker price opinions).  An opinion isn't worth the paper it's not written on. Get real comps based upon criteria YOU input.  Find a great source and use it.  That could mean using proprietary software and/or getting them straight from a broker / agent source that you've developed a relationships with.  It's up to you to make the decision on how to best get this information.


Once you have determined a motivated source for the purchase of non-performing notes, you do your comparable / financial analysis of the underlying asset, you now have an idea of how much the property is worth.  Clearly you want to buy the NPN for well below the property value.  You must know your exit strategy before buying.  How will you dispose of the note once your purchase it?  You have to know that going in, not afterwards.  You have choices of exit strategy.  If the current owner is paying as agreed with the bank but the situation is that their property is worth less than what they currently owe, you can make the note performing by negotiating with the existing property owner to reduce the loan amount to them....for example:


Current UPB:                          $150,000
Current Market Value of Home: $125,000
You buy the note for:             $  50,000


You negotiate with owner to agree to pay say $90,000 on a new note instead of the original $125,000.  Why?  Because this is a win-win....The owner of the property now has a performing loan on their property (as long as they pay as agreed).  You have done them a favor, right?  Yes you have, but you've also helped yourself.  You can then sell this note to another investor for $70,000 for example, and pocket the difference ($70k - $50k (amount you paid originally) = $20k).  You have sold a $90,000 note for $70,000 giving the buyer of your note a $20k equity kicker, plus they can now collect monthly P&I payments (principal and interest).  You win, the property owner wins and the investor who buys the note from you wins. Of course there is more due diligence involved, like understanding the condition of the property, the borrower's credit history etc., but you get the idea. 


This is just one way of exiting the deal.  There are other options that we will discuss at a later date.  There is no such thing as a loss of money, only a transfer of wealth....stand in it's path and collect your share.  Until then....carpe diem!

China : Investors Want More USA Real Estate

I'm on my way to China tomorrow for a two week excursion for both business and pleasure.  As I've never been there before, I am very much looking forward to experiencing the customs, culture, sights and sounds of this powerful and massive country.  By land area, it has 3,722,027 square miles, landing #3 overall in the world, just slightly larger than the United States (3,678,190 square miles).

What's important to understand is that we live in a global economic system now and that investors worldwide are looking to put their money in the highest return, lowest risk investments.  These investors are everywhere, but with the massive rise in the economic power of China over the last decade in particular, there are many investors who have garnered substantial wealth in a short period of time and are among those individuals looking to park their money in the best, most viable investments for their personal goals and criteria.

What's not typically known or advertised is that the price of real estate in the United States in major cities compared to that in China for similar properties is a massive bargain, not only in terms of price for the Chinese, but the fact that the Chinese government does not allow citizens to own the land on which a property is built.  The land is leased to the owner of a property in comparison with complete ownership ability in the United States.  The following Forbes article explains further why the United States is such a popular country for the affluent Chinese to invest their money.  There are many positives that the influx of foreign capital will help with in the USA, and the Chinese do have plenty of capital to spread around.

For those that have an interest in what foreign capital will do to a real estate market, just look north of the border into Canada where there is a completely different market in comparison with the USA.  There has been much said about the strength of the Canadian banking system, and this is one of the driving factors for the long term appreciating real estate markets north of the border, however foreign capital influx has had a bigger impact than the banking system, with much of that coming from Asia and in particular, China.  

The major real estate markets in Canada have been appreciating without a drop for many years beyond that of a typical market cycle and even during the last "great recession" contrary to conventional wisdom.  A vast influx of foreign capital flowing into "relatively safe" Canada has boosted and pushed the real estate markets up in cities like Vancouver and Toronto to astronomically inflated values.  As long as that capital continues to flow, prices will continue to rise and will likely do so in the near future, but this cannot be expected to continue much longer as many experts are now in agreement with including the Bank of Canada.  Without that foreign capital influx, and the "safe" impression that the Canadian Real Estate markets have to foreign investors, the markets for all intensive purposes there should have declined somewhat at minimum over the past few years but didn't as a result of foreign capital influx.

As the tide begins to shift in the United States and the tough times that have been prevalent since about 2007/8 begin to show increasing signs of improvement, expect to see more foreign capital coming into the USA, and a substantial amount more so from China.  There are still many that see the USA as a risky place for investment.  I absolutely disagree with them for a multitude of reasons, but as my business partner Nate Mack of PinPointe Partners in Atlanta says, there is no such thing as a good or bad market.  There are only good or bad investment strategies.

I wish everyone a great balance of April and I will check in again upon my return in May.

A Nightmare Due to Management!

I just got back from a very productive business trip to Chicago and Atlanta.  Among one of the projects we're working on at the moment is an apartment complex in Texas that is stabilized with excellent occupancy numbers.  Not only is it occupied and almost completely full, the economic occupancy is also near 100%.  When reviewing an apartment complex for potential purchase, we need to know the physical occupancy (the ratio of occupied units to total units), and the economic occupancy (the number of tenants that are actually paying regularly and on-time).  It makes no sense to do your due diligence based solely on physical occupancy as we do need to know who's paying and how much.  Bear in mind the difference between those two occupancy figures.

What we found in this complex is that expenses are running nearly 80% of gross collected rents.  This is a sure sign of a bad management company.  We also found that the management fee is more than double that which it should be for this type of property.  This is bad news for the current owner, but it's great news for us because we know how to solve this problem, and that's why we're here....to solve other people's problems and make money in the process.

Note the following 10 no-no's to identify a bad management company:

1.   Not able to collect rents
2.   Higher than normal expenses
3.   Not able to keep property full to local market levels
4.   High rate of evictions
5.   Poor tenant screening
6.   Slow turn-around getting units re-rented
7.   Property not maintained / clean
8.   Unattended leasing office
9.   Poor reporting regarding expenses
10. Tenant relations are not working properly

The top three above are the biggest flags to identify a bad management company.  Note that what we found on the above property is in the top three.  What does that mean?  We have an acquisition target and the numbers told us this before we ever set foot on the property more than a thousand miles away.  What's more about this project is that we have identified an under-valued property as well with a number of options for us to increase the property value.

Keep in mind that much of determining a viable project lies in the numbers.  If you understand the numbers and the flags, you can quickly reject the vast majority of projects that come across your desk and zoom in on those few that make sense.

Until next time.....best to you.