Can You Show a Real Track Record?

There are many people who claim to have a successful track record in real estate, but when the question is asked for some examples of their success, there is no substance provided, but rather a change of subject matter tends to be the norm.

I find it also very interesting that there are many people attempting to sell courses, seminars, training, and that's perfectly fine, but are those people really doers rather than theory pushers?  My advice in this regard is to vet anyone you intend to pay for their knowledge.  Just because someone wrote a published book or two, doesn't mean that what they are giving you is useful, practical knowledge.  It may just be pure theory.  How will you know the difference?  I'm sorry to say that you just have to do more deals.  There is no secret to the business, but if there is a "secret sauce", it is simply doing more deals.  It's as straight forward as that.

Just make sure you are getting your information from someone who has actually walked the walk and not just talked the talk.  These days it seems with social media there are far too many talkers and not enough experienced people sharing their knowledge of real-life deals.

So, for those of you out there that want to be in the Real Estate education business, I believe it's important that you have had a fair share of success in real estate and can demonstrate it with HUD-1's etc. if someone asks the question.  Being transparent only solidifies your authority and helps those who want to do business with you to have confidence and trust in you.  

Conversely, for those newer people who feel they need more knowledge or education in the business, let me just say again, that the best education is actually doing deals.  If you're not doing deals, you're not in the business.  Don't over-analyze.  Just make sure you buy low enough to ensure you can make a tidy profit.  If you buy too high for the neighborhood you're in, then you won't make much, or worse, you could be in a loss situation.  Remember, you make money when you buy, not when you sell.

Until next time.......

Can You Trust Sellers and/or Buyers?

Hello everyone and hopefully your year has been fantastic so far and you are looking forward to finishing 2013 on a strong note!  As always, I never throw theory at you, but rather the realities of real estate.

Let me give you a real example that happened not too long ago but it is not unique at all.  This happens time and time again when you attempt to facilitate a deal.  This is why I don't bother with these types of deal structures further.  The funny and serious side of this is that this type of scenario is captured time and time again in various books on the topic and the writer is clearly only writing based on theory and not on real experience.  The books make it sound so simple to facilitate as an intermediary and walk away with a huge profit with little to no effort.  The truth to the matter is no matter how you try to facilitate (and please remember, that there is plenty of effort here because you have to time the deal so that two contracts consummate at the same time, and not just one), the end Buyer and the Seller do not want you to make any more money than what they deem is reasonable.  This amount depends on the individual, but remember, ultimately, you have to satisfy two parties, and not just one in your negotiations.  This is a large and complicated task with many moving parts.  I write this not to dissuade you, but to make it clear that the books on this topic sugar-coat the reality of these situations and do not include the psychological factor that the Buyer and Seller are feeling, which ultimately influences their decisions.

Real Life Example:

I set up a deal where I knew the Seller was motivated.  I negotiated the Purchase Price at $2.5 million and at the same time I had an LOI from a Buyer for $2.75 million.  I then heard that the Buyer wanted to use their own Closing Agent, which would have created problems because my intention was to double close and get the deal done within 5 weeks of contract.  Why would this create problems?  Because "their" Closing Agent would note that my company did not own the properties that they were buying and that I was an intermediary that was double closing.  Don't ask me why this matters, but Buyers get frazzled in this kind of deal because when they find out you don't own the properties that you are flipping to them, until the day of Closing, they get upset.  Don't kid yourself in the vast quantities of trash written on the subject.  Buyers absolutely care about this point.  This is psychology and not anything real to do with the deal.  If we used our own Closing Agent, the situation would have been exactly the same but since they are representing my company, they would not highlight the point that we didn't own the properties until the day of Closing before we flipped them to the end Buyer.  This is the same information exactly, however, it's a question of what is highlighted and what is not.

Instead, we decided to skip the double closing and just show our fees on the contract to avoid any negative reaction from the end Buyer.  From past experience, I knew that neither the Seller or Buyer would accept us making $250,000 on this deal, so to attempt to make this deal work, I offered the Seller $37,500 more and the Buyer a $37,500 price reduction which effectively changed our fee from $250,000 to $175,000, so this is roughly 6% of sales price which I thought would be acceptable to both parties.  I was wrong.

The Buyer requested a phone call with Seller and I was hesitant to allow this before a contract was signed and I did not allow this.  I was led to believe that the Buyer just wanted to ask some basic general questions.  I knew better and waited until a signed contract was provided (it never came).  What happened instead was that the fellow who claimed to be representing the Seller was in fact an intermediary and there was actually a real estate broker representing the Seller!!  All this time I was led to believe this was an off-market deal with no licensed broker representation.  This was a blatant lie fed in my direction.  The individual who claimed to represent the Seller, once he learned the company that was interested in buying the package, looked up in the public records and found the name and phone number of the end Buyer and set up a phone call directly between Buyer and Seller without our involvement or our permission.  Now of course, once the end Buyer and Seller talked and we didn't have a signed contract, we had absolutely no control anymore.  We also learned that the Seller did not want to agree to pay our fees and actually he didn't want to pay ANY fees.  It's interesting to note that until the end Buyer and Seller talked, the Seller made no comment on our fees.  Once they got what they wanted (talking to the Buyer directly), they didn't need us any more and then told us exactly what they thought.  Funny isn't it?  No, it's not funny.  We spent several months on this deal and several potential Buyers fell through the cracks.

The moral of the story is don't trust any Buyer or Seller to do anything that represents honesty or integrity.  Sellers will LIE.  Buyers will LIE.  These people don't care about you or the number of hours you have put into any deal to work to a successful Closing.  They are concerned only about themselves and the outcome for themselves, just as you are focused on what's in it for you.  Cordially, and professionally, never forget these axioms.

Here's a simple addendum to a contract that you can put in your purchase contracts to protect yourself:

"Vesting to be determined at Closing."  Simply put, this means you reserve the right to determine the Buying entity at Closing.  This way if you are doing a double closing you don't advise anyone of the final Buying entity until the very last minute.  This protects yourself and it motivates the Seller to sign closing documents because by the time they learn the Buyer's name, the money for the purchase is already in escrow.  When you are asked why you are putting this clause, just tell them that you are consulting with your accountant and tax attorneys to determine the best way to buy the property(ies).  This puts the concern off of you and onto a professional third party and this should suffice to answer the query.

Contrary to popular belief and written Guru documentation, Sellers and Buyers always worry about how much money you will make in a deal.  They are very focused and concerned to maximize their gains and to minimize yours.  DON'T EVER FORGET THIS!!  This is the truth based on personal experience over and over again.  Don't believe the mounds of b.s. written on the topic.  If you don't heed my advice, you will learn the hard way that Mr. Alex was in fact telling the truth about this.

Until next time....Enjoy the rest of the Summer as Fall will be with us officially in about three weeks.

Negotiating Your Property Sale & Vetting Your Buyer - Commercial or Residential

As we go about our daily business, the most difficult problem facing investors is in my view, the number of people claiming to be something that they are not. i.e. the ones that are not straight-up about their intentions.

When we do a deal with a party claiming to be a Buyer, we don't care about how much money they are going to make on the deal and neither should you.  If they are bringing a Buyer and they are getting paid through a double close, that's perfectly fine with us.  If they want to do an assignment, then that's fine as well.  What's wrong with this?  Absolutely nothing....  

We get people telling us they want to contract our properties and then they don't explain their full intent is to do a flip or an assignment rather than an actual purchase.  We typically get around this situation by asking for non-refundable earnest money for residential properties and proof of funds (POF) for the balance.  For commercial, fully verifiable proof of funds from a known source should be your question to the Buyer and they should have no problem providing this to you.  By asking these questions, you will usually get the truth.  This usually puts the "Buyer" on notice that we are not fooling around and we don't intend to allow anyone to tie up one of our properties unless they have full intention to close.

These so-called Buyers are not really Buyers but middle-people and again, there's nothing wrong with this and they do deserve to be paid just like anyone else in a deal.  What is typically wrong is that these intentions are not clearly spelled out and instead these people play a game whereby they pose as a Buyer instead.  Why they do this has always crossed my mind, but the best way to squeeze out the truth is to ask for non-refundable earnest money and/or allowing a short closing period for an exclusive contract.  Now, if we get a Buyer who comes clean and tells us that they really intend to double close instead, then that's fine, as long as the POF is presented and can be verified and the earnest money will become non-refundable with a short due diligence (DD) period and a short period after the DD to close the deal.

In no uncertain terms should you ever allow any property you are selling to get tied up for an unreasonable period of time without the Buyer putting, "skin in the game".  As an alternative you can always offer a non-exclusive option contract that allows you to sell the property to someone else at any time.  Out of courtesy, you can always put in a 24 hour clause that will allow your option contract holder to firm up the deal within that 24 hour window, but otherwise, you can then sell to your other stronger party willing to show a stronger offer.

Contract Guidelines for Commercial Properties:

Due Diligence: 15-60+ days depending on scope / complexity of the deal.  Earnest money becomes non-refundable after the agreed time-frame and that's usually after the DD period has expired or when the Buyer is satisfied with the DD, whichever occurs first.

Time to Close after DD: 10-15 days is adequate.  May be slightly longer depending on the structure of the deal. 

Contract Guidelines for Single Family Residential Properties:

Due Diligence: 5-10 days (more time is absolutely not necessary)

Time to Close after DD: 5-7 business days is enough depending on the work load from the Closing Attorney / Title Company.

Hope this helps with your negotiation efforts!  Until next time....

How to Ask For a Commercial Real Estate Loan

Most investors don't use all of their own resources to do their deals, and in many instances, borrowing money from lenders is not only necessary but makes the most sense financially.  However, it is important to note that the Underwriters of any lender will want to have a clear and complete picture of the property you want a loan for and it is entirely up to you as the proposed Borrower to paint that picture in the most complete and honest terms and nothing less is professionally acceptable.  

The correct way to put this package together is to attempt to sit in the Underwriter's shoes and think about what they will want to know to review your loan application properly.

The package needed is as follows:

• A detailed description of the deal and the property
• Include as many color pictures of the property as possible to show as much of the property as you can
• Aerial map of the property
• A copy of the Letter of Intent (LOI) or Purchase and Sale Agreement (PSA) (if available)
• Important dates should be highlighted, such as when the due diligence period ends, the closing date and what day the financing contingency expires
• 2-3 years of financial statements for the property
• Current rent roll
• Current profit and loss statement (year to date)
• A detailed Operating Plan, explaining how you will operate the property.  Include such things as explaining how you intend to keep the tenants that are there, and/or how you intend to fill vacancies, repairs etc.  Include further explanations such as break-even analysis, and how the lender will be paid back.  
• Include your exit strategy to exit the deal after your planned holding period.
• Your proposed property management company resume showing their level of experience and past and current work.  Ensure that your property management company's marketing plan is included
• 5 year Pro Forma projections to be included 
• Your resume

The interesting thing about the above is if you put this package together, you will answer just about any question that the Loan Underwriter will have  The Underwriter will want to know these details, so wouldn't it be great if we provided all that information in the package so that they don't waste their time having to ask us for it later???

You can get excellent aerial maps by going to Earth.Google.com.

Ensure in your description of the deal to highlight all of the strengths of the property, such as high occupancy, being close to an expressway / main road, high traffic, good neighborhood.  Include as many positive features of the property as  you can determine.  Remember, the Underwriter is human and may not be familiar with the area and even some very obvious things to you may not appear obvious to them, so ensure these pluses are noted.  Also recall that they are weighing the risk of lending to you so provide as much information as possible to help them do their risk analysis.

By following through in a professional manner as has been described, your loan will stand above others and will have a better chance for approval as a result of being thorough up front.

Until next time, make it a great day!

Interest Rates and their Effect on Real Estate

So apparently, it seems that the market is heating up.  Prices are on the rise (or so the media does report), but they tend to only report averages and that may not be applicable to your particular market focus areas.  The best thing to do is keep track of sales prices in your area.  Finding recent sales prices in your market is very easy compared to just a few years ago.  This will help you obtain market trends for your area and give you a focus rather than listening to the "averages" being thrown out there by the media.

Record low interest rates are allowing more qualified buyers into the market and the perception that prices are on the rise is really a good thing for the economy and it may well turn out to be a self-fulfilling prophecy.  Time will certainly tell....

Be on the lookout for higher interest rates on the horizon, but in my opinion, those are still far away.  I am not a fortune teller but through deductive reasoning, it follows that with the economy on the whole still not functioning on all cylinders with unemployment much higher than anyone wants, large interest rate increases are not coming yet.  Interest rates will however rise as a necessity to cool off an increasingly heated economy when that begins to happen but also to allow the government to pay down debt with lower cost dollars.  Because interest rates are so low now, a 1% rise in rates now will have a significantly higher impact on affordability than a 1% rise if interest rates were higher.  Let me explain (numbers rounded for ease of viewing):


Example A

On a $100,000 loan at 4%, the monthly payment is = $477
............................at 5%, the monthly payment is = $537         

% payment increase = $537 - $477  = 0.12576 = 12.58%   
                                      $477

Example B

On a $100,000 loan at 14%, the monthly payment is = $1,185
................................15%, the monthly payment is = $1,264

% payment increase = $1,264 - $1,185  = 0.06666 = 6.67%    
                                      $1,185

Notice immediately that a 1% interest rate hike in Example A has a substantially higher impact on the monthly loan payment as a percentage than it does with the same hike of 1% in Example B.  It follows that as interest rates rise, a 1% rate hike will have less and less impact as a percentage on the payment.  Yes the payments are higher as interest rates rise, but the impact as a % is less as rates rise.  Conversely, when interest rates go down, the impact on the monthly loan payment is substantially higher.

Those homeowners and commercial property owners that are "betting" on low interest rates to make ends meet are potentially going to be shocked as interest rates rise because of the mathematics shown above.  Taking action to manage your real estate holdings to ensure that interest rates do not hurt you is very important at this time more than perhaps ever before.

On another general note, as a percentage of GDP, although the US National Debt is considered high by just about any observer, it is not as high as it was at the end of the second world war (see article)   http://en.wikipedia.org/wiki/National_debt_of_the_United_States.  I am simply presenting this information as a reflection of ratios and not total dollars because in my view, ratios tell the story better than total dollars owed.

Low interest rates are great if managed properly and by making provisions for interest rate increases that are definitely on the horizon, we can make the transition to a higher interest rate climate with less difficulty.

Until next time.....

Now That Is Too Good To Be True!

Don't Let This Be Your Expression - Trust but Verify

I am amazed at how many people always believe that if it sounds too good to be true, then it's not true.  Do you fall into this non-belief category?

Let me give you three examples and you tell me whether it's too good to be true?

1) We bought a property for $80,000 and sold it for $140,000 with a holding time of less than 2 weeks.

2) We bought a property for $27,000 and sold it for $85,000 with a holding time of about 3 months.  

In both cases we did nothing to the property and simply flipped it.

Too good to be true?  Must be a scam?  No way, Jose!?

Well, it's completely true and we have the HUD-1's to prove it.  These are just two examples of many, many deals we've done.

Still think the same about "Too Good To Be True"?

We recently also had a high profile investor tell us that a 500+ unit deal we had for $4,000,000 with 80+% occupancy was too good to be true and he completely balked at even looking at the financials?!!!  Let me reiterate:  If it sounds too good to be true, then at least do your own due diligence to confirm or deny whether there is truth or not in the deal being presented.  Not doing a simple due diligence may cost you thousands, hundreds of thousands or even millions of dollars in lost profit.  Play things smart and follow Ronald Reagan's approach..."Trust but verify".  Don't immediately pass on a deal if the numbers sounds amazing.  They actually just may be true and by acting rather than passing, you are the one that will make the money and not your competition.

Until next time......

Getting the Deal Closed

As I'm sure we've all experienced, the Buyer comes to the table with an Offer and we think the terms and price are good, so we agree to move forward but the deal doesn't end up closing.  What can we do to avoid this unpleasant result?  

Ideally, the Buyer should have a very short due diligence (DD) period to limit their control on the property.  Then they should close within days of the DD period expiring.  The reason is that we do not want our property tied up for any extended period of time because there is always a possibility that we will miss another deal.  This is why it's crucial to do our own due diligence on our Buyers.  Do they have the ability to close?  Are they serious?  Will they close?  These are all questions that we need answered before we agree to a contract and what they say is not necessarily the truth, so we need to dig further and ensure that we have a solid deal when we sign that contract to sell.

Ask for proof of funds at the time of Offer.  As our deals are always solid for the investor, we ask for non-refundable earnest money deposits as well.  Yes, non-refundable!  If the Buyer sees they are getting a "smoking" deal, then they should have no difficulty with this and should really do their due diligence prior to contract.  By providing a non-refundable EM deposit, they are showing they are serious and in this case it's probably not necessary to ask for proof of funds, just ensure that the due diligence period is reasonably short such as 3-5 business days.  This is enough time for an inspection, which should be the only contingency they need to be satisfied with.  Now if they don't close, they pay a penalty by forfeiting their EM deposit.  We must of course provide Clear & Marketable Title and this is the Closing Attorney's job.  Once this is confirmed, the deal is then firm and the Buyer must proceed with Closing by providing balance of funds and we then transfer title to them at Closing.  If they don't Close then, then we do have legal recourse if we choose (consult with your Closing Attorney for options if your Buyer does not Close but has waived all conditions / contingencies).  It's probably best to move on if this happens and at least you have the EM deposit as a penalty paid to you for wasting your time.

You don't have to ask for non-refundable EM deposits, but it doesn't hurt to do so and is indeed a preferred method of showing how serious the Buyer really is.  It shows commitment and that the Buyer is serious.  Refundable EM deposits are good as well as long as the contract due diligence period is not protracted to the benefit of the Buyer and the detriment of the Seller (in our example, YOU).

It's always best to deal with cash Buyers (theirs or someone else's, such as a hard money lender).  

Hope this helps with the thought process of getting the next deal closed quickly and avoiding the walk-away non-serious Buyer who is looking to flip your deal and does not intend to buy at all, or a similar type of person.

Until next time.....