Flipping a Property (Reality vs What's in "books")

Happy 2013 Everyone!


This article is mostly for new people but other more experienced investors may learn some amazing tidbits here for free!  The next couple of minutes can literally save you thousands of dollars and countless hours of time.  Seriously...read on, it will be worth it.

If you're a typical real estate investor, you'll go to seminars, buy books, read everything you can on the subject, and then hear about stories where someone bought an apartment complex with no money and flipped it for a million dollar profit overnight using transactional funding!  Now you want to try something similar because you are soooo smart with your knowledge :) Now isn't that special?!  It's also unrealistic and if it did indeed happen, it was a complete fluke of astronomical proportion luck.  How do you think I know that?  From plenty of real life deals and experience, that's how.  MLS deals are the worst to deal with because there's just too much public information.  Off-market deals are better if you're selling to a homeowner, but if you're selling to an investor, the first thing they are going to check is how much you paid for the property!  Yep!  That's exactly what they are going to do.

Here's the reality folks:  The buyer wants to know how much you're making, no matter how stupid that may sound, that is the complete, honest reality of life.  And they'll find out in the HUD-1, won't they?  If you're not sure, go get a copy of a completed transaction HUD-1 and look at it closely.  The buyer will see "your" money.  So it doesn't matter whether you are using transactional funding or not.  The money distribution is on the HUD-1.

It's unfortunate, but you can rest assured that all buyers will look at the HUD-1 when it comes time to close and if they think you're making too much, your deal is dead.  If you're going to be making a significant gain on your deal, then you have to negotiate that ahead of time and make it completely clear to all parties.  I'm not talking about $10k profit.  That's reasonable and not necessary to discuss with the buyer, but if you're flipping an apartment complex for say a $500,000 or $1,000,000 profit on a quick flip without adding any value, then you are probably doomed to failure unless you can negotiate that up front.  

However, what I am writing in these short paragraphs that's free to you will save you a lot of time and money if you heed my advice.  

If you're expecting to make a significant sum on the deal, work out "your" money ahead of time and make sure it's ok with the buyer, otherwise when you're selling, you could get all the way to closing table and the buyer will likely back out if they think your side of the ledger is getting too much money, regardless of whether they are getting a smoking great deal or not.  Doesn't that sound counter-intuitive?  Absolutely, but people are funny and that's how people (buyers) think, make no mistake about it!  If you don't believe me, go do a deal where on paper, you make a ton of cash in a quick flip!  If it works, then I'd love to know your secret, but I would venture a guess that the probability is 99.99999% that you will fail at this endeavor.  Quick flips for big money are highly unlikely using conventional methods. 

Psychology plays a big part in real estate because you have to remember, that this is a people business and not a property business.  Always remember psychology comes first, and the deal comes second.

All the best in the New Year!

One Good Definition of Stupidity in Real Estate

I really don't have time for b.s.  If you're a real buyer, you don't either.  I've covered this topic before, but I really hope that hitting the same topic again will hit at least a few Sellers and shake their thought process up.

Let's talk to the Sellers:

Dear Seller,

It is your responsibility to demonstrate that you have something of value to your proposed Buyer.  If you control it or own it, you should have no trouble providing any of the information needed for a prudent Buyer to evaluate your deal.  Asking us for a proof of funds before demonstrating value proves nothing to us.  It actually doesn't do anything for you either because if you don't have something of value to sell, then you won't sell it and all you'll have is a nice proof of funds.  Do you really think you'll have anything else if you don't have something of value?  If you do, then I suggest you go to Dr. Phil's website and ask to be on the show.

Respectfully,

The Buyers

Now for some this may seem like a rant, but really it's not.  What it is, is a demonstration of reality and as such as reality check for those involved in this business.  If you don't have something good to sell, nobody will buy it, so stop asking for proof of funds before you demonstrate that value Mr / Mrs / Ms Seller.  Once you have an offer on the table, then you have a right to ask for a POF, but not ever before.

Now, I hope all of you Buyers and "REAL SELLERS" enjoyed that.

Until next time....

Is this a Good or Bad Market Now in Real Estate? No Such Thing!

I speak to many people every day like most of you.  I often am asked, "Hey Alex, what do you think will happen in the market next year."...or, "Do you think the market has bottomed?"...or various similar questions.

My business partner, Nate Mack says it best when he says, "There is no such thing as a good or bad market, only good or bad investment strategies."

Let's face the reality of the situation and understand that we cannot predict the future.  We are not fortune tellers and thinking that we are can lead to trouble.  I do not preach things that I cannot back up with data.  That type of preaching is hypothesis and conjecture, but I prefer to work with facts because when it comes to investing, decision making using predictions is essentially gambling, and I don't gamble.  There is no need to take on that kind of risk!

What we can do is make intelligent and educated decisions on investments by weighing all the facts at hand and ensuring that we've done our due diligence.

As I've mentioned many times in the past, our objective at this point in the market cycle is to buy low enough that we can't get hurt.  By purchasing well below fair market value, we eliminate almost all risk.  You can never eliminate it completely, but by being very picky and intelligent, you can buy into investments that have tremendous upside.  Yes, some of you are going to say, well, that's all well and good but those deals are hard to find or even impossible to find.  And those of you would be right (for YOU)!  Remember, if you think you can, you can and if you think you can't, then well....you can't!

Who ever said that type of deal would be easy to find?  Many people are skeptical that they can be found, but I'm here to tell you that we find them and we buy them and sell them.  

I enjoy working with people of like mind and similar investment goals and objectives.  You can get in touch with me at: info@almavesta.com or connect with me on LinkedIn at: www.linkedin.com/in/alexmusulin.

Until next time....

When and How to Show the Money

My company is asked to show proof of funds many times each week.  We have no problem doing that provided the other party has something of value to us.  Having a property is not necessarily something of value.  For example, if the property has a market value of X, and the asking price is X or higher, then there is nothing of value to us, and therefore, there is no need for us to show proof of funds.

As another example, many people ask for LOI's right up front before any due diligence has occurred.  Why do they do this?  I have no idea and sometimes I'll go ahead with it to get additional information about a property or properties, and sometimes I won't depending on what I know and/or how I feel about the source.

Asking for a Letter of Intent before divulging basic information about a property is entirely WRONG.  For those of you reading this that practice this modus operandi, please consider not doing this.  A buyer has a right to inspect and ask questions about a product until they are satisfied whether they want to buy it or not.  This applies to real estate, cars, trucks, electronics, food, whatever!  I wish the supposed professionals in our business would get that straight in their minds.  What purpose does it serve to ask someone to submit an LOI on something they really don't have any idea about, aside maybe an address and in some cases, that isn't even given.  You are wasting your time and theirs, period.

The last point is something that most professionals already practice but some do not.  I choose to handle our business this way:

When I give an offer, I include a proof of funds regardless of whether I am asked or not.  If the property I want to buy is $200,000, then my proof of funds will show this amount.  If the property is $1,000,000, then my proof of funds will be for $1,000,000.  Do the new folks understand why I am doing this?  If you don't know why, I'm going to tell you:  The reason is because it is nobody's business how much I have in my bank account except me.  The seller or the seller rep only needs to know that I have enough to consummate the deal, nothing more.  They do not need to know my bank account balance.

I have been asked by some sellers to provide proof of funds right up front before we've even decided what properties we want to purchase from the seller.  Umm, nope, I'm not going to do that.  Why should I provide that information before knowing I have something of value that I want to buy?  Do I need to show my bank account prior to putting in an offer?  NO, I DO NOT, and neither do YOU.

Let's not forget folks that seller's need buyers and we're buyers.  We do not need sellers as buyers.  We need sellers that have something of value that we want to buy.  There is a drastic difference in need here, so please understand this and do not make the mistake of thinking that it is a reciprocal relationship.  It certainly is not.  Uncooperative sellers deserve exactly what they dish out....a no sale.  

I had a rather annoying situation with a realtor recently.  She wanted an LOI and POF (proof of funds) before we even identified what we may want to place an offer on through her pipeline.  Well, as you now know our practice, the answer was no, but rather than saying no, I went through the trouble of showing several portions of HUD-1's we've closed in the past two months.  They showed purchase price, and other pertinent details to show we were serious.  I also posted a link to our buying entity from the Secretary of State and a link confirming ownership and signing authority from the same site.  I gave her POF without giving her POF, but that was not enough for her.  The realtor chose to play hard ball and ignored my valid request for additional information about the properties she had available.  We do not deal with difficult people and unrealistic and unreasonable ones are the first to get dropped and so she is now history.  

I like writing these articles because in many cases, I take real life events and discuss them.  I do not gloss over them as some writers do to make real estate look easy and fast money.  It is neither easy nor is the money fast.  

So in summary, as a buyer, do not provide proof of funds until you place an offer and only provide proof of funds to show you can consummate the deal, nothing more.  You do not show $1,000,000 in your bank account when you're buying a $50,000 property for example.  Doing so, reduces your negotiating ability and it gives too much information to the other party that they do not need.  It helps them, but does not help you.  They only need to know that you can close the deal and nothing more.

I hope this has been a helpful article for all those fine folks out there in cyberspace and that it has helped steer certain sellers into proper professional behavior because serious buyers do not play games.  They buy real deals fast and they pay cash but they only like to deal with nice, reasonable people.  If you as a seller or seller rep find yourself getting frustrated with buyers, then you either need an attitude adjustment, or you need to pick a different occupation.  Not having patience and being uncooperative with reasonable requests will hit you hard in your pocket book.  Do not make this amateur mistake those of you who know who you are. :)

P.S., our sister company has a brand new website and some high value-add properties available in Atlanta, GA right now.  Light to moderate rehabbers have the option of being one of the first to learn of new high value-add deals as they become available.  You can get more information here: AtlantaWholesaleHouses.com.

Until next time, enjoy your week!

Done Any Volunteering?

I've done a fair amount of volunteer work in the past and today spent my Saturday afternoon working with the UTVCG (University of Toronto Volunteer Consulting Group).  Today was the first day in action this year, allowing me to meet with some great team members in an effort to come up with solutions for a non-profit group seeking help.  After that meeting, I spent some time with an engineering student, as part of another volunteer program to help mentor a student.

In a couple of weeks, I am going to repeat some work I did last year with a new group as a Seminar Leader, also a volunteer position.

I don't mention the above to toot my own horn, but instead I mention it to remind everyone that there is a strong need for volunteers in every community, town, city, state, province, and country.

Regardless of where you are, there is a need right in your own backyard.  The fulfillment one gets from helping is fantastic and extremely rewarding and  you'll meet some tremendous people in the process.  If you've never volunteered before, take time right now to think about a cause, a charity, a need in your community that you find interesting or close to your heart.  Go and talk to those folks and tell them that you want to help.  They will be very glad you called them and you will be very glad you did once you understand what I am writing about fulfillment.  The only way you'll know is if you do.

If you've never volunteered or haven't in some time, go ahead, take the steps right now and go volunteer your time!  The busiest people are the ones who can help the most because busy people get things done.

Thanks for reading, enjoy the balance of October and go help and/or mentor someone today.

Trust But Verify

Regardless of your political affiliation, Ronald Reagan nailed it with the three words, "Trust, but verify."

Throughout time, people will say this and say that.  They will also write this and write that in emails etc., and we as business people, must make judgments and decisions based on what other people are communicating.  

However, it is our duty and responsibility to ensure that when people do say or write something, that during our course of doing business we need to verify what was communicated.  If we fail to verify, then we have no one to blame but ourselves if the outcome does not follow from what was communicated.

So, let's remember that we need to, "TRUST, BUT VERIFY" all the time and don't let things lapse for one minute, or it may cost us.

This applies to business and personal relationships equally.  

"Trust, but verify"....So simple, yet so powerful.  Make it a standard in your day to day activities.

Until next time......

So You Want to Buy a Fannie Mae or Freddie Mac Property?

Buying a Fannie or Freddie property can be a great option.  It can also be a nightmare.  Just like any other purchase, you have to know your market and ensure you are not overpaying.  Just because it's a "government owned" property does not automatically mean it's a great value deal.  We like to focus in our blog on real life and not theory.  Theory is for students who want to study and learn about ideal situations.  Practice is for professionals who want to apply real life knowledge to what really works.  In real estate, theory is rarely valid.  Real life practice is always valid.  This blog is not for students but for professionals who are active in the business.

If you've identified a Fannie or Freddie property that makes sense, then bear some things in mind before buying one of these government owned properties:

1) You will almost certainly be subjected to a 90 day deed restriction.  You won't be likely told of this restriction up front as it tends to be "assumed" that you should know but it will be in the paperwork eventually.  The deed restriction works like this:  For 90 days you cannot transfer title to another Buyer unless your gain is no more than 20% of what you originally paid to Fannie or Freddie.  In other words, for example, if you buy a Fannie or Freddie property for $50,000, you can only sell it for up to $60,000 (a $10,000 profit...i.e. 20% of $50,000 = $10,000).  The actual clause looks like this:

"GRANTEE HEREIN SHALL BE PROHIBITED FROM CONVEYING CAPTIONED PROPERTY FOR A SALES PRICE OF GREATER THAN $_______ FOR A PERIOD OF _____ MONTH(S) FROM THE DATE OF THIS DEED.  GRANTEE SHALL ALSO BE PROHIBITED FROM ENCUMBERING SUBJECT PROPERTY WITH A SECURITY INTEREST IN THE PRINCIPAL AMOUNT OF GREATER THAN $ _________ FOR A PERIOD OF _____ MONTH(S) FROM THE DATE OF THIS DEED.  THESE RESTRICTIONS SHALL RUN WITH THE LAND AND ARE NOT PERSONAL TO GRANTEE.

THIS RESTRICTION SHALL TERMINATE IMMEDIATELY UPON CONVEYANCE AT ANY FORECLOSURE SALE RELATED TO A  MORTGAGE OR DEED OF TRUST."

Notice the clause states that it "RUNS WITH THE LAND"?  That means that it doesn't apply to you personally but applies to anyone attempting to purchase the property from you because it is property based.

2) Using the above example, if you buy a property from someone else who has already purchased it from Fannie or Freddie and has held it less than 90 days, and they've sold it to you for the maximum allowable amount by law as we've explained above, then you cannot sell it at all until that 90 day period has expired from the date of the original deed restriction.  Make no mistake...you are bound by the law and have no way around this.  How do you think I know this?....the hard way as happens sometimes to the best of us.  Learn here and don't get caught.  No matter what your Seller is telling you, always check with your Attorney to verify what they are telling you.  Get it in writing and make sure it's not just in writing but explicitly in writing.

3) Possible alternatives are to ask to have the deed restriction removed right in the Offer.  Put this in the Special Stipulations section of a typical broker Purchase & Sale Agreement.  What's the worst that can happen?...they say no.  Just write in, "Buyer requests any Deed Restrictions be removed."  With this simple statement, you are not demanding, but asking politely.  Best case is that they accept and then you have no deed restriction.  The odds are slim, but it's worth asking if you're in the deal.

4) If they still refuse to remove the deed restriction, offer to pay a little extra to have it removed if you don't want the restriction.

5) You may get lucky that the "checkbox" that defines whether a deed restriction will be applied is not checked off for your property.  I've heard of this happening from an asset manager not checking it off but have not experienced it.  You may luck out however as it is possible.

6) If you can't get around the deed restriction, it's best to focus on properties that you can rehab and profit from.  You can take the down time and use it constructively to rehab the property and then market it immediately.  There is nothing wrong with marketing the property that has the deed restriction.  You just can't transfer the deed to someone else until that 90 day period has expired.

For those that want the advice, the above can help you put together an entrance and exit strategy to purchase a Fannie or Freddie owned property if you've never purchased one before.  If you have, it's good to brush up on your options for the next one.  Again, I want to reiterate that the above is based on our experience only and that we are not attorneys and none of what's in this article should be construed as legal advice.  You should always check with your attorney before signing any legal documents to completely understand what you are signing.  

Until next time...have a very prosperous week.