Archive for October, 2008

Conducting Tenant Background Checks

October 31, 2008 at 1:04 pm · Filed under Tenant Background Checks

It is amazing to me how many people are shocked when they are denied a lease after their landlord conducts a background checks. It is also surprising at the lack of information some landlords are regarding what is permissible in a background check.

The basic principle behind conducting a background check is that a landlord needs to know that potential renter is dependable and trustworthy. For example, they need to know in advance whether or not the person that they are planning on renting to will pay their rent, maintain the property, and doesn’t have a history of illegal activity that could potentially be carried out on their property. This is all very important information that a landlord must consider before signing a lease with any client.

One of the most important pieces of information required in a landlord’s background check is to obtain a credit report. This may seem excessive; the point is for the landlord to know that the tenant reliable about paying their bills and their debt ratio is not so excessive that that they will be unable to afford the lease payments.

Regrettably, there are circumstances which cause a person to have a less than stellar credit report without it being their fault, an example is a divorce. Some landlords take these issues into consideration, others will not.

Many landlords routinely conduct a criminal history background check on their tenants. This additional protection is paying positive dividends in not only protecting the property; it is also increasing the level of security for the remaining tenants on the property. The scope of criminal background checks can vary, we see this routinely limited to felony convictions and activities which could place the property or other tenants in potential danger.

A Tenant Screening background check includes checking the renter’s employment history and their prior residences. If they have a history of fragmented employment, or tend to loose jobs on a recurring basis, or lack the current income to pay their bills, these are red flags that renting to them may not be a sound decision.

Something else to pay attention to is the frequency the potential renter changes residences are also indications on whether or not he would be a good future renter.

- Did they violate the terms of a prior lease agreement?

- Where they evicted?

These types of negative indicators should be enough to sway a landlord’s decision to decline renting to this applicant.

The most important purpose of conducting background checks on potential tenants is to ensure that the property owner can protect their investment, and their wellbeing of the current tenants. When these checks are returned favorably and the landlord is able to determine the basic character and appropriateness of a prospective tenant, the benefit of this action far out ways the small fee to have it completed.

Any landlord not currently conducting tenant screening background checks on their potential tenants is playing financial Russian roulette.

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Private Lenders

October 30, 2008 at 2:34 pm · Filed under Private Lenders ·Tagged , , ,

Alot of times I’ll get inquiries from investors having problems thinking outside the box and coming up with creative means of financing a property. “I made an offer on a bank-owned property, and now I’m trying to figure out a way to finance the deal without coming up with my own money. I have traditionally gone to banks, which I am trying to get away from doing. I have 3 weeks to come up with $22,000. The house needs $5,000 in repairs and will retail for $55,000. I’m going to have to hold it for at least a year. Any suggestions?”

There are lots and lots of ways to get money to buy real estate without going to a bank to borrow it. In your case, we can eliminate several options–the common “owner financing” techniques like lease/options and land contracts–because the property is institutionally owned. So what you’re looking for here is 3rd party financing that doesn’t involve banks and which will be relatively quick and easy to get. My first thought is to forget about spending a year fixing up the property and wholesale it instead. If your numbers are correct (and the $5,000 reflects the cost of labor and materials), you should be able to sell your right to purchase the property to another, more cash-rich investor for a profit of $5,000-$10,000. All you need to do in this case is find a good, experienced cash buyer who wants the property, and assign your right to buy it to him for a cash payment. As long as his total purchase price (what he pays you for the contract and what he pays the seller for the property) leaves a decent profit for him after he fixes up and resells the home, you can take your profit out now and not concern yourself with coming up with the money to buy it.

But if you’re determined to acquire and repair this property, there are 2 other possibilities. The first is to find a partner who wants to put up the money to buy and repair this deal in return for part of the profit. The other is to find a “private lender” who’d like to act as the bank, and finance the deal in return for a fixed return of 8%-10% interest on his money. Of the two, a private lender will give you more control over the deal and a higher overall profit.

A private lender is an individual who has funds in the bank or in a self-directed retirement plan that he’s willing to loan out for good, safe deals like yours. Now is a great time to start cultivating these folks: there’s an awful lot of money sitting around earning 2% because the owner is afraid to invest it in the stock market.

A private lender can act much more quickly than an institutional lender, because he doesn’t need to see reams of paperwork or process an application through an underwriter or board of directors. Most private lenders can close as quickly as they can get an appraisal on the property–and they don’t charge the fees, points, and closing costs your bank does. All you generally need to do to close with a private lender is to prove that the security for the loan–the property itself–is worth significantly more than the loan amount, that the title is clear and marketable (most private lenders do want you to buy a lender’s policy of title insurance for them at closing) and that the property is appropriately insured with the lender named as loss payee.

When you start asking your friends, family, and colleagues whether they’ve got $27,000 to loan out at 8% interest with a $55,000 property for security, you’ll be surprised at how many people you know who will jump at the chance for this kind of return. Start cultivating private lenders now–you may never have to use a bank to finance a property again.

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What To Do When You Can’t Find a Buyer for Your Wholesale Deal

October 28, 2008 at 10:56 am · Filed under Can’t Find a Buyer? ·Tagged , , ,

I was asked this question last summer, “I put a “junker” property under contract for $7,000. It had an “after repaired” value of $45,000 and needed about $12,000 in work. This seemed like a classic wholesale deal, but I was unable to find a buyer at $10,000 before my inspection period ran out. I chickened out and exercised a contingency to get out of the contract. I’m very sure of my numbers and I’m sure this would have been a great deal for someone at $10,000. That lost profit has been haunting me for months. What can I do next time?”

As I see it, you have two separate problems here. First, you don’t have the resources to find a buyer quickly. Second, you don’t have any strategies for buying or controlling your great deal if you didn’t find a buyer right away. Let’s look at these problems one at a time.

When a wholesaler offers a deal where a buyer can purchase and renovate a property for an investment of less than 50% of the value of the property, and that wholesaler can’t find a buyer for that property, one of four things is happening. One possibility is that the property is in an area so bad that buyers don’t want to deal with. If other buildings in the area of yours are mostly boarded up, or the area is extremely unsafe or has a reputation for open drug and gang activity, finding a buyer can be difficult even when the numbers seem to work on paper.

The second possibility is that your estimates of the value or cost of repairs are badly wrong, so that the deal is not as good as you present it. This mistake is sometimes caused by overlooking an incurable defect in the property itself that makes it significantly less valuable than your comparable properties. Examples of this kind of defect might include a house sandwiched between industrial properties, or a terrible floor plan, or the only concrete-block bungalow in a neighborhood of brick Tudors. Fortunately, these mistakes don’t usually hurt you in the long run, because your potential buyers will quickly enlighten you as to the reality of the situation. You then have the opportunity to enlighten your seller, and renegotiate or get out of the contract through your inspection or partner approval clauses.

The third possibility is that you did not leave enough time in your inspection period to locate a buyer and give him time to inspect the property and make a decision. If you’re working with the right kinds of buyers – that is, experienced investors and rehabbers with cash – this is not a particularly lengthy process. Still, a minimum of 10-15 days is a must.

The final – and most likely – possibility is that you have neglected the very important task of creating and maintaining a good buyer’s list. A professional wholesaler does NOT depend on “finding” a buyer to make a profit on a particular property. Instead, he works hard to identify potential buyers before he’s ever found a property to sell to them. By networking with investors and rehabbers, he learns who’s a cash buyer, what areas and types of properties they’re looking for, what their exit strategies might be, what their requirements and pet peeves are, and how fast they can close. He gathers this information and keeps it where he can get to it when he needs it – that is, when he has a deal to sell them. By having a list of potential buyers, and knowing it well, you’ll know to whom the property will probably sell before you even get it under contract. At that point, it’s simply a matter of calling the right people until you get the answer you want.

Occasionally, matters conspire to put you in a position of having a great deal – but no buyer – despite your best efforts. This is where your real estate education comes into play. If you have the knowledge and resources to get these properties purchased and/or for getting your closing date delayed, you can still make these deals fly.

Tools you might use include a partner or private lender who can come up with the cash to close very quickly. Once you own the property, your exit strategies are no longer limited to a quick flip; you could retail the property or offer it for sale with owner financing. Another strategy might be to negotiate short-term seller financing or a “split funds” deal where you pay part of the purchase price now and part in 90 days. In wholesaling, as in the rest of the real estate business, knowledge is the key to profits.

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Real Estate Investing is Just Like Weight Loss…

October 27, 2008 at 6:31 pm · Filed under Real Estate Investing

It amazes me how many people get started in real estate investing, only to fail when the going gets tough. As soon as someone discovers they can’t get rich in a week or two, they are on to the next “hidden guru” secret. It’s the same as weight loss – everyone talks about it, many try it, but few succeed. There are thousands of “get rich quick” and “get slim quick” gimmicks. No wonder both the real estate investing information and weight loss products industries make BILLIONS!

Weight loss isn’t easy… ask anyone who has tried it. However, the concept of weight loss is very basic – burn more calories than you ingest and your body will react accordingly. Unless you have a medical disorder, this formula works for just about anyone. Simple as it may be, the formula is HARD, meaning it takes a lot of DISCIPLINE AND HARD WORK. So, the weight loss industry has offered us thousands of ways to make it easier. Many of these solutions do work, but they only work if you put forth effort.

Now, let’s start with the premise you don’t need any of these “solutions” to make real estate OR weight loss work for you. You can eat less calories, go walking or jogging every day and you will lose weight. But, having knowledge of the caloric content of different foods is relevant. Also, for many people, knowing the carbohydrate content is relevant. Having the advice of a physician, dietician and personal trainer will help you prevent injuries and maximum your effort.

Same principle applies to real estate – you can go out and make hundreds of offers to motivated sellers and find a good deal. However, having information about how to solve the seller’s needs and construct an offer will help. Having an attorney, real estate agent or “guru” to assist you with constructing the offer and the paperwork will make it easier. Having advice from other people who have already done hundreds of deals will also make it easier for you to learn from other people’s success (and failures). However, whether it’s weight loss or real estate, the bottom line is not just knowing, but DOING. You can’t blame the diet if you don’t stick to it. Many people have successfully lost weight using the ZONE, WEIGHT WATCHERS, ATKINS and other similar plans. Many people have succeeded with the famous “guru” plans, but many have failed, likely because they didn’t give the required effort, NOT because the plan isn’t effective.

Both real estate investing business and weight loss are simple, but neither is easy. It takes a lot of work. Having a proven “system” or plan helps, but only if you stick to it. If the diet plan says, “exercise 3x times per week”, you can’t be sloppy about it and expect results. It’s like the people reading a book on the treadmill at the gym – if you can read a book, you’re not working HARD ENOUGH. Likewise, people call newspaper ads and say “hey, you wouldn’t want to sell me your house cheap, would you?” This is not DOING it is TRYING. You have to give 100% to a particular plan or formula before you say, “this stuff doesn’t work.”

Many people who are interested in weight loss join a gym or hire a personal trainer. From personal experience, I can say that both are great for weight loss. But, the weeks I didn’t show up, it was a BIG WASTE OF MONEY! The same thing goes for a real estate training system or mentor program – if you don’t put forth any effort, it won’t work! And, of course, you’ll likely get bitter about all the money you spent and blame the guru. After all, it can’t be YOUR fault!

That brings us to another topic – the “scam” side of the real estate and weight loss business. Sure, the “magic pills” that melt off fat are probably a scam. These snake oil salesman are offering the lazy and desperate people a solution – no work and results. Hah! If you bought into this scam you deserve to be parted from your money. Likewise, any real estate guru who promises riches with no work is also a scam. My favorite promise is “no selling involved” – that’s the biggest lie ever told. No business can be successful without a certain amount of selling of their product or service to customers – period! So, while there is a dark side to the weight loss and real estate investing information businesses, I assert that most people fail at both because of their own lack of action, not the fault of the “systems.” If you aren’t willing to work, another weight loss program or real estate seminar won’t get you any more results than you are currently getting – save your money and take MORE CONSISTENT ACTION with what you are currently doing.

However, if you are willing to work hard and take a lot of consistent action, a guru or program will likely give you more results. If you bought a book, course or program and already have results, another program, course or book will likely give you tools to get MORE RESULTS. I often hear about successes people have with my real estate programs, but a lot of them are not FIRST TIME successes. They are most often people who have already been successful, and, using my tools, became MORE successful. If someone asks me whether my program will make them successful, I ask, “what other programs have you bought?” If they have already spend thousands on other programs and have done NOTHING, I discourage them from buying mine. These people are looking for the elusive “holy grail” that all the other programs left out. More than likely, the missing element is lack of action on their part.

If you aren’t willing to take action on a massive scale, you won’t get more results by buying more products. If you have the discipline to work hard and take consistent action, then products and services will help you get there faster. Whether you are looking to get rich or lose weight, the bottom line is YOU!

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Partnerships for Real Estate Investing

October 27, 2008 at 11:48 am · Filed under Real Estate Partnerships ·Tagged , ,

Partnerships? Who me? Yes, you. They can be very profitable!
Partnerships can be a very lucrative decision for real estate investors. A partnership’s definition is “a legal relation existing between two or more persons contractually associated as joint principals in a business ” – in real estate, partnerships can be used for many applications. If you have time, knowledge or money, then you are a perfect candidate to partner with someone with different qualifications. Say you have money, but don’t have the time or knowledge – there are many investors who have time and knowledge, but don’t have or they are out of MONEY! If you have them all, money, time and knowledge, then you don’t need to partner, but most of us don’t have them all, therefore, other solutions can give us more flexibility for buying properties. Partnerships are just one solution to this problem.

Let’s talk about how a partnership can work in lease options. Say I find a good home that would sell for a good profit on an option, but the seller can’t sell to me on an option. They must have their cash out of the home, therefore, you have to pay cash or get a mortgage to make it work for the seller. If you don’t have cash and can’t get it, why not partner with someone who has the cash? Isn’t half of a good profit better than zero? And on the other hand, that someone with money, may not have the time to find or manage a property, but they would like to get in on real estate investing. In this case the person with the money would be responsible for paying cash for the home (with a reasonable interest rate on that money) or acquiring a mortgage for the home. The partnership pays the mortgage payments with the rent received from the home. When the tenant/buyer exercises their option – all profits are split or rolled back into the company for more deals. Partnerships are flexible and can be worked any way both partners want.

Picking a partner is important. Many good friendships end over business, so be careful who you partner with. A good friend is not worth losing over any amount of money. If you are the money person, you want to pick someone that is aggressive, detailed on record keeping, honest, fair, trustworthy and experienced. If you are the manager of the property you want a partner who has money to work with, is honest, fair, easy-going and most of all – hands off. They must trust you to do your part of the partnership.

Create a legal partnership agreement. All details of how the partnership will work, should be worked out, documented and signed prior to any business transactions being started. Go through your plans together. What do you want the partnership to do? What happens when things don’t go well? Go through worse case scenarios and make sure that all of your solutions are worked out before they happen. What happens if the well goes out and it will cost $3500 to fix it? What happens when the tenant doesn’t pay the rent and knows the system and gets the judge to extend their time before eviction – and then damages the home severely? What happens when you have to go to court? Who will represent you? Etc. I use LLCs- Limited Liability Company’s for my partnerships. Having an attorney draft the operating agreement is a very good idea. Both my partner and I review them. When we get all of the changes or corrections made. We both sign 2 copies. One copy goes to me and one to my partner. Talk to an attorney before you start a partnership. Poor communication and lack of documented procedures is the number one reason why partnerships have misunderstandings. Misunderstandings cause hurt, fear, and disappointments, all of which bring partnerships to ruin.

I currently have 6 partners that either do the money end of the partnership or they ‘bird-dog’ for me. Bird Dog partners are ones that find the properties and many times manage them also. Many successful investors have partnerships with multiple people. Partnerships create synergy. With Synergy you can do more than you could by yourself. Here’s an example: by myself I might only be able to purchase 4 homes this year. With a partner, I might be able to purchase 10 homes – more than double what I can do myself – therefore, synergy – doing more than twice as much together as you could do alone. So, why not partner?

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