SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Buying and Financing Properties

Landlords, Understand No Fault Evictions

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No fault evictions are making headlines .  Laws are being considered or enacted recently that either ban or restrict the practice in California, Oregon and New York.  Therefore now would be a good time for landlords to understand no fault evictions, why they might be used and offer some suggestions before doing so.

Understanding No Fault Evictions

A no fault eviction is a legal proceeding during which the landlord attempts to regain legal possession of a property from a tenant.  The tenant is being asked to move, due to no fault of their own.  Most tenants facing no fault eviction are often current on their rent and may otherwise be a good steward of the property where they reside.  In lay terms one party to the lease contract, the landlord, is deciding to end the relationship.  The legal process for a nor fault eviction is however generally the same as if the tenant had not paid the rent.  There are legal notices, court dates, judges and judgments.

Why Use A No Fault Eviction?

A landlord might use a no fault eviction for many reasons.  First, upon purchasing a property, a landlord may want to have a clean slate. Inherited tenants will not have been through the new landlord’s screening process and that may cause some unease on their part.

Second, a landlord may want to rehab and upgrade a property.  I can tell you from experience that a major rehab is impossible to do with a tenant living in the property.  Having a vacant property allows for the gutting of kitchens, bathrooms and the replacement of walls, windows, etc.

Third, a property owner may want to move into the property.  I myself moved into one of the first properties I purchased.

Why The Backlash?

In short, there is a backlash because people are being kicked out of their homes even if they have diligently paid the rent and otherwise done nothing wrong.  Some simply do not like that.  They may have lived in the same place for years and developed an attachment to the neighborhood.  Their rent may be under market and they worry about finding a new place of similar quality to live for the same price.  They may not have the money to move.  They may be older or even sick and moving will be difficult.

Taken together, these reasons have produced a backlash resulting in various w or proposed new laws across the country.

What Know About No Fault Evictions

I myself have purchased buildings with existing tenants which I intend to gut, fully rehab and bring back on the market.  Believe me, they needed it and unfortunately the tenants had to go.  Understanding that this can upset the inherited tenants, I strove to ensure that I was in compliance with existing laws, understood existing leases and was as accommodating as I could be.  A bit of tactfulness can go a long way in these situations.

The first thing that any landlord, and tenant for that matter, must understand is that a lease is a contract.  That contract specifies who is a part of the contract, what property the contract applies to, the consideration between the two contract parties aka rent, and the duration of the contract.  Either party can end the contract by providing appropriate notice.  Tenants can move of their own volition and landlords can ask tenants to move.  When tenants refuse, then the landlord is forced to evict.

Secondly, landlords cannot just cannot arbitrarily kick people out of their homes.  Even if they are a new owner and have recently purchased the property proper steps must be taken.  Tenants have rights to the property they live in and their lease runs with the property, not the owner.  Not having a written lease does not matter, tenant rights will still apply.  You as a party to that lease contract have to uphold those rights.  If a year long lease was signed two months before your property purchase, it means you will have to wait another ten months before you can file to regain possession of the property.

People Need Time

Most folks cannot just up and move tomorrow.  They need time to find a new place to live and get their stuff together.  If you intend to empty a property of its existing tenants, you can soften the blow with time.  Give as much time as you can give.  At a minimum, there will likely be contractual time obligations contained in the lease, or there may be legal time requirements.

When purchasing a property, be sure you understand the time constraints you will be under.  Carefully review existing leases.  Use an estoppel agreement to further clarify your new landlord/tenant relationship.

Cash For Keys

Another possibility to soften the blow is to offer some type of incentive for tenants to move.  A little cash or help with a move might go a long way towards getting you the keys.  It sure can be easier and less confrontational than eviction court.

If They Will Not Go

If tenants refuse to go, or drag their feet too long, you have no other option than an eviction.  Evictions can be ugly in the first place, but add an angry tenant who feels that they have been wronged and it can get nasty.  So nasty that it leads to calls for bans on no fault evictions.  And while I can understand and sympathize with tenants, it is wrong to force one side to stay in a contract they no longer wish to be a part of. Landlords can hopefully minimize the issue by understanding what they are getting into and using some of the advice outlined above.

Kevin Perk is the founder and publisher of Smarterlandlording.com.  He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here.  Contact Kevin here.

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The Effects of Rent Controls

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I wrote about rent controls here a few months ago.  I closed that post with a quote from economist Assar Lindbeck.  “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”

Since writing that post, New York has enacted more rent controls and the destroying effects of rent controls are now beginning to appear.

From The Wall Street Journal:

Barely a month has gone since New York passed its new rent-control law, and the predictable problems are fast emerging. Blackstone Group , which owns the Manhattan developments of Stuyvesant Town and Peter Cooper Village, is putting renovations on hold, reports Crain’s New York Business.

“In light of the recent legislation, we are in the process of evaluating capital investments at Stuy Town,” a Blackstone spokeswoman said. Maintenance, such as fixing leaks, must legally continue. But Crain’s, citing an unnamed source, says “renovations to vacant units would stop, as would potentially larger construction projects.”

Together the two properties cover roughly 24 city blocks. They include more than 11,000 apartments, some of which fall under the state’s rent regulations. Because the complex was originally built in the 1940s, sprucing up is necessary.

The old rules at least gave landlords some leeway to recoup costs. When an apartment became vacant, rent could rise 20%. If rent passed $2,774, the regulation ended, and the market rate could be applied. The new law axed those provisions, lowering the incentive to invest and update properties.

Stuy Town and Blackstone are making the news because they’re enormous, but the same logic applies to every building owner. Economists are more or less unanimous in calling rent control destructive. The only short-term winners are people who’ve already locked in.

The Stuy Town tenants association favored the new rent law. No wonder: Its president told another newspaper in 2016 that she moved in 35 years ago and was still paying less than $1,400 for a one-bedroom. You might call that the low price of stagnation, but wait until neighboring apartments deteriorate around her.

In Oregon, which implemented statewide rent controls recently, Karen Sale notes in a comment at this post that the law “dramatically affects Oregon landlords. Many are putting their long term rentals on the market for sale.”

H/T to economicpolicyjournal.com 

The SmarterLandlording Podcast – Loans For The Beginning Investor – With Herb Hyman of Iberia Bank

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Download the podcast here.  Or, check out the SmarterLandlording Channel on iTunes

Items we discussed.

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A Handshake Is Not Enough

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My previous post described how word gets around in the real estate investing community.  Investors generally know the reputations of other players in their market and act accordingly.  However, as much as one investor might be wary of another, you never know who is going to have a deal you may want.  Additionally one cannot ever know the whole story of why someone has the particular reputation they do.  It may be unfounded and based wholly on rumor, or it may not.  People also can change over time, some for better, some for worse.

The fact is in the real estate investing world you just never know completely what or who you could be dealing with.  You really can never know the true motives of why someone is selling a property or working a particular deal.  It is always wise therefore, even in the best of situations, to protect your interests from potentially unscrupulous players and actions.  A handshake is not enough anymore.  In this post I want to talk about one easy method to do just that.  That method is to always use a purchase and sale contract.

We all like to think that everyone will keep their word.  The truth is that most folks likely will.   But you can never know for sure who will and who will not.  It is just so tempting to a property seller to agree to a higher price when offered, even after an agreed upon price sealed with a handshake.  Unfortunately, that handshake offers no proof that you actually agreed to a price in the first place.  You have to protect yourself and the time you spend looking for and evaluating potential deals by binding them to you with a written purchase and sale contract.  Handshakes just will not do in today’s world.

Being ready to utilize a purchase and sale contract does not mean that you need reams of paper, paragraphs of legalese and approval of an attorney.  You can go that way if you wish.  But I would recommend something a bit less complicated if you actually want to acquire a deal of two.  Your purchase and sale contract should be simple.  It should be simple to have on hand, simple to read and simple to use.

What’s In Your Contract?

All a purchase and sale contract needs are a few basics.  These are:

  • Name of the seller.
  • Name of the buyer.
  • The property address and/or legal description.
  • Purchase price.
  • Contingency clauses pertaining to financing or property condition.
  • A date to close or complete the property sale.
  • A place for the buyer and seller to sign and date the contract.

The above seven items are really all that is needed in your purchase and sale contract.  All of that other stuff you see in most purchase and sale contracts is fluff designed to protect the realtors involved.

These seven items can all easily fit on one simple page.  A page that you should have with you at all times.  Because you never know when an opportunity to buy or sell will present itself.  Sure, you can use those long winded contract if you want to, but there are no words that can really make someone buy or sell if they do not want to.  So while you may not be able to force a sale, with a contract you can make things difficult for someone who wants to go back on their word with you.  In a future post, I’ll discuss how.

The Banker’s Book – Putting Your Best Foot Forward

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If you have been reading my last few posts and started to put together your own bank book, you have likely discovered that it is not something that can, or should, be rushed.  It takes time to pull together all of information needed.  Plus, all of that information needs to look coherent and organized.  The pieces of the book need to be put together thoughtfully and carefully so that you put your best foot forward when looking for other people’s money.  To help you, I have listed some tips below that in my experience will help you do just that.

Leave Out Most Of The Tax Return

Tax returns, especially for the real estate investor, can be very convoluted and lengthy.  Mine total well over 150 pages when you include all personal, corporate and state income tax forms.  Placing all of these forms in your bank book can be unwieldy and expensive.  Thus for introductory purposes, I only include the 1040 form (and form 1065, if you have them) in the book.  These forms total at most a dozen pages or so and tell most of the story.  The remaining forms are made available later if the potential lender wants or needs to see them.

In this way, the potential lender can review the most relevant information and is not overwhelmed with paper at first

References

Always include a section for references but think carefully about people you will use.  References should be from those you have done business with as opposed to friends and family.  References should be people who can and will vouch for you both as a person and as an investment risk.

Be sure you give your references the courtesy and ask if you can use them as a reference.  Let them know upfront what you are doing and who might be calling.  In this way you provide your references with a heads up and hopefully find out what they will say when they are asked about you.

Make It Easy

Many people do not like having a lot of paper around and would prefer to be able to review your information when they are on the go.  You should therefore make it easy on your potential lender by having your bank book available in an electronic format.  You can do this in a myriad of ways but two that have worked for me are jump drives and dropbox.

All of your files can be easily placed on an inexpensive jumpdrive.  This drive can then be given to your potential lender in much the same way you would hand them a paper book.  Your lender can then review the files at their convenience.

You can also provide a link to a dropbox account.  This technique is even simpler in that all it takes is an e-mail to send someone the link.  You do not even actually have to meet.

Make It Pretty

Neatness speaks volumes.  If your book is well organized and put together, it will reflect well upon you.  Always have a cover page and a neat folder or bender to put everything together.  I like to use my corporate logo on my cover page.

If you really want to go above and beyond, make your book personal.  Include a cover letter specifically addressed to your potential lender.  Nothing makes a person feel better than when they feel that an extra effort has been made especially for them.

Building Your Banker’s Book – The Personal Financial Statement

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An essential part of any banker’s book is a personal financial statement.  A personal financial statement details your financial history and plays a major role in helping those with the money determine if you are a risk worth taking.  In this post, I want to go over what a personal financial statement is and some of the basic information it should contain.   Plus, I will provide you with a blank personal financial statement in a spreadsheet format so you can get started on putting yours together.

It Is All About Demonstrating Low Risk

First, remember that potential lenders generally care about only one thing.  That thing is getting their money back.  Before they lend their money, they should do some due diligence to determine the level of risk they will have to take in lending to you and what their chances are of getting paid back.  Your task is to demonstrate that you are a good risk and will pay them back.  A well designed banker’s book with a personal financial statement will help you accomplish that task.  It will demonstrate that you have your financial house in order.

As mentioned in the opening paragraph, a bank personal financial statement has been uploaded here.  As a spreadsheet, it has formulas already designed in it to do some of the work and calculations for you.  Download the blank personal financial statement and follow along as I describe the major components.

Filling Out The Statement

The personal financial statement form consists of three pages.  The first page lists all of your income and all of your expenses.  It is here that you describe what you earn and what you spend those earnings on.  You can add or remove the income and expense categories to fit your unique situation.  Once all of the data is compiled and entered, hopefully this section will demonstrate that you are living within your means.  If not, perhaps it is time to explore some of Dave Ramsey’s expertise and develop a budget.

The second section lists your assets and liabilities and creates a personal balance sheet.  It lists what you own and what you owe. What are assets? They are items such as cash, stocks, retirement accounts, real estate, automobiles, jewelry, art, etc.  Assets are anything of value that you own.  In assigning value, enter what you believe they are worth.  For example, if your home is worth $200,000, enter that number.  Do not worry about what may be owed on the asset, that comes in the liabilities part.

Your liabilities are what you owe someone else.  Liabilities include items such as credit card debt, student loans, mortgages, car loans, etc.  Enter the amount you owe on your mortgage for your $200,000 home in this section.  The spread sheet will automatically tally both of those sections and then present you with your net worth as a personal balance sheet.

If for example, your only asset is the $200,000 home described above, but you owe a mortgage of $150,000, then your net worth is $50,000.

The second and third pages provide details of your assets and liabilities.  It is in these sections that you answer several questions.  These questions include: What types of assets? Where are the accounts located?  What is the address of the real estate assets?  Who holds the debt?  How much debt is owed on each asset?

Sign And Date It

Once all of this information is entered, you sign and date the personal financial statement.  Your signature notes two things.  One, it tells the lender how current your statement is.  Second, it notes that everything you have represented is true and accurate to the best of your knowledge.  It therefore has a sort of legal standing so be true and accurate.

It takes Time And Can Be Eye Opening

Compiling the personal financial statement can take some time.  There is often a lot of data to be collected and entered.  It may not be something you can do in a day, but may in fact take a couple of weeks to figure everything out.  Once completed, be ready.  If you have never completed such a document before, it can be pretty eye opening.  You may not have really known where all of your income was going and where you were balance sheet wise.

Better to find out now that you need to get your personal financial house in order before you ask for other people’s money.  Once things are worked out to your satisfaction, you will be very on top of your financial matters and able to clearly demonstrate that you are a good risk to take.

Building Your Banker’s Book – Part 1

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Recently, I have been examining how to ask for other people’s money.  In my last post, I discussed building a banker’s book.  In this post I want to get into building and organizing that book by delving into a couple of its components.

Asking for other people’s money, be it from a commercial bank or private lender, is a learned skill.  The key to learning that skill is understanding the lender’s perspective. That is, the lender is concerned about the risk of losing their money.  They want to be assured that you can and will pay them back.  Learning how to provide those assurances and demonstrate that you are a good risk is therefore a major part of your job as an investor.

The first two sections of your banker’s book will in part provide those assurances.  These are the “Company Overview” and “Resume” sections.  It is in these two sections that you get the chance to make your first impression on the lender.  And since you only have one chance to make a first impression, the development of these two sections should not be taken lightly.

The Company Overview

Most investors are going to develop some sort of business structure.  In the early stages of your business, this structure may simply be a sole proprietorship or a partnership.  No matter.  This “Company Overview” section of your banker’s book provides you the opportunity to give a quick synopsis of your business, who does what, and what its goals are.

This section should be no longer than a page at most.  You do not want to burden your lender complicated and complex business structures.  Rather, layout when things got started and where you plan to go.  Describe your business strategy.  Here is an example from my own Company Overview:

Kevron Properties, LLC has been in the real estate business for fifteen years and is a licensed LLC in Tennessee.  Our company focuses on buying and managing residential rental properties in Memphis, TN.

Kevron Properties strives to provide high-quality, well maintained rental units.  We purchase mismanaged properties at a discount, do quality renovations, and then increase the rents while selecting the best quality tenants.

The Resume

The next section, your resume, should be a bit more detailed.  Your Company Overview section lays that foundation, now you must add detailed finishing with the Resume section.

A resume describes work and educational history.  Details and dates are provided.  Try to emphasize increasing levels of knowledge and experience.  List any real estate or business related organizations that you may belong to and add a few personal touches, such as coaching little league for example, to help personalize you.

If you have never completed a resume before, this task may take a bit of effort.  To help you, here are some resources, including a resume template, offered by a local community college that I teach at.

Do Not Lie

I should not have to say this but unfortunately it is necessary.  Sure, you can be a bit boastful perhaps but do not cross the line into outright lies.  Nothing says high risk like being caught in a lie.  Lying can quickly stifle your chances for success and ruin your otherwise good name.  Be honest.

The Catch 22

Lying can be tempting however, especially if you have no real estate related education or experience.  How do you get that first deal so you can get over the hump and show experience?  How do you get around the catch 22?

I’ll admit it may not be easy but it can be done.

You may not have any real estate experience, but you likely have more relevant experience than you may at first realize.  Have you renovated and built things?  Have you worked at jobs with steadily increasing responsibility?  Did you do any college coursework?  Have you been educating yourself on real estate investing?  Put all of that down and show how you have set and met goals in the past and plan to do that going forward.

Even if you are a newbie with little to no experience, someone will take a chance if you present yourself properly.  They did with me and they will with you.

Think carefully about the Company Overview and Resume sections.  Use the resources I have provided and Google other sources to provide you with some examples on what to write.  You do not have to reinvent the wheel here but you do need to create a good first impression about you, your business and what you plan to do.

How To Ask For Other People’s Money

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Very few of us have the necessary funds to purchase investment properties outright.  Instead we need other people’s money.  Learning how to ask for other people’s money is therefore crucial to your business.  Learning the right way to ask for other people’s money will put you and your business on the path towards growth and cashflow.

It Is About Risk

Other people’s money, or OPM, can come from one of two sources. Those two are institutions or private lenders.  Institutional lenders can be neighborhood or commercial banks and credit unions.  Private lenders could include hard money lenders, syndications of investors and individuals.  While the sources can be very different, asking to use either one is done in much the same way.

Very few lenders are just going to hand you some money with no questions asked.  Lenders are instead are going to be concerned with just one thing.  They will want know if you will be able to pay their money back.  The will want to assess the risk of lending their money to you.  Your job as an investor therefore is to demonstrate that you are a quality, low level risk.  Your job is to show that you can and will pay them back.

How do you do that?  You do it by putting together what I call a banker’s book.  This book will demonstrate that you are a risk worth taking and should go hand in hand with asking to borrow OPM.

Putting It All Out There

A good banker’s book lays everything about you, and the risk you are, on the table.  It puts it all out there in black and white.  If done properly, it will easily demonstrate that you have your business and financial act together.  You are a good risk.

What goes into your banker’s book?  Quite a bit.  The book contains your personal and business financial information.  It charts the history of your financial decision making.  It demonstrates who you are and where you want to go.  Because of this it is not something you want to publish for the entire world to see.  Rather, it is offered selectively and privately to those companies and individuals you are interested in doing business with.

The Contents

What are the actual contents of such a book?  I can’t put mine on the web, but I can put up the table of contents.  You can download the table of contents to see for yourself and use here.  This table of contents will provide you with an outline to get started in putting together your own banker’s book.

At first glance, putting such a book together may not seem like a very large or difficult undertaking.  It may appear to be simply getting paper work together.  While getting paperwork together is certainly part of it, there is much more.  And if you have never done such a task before, you may be in for more than you think.

Get Started Today

You newbies out there (and perhaps even some of you more experienced investors) need to look over the table of contents and start putting the materials described in it together.  In future posts, I will go into more detail about the book’s organization and contents.  If in the meantime you have a question, please feel free to ask in the comments section.

Putting this banker’s book together has made me a lot of money over the years.  If you are serious about becoming a serious real estate investor, you need to do this.  It shows lenders that you are professional, focused, organized and many of the other qualities that constitute a good risk.

The Highest Bid Does Not Always Win

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Investment properties can be tough to come by right now.  There is a lot of money, big money, chasing almost every property that comes on the market.  Getting outbid is almost becoming the norm.  But, the highest bid does not always win.  There are ways we smaller investors can tip the scales in our favor.  Learning how can help you get more properties.

Money Is Not Everything

Sure, everyone would like the biggest pile of money they can possibly get for their property.  That is just human nature.  But sometimes other factors, especially speed, can be more important.  Time is money.  If you can close quickly, and I mean really quickly, like within 48 to 72 hours, you might just beat out everyone else, even if they bid more than you.

You may not think you can close that fast, but it can be done.  To close quickly you need three things.  One is financing that is ready to go.  The second is a good knowledge of rehab expenses.  The third is a title search.

Traditional bank financing is not speedy.  You are not going to have time for appraisals and other paperwork.  Fast money comes from private lenders, lines of credit and even hard money lenders.  These sources of funds need to be developed now, before you make any offers.

The financing types needed to make this quickness work need to be developed well in advance of any offer.  You need to have private lenders or other types of funds lined up and ready to go once you make an offer.  There will be no time for lengthy explanations once the trigger is pulled.

Secondly, you are likely to only get one shot looking at the property.  You will not have time for any later inspections.  Actually, the fact that you do not require inspections is what will make your lower bid offer tempting.  Make the time you do get to examine a property count.  Learn how to estimate a rehab.

Lastly you will need a quick title search.  This can generally be done by a reputable title agency.  Have a relationship lined up before you make any offers.

Put It All On One Page

All of the above can be said on a one or two page purchase contract.  Keep things simple.  Lots of words and clauses can create confusion.  A confused mind will often say no.

Contingencies?

I am not a big fan of signing anything without a way out, but sometimes it might have to be done, especially in this seller’s market.  You can often lure a seller if you offer a contract with a speedy closing and NO contingencies.  No appraisals.  No Inspections.   Nothing.

Be careful here.  But if you know what you are doing and are confident of your numbers, then go for it.

I’m Local

You might be surprised, but sometimes sellers feel better about selling to someone local.  During negotiations, I always try to somehow thrown in that I am a local buyer.  You never know, it just might give you an edge.  I know that it has helped me a time or two in the past.  Try it.

Someday the market will swing back towards us buyers and the money that is out there will dry up.  But for now, we smaller buyers may have to pull out all of the stops if we want to keep growing and acquiring properties.  By doing so we may just find an edge over those deeper pockets.

The Great, Difficult Deal

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One of the best things about real estate investing is putting the deal together.  Doing so however often takes a lot of persistence.  Check out this short video clip taken from Episode 13 of the SmarterLandlording Podcast where Pablo Pereyra and I discuss the Great Difficult Deal.  Pablo’s persistence got him the deal.

Persistence pays off folks!