SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Buying and Financing Properties

Home Prices Continue To Rise

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The boom is on, but let’s not forget the bust of 2007/2008. It will happen again.

According to EconomicPolicyJournal.com,

“The S&P/Case Shiller composite index of 20 metropolitan areas rose 5.8 percent in November on a year-over-year basis. This is the strongest price gain in 16 months.

Home prices in three U.S. cities, Dallas, Denver and Portland, Oregon, are now at record levels, the survey showed. San Francisco matched its previous peak and Charlotte, North Carolina, is less than 1 percent from its record high.

Home prices are up 11% in Dallas, Denver and Portland, Oregon over the last 12 months.”

h/t to EconomicPolicyJournal.com

Home Prices 2007 to 2015

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The change in home prices 2007 to 2015. How is your neck of the woods doing?  There is a lot of “green” out there.

Have Home Prices Rebounded In Your Area?

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Have home prices rebounded in your area? Check out these maps and graphics from the New York Federal Reserve.

I can say that here in Memphis, TN prices seem to have ticked up a bit, especially in the parts of town I deal in. It also seems to me that there are fewer deals out there and more people chasing them. Are the boom times coming back?

How are things in your part of the country? Are prices up? Deals harder to come by? Please share with your comments.

The Smarter Landlording Podcast – Episode 6 – Real Estate Titles and Closings What Investors Needs to Know

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The SmarterLandlording Podcast – Episode 6 – Real Estate Titles and Closings

What Investors Needs to Know

With Joe Kirkland of Tri-State Title and Escrow

 

 

 

 

 

 

 

 

 

 

Links We Mentioned

MemphisInvestorsGroup.com – Stop by on the 2nd Thursday of every month for informative real estate presentation and networking opportunities.

Tri State Title and Escrow – Need a real estate attorney in the Memphis area? Give Joe a call today!

Shelby County Register – Do your own title searches here for Memphis and Shelby County for free!

Check out all the podcasts at iTunes on the Smarter Landlording Channel.

Like the Intro Music? Check out my good friends in the band Kitchens and Bathrooms (Kind of fits right!). They write and play some awesome, original music from right here in Memphis, TN.

Seller Financing – It’s Real!

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When you are new to real estate, and without much starting capital, seller financing is the strategy that gives you hope. With seller financing, you don’t need a bank. You don’t need a hefty down payment. You don’t even need good credit.

I was sure that seller financing was a strategy of fairy tales.

As it turns out though, obtaining seller financing is completely possible. I bought a property with seller financing within 6 months of purchasing my first property. Regular banks would not have financed another mortgage for me that quickly, and I didn’t have 20% of the purchase price saved for a down payment. So, attention newbies and veterans alike, seller financing exists and it’s in your best interest to find it!

So, how did I find a seller willing to finance?

  1. I looked for real motivation. This property was days away from being sold at a tax sale for several years of past due taxes. If the owner hadn’t have sold her property, she would have lost it completely and gained nothing. I did her a service by jumping in with an offer at the last minute. Seller financing allowed us to close in just a few days.
  2. I asked. It’s as simple as that. You never know if someone is willing to carry the note if you don’t ask. In my case, I let her know that the only way this would go through is if she would be willing to seller finance the property. She listened and agreed.
  3. I told her she could foreclose on me if I failed to make payments. That’s right. If I stop making payments, she can take back full ownership of the property—including all of the hard work that I’ve put in and wonderful tenants I’ve put in place. This made her feel a bit more comfortable.
  4. I promised that she wouldn’t have to pay a dime in closing costs or legal fees to transfer ownership. She wouldn’t be financially hurt by agreeing to seller finance.

So, here I have an owner who is willing to seller finance. That doesn’t mean that we agreed on the details. This particular owner was quite stubborn about the dollar figure that she wanted to gain from selling this property. Now, many investors would like to interject at this point and say that she has no bargaining power given her situation. Quite frankly, I was outside of experienced territory and I’ve never been the kind of person to feel as if I was taking advantage of someone. So, I heard her out. There was no way that the property was worth what she wanted, but I listened anyway.

It’s important to remember that this is a people business. We are dealing with real people who are experiencing real problems—and who deserve the respect to at least hear them out. If I had low-balled her, she would have walked right out of the door. It was obvious, given the tardiness of her actions, that there was a part of her that was unconcerned with losing the property at tax sale. I listened.

Then, I told her exactly where I needed to be for this property to make sense for me. That’s right; I put all of my cards on the table. With seller financing, the silver lining is in the terms—because everything is negotiable. Here are the steps of our negotiation process.

  1. I told her that the back taxes owed would absolutely need to be deducted from her asking price—since that would need to be paid immediately. I also explained that the private loan I would need to get to pay these taxes would have a high interest rate. This allowed me to shave off a bit more from the asking price. After all, it wasn’t my fault she didn’t pay her taxes!
  2. Remember how I promised that she wouldn’t pay anything out of pocket for closing costs? Well, I had an estimate of what that would cost me, and dollars add up! I showed her this estimate and explained that this dollar amount should also be deducted from her asking price. She agreed.
  3. I explained the extent of repairs, and what it would cost me. At this point however, she was adamant about sticking to our new—already declining—asking price. She became flustered and kept saying the property is being sold “as is.” OK OK, calm down. Let’s switch gears.
  4. I explained that it wouldn’t make sense for me to purchase a property at the after repair value while ¾ of the property was vacant. It would inhibit my ability to perform renovations. Would she be willing to allow me to start my payments 6 months from our closing date? Yes, in fact, she would. I purchased the property on December 31, and I won’t start making payments until July 1.
  5. Next, I showed her the numbers. I listed the taxes, property insurance, private loan payments, utility expenses and any other expense that I could think of associated with the property. I also told her that I needed to make $200 in profit per unit for this deal to be worth my time. We looked at the numbers and could easily tell how much of a payment I could afford to give her every month. From there we manipulated the length of the loan and interest rate until that monthly payment landed where it needed to be. We shook hands and met at the closing table two days later.

In this case, I bought a quadplex with $0 out of pocket. I gained a 20 year loan with an incredibly low interest rate, and I have time to renovate and rent out the units before I start making payments. Each seller financing deal will be different, I’m sure. Maybe the next seller will be adamant about the length of the loan, the down payment, or even the monthly dollar amount. The beauty of seller financing is that It doesn’t matter. Every inch of the terms are negotiable and you’re the boss.

Go out there and get it.

Silence Can Be Golden!

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Being a successful real estate investor means being a successful negotiator.   Being a successful negotiator is not easy, but it is a skill that can be learned.

Browsing one of my favorite websites the other day I came upon some valuable negotiating advice and thought I would pass it along.

 

SILENCE

The most powerful words are silent.

I had a dinner with Michael Fishman (cc Monica McCarthy) last week. He said, “if even for one second you are preparing your response while someone else is talking, then you aren’t listening.”

That’s pretty wise, Michael!

My technique is this. Someone talks. I count to two. Then I prepare my response and not before then.

Very valuable advice! 

During negotiations, our minds can race ahead.  We want the deal!  But by not listening we may actually lose the deal.   We will never hear what the other person actually wants or needs and we instead craft the deal to what we think they want or need. 

Give this technique a try.   Your silence can be golden.

Buying Apartments? Use This Form!

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For us landlords, growing our business means adding new properties.  New property additions mean more rental units and more cashflow.  New property additions also mean more tenants.  Sometimes these tenants come with the properties we buy.  I call these tenants “inherited tenants.” 

Inherited tenants pose a special kind of risk to a buyer in a couple of ways.  First, as a buyer you are generally bound by their existing lease agreements.  You cannot just kick tenants out, raise the rent or revise other lease terms just because there is a change in building ownership.  Second, these tenants have not been through your screening process.  You really have no idea about their background or payment history.  100% occupied may not be what it seems.  So if one of these inherited tenants is a rotten egg, you may be stuck with them for a while

One way you can protect yourself as a buyer is to review all of the leases before purchase.  While I recommend doing this, I feel it does not go quite far enough.  I want more protection.  So I use an estoppel agreement as well.

Estoppel is a legal term which means someone is prevented by their own acts by claiming a right on another party.  For those of us buying investment properties and inheriting tenants an estoppel agreement prevents those tenants from making future claims on us after the property is transferred.  The agreement spells things out on the front end before we buy, thus preventing our inherited tenants from claiming something different later on.

Here is what an estoppel agreement should include:

  • Tenant(s) name and who lives in the unit
  • Lease term
  • Renal payment amount
  • Security deposit amount
  • Who pays utilities
  • Who owns the appliances
  • If there are any pets
  • If there are any problems or repairs needed
  • If there are any other agreements with the landlord.

The agreement should also be signed by both the tenant and the current owner once it is completed.

Don’t think for a minute that some unscrupulous tenant will not try to claim that their security deposit was really $1,000 instead of $500, or that they paid six months rent in advance, or that they really do own those window air conditioning units.  An estoppel agreement will stop those claims cold and it will stand up in court.   

Don’t let yourself be taken advantage of during an ownership changeover.  Protect yourself and your business.  Make completed estoppel agreements a part of your purchase contract.  It’s simple and easy to do plus it may just save you a bundle.

Feel free to download the estoppel agreement I use here.

Getting a 203K Loan? Expect Trouble!

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Yeah, I said it. The 203k loan is troublesome.

But now that I’ve gotten that out of the way, you should know that the FHA 203k brought my real estate investing aspirations into reality.

There is a plethora of information out there regarding FHA’s 203k loan. You can see details of the loan here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.

Basically, the 203k allows you to finance a property as an owner occupant with a 3.5% down payment. So why is this so special? The 203k allows the homeowner to finance repairs into the mortgage too. That means that normal, everyday folks can buy a property that is in substandard condition and rehab it—without having to eat the rehab costs in one sitting.

Oh, did I mention that you could use the 203k loan to purchase a multifamily property? Yup, that’s right. You can buy a 1-4 unit property, live in one of the units, and rent the others out.

That is exactly what we did. We purchased a triplex, and the other two units (now rented) cover the mortgage. This has allowed me to get my feet wet in the world of rehabbing and landlording—and save more money to fund other deals.

Before you get too excited though, you should know that the 203k loan is complex. You won’t quite understand all of the complexities of it until you go through the process yourself. It has many moving parts and quite a few people involved.

For example, you must use a licensed General Contractor for all of the repairs outlined in the loan. Additionally, all of the repairs have to be inspected and approved by a HUD inspector who works on your behalf. At one point, we had the lender, the investors, the contractor, and the inspector all in disagreement over one issue. To say the least, it can be exhausting.

The 203k loan requires a large amount of paperwork. You will need access to a copy machine, fax and scanner. I was able to move things along when requests were made of me or my contractor because I could easily copy, fax and scan. If you do not have these resources, expect to be insanely frustrated. I cannot count how many times additional documentation or signatures were requested.

Couple these hassles with requirements that were not disclosed on the front end (like lead-based paint testing, mortgage payment reserves and payment processes), and you can imagine how frustrating this loan can be. I will (most likely) never do a FHA 203k loan again.

With all of my complaining out of the way though, I don’t regret at all my decision to take advantage of this loan for my first property purchase! I could not have bought my triplex without a means of funding the rehab.

Plus, my other property acquisitions should feel like smooth sailing after that—right?

 

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The One Clause You Must Use When Buying a Property

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You never know when a potential deal will come along.  I have literally gotten a property under contract less than an hour after talking with the owner.  That is why I always have a copy of a purchase contract on hand.  Because you really don’t ever know, so be a smarter landlord and be prepared.

I like to keep my purchase contract short and sweet.  It gets right to the point describing the property, how much I will pay and when I will close.  I do not like to put a bunch of other contingencies or clauses in there.  They tend to muddle things up and if you really want the property and intend to close, they are not necessary.

There is however one clause that is absolutely necessary.  I will not sign a purchase contract without it, and neither should you.

Here it is:

“Seller warrants that seller has good, clear and marketable title subject only to property taxes and any easement and or/restrictions of record.”

If you cannot get a “good, clear and marketable title” to a property, then do not purchase it.  If there are so called, “clouds” on the title, then move on down the road to the next deal

Clouds on a title can do all sorts of things.  They can hinder your ability to get bank financing.  Clouds can prevent you from getting title insurance (something you want) and they can leave you exposed to a law suit (something you do not want).

All sorts of things can cloud a title.  The property could have been sold at a tax sale.  A foreclosure may have been done improperly.  A property may not have gone through the proper probate process or may have IRS or contractors liens attached to it.

So how do you find out about these clouds?

You pay to have a title search done.  A title search generally ranges in price somewhere between $250 and $500.  Do it!  Do it every time you are going to purchase a property.  It is money well spent.  Don’t think so?  Imagine purchasing a property only to find out later that the person that sold it to you was not the rightful heir and had no authority to sell it.  Can you say lawsuit?  How much will that cost you?

So use this clause in your purchase contract.  Use it every time.  Get a title search done, every time.   Avoid those clouds on the front end, don’t let them develop into a storm.

The Autumn Leaves Mean Deals

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I hope everyone had a great holiday weekend.

As we get summer behind us and look forward towards fall, smarter landlords are also looking forward to some great end of the year purchases.  It has been my experience over the years that some of the best deals show themselves towards the end of the year.

Why is that?

I think there are a couple of reasons.

  1. People have had their property on the market for a while now, some since spring trying to hit the “peak” buying season, and have had no success.  They will now be ready to make a deal.
  2. Banks will be looking to unload non-performing assets or foreclosures.

You see, the end of the year is both a psychological and fiscal boundary.  People want to start fresh in a new year.  They want to unload things that are perhaps holding them back.  They are tired and ready to deal.

Banks and many other businesses will be starting a new fiscal year.  That means it is time to clear the books.  It is time to take those tax write offs.  It is time to move some inventory so the banker can get their year end bonus.

Basically, the looming end of the year can be a great motivator.

So what should a smarter landlord do if you want to pick up some of these deals?

  1. Get your money and/or financing in order.  You will need to be able to move quickly.  It is best to have all of this arranged now.
  2. Know your market.  You will need to know what a deal is and jump because others will be looking too and the good ones go fast.
  3. Network.  Let others know that you are in the market and what you are looking for.  Paying someone a finder’s fee is a great way to get deals.
  4. Keep a close eye on all of your sources.  Many deals are still found through the Realtor’s Multiple Listing System (MLS).  Have your realtor set up a search that will e-mail you directly potential deals.  Use key words such as bank or corporate owned, price reduced, make an offer, priced to sell, estate, etc., as part of your search criteria.

It’s September.  Time to think of the autumn leaves, football and getting a break from this humidity.  But smarter landlords are also thinking about picking up some year end deals.  Some are going to come your way.  Be ready!