SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

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4 Discriminatory Questions That Can Trip Landlords Up

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Most people are aware of fair housing laws.  These laws make it illegal for a landlord to discriminate on the basis of race, age, sex, familial status, national origin, color and religion.  State and local laws can often add disability, veteran status, sexual orientation, income source and other items to that list.  Every landlord I know tries their best not to run afoul of these laws.  They know that it is both wrong to discriminate in such a manner and that it could land them in a deep and expensive pot of hot water.

But, even if you are aware that these laws exist and have no intention of acting in a discriminatory manner, it can still be easy to trip up.  How?   By asking questions that they think are perfectly innocuous but can be taken as discriminatory.

As landlords, one of the most vital things we do is screen potential tenants.  To screen tenants properly, we need to get certain pieces of information.  How we ask for that information however is what gets us into potential hot water.

Here are four questions that landlords often ask which can be taken as discriminatory.

  1. How old are you? – As landlords we want to make sure potential tenants are old enough to sign a legal contract and we want to run credit and criminal checks on everyone over 18 years of age. How can you find that out without asking their age?  Well, you do not really need to know their age, just if they are legal adults so ask this question instead.  Are you a legal adult?
  2. Do you have any children? – A seemingly innocent question that can get a landlord into deep dodo. Remember that familial status is a protected class and if you ask about children you run the risk of running afoul of the law.  Instead you should ask this question.  How many people will be living with you?  You can then take this a bit further and ask how many will be legal adults.
  3. What size apartment are you looking for? – How could you get in trouble for asking this? After all you were just trying to be helpful.  But, by asking about size someone might think you are trying to dissuade people with large families.  Thus putting you on the wrong side of the familial status protected category.  Instead ask what a potential tenant’s price range is then let them know what you have available in that range, no matter the size.  In that way you let the potential tenant make the decision.
  4. Do you have a job? More and more communities are banning discrimination based on the type of income someone receives.  To avoid problems ask this question instead.  How much is your monthly income?  After all, what we really want to know is if a potential tenant can pay the rent.  Who cares where the income comes from as long as it can be verified.

When screening potential tenants do you best to keep your questions general.  Base your questions on items that matter such as verifiable income, and age of consent.  By keeping things general, especially at the first points of contact, you can hopefully avoid tripping over some of those housing discrimination laws.

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.

Word Gets Around

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Real estate investing is in many ways still a very local endeavor.  Despite the achievements made by some turn-key companies and others, many investors still just work locally.  The real estate investing community in any locale can therefore be very tight knit.  Everyone has at least heard of, if not met, the other investors and players in the local market.  And word gets around about everyone.

They get around because the plain truth is that people like to gossip.  Everyone talks to everyone else.  Investors talk to other investors.  Your attorney talks with other attorneys.  And your CPS talks to other CPAs.  The same goes for your contractors when they see other contractors over at Home Depot.  They all discuss what they are doing and what you are doing.  They may not directly name you, but it all eventually comes out; the good, the bad and the ugly.

What Gets Around?

What sorts of things and I talking about?

  • If corners are cut, or not.
  • When legal “grey areas” are crossed into.
  • If bills are paid or not.
  • If anyone has been “screwed” over.

All of these things of course affect your reputation.  And reputations in the real estate business mean a lot because much of what we do is based on trust.  Trust that others will uphold a contract or deliver a good rehab for example.  But your reputation is not built by you alone.  It is also reflected by those you choose to work with.

Assumptions Will Be Made

Like it or not, you will be judged by the company you keep.  Even if nothing is known about a particular real estate investor, if they use certain attorneys, contractors and others, assumptions will be made.

Imagine the following scenario.  You are interested in a property bought to you by a wholesaler.  How would you feel about the deal if your attorney told you that “He uses so and so as a closing attorney.  That attorney is thorough.  There should be no problem.” Now imagine the opposite.  What if instead your attorney said “He used so and so as a closing attorney!  We need to look at this deal a lot more closely.”  How will this affect your dealings with this wholesaler?

Or think about this.  Would you rather have the building inspector at ease or on high alert at one of your projects due to the contractor you are using?  A building inspector’s discretion can cost you a lot of time and money.  By using people with a solid reputation you put the building inspector at ease and you are more likely to be the recipient of their good discretion.  That discretion can mean a lot for any project.

Bad News Travels Fast

Bad news, especially in a close knit industry such as real estate investing, travels quickly.  Reputations can be made or lost very quickly.  Once lost, a reputation can be very hard to get back.  Using people with solid reputations is just the way to go.  Yes, they may cost more on the front end but only thinking about cost is short sighted.  Smarter investors also remember how much, time, effort and money is saved on the back end over an investing career by using people who do not cut corners and have good reputations.  Smarter investors work hard to preserve their reputations.  Sure, we can all get fooled once, be we are the fools if we let the fooling continue.

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.

Foreclosure Rates – Then and Now

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This headline recently came across my inbox recently, Top 10 States With The Worst Foreclosure Rate.

That seemed worth a click, so I did.

Here are the ten states with the highest foreclosure rates.

 

New Jersey                 1 in 1,006 Housing Units in Foreclosure

Delaware                     1 in 1,008 Housing Units in Foreclosure

Maryland                    1 in 1,193 Housing Units in Foreclosure

Florida                         1 in 1,365 Housing Units in Foreclosure

Illinois                          1 in 1,465 Housing Units in Foreclosure

South Carolina            1 in 1,615 Housing Units in Foreclosure

Connecticut                 1 in 1,801 Housing Units in Foreclosure

Ohio                              1 in 1,918 Housing Units in Foreclosure

Nevada                         1 in 2,041 Housing Units in Foreclosure

Pennsylvania              1 in 2,205 Housing Units in Foreclosure

At first glance, these rates may seem pretty high.   Are they?  Are they really that bad?  To check, I went back and looked at the data for the same states from 10 years ago at the height of the bursting real estate bubble.  The picture that emerges shows that words such as “worst” are relative.

New Jersey                  1 in 55 Housing Units in Foreclosure

Delaware                      1 in 1,512 Housing Units in Foreclosure

Maryland                      1 in 343 Housing Units in Foreclosure

Florida                           1 in 17 Housing Units in Foreclosure……1 in 17!

Illinois                           1 in 401 Housing Units in Foreclosure

South Carolina             1 in 754 Housing Units in Foreclosure

Connecticut                  1 in 593 Housing Units in Foreclosure

Ohio                               1 in 50 Housing Units in Foreclosure

Nevada                          1 in 10 Housing Units in Foreclosure……1 in 10!!!!

Pennsylvania               1 in 1,140 Housing Units in Foreclosure

So yes, these states are the ten worst right now.  But it can definitely be much, much worse.

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.

Your State’s Most Expensive Neighborhood

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So where do you live?  Are you in one of the most expensive neighborhoods across the country?

Click on this report from Realtor.com to find out.

Me?  Not even close.  When you are bad you get put in the corner.

Property Taxes By State

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Understanding property tax costs is vital to any real estate investor’s bottom line.  Property taxes are one of the major components that have to be plugged in when figuring out how much a property is going to cash flow.   Property taxes by state can however vary widely as this report from the National Association of Home Builders demonstrates.   Some states, such as New Jersey and New York have very high effective property tax rates, while other states like Alabama and Wyoming are much lower.

Investors also need to understand however that property taxes potentially only make up a portion of your total tax burden.   Many states will also tax income.  Others, like Tennessee where I live, will also tax entities such as LLC’s that are used to hold property.  Plus, some properties are going to be taxed differently.

Thus, while the attached report is interesting and informative, it only tells part of the total tax story.  Smarterlandlords are wise to research and uncover the entire tax story and burden wherever they plan to invest.