A Day in the Life/Office

Ok, so how about a day in the life? Well here goes for everyone.

Up at 6:45 check email via blackberry by 7:30 in the office by 8 at morning prayer by 8:30, back at the office by 9. Short sales meeting with sales staff. Meet with my buyers about appointments for the day. By 11 looking at a house we got under contract yesterday. Signed a sales contract on a retail sale for 75k (got about 28k in it). Went to lunch with an investor and talked about the biz. Played around on flipitbig.com for a while after lunch. Worked on a contract addendum for a particular deal that we are working. Followed up with one of my buyers after one of his appointments regarding a house that he looked at. Talked to my sales girl about some of her leads with retail buyers that are pre-qualed. Talked to a couple of investors about lines of credit and how to establish them. Met with a private lender regarding transactions coming up. Got earl (the rottie) and packed up the laptop and called it a day (5:15).

Kinda’ normal day. I spend a lot of time on the phone, mostly networking and talking to lenders and investors (8000 minutes/month usually). But I only look at houses that are deals and are under contract after my buyers have completed their part of the deal. I basically manage my system and manage my people at this point. However, I do have bad days and days that I run crazy all day etc. I am sure we all do. But let me give you a day in my franchise/business and what goes on around here all day overall.

We usually start showing up at the office around 9 am as a group. I usually spend a little time with each of my buyers and sellers to see what they have working at the time. My buyers will go over the paperwork and comps for their upcoming appointments for the day. We generally schedule appointments at either 10 or 2. This gives the buyers time to prepare emotionally and with their paperwork etc for the meeting with the sellers. We have 3 buyers and each of them will have 2 appointments on the average each day. My coordinator will pull a comp report on each house that we will look at. On each house she will pull at least 10 comps and then narrow them down to the three closest and in size to the subject property. She then puts each one of them into our proprietary program which includes an estimator program for repairs. Once it is all entered, a packet is produced and given to the buyer on that house. Along with a credibility packet the buyer will take all of this including a laptop to the appointment.

We normally have at least 15 or so line ads in the local paper, or thrifty nickel type of paper. Because of this, the phone rings about 10 or 15 times an hour on average! So needless to say my coordinator is busy every day just with that part and the paperwork for the buyers, but she does a variety of other things as well. She is responsible for our reporting to HVA, as well as the daily managing of the comings and goings of the office. She coordinates between all of the members of our team. This also includes requesting title work and maintaining a file on each property that we have under contract. She will push our deals from a communication standpoint and make sure we are all on the same page. She will make sure that everything is on schedule with rehab jobs as well. Basic tracking of invoices as well as ordering of office supplies and deploying garbage cans etc are covered by her as well.

My buyers of course are the ones who go out to the appointments and meet with the sellers. Their job is to negotiate for the purchase of the houses with them and convey our position as the industry leader to them as well. This gives them confidence in our abilities as professionals and lets them know that we are their best choice in the market for them. They will drive the area that they have the appointment in and look for vacant houses before leaving the area. Once back at the office they will pull the subject information of the vacants and mail them a letter. They will also place door hangers on all of the houses within a couple of streets of there as well. Then do that all over again for the second appointment. Two of my buyers will also sell houses wholesale for me to our investor database, they have a group and list of buyers that are their clients.

Our retail sales person schedules and has appointments with potential buyers where she will pre-qualify them with our FHA lender. Once pre-qualified, she will give them a list of property that they can go and look at, this happens about 3 times a day on average. There is of course a big pile of paperwork that will need to be gathered on the buyer including two years worth of W-2’s, two years of tax returns, verifications of rent, deposit for down payments, and verification for the 3 necessary trade lines as well. Her job is to manage all of the gathering of the info to send to the lender along with the selling of the houses retail. She normally talks to 4-6 potential buyers a day and meets with at least 3.

I have 2 property locators that drive neighborhoods daily looking for houses that are vacant and need work, which we will pull records on and mail to them to attempt to get a lead and set an appointment.

Our construction superintendent oversees the rehab process on our rehab projects. He of course has to procure supplies for the jobs and manage the subs that are on the jobs, which is one of the hardest jobs in the business. We normally work 2-5 rehabs at a time, so all of it is in multiples. He normally is at Home Depot at least 2 times a day, and is at each rehab at least once a day.

Our bookkeeper is responsible for the day to day management of the financial part of our operation including maintaining the daily balances, booking invoices, and HUDs from closings. We also have a CPA that oversees her process and we meet with him monthly to go over our P&L and he lets us know exactly where we are at financially.

We have one full time short sale person along with my wife who oversees the department. She talks to banks every day and usually have at least 4 or 5 hours on the phone daily either talking to banks or holding for banks. She deals with people about to lose their houses and has to maintain a communication level with the sellers to ensure the deal will go well.

My wife’s main job function is to oversee the sales department of the office and make sure that part is moving in the right direction. She oversees the short sale department as well. My goal for her is the same as myself, doe us to work on our business not in it. this gives us the ability to develop our business and take it to the next level.

All of these parts are moving daily in conjunction with each other, sometimes they move well, sometimes not as much, but that is what we do around here.

Negotiating Tips

Now I am going to attempt to “wrap up” this topic. Not sure how successful that will be. We could literally talk for days about negotiating, but I will get it to where everyone has a little bit of understanding of the topic and let it go from there.

Ok, I walked everyone through they way that I teach my buyers to buy houses. We walked all the way through the process, but now I want to back track a little and talk about some tips/tricks that may have been mentioned but should be expanded upon.

Planting seeds is the first thing that you need to learn about. In the negotiating process you must plant seeds of doubt regarding the seller not taking your offer. So think of all of the negative reasons that a seller would have where keeping the property is concerned and these should be brought up.

Costs: most of the houses that you get a call on are going to need plenty of work, and that means money. One of the main reasons that the sellers will call you will be because they do not have the money to fix the property on their own. I usually even bring that part up from the get go. Just to let them know and be upfront I put it out there that they will make more money if they keep it, fix it, and sell it themselves. Once that is done, we have planted the seed that they will need the cash to fix the house. So this will be in the back of their mind when they get your offer.

Slow Market: we can capitalize on the market conditions and present the fact that it may take a while for them to sell their house. You can quote falling prices in the area, or days on market that you know about. The number one thing to do here is be armed with the facts of what is going on. When that is put out there they will then think hard about how hard it is going to be to sell their house.

Fees: closing costs and commissions fit in here, as does insurance costs. So these are figures that you need to bring up to the sellers so that they are aware of them and will think about them. I like to do this just like a net sheet that a realtor prepares. You can itemize all of the fees that they will see in the process so that they will also be thinking about those fees when they see your offer.

Dealing with contractors: all of us have problems dealing with them, and civilians are no different. They have the problem of finding the contractors that will do the job. Then fight putting up money up front and whether or not they will even show back up (sound familiar). Then what about the time to manage them, bad workmanship, not completing the work, etc. these are all seeds to be planted as well.

Financing: most sellers don’t even realize what is going on around them so you may need to educate them on the financing battles that are going on in the market right now. Let them know that it is now that people don’t want to buy a house, it is that with the recent collapse of the lending companies it is harder and harder to get people financing. Let them know that often times when a house sells and gets to the table to close the financing falls apart. This is a seed that will plant a lot of doubt in the mind of a skeptical seller. Now everyone that wants their house could be the loser that they are scared they are.

All of these things are small by themselves, however, when you put them together, they become a lot of negatives. You must practice your presentation skills so that you work certain things in at certain times in your visit. It must not sound rehearsed but it is almost a script that you have to follow. Once you have done it a few times it starts to become natural to you. You are adding blurbs to your presentation in the middle of building rapport.

Another thing that we must talk about is finding the pain. Part of the rapport building process is to find the pain. Why are they selling you their house? What problem is there in their life that makes them need to sell to you? Also what do they need? Is there something in particular they need to allow them to get out of their house? Usually this is a topic that will help you decide what seed to plant. If they need to go fast then you can mention the time on market in the area and the uncertainty of the financing even if it is sold. This is just like a debate session or playing devil’s advocate. If they are broke then you emphasize the costs of getting the house ready to take to the market.

When talking about of costs and pricing, it is important to note that you may need to allow them the ability to lead the conversation to some extent. A lot of times their pricing that they have in their mind is completely different. The main reason is that you as an investor will get an entirely different pricing from your contractors than what a civilian will get. So allow them to lead you a little bit on pricing and values. You can also allow them to tell you what they think needs to be fixed on their house and they may tell you something that you didn’t know or won’t see on your own. You can also ask them what they think their house will sell for, this may be a lot less than what you think as well.

You should be able to sell yourself/company as well and why it is that they should deal with you as opposed to all those other guys out there. What is unique about you and your company that makes you stand out and makes them want to sell to you instead of someone else. This is where you push your abilities, the financing that you have available, and the network that you have at your fingertips. You can also use this time to explain to them about you and your company and some of the things that you have done. Remember they have to be convinced that you can solve their problem.

I like to be able to talk intelligently about my contract as well. I like for it to be in layman’s terms and be able to paraphrase it for the clients that I meet with. It is important to be able to convey all of the information to the seller, otherwise they will slow the deal down to run it past someone else. I like to put a timing deadline on all of my contracts so that they can’t just hold on to it and shop it to everyone in town and then call me at the end.

So these are some tips for your negotiations for now, I will add more stuff on this later.

Negotiating The Deal Part 1

I guess I will start a little line about negotiating your deals. I know a lot of people out there are starting out and there are some things that you should know and learn.

First is empathy, and rapport. These are essential to establishing the reason that someone will buy from you. No matter what you offer, or even if two people offer the same amount the seller is going to sell to the buyer they have a level of rapport with. The person they “like” will win every time.

So let’s talk about rapport. In a drawn out way let me give you a story on rapport. When I was a restaurant manager, I had a waiter that consistently sold more than everyone else working, every night. He was a big guy and used to play college football, so I naturally thought he scared them to death until they bought whatever he told them to. He never seemed to get in the weeds like everyone else in the store and could handle as many table as I dared to give him. One night I had a conversation with him about this, and he allowed me to follow him all night and explained a few things. First he said that the key was to identify with them, next was to put yourself on their level, and never stand over them looking down. After that he said you must lead them to what you want for them. Now let’s apply that to houses.

The rapport starts with the phone call, when you receive it you must start building this rapport. You must identify with them by sharing something that is similar to what they are going through. Don’t rush them off the phone take your time. Usually, when people call us (investors) they are in trouble, so in a lot of situations part of your job is to listen. They just want to vent some of it to someone that will not judge and we are perfect, they probably will not ever see us again. Ask open ended questions like “tell me about your house” and “it sounds nice why would you want to sell it”. This is to get them talking about their situation so that you can establish the level of motivation, and connect on a emotional side as well. Once you get that rapport built, the next thing to do is set the appointment to go out and look. It is important to note here that if it is in the area that you like to buy in, I did not say “how much equity do you have”. Doesn’t matter, if they are motivated enough they will make it happen and so will you, but beyond that you have to realize that this is part of the reputation that you are building.

So let’s go there now; most investors get a call screen because of equity, and then determine that they cannot make a deal and don’t call back or follow up with the potential client. If they do go out, even on a call that has some equity, they have their numbers down and usually within the first 30 seconds with the seller they are trying to make a low ball offer. Then afterward, everyone wonders why didn’t they get the house, and why do people think investors are bad. Go figure!

So for you as an investor, you should think enough of your marketing, and enough of your clients to go out and meet with them. There is no sense in doing heavy screening if it is in an area that you will buy in ( or you have a buyer that will buy in) just go and meet the seller. You go and meet them and pick up where you left off on the rapport building. Sit down and ask them about their house, and how they got in the situation they are in. How did they hear about you? Wow, I notice you are in to hunting, me to, what do you hunt? That type of thing. Establish a medium between you and the seller so that they understand you can identify with them. Also this is the part of the meeting where you plant seeds. Talk about the market and how hard it is to sell, or how much of a problem that buyers are having getting financing. Also you need to mention basic fees involved in selling a house such as sales commissions, closing costs, holding costs, insurance, and the fix up of the house. I usually let them give me some numbers here, like “how much you think that roof will cost to replace”. You know your numbers, so if theirs are higher use theirs.

Once this is established you can then go and check out the house. Take a notebook or clip board to write notes on. It is important to note here that it does not help or even do you any good to bash someone’s house. You should not say “crap this room is ugly” or “wow your house is a piece of crap”. In most cases this is where they have raised their kids, spent Christmas, thanksgiving, and other family times. It will not help you to bash that. In fact you may want to stress that you understand that specifically by saying something like “I understand that you have raised your family here, but please understand that for me as an investor I could never make an offer that would do justice to the memories you have made here”. That being said you can also let them know that you have to make an offer that make business sense to you. These types of hints start to plant the seed about what you are going to offer. What is acceptable to do for conveying the stuff that you will work on is to make a “hmmmmm” noise, or just touch the spot without saying anything. Make a noticeable attempt to write down the defect. This puts a spot in their head regarding the defect, without you saying “damn lady you sleep here”. Believe me they know what is wrong with their house, you do not have to tell them.

So once you have made your pass around the house and looked at everything it is time to prep them a little more. Let them know that you are going to work the numbers out and see what the offer will be, but want to cover a couple of things. Cover everything that you have done and talked about, mention everything before, and then go to the car to figure your numbers. This gives separation between you and the seller, long enough for you to think and work out your numbers, but also to allow them time to mull over the offer that you are about to make them. You can even get the in the “ballpark” before you go out to the car with something like “so let be clear here, we think this house will be worth xxx when it is fixed, and we got at least xxx in repairs, but I will figure those numbers out, so if I can be around xxxx are we going to be able to do business?” Then go figure out what exactly your offer will be, but take at least 8-10 minutes on it. When you go back in you can go through your blank contract to let them know about it. I like to be able to paraphrase it for them, and then when you are done you write the amount in the price line and push it in front of them and say “I can offer you xxxxx” and be quiet. Don’t say a word until they do. The first one that talks looses.

We’ll start wrapping this section up tomorrow…………………..

Thursday

Today has been much like the whole week, I have not had a second during the day. Two appraisals, meeting with my real estate attorney, countless calls to investors regarding new projects. Looked at 3 houses, signed 1 contract to buy, and showed 1 retail property to a buyer. Got 1 new client pre-qualified for a loan. Talked to Gerald my one of my partners on flipitbig about some/alot of the possiblities for the site. Talked to my corporate credit guy-a couple of times. Worked out a title issue on a house we are buying. Talked to a seller we are about to close with, and was at home by 7 for a webinar. Wow!

Just another day at the office I guess.

I will catch up with a more detail post tomorrow.

Fliptibig.com

If you have not been over there yet you gotta' get over to flipitbig.com to check it out. Go here www.flipitbig.com to check it out, it is the newest and best social real estate networking site on the web. I am partners with Gerald King and Jared Christensen in the site, and we are bringing more and more people to the site daily. There is great content and lots of freebies. We do a chat each week regarding a different topic.

Assign or Wholesale

Here is another one that Justin edited for me................

Assignment or Double Closing

There are two ways to sell a house to your buyer in a wholesale transaction; either Assign your Contract or conduct a Double Closing.

Basically, in an Assignment of Contract, you are assigning your right to purchase a property to another investor for a fee. This is one way to go with your transactions, but I think there is a little catch in there personally. I have always tried to be open with investors when selling properties, but it can come back to bite you. Ask yourself what amount you would be upset about seeing on the HUD if you were purchasing a property from a wholesaler.

The concept behind this part of the wholesale business goes back to the relationship part I talked about in the “Wholesaling 101” article. If you have built relationships with your buyers, you will know what they want and they will know how much you work to get them the deals that they are looking for, which justifies your fee. But human nature is to ponder on what ifs.

If you had not charged them 5k and only charged them 3k they would have made 25k instead of 23k. Woulda’, shoulda’, coulda’ syndrome right?

Your goal as a wholesaler is for your clients to appreciate what you bring to the table and for them to not be concerned about how much your fee is. This is done by only giving deals in the price range that they are looking for. If they are buying from you on the first few deals at 70% consistently, then they will expect that LTV, and at some point they will not worry about your fee, because they know where to come to get a house. Eventually their rationale will be if it is 70% who cares what you make.

This is a building situation, and will not happen in most cases on the first deal. A lot of investors must be conditioned to deal with wholesalers.

So here is my personal guideline on assigning fees, if my fee is under 5k on a house worth less than 80k then I assign the property. One clear cut advantage to assignments is the lack of costs to you the wholesaler. You will place your assignment fee on the HUD directly and that is what you will receive at the closing. No extras or hidden costs. Neat and clean, except for the part where you will sweat your butt off until the closing is over and you actually have the check in your hand.

On Double Closings, which is how we close most of our deals, you will close with the seller first and then the buyer next. This is normally done around the same time and in two different closing rooms to make it suspenseful. I actually prefer to do one of a couple of things; first I like to close my deals opposite from normal and make my buyer come in first and put his money on the table and then I bring in the seller later in the day. I do this because now the funds are liquid and my closing attorney does not make me bring in a cashier’s check for my part of the closing (I really like that part the best).

Next, I use a little trick my friend Scott Britton taught me and use a flying deed. No I don’t make it into a paper airplane, but I have the seller deed the property directly to the buyer! Think of it this way, if I would like I can add anyone in the world to a deed of a property that I purchase, for no reason, and without explanation. That being said what is different from just putting it straight into someone else’s name instead of mine, even though I am technically paying for the house. I have found that there is no need to go on title of a property unless you have to. Nothing good comes out of owning a property for an hour or two, except confusing tax situations and bills, etc.

Now what about costs though? Well you will increase your costs by double closing. You will have at least two closing fees and deed fees etc. however there will not be a disclosure on the HUD of what was paid for the property like there is in an assignment.

If you are in a disclosure state your client will eventually be able to find out what was paid, but at that point it will be over. Also unlike in an assignment, your seller will not know what you are making off of their house either. Sometimes that can be a barrier to completing a deal, when a seller sees that you are making a certain amount of money off of a property but told them you could not give them over a certain amount of money, you could have a problem. Remember, they don’t have to sign in the assignment closing, but they don’t know any better in the double closing. Your margin takes a hit, but it is easier to mark it up to a level that is better for you.

Wholesaling 101

Ok now I have an editor........well not officially, but my buddy Justin Anderson, who is a great real estate investor in his own right, edited my wholesale articles in to a couple of shorter snipits that I will include here as well.

Wholesaling 101

Wholesaling is the one of the most misunderstood segments in the pantheon of real estate investing. As wholesalers we are like Wal Mart the low price leader. We buy low and sell low. Basically, if you are a new investor the best thing you can do to find your first few deals is make friends with your wholesalers in the area. They will do all of the leg work and searching to find the deals and you will pay them a fee for it, but you will get your houses and be in business much faster. There are 3 key things to look at when evaluating a wholesale deal:

The most important part of wholesaling and being able to wholesale efficiently is pricing. This is what sells a house on the wholesale market. That being said, you must know the market very well to know what a house will be able to be sold for, which is where the pricing will come from.

The next thing is the repairs of the property. You must have a certain amount of expertise to be able to estimate the repairs needed for a rehab. The repairs also will effect the amount that you will offer for a property, so if you do not understand this part of the equation then you will automatically set yourself up to fail.

3. Next is the networking side of the business. When you are getting going the hardest time to try to wholesale is when you do not have the contacts established to allow you to move a property. You will not have the contacts that will run out to a property and look at it to make you an offer if you do not have a reputation of being able to successfully find deals. Once you have built a list of investors this part becomes a lot easier, but it doesn't happen automatically.
Whenever one of my buyers or I go out to look at a property we always take into account the fact that if we are selling a house wholesale, the first concern is that you can get financing for your client that is interested, which means the house must come within a certain LTV. Usually that LTV will be 70% or less. Obviously as a wholesaler, we have to buy below that number to make any money. So we start at the comparisons and figure out what it will sell for when it is rehabbed, then figure out what the rehab will cost, then back out the profit that we would like to make, and that leaves us with the purchase price that we will offer.
Wholesale Buyer Mindset

When you deal with investors during wholesale transactions it is imperative to build a relationship. As wholesalers, you have to be the eyes and ears on the street for the investors that you supply property to. That being said, you have to have some knowledge of the market so that you can supply the necessary information for your investors to make educated decisions about buying investment property. You become the “go to” for their real estate needs in the investment business. So the natural progression in this type of a situation is for you to get to know your buyers. I always call this “order taking”.

For example if I talk to “Joe Investor” on Monday and he tells me that he is looking for a house in West Mobile and he wants it to be a 3/2 that needs paint and carpet. On Tuesday I go on a lead on a house in West Mobile that is 3/2 and needs cosmetic updates, so I call Joe when I back out of the driveway with the contract in hand. I tell him about the house and the details and name my price. At this point there is a good chance I will sell the house to Joe because I have superior knowledge about what he is looking for. That is a very different situation than if I blast an email out to every single investor that I have ever met not knowing anything about what they want.

A few questions to ask yourself when dealing with investors in these types of situations;

What is the area that the investor buys in? Most of your investors will have areas that they like and areas that they do not. Most of them need education in this area as well, by having rentals of your own; you can give them some personal experience regarding good areas.

What type of houses do they like? Brick only, wood ok, siding etc.

What type of rehab is acceptable for the investor? Some investors are intimidated by certain types of rehab like roofing or foundation.

What is the pricing that is acceptable for your investor? As cheap as possible is not the right answer here.

How do they get their money? With lending being what it is nowadays this could be the most important part of your questions. A cash buyer will normally demand a better price than other investors, and there are certain lenders that have LTV(loan to value) limitations that will determine the price that you can charge that particular investor. Cash questions are imperative in the rehab projects, your buyer will need a certain amount of cash to start the rehab even if they have a loan, so this question, although touchy, is necessary.

Remember that your investors are like a book of business, and you must take care of them, so that they will buy from you repeatedly, not just once. You do this by building the trust that they have in you, and by being able to help them achieve their goals. This is not a one time sale and off you go on down the road, this is a service after the sale situation if there ever was one.

Entity Choices

There are many types of paperwork in this business to worry about, but one of the most important to start out with is the business itself. There are many different types of business structures to consider when starting out. Everyone that is getting in this business wants to know what type of entity to use for their business, but the right answer is that it depends on the situation. Most investors don’t realize it but the first decision that they make for an entity may be great at that time, but it may change drastically as time goes on and their business changes. Don’t get tied in and caught up in an entity or name and realize that you can start them and end them very easy, and they are all replaceable. So let’s run down the different types of entities and what makes them good. Here is where I also let you know that I am not an attorney or a CPA, blah blah blah. Of course the age old types that we as investors should never use are sole proprietorship and partnerships. These types of structures are not advantageous from a tax standpoint for one, but the other reason is the lack of liability protection. For both of these types of entities there is no barrier between yourself and your company. The sole proprietorship is you interfacing with the public directly with no shield. The partnership is worse because you may be liable for the actions of your partner as well. So the next up is the corporation(general). The corporation is a structure where ownership is held via stock. Because of this structure there is a lack of liability for the stockholders. The only exposure that there is becomes the investment in the company itself. A corporation may have as many stockholders as it likes. Here are some more things to consider;Advantages *Owner’s personal assets are protected from business debt and liability *Corporations have unlimited life extending beyond the illness or death of the owners *Tax free benefits such as insurance, travel, and retirement plan deductions *Transfer of ownership facilitated by sale of stock *Change of ownership need not affect management *Easier to raise capital through sale of stocks and bonds Disadvantages *More expensive to form than proprietorship or partnerships *More legal formality *More state and federal rules Closed Corporation: There are a few minor, but significant, differences between general corporations and closed corporations. In most states where they are recognized, closed corporations are limited to 30 to 50 stockholders. In addition, many closed corporation statutes require that the directors of a closed corporation must first offer the shares to existing stockholders before selling to new shareholders. This type of corporation is particularly well suited for a group of individuals who will own the corporation with some members actively involved in the management and other members only involved on a limited or indirect level.S Corporation: With the Tax Reform Act of 1986, the S Corporation became a highly desirable entity for corporate tax purposes. An S Corporation is not really a different type of corporation. It is a special tax designation applied for and granted by the IRS to corporations that have already been formed. Many entrepreneurs and small business owners are partial to the S Corporation because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure. S Corporations have the same basic advantages and disadvantages of a general or closed corporation with the added benefit of the S Corporation’s special tax provisions. When a standard corporation (general, closed or professional) makes a profit, it pays a federal corporate income tax on the profit. If the company declares a dividend, the shareholders must report the dividend as personal income and pay more taxes. S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the shareholders. However, like standard corporations (and unlike some partnerships), the S Corporation shareholders are exempt from personal liability for business debt. S Corporation Restrictions: To elect S Corporation status, your corporation must meet specific guidelines. As a result of the 1996 Tax Law, which became effective January 1, 1997, many of these qualifying guidelines have been changed. A few of these changes are noted below: *Prior to the 1996 Tax Law, the maximum number of shareholders was 35. The maximum number of shareholders for an S Corporation has been increased to 75. *Previously, S Corporation ownership was limited to individuals, estates, and certain trusts. Under the new law, stock of an S Corporation may be held by a new "electing small business trust." All beneficiaries of the trust must be individuals or estates, except that charitable organizations may hold limited interests. Interests in the trust must be acquired by gift or bequest -- not by purchase. Each potential current beneficiary of the trust is counted towards the 75 shareholder limit on S Corporation shareholders. *S Corporations are now allowed to own 80 percent or more of the stock of a regular C corporation, which may elect to file a consolidated return with other affiliated regular C corporations. The S Corporation itself may not join in that election. In addition, an S Corporation is now allowed to own a "qualified subchapter S subsidiary." The parent S Corporation must own 100 percent of the stock of the subsidiary. *Qualified retirement plans or Section 501(c)(3) charitable organizations may now be shareholders in S Corporations. *All S Corporations must have shareholders who are citizens or residents of the United States. Nonresident aliens cannot be shareholders. *S Corporations may only issue one class of stock. *No more than 25 percent of the gross corporate income may be derived from passive income. *An S Corporation can generally provide employee benefits and deferred compensation plans. *S Corporations eliminate the problems faced by standard corporations whose shareholder-employees might be subject to IRS claims of excessive compensation. Not all domestic general business corporations are eligible for S Corporation status. These exclusions include: * A financial institution that is a bank; *An insurance company taxed under Subchapter L; * A Domestic International Sales Corporation (DISC); or *Certain affiliated groups of corporations. Keep in mind, these lists of qualifying S Corporation aspects are not all-inclusive. In addition, there are specific circumstances in which an S Corporation may owe income tax. For more detailed information about these changes and other aspects regarding S Corporation status, contact your accountant, attorney or local IRS office. How to File as an S Corporation: To become an S Corporation, you must know the mechanics of filing for this special tax status. Your first step is to form a general, close or professional corporation in the state of your choice. Second, you must obtain the formal consent of the corporation's shareholders. This consent should be noted in the corporation's minutes. Once the filing is approved, your company must complete Form 2553, Election by a Small Business Corporation. This form must be filed with the appropriate IRS office for your region. Please consult the IRS' instructions for Form 2553 to determine your proper deadline for completing and submitting this form. You must prepare and submit the IRS Form 2553 as part of your incorporating process. Limited Liability Company’s (LLC) or LLCs have long been a traditional form of business structure in Europe and Latin America. LLCs were first introduced in the United States by the state of Wyoming in 1977 and authorized for pass-through taxation (similar to partnerships and S Corporations) by the IRS in 1988. With the recent inclusion of Hawaii, all 50 states and Washington, D.C. have now adopted some form of LLC legislation for both domestic and foreign (out of state) limited liability companies. Many real estate investors believe LLCs present a superior alternative to corporations and partnerships because LLCs combine many of the advantages of both. With an LLC, the owners can have the corporate liability protection for their personal assets from business debt as well as the tax advantages of partnerships or S Corporations. It is similar to an S corporation without the IRS restrictions. The income or loss from the LLC passes through the company to the personal income tax return of the owners. This is especially important when dealing with rental property. As your rental property is considered a passive investment, by allowing the funds from your rentals to flow through to your personal return it tremendously reduces the tax implications of owning real estate. This is the primary reason that owning rental property has always been a preferred investment vehicle of the rich. One of the main disadvantages of LLC is the same as with S Corps is that at the end of the year you must allow all income to “flow through” to the tax return, which on a good year could be painful to your return. This fact also means that you cannot regulate the income that you make with a salary. It is also important to note that an LLC may also elect to be taxed as a C Corp instead of the “default” election as an S Corp. This is a separate election that you must take via a form 8832 when forming the LLC or within the first 6 months of operation. This is an uncomplicated version and does have certain inherent disadvantages due to the informality and the lack of documentation for certain financial and operations issues that may be impacted if a suit were imminent. It is important to understand that a corporation is the only entity that can stand on its own as a person can, which helps in corporate credit, but is not necessarily the top choice in all cases. The choices are many, but it is important to decide one way or another, don’t delay get a business going so that when it is time to get started you are prepared.

Starting From the Beginning

Ok, tonight on the site I saw a post about contracts and I think I need to go there cause this is bothering me a little bit. Before all of you say it and start sending me hate mail, I know I am a little off topic, but hey I think this thing says “your” blog when I log into it, nuff said! Besides you will all thank me in the morning. I have some strong opinions about education in this business. I have had some very educated students, two pharmacists, three lawyers, two CPA’s, and two doctors, just to name a few. Now what makes them different from us? Well, I like all of them and all of them will tell you that there is not anything that is different, except education. They have superior knowledge about their chosen field, imagine that! They are successful because they learned their trade, is that hard to understand? So let’s look at the comparison; I know a couple of these doctors personally, and in fact my wife has passed the med school exam and was accepted, but has not attended as of yet, because we have made plenty of money in less time (school wise). So what is the point? Well the point is that in order for a doctor to make 300-400k per year gross and walk out with 140-160k they go to school for 4 years and have a residency for 3-4 more and if they specialize it is even longer, and all of this starts at 200k in cost and goes up. We as real estate investors are able to make their salaries in 4-6 months of the year and from a much better taxable standpoint, plus if we build a rental portfolio it pays us no matter what, and a doctor only gets paid when he is performing. Now I said all of that to say, how much education have you sought out to prepare yourself for this business? There are a lot of investors that get a $350 course from Carlton Sheets and then they are an investor. If that is true then when I got out of biology in my freshman year of college I was a doctor!So I am going to start from the beginning for everyone, and I hope that will help out. Once you decide you want to be in this business, there are some things that you will need to get started. This is not the entire list, and the list will grow as you go along in the business, but there is a list of things that you need just to get started.*Cell phone, this is probably the most important piece of your list. You must have a phone with a liberal plan, because you will drastically increase the amount of talk time that you use while in this business. It should be noted that if you are going to be busy at all you will probably need a Smartphone of some sort so start there with your cell phone decision, especially given contracts such as they are choose earlier than later.*Email, I know it sounds silly, but I have seen this one a lot. Don’t have the cool email address either, sexyguy69s is not the best email address from a business standpoint. Gmail, yahoo, and aol are free now, so get you an account asap. More latter on this. *PO BOX is necessary as well. If you are going to be in business it is best to get a PO BOX so that you will not have people coming to your house to look for you, especially if you are going to be in the rental business. *Fax line is important as well, and for an “office” phone system you can use a Hosted PBX system with a company like Onebox that will give you a dedicated virtual fax line along with a phone line and extensions to give your business a professional sound from day one. You can do outgoing messages only as well.*Get a map book and a mapping program. I use Microsoft Streets and Trips which is a easy program to use and only about 20 bucks. You will also need a map book or if you are enterprising get a nav system like tom tom to guide yourself to the properties. Don’t underestimate this point, you do not realize how many parts of your town you have not been to and do not know until you get a couple of calls to look at houses. *You will need to establish a business, and I advise the easiest versions in LLC’s. These are great, not the do all end all, but easy to set up and manage and great for real estate in general. In doing this I advise to set up at least 2 LLC’s to start with. More later*If you are going to have businesses you need a checking account for them, so that is next. Start thinking about a website to match the name of your business, to give yourself a more professional image.*In order to be in business the next thing you will need to make your business grow fast will be credit, and I advise to start building your corporate credit NOW! More on this later as well.*The easiest thing on this list to get is very important as well and that is motivation. You must be motivated to be in this business, it is not as easy as it looks on tv.*Now the hardest is the last and that is MONEY, you will need some to get started, and remember the more the better.The next thing that is imperative when you are starting out is to make a plan. This will determine and affect EVERYTHING ELSE in your business. You must have a plan in order to have something to change. The statistics are innumerable that show how people that set goals are more successful and happier, so I won’t go into detail on all that, but the main thing is that in our business it is imperative to have a road map to know where you are going to understand how to get there. One reason that goals are so important is because of the time line of our business. For example, if you purchase a house that you are going to sell retail and you are new to this business you will most likely go to at least 4-6 months depending on where you are at in the country before that house sells. That being said, if you want to purchase 4 houses a year to sell retail and you do the math, you will need funds to purchase and rehab at least 2 houses at one time, and maybe even 3. So this lets you know that if your average house purchase is 50k and your average fix up is 15k (using numbers from my market) then you need 65k plus holding costs for 2-3 purchases minimum. Also, if you are going to put 4 houses per year into your rental portfolio then add at least 1 and 2 to be more safe, because you will have to purchase it rehab it and refi it while you are doing the retails. In the cash requirement department you also have to compensate for start up costs of the list of stuff we talked about above along with some marketing money to start generating leads as well. From a timing standpoint it is easier to start with a total number like;How many rentals per year will I buyHow many retail do I want to doHow much money do you want to makeDo you want to improve your living statusDo you want to build your retirement incomeDo you have other personal goals as well like replace your job or your wife’s or put back money for the kids educationDo you want toysDo you like to travelDo you desire security and peace of mind for your personal lifeAll of these things should play into your goals and decisions in this business. We have a very distinct advantage in that we can structure our business to conform to our personal needs and wishes. You can stop and start your business as needed to be able to take time off if you like, but you must plan all of this. When getting started the next thing to think about is lending power. I believe you must start at the top and work your way down. The best possible money you can get from the bank is an unsecured line of credit. A commercial unsecured line functions just like a checking account and you can buy whatever you like whenever you like. The next best thing is a HELOC or home equity line of credit on your personal home. This is secured to your personal house, but it functions that same as an unsecured line, so that you can write checks for anything you need. The next best line is a guidance line. This line is usually capped by a dollar figure and a number of houses. It also has a “guidance” amount for your LTV (loan to value) that you must stay within. Most of these are 80% or less LTV. Usually they are tied to prime for the rate, such as prime plus 1 point and 1 point in origination and they are interest only for the monthly payments. There are normally no prepayment penalties and the term is usually one year. If you get a guidance line you should also ask for a semi-permanent financing line as well, so that you can move the houses from your guidance line to semi-permanent financing and keep it in your business’ name. these usually are for 1, 2, 3, mill and are on a 15 or 20 year amortization with a 5 year balloon. If these types of financing do not work the next step is to find yourself a hard money lender. These are asset based lenders that will loan up to 70% or so LTV including the fix up. They usually charge between 3 and 5 points in origination and 11-18 percent in interest. These are normally 6 month loans that may or may not be able to be renewed. If this doesn’t work for you either then you need to be looking for a partner to team up with that can get one of those types of financing. So you got everything you need and you have your financing lined up, you need to learn your paperwork next before you can make an offer, so next time I will cover paperwork…………………….

Paperwork can be fun too!

Ok, I hate paperwork probably more than anyone out there, however, it is a must for success in our business. You have to master the paperwork, because everything starts there. All of this part of the blog got started because of comments regarding contracts, so that is where we will start. First of all there is a mentality to contracts that you must think about and figure out first. In any contract situation you must decide and think about what side of the transaction you are going to be on. This isn’t rocket science here, but if you are on the buying side you want your contract to be pro buyer, but if you are the seller it should be slanted to the sales side. The natural concept that most investors start out with is that the contract is what it is, and you can’t do anything about it. You must be able to read and comprehend the language in the contract first, and then you must not be afraid to change the wording to match what you are attempting to do. So now let’s talked about what makes a contract legal. The main ingredient in a contract is not technically “in” the contract at all. The first and most important thing that you need with regards to your contract is a meeting of the minds. This means that both parties have met talked regarding the deal that is going down and discussed the parameters of what will happen during the transaction. Once the deal has been discussed and the details are verbalized the reducing it to writing will happen, and this is where the contract comes in. After the meeting of the minds you must have a price that will be agreed upon. Terms of the deal come next and this can be the most diverse, but we get to that in a second. You must set a timeline for what is stipulated to happen, and then have consideration, what most people call earnest money. In most states consideration does not necessarily have to be cash, but it is in most cases. However there is not a minimum or maximum, so it can be as low or as high as you would like. Also during this process you want to stipulate to the title of the property, status of the property, or lack thereof (as is where is) along with any inspections that you may want to have completed. You must decide who will take care of closing costs, and in what percentages, along with where the closing will take place.So here are some easy questions for you to think about;If you are buying how much do you want the earnest money to be?If you are selling how much do you want the earnest money to be?If you are buying when do you want the closing to take place?If you are selling when do you want the closing to take place? Are there late fees associated? How about closing costs?What about inspections? How long before approval of the inspection if you are selling vs buying?Who do you want to be able to get into the property if you are buying?So as you can see there really are two sides to every story, and your side will determine how you want the contract to read. So if you have a realtor can you use your contract? Of course, there is not a requirement that says that you have to use a board of realtors contract. Many of them prefer not to “allow” you to use your own contract because they do not understand contracts, especially yours. One of the most important parts of your contract is in the signature line; under the line that you sign on make sure you add “Buyer and/or assigns”. This makes your contract assignable. These can be 4 very powerful words if used right. Some other good clauses for your contracts;A lien clause;Special liens against the property shall be paid by Seller, if any. *This makes sure that when you buy a property any additional encumbrances on the property will be taken care of at closing by the sellers, this applies to tax liens, or mechanics liens etc.A closing clause;The sale is to be closed within 30-45 days from delivery of copy of proposed deed and certificate of title to Buyer, or as soon thereafter as said insurable title can be effected, as hereinabove provided. *The additional time attached is from the receipt of the copy of proposed title which can add a week or so to your time to close, this also protects you if the title is not clear. Inspection clause;This contract is contingent upon Buyer’s inspection and approval of the property prior to transfer of title. The buyer reserves the right to personally inspect and give written approval of the described property within 15 working days after the acceptance of this contract by the Seller.*Another way to add time to your contract, by stipulating the time starting AFTER the approval of the condition of the property. BTW I have never given a written approval of the status of a property!A financing clause;This contract is also contingent on buyer obtaining acceptable financing for the subject property once said inspection has been completed. *This gives you an out if you cannot get suitable financing.A Deposit or Earnest Money Clause;Buyer will deposit with Doug Dunning P.C. at Advanced Land and Title Company 1659 Government St. Mobile, Al 36604 $500 as earnest money.Such earnest money shall be applied to the purchase price and shall represent all liquidated damages in the event that the property is notpurchased. *One key here is the liquidated damages, if you are not able to close this reduces your liability in the deal.An Acceptance Clause;This instrument shall become a binding contract when accepted by the Seller and signed by both Buyer and Seller. If it is not accepted and signed by Seller prior to 2 working days from the date mentioned below, this contract shall be void. *This gives the seller a deadline to perform by when you give them a written offer. As is Where is Clause;Seller and Buyer acknowledge that this is an “As Is” offer to purchase and Seller makes no warranties as to the condition of the electrical,plumbing, heating and air conditioning devices. Refrigerator, air conditioning unit, if any, and stove shall remain and are considered part of thesale.*As is where is and you want to stipulate to keep the appliances.Access Clause;Buyer shall be permitted access to the premises for, but not limited to, inspection and showing appraisers, contractors and inspectors.*You have to be able to get investors in to be able to sell something wholesale.Marketing Clause;Seller agrees to allow Buyer to Market the subject property in any and all ways including signage in the yard, MLS, flyers, and word of mouth.*This allows you to market the property and sell it before you have to buy it. This is what we call our Hurricane Clause;This contract is further conditioned upon delivery of the improvements in their present condition, and in the event of material damage by fire orotherwise, before closing. Buyer may declare the contract void and shall be entitled to the return of his earnest money, or Buyer may elect tocomplete the sale.*This is in case there has been damage to the property since you originally contracted it. Does not mean you can’t renegotiate though. These are some parts of my purchase contract that we use on a daily basis in my office, so it is tried and tested in battle, I am sure you can come up with otherthings clauses on your own that would work well. The key here is to not be scared to change things on your own and to try stuff out, I promise there is not anyway you can mess something up that you cannot fix. Just remember to read, it is all English after all.

What type of houses should you buy?

Ok, if you have been following the blog I have been doing of late, it is kinda’ taking everyone back to the beginning. So for the people that are following here we go;You have thought about where you want to go and where you want your business to take you. When doing this you set goals for yourself that are reaches but still attainable at the same time. These goals are quantified and measurable, so you know what to do on Monday and where you are at in your business. You know how many pieces of mail to mail out each day. You know that you have to drive neighborhoods to get your leads. You are implementing a marketing plan daily. You get motivated sellers calling you.You are setting up appointments to meet with these sellers. You are going belly to belly a few times a week with these motivated sellers and honing your skills. You know your numbers in your business; how many leads it takes to set an appointment, how many appointments to get a buy. You understand the paperwork and have a bulletproof contract to use when making your offers.You understand the types of deeds in your state, and you have formed a company and are using your own leases in your business.You are moving forward in your business, but here are a few other things to think about as you get going;What types of houses should I look for specifically?What makes these houses good for me?So let’s start with the types of houses you want to buy and that you should look for. There are many different houses in every market, in fact there markets within markets. But I always advise my students to start in the middle. What I call the 3 legged stool theory. No matter how long or short the legs of a three legged stool are, you will still be able to sit on it. I use that to illustrate the following items that are capable in our business, wholesale, retail and rental. If you purchase a super high end house you can fix it and retail it, you might be able to wholesale it, but you will have a problem renting it and making any money (cash flow). On the opposite end of the spectrum, if you buy a house in the hood (for lack of a better phrase) you can easily cash flow it, you may be able to wholesale it if you know another junk dealer, but you will have a hard time retailing it. So just like in the story about the 3 bears, you a need houses that are just right. So the house that is just right is one that I like to back my way into. First figure out what the median price is for the houses in your area. Once that is established take 60-100% of that price and that is going to be the best target area for you to buy houses in. These are the ones that you can wholesale, retail, or rent and still make money in most markets. You will find that where you are going to be most successful at in the market is going to be that “less than” part of the price range. That is the part of the market that is normally under the most transition and has a chance of having equity that you can negotiate for. Also in this price range you are going to find the houses that are most affordable for your first time homebuyers which are your retail and good rental targets. These are also the houses that other investors like to do the same with and will buy off of you wholesale. When you figure out what that price range is it is pretty easy to find those areas of town and isolate them in your marketing plan. You can do a mailer to a whole neighborhood, or a particular zip code. Or you can drive those areas specifically looking for houses in need of repair. They will be easy to see; peeling paint, broken windows, high grass, general disrepair. You can also look for meters being out of power boxes, this is a easy sign of vacancy. This is also going to be an area that will qualify price wise for FHA financing for your buyers as well. This means the working class neighborhoods of your town are your target. My philosophy is that I would much rather sell everyone their first house and nobody their second. Once good thing about this price range is that your average person in your town can afford them. So the other way to figure this out is by taking the average income of your town and work your way back to the house that they can afford as well. For example if the average wage is 50k, the FHA guidelines are 25% for PITI so $12,500 per year in payments so about a thousand a month is the median, and you want to be 60-100% of that number as well. Given the rates of today $1000 per month gets you about a $130k house so you want to look at $70k-$130k houses. You obviously will find the sector that is the best mover for you, and then you just need to target that. This house that you have now targeted is your sweet spot for your buying. The key here is to stay in that sweet spot and do not venture out from there. So let’s talk about that elephant in the room that I am sure everybody is thinking about right now. What about the nice cool big houses? or what about the governmental low end programs that you can sell to people in the bad neighborhoods? Should I ALWAYS look for cash flow? These are general things, but the key to me for my students has always been to keep it simple in the beginning and diverge from there latter on. Yes there will come a time in your business where you feel good enough about yourself to venture out and do a high end house, or other types of products. This is ok, at some point but don’t start out doing these types of houses, keep it simple till you get your legs under you. So can you buy a house with negative cash flow and it make a good investment? Of course you can, but that is not a good proposition when you are just getting going in this business. There are a million ways to make money in real estate, but keep it simple when you are getting going and it makes a lot more sense in the long run. Next we will get into financing to run your business………………………………..

Real Estate Financing 101/202

Alright, we need to talk about financing now. Understand that if you get control of and understand financing it will take your real estate investing career to the next level faster than anything else that you can do! I have said it a bunch of times in the past, but if there is one thing that I wish I had learned quicker and earlier in my career it would be financing.There are a lot of things to consider when talking about financing, but where the real estate business is concerned financing is the engine that makes the car go, without it you have nothing. The next point that I would like to make is that you should always go to small banks. This does not mean that the big banks will not work for you, but it does mean that the small ones are going to be better and more flexible for what it is that you want to do. Also do not be discouraged if you get turned down the first couple of times that you go to the bank. You need to have a business plan ready when you go along with financials, either for your business or personal or both. The way you get approved in the financing arena is with packaging, that is what lenders look for; how the deal looks. Remember if it looks like you need them more than they need you, you are not a good risk. So let’s talk about the different types of financing that are out there.Lines of Credit: there are commercial lines of credit and also equity lines of credit. The best type to have is a commercial unsecured line of credit. This type of credit line can be used just like a check book. You pay for whatever you want whenever you want to(read no appraisal needed). These are also, of course the hardest to qualify for. With this type of a line you can close immediately. The other type is an equity line. This can be an equity line on your personal home or your rental property. Either way it is a secured line in that it is attached to a property or an asset of some sort. This means that your asset is at risk if something goes wrong, however you can write a check from this type of a line. These are the best types of access to capital that are out there. Most of these lines are tied to the prime rate and float with it. The norm is a point (one point equals one percent)or so above prime. You only pay origination once, and that is when the line is set up, and it should not be above a point or so. these types of lines are usually structured over a 2-5 year period. In order to get a line of credit that you will be able to use successfully in your business you will need a pretty strong credit score and some assets up front, or an available asset to leverage. Sometimes you can get a small line to start out with and then by proving yourself/business to the bank it will get increased. It will be hard to get enough to run your business with in the early going, until you have a couple of years of business under your belt, where the unsecured line is concerned. Guidance Lines: the next version of credit is the guidance line. This is just what the name implies. Your line is under “guidance” or guidelines and as long as they are met you can buy a house. Most of the guidance lines go up to 80% or so of the LTV (you will have to get a subject-to appraisal done for this)of the house including the fix up costs. Some banks require you to put some “skin in the game” and will want a certain amount of money down on each one of these deals. It will normally take 7-10 days to close. For example I have a $1 million line that is good for up to 10 houses and each one must be within 80% LTV and my investment is 10% net so 10% of the purchase and the fix up is the down payment. The interest rate is prime plus one and the origination is one point. A fifty thousand dollar purchase with ten thousand in fix up means sixty thousand total investment so I bring six thousand to the table to close. Guidance lines of credit are commercial lines and they are a version of a construction line of credit that builders use. Bankers love to give these to real estate investors, especially in this market when the builders are slowing down, and being that 80% in a house for us is a bad buy. This makes them be very secure in the investment that they have with us. I would suggest these types of lines even if you get a unsecured or secured line of credit. This enables you to use the guidance lines for acquisitions and the lines of credit for fix up and marketing/holding costs, etc. It is good to note that if they prior two options do not work for you that is not the end of the line for your financing options. There are a number of buy it and fix it financing solutions out there, but please beware of dealing with mortgage brokers for this type of financing. Nothing against mortgage brokers, but most of them are not going to have a program that will work with a house that needs extensive work. If it is minor work they may be able to help you. Hard Money Lenders: A hard money lender is simply a lender that loans money based on the value of the asset. Also called an equity based lender. These hard money lenders usually require the loan amount to be at a 70% or less LTV including the fix up of the house. Anything above that amount must be brought to the closing table including the closing costs. The cost of hard money is expensive, but not when you consider the cost you have when you don’t buy a house at all. Usually origination is 3-5% and the interest rate is 10-18%, so you need to know what you plan to do with the house and where you are going with it before you make your move. Closing time is normally 2-3 weeks. Be mindful of the costs involved and make sure you ask about all costs that you will incur from the HML so that you go in with your eyes open. If you have decent credit and can refinance, but cannot get a line of credit a hard money lender is a good alternative, once you own it and have it repaired, you can refinance it and cash out the hard money lender. You can use this technique even if you want to sell the house retail if you get a good enough deal on your take out lender, just make sure there are no prepayment penalties for the take out loan and you can get rid of the HML and get a better rate for the holding period. If you are going to move to your rental portfolio, then it is even better. It is important to note that an appraisal will be required for this type of loan.Temp to Perm: it is good to talk here for a second about temp to perm loans. I don’t know if that is a real type of loan, but that is what I call it. The smaller banks that have the lines of credit and guidance lines will have a temp to perm option where they will convert the short term loan to a permanent/semi-permanent loan. This is usually a 5 year loan with a balloon at the end of the 5 year term. It will usually have a 15 or 20 year amortization schedule as well to make it cash flow. When you have a property on your short term line or guidance line and get it fixed you will then want to have the ability to move it over to longer term financing to get it off of the line so that you can go do it all over again. These loans are going to be held in the bank, meaning that unlike most loans that are sold on a regular basis to other institutions these types of loans will be commercial and kept in house by the bank. These types of loans are usually attached to a dollar figure limit with the bank, for example with one bank that we use we have a 10 house guidance line (different than the one before) that goes up to 80% LTV, under the 80% we don’t bring anything to the table for closing and fix up is included. Once the property is complete we can move it to our temp to perm line which we have a 3.5 mill cap on, and the loans are on a 20 year amortization and a 5 year balloon. The conversion costs us $150 to move it to the perm side. So given this example you can see that it is necessary to have multiple versions of this at more than one bank. Until you get these types of lines set up you may need to have your financing done through your personal finances for permanent financing. For that remember that Fannie Mae guidelines stipulate that you can do 10 refinances under their guidelines in your personal name. These are the easiest loans to qualify for and have the best terms of all hold loans. The down side is that they are in your personal name and the debt to income ratios can be difficult and drag down your personal credit score. After those first ten you will have to find other sources, but most banks will then take you in house with the loans and usually will allow 3-5 per bank. Here is a good point for me to tell you that you need to start early working on your corporate credit. You WILL damage your credit in this business, if by no other way than piling stuff on to your credit. The best way to prevent that is to start early building credit in your business’ name. ALWAYS ask for the commercial lender in a bank or the commercial lending product with a credit card or supply company. ONLY allow for loans in your business name if at all possible. This will be hard at first and you will hear no’s a lot more, but it is important to go through this process until you find the lender that you can work with. You must go to the bank with a little of an attitude and let them know that you are interviewing banks to do business with and let them know up front that you want an unsecured line, a guidance line and a temp to perm type of line if you are going to give them your bank accounts. Also you will not pay any fees for wires or checks………ever! If you do not have that type of an attitude then you will have a hard time dealing with the banks. Wow that is a lot of financing stuff packed in there, but that is not the whole thing, next I will go into private lending, which is the ultimate in real estate financing.

Deeds

Ok, I know this is a little off topic, but I have received a request for information regarding deeds, specifically quit claim deeds. Well this is exactly what I was hoping for……not deeds specifically, but requests for specific topics to be discussed on my blog. I could very easily be a drone about what I got going on or even what I want everyone to hear about, but I like the idea of this blog being more about educating the member of flipitbig on the topics that they are interested in hearing about. Although I could tell you about what is going on in my life or business and it would probably be interesting, but that is not the point, it would be better served for it to be an educational thing about real estate than any of the other things. On to the deeds. The first thing that I advise all investors to do when wanting to get into this business is don’t worry about the sexy stuff and learn the basics. There is nothing more basic for a real estate investor than the deed. This how interest in a property is conveyed. So I will cover most of the deeds that are out there, some may not be in your particular state, but bear with me. The Warranty Deed, the bread and butter of our business(may also be called a General Warranty Deed). This is the way that you want to receive a property when you buy one. This is also the type of deed that most lenders want to see at a closing that they are funding. The basis of a Warranty Deed is that you are warranting the title of the property to the person that you are selling the house to. This is where title insurance comes in. The big boys in the title insurance game such as Chicago Title, and Fidelity write insurance policies much like what you are used to with property insurance. They insure the title of the property against encumbrances or liens that may arise against the property once they have issued the title policy. Of course for this to happen they have some requirements, which include a title opinion which normally will have to be signed off on by a title attorney. A title opinion is just what it sounds like the opinion of a attorney regarding the state of the title on the property. So you as the owner purchase a policy that insures the title on the property against any thing that may come up with the title of the property. All of that being said it is the language of the deed that actually carries the warranty, the title insurance policy just makes you capable of actually doing it. All of your warranty deeds will contain “TO HAVE AND TO HOLD the above described property unto the said Grantees, as tenants in common during their lives and upon the death of either of them, then to the survivor, in fee simple, FOREVER” this is the general warranty language that goes into the deeds. A Special Warranty Deed is when you convey title and only warrant the time that you had the property. This is how you should always convey property if at all possible. There is nothing good that can happen when you WARRANT the title to a property even though you only owned it for a short time, which in our business is anything under 5 years or so. The only barrier to being able to do this is the underwriter for the title insurance company that will be insuring the title. If they will allow it you should do it every time that way, especially if you are fixing and flipping properties. The Quit Claim Deed is just what it sounds like, someone is “quitting” their claim to the property. Basically, this means whatever I have I am giving to you, bad or good. In most states this is how title is conveyed between siblings in probate issues, and between spouses upon divorce. There are other ways as well, but this is the main way that they are used. So what does that mean to us as investors? In most states you can do a search by Quit Claim Deed and see who has recently went through or is going through divorce or probate, which should mean a possible deal. You will also, from time to time see Tax Deeds as well. This means that a property is delinquent on taxes. In some states this is a absolute sale and in others you must have three years of taxes bought in order to get a full deed. In other states there is also a confirmation or quiet title action that then needs to go on in order to receive marketable title. Understand that anyone can convey anything to anyone, but the status of the title subject to that conveyance is where the possession of the property comes in at. So I can give you a deed to the Golden Gate Bridge if I want to and you will pay me for it, but it wouldn’t be worth the paper it was written on. In fact the deed stamp or transfer tax or whatever you have to put on a deed in that area to file it would cost much more than the deed was worth. Tax deeds are tricky, so please get educated on the tax deed situation in your particular state before you buy them. My state has a Vendor’s Lien Deed, which is a deed where a “vendor” or seller finances a property to the buyer and the terms of the financing are in the body of the deed. This avoids a mortgage and note type of situation. This is not better or worse, just different, and you may have some state specific deeds to learn about as well. You will also need to learn about Trust Deeds and Fiduciary Deeds for your investing career. Trust deeds are given to secure an obligation to a property such as a promissory note or mortgage. In many states they use a Trust Deed when a mortgage is created instead of a mortgage. This doesn’t mean that you can’t get a mortgage in that state, that just means that even though they say you get a mortgage it is not recorded that way technically. One point that I like to make is that deeds and mortgages are separate from each other, oftentimes new investors do not understand or grasp the fact that even though title changes hands the mortgage can stay just like it is from a vesting stand point. This happen in a “subject to” meaning that you take title to the property subject to an existing mortgage. A Fiduciary deed is given when the grantor is a trustee, guardian, conservator, or executor. This will take place when you do land trusts, which are great for asset protection purposes, mainly for anonymity. These are the basics of our business, there a few other things, but you cannot be prepared to be in our business without educating yourself on the basics. Doctors need biology, and we need paperwork, so get to learning the basics to get into gear in this business.

Bandit Signs and Websites!

So now that we have went through developing your look, design, and brand, the stuff that you will be able to market will get larger. You can do bandit signs, the small signs that you see hung on telephone poles and stuck in the ground at intersections. The message should be concise and to the point. The better signs of course match the look that you have developed with the message that you want to convey. If you want to work the pre-foreclosure market then you can do “stop foreclosure” signs in the colors and look of your company. The basic message that everyone does is “we buy houses”, so you may want to diversify what your message is. If you use a different message it will make your sign standout from the crowd. Another point to remember when dealing in any version of mass media is that you WILL be shopped. Meaning your offer will be shopped to other investors that do the same thing. If you do bandit signs, the person that calls you will call every bandit sign in town to see what all of you will pay. One last point on bandit signs is that most municipalities have strict rules about bandit signs that are not usually supportive of them. You must learn what you can or cannot do in your market, and remember they will have your phone number so you cannot get away from them. During political voting times, they tend to be even more stringent about them. Most places have a law that stipulates how long those types of signs may be out and around elections they have a maximum time that they can be out after the election. Needless to say the time when they are looking the most at the signs is after an election. I have seen the fines get pretty expensive if the area is adamant about it. All of that being said, bandit signs are a cheap way to get the calls coming in though, but like we talked before be prepared for them. So you get your referrals going, and your business cards out all over town, and you have even put bandit signs out to get the phones ringing off the hook. So What’s next? Well now a days, you have to have a place to push everyone to, like a website. The internet is starting to attract more and more people to it as a venue to look at houses. So you get a website and that is it right? Wrong, that is just the beginning. I would like to suggest that you should boil it down to the least common denominator. I know that people build these nice fancy websites that have all kinds of stuff going on, but realize what people are going after. If you send a seller a postcard about their house with a web address on it and they go to your website. What do they see? A very cool site that has all kinds of stuff on it about you and your company and it has stuff about selling houses to first time homebuyers, buying houses, foreclosure questions, articles about the market, wholesale houses for sale. Wow you got a lot of stuff on there! Seriously, most research shows that you have about 3-5 seconds to capture that surfer at your site. So I suggest that you boil it down or net it all the way out. Get it down to the least common denominator. If you are going to chase foreclosures, then have a foreclosure website with only foreclosure information on it. If you are going to sell houses retail to first time homebuyers then build a site that caters to those first time homebuyers and answers all of their questions. You can also pair this technique with the phone system that I mentioned on my blog. The Onebox system has the ability to do an outgoing message. You can put the outgoing message on the phone line that you are marketing for your foreclosures to direct them to the website that gives them information about the process and who they should call (hint this will be you). So if you start thinking this way you can see the potential that a technique like this offers you. You could have a rental website and a dedicated phone number and have all of your advertising going to the outgoing message that instructs the caller to go to the house and check it out and if they like it they can take the application that is in front of the house and follow the directions there. The directions will tell them to go online and fill out an application. When you get the app you can check it out and decide if you like them or not. NOW, you call them back after all of this and you have a potential tenant that you are just now talking to! Better yet you can advertise a house in the paper and put under the ad that you have others at your website and not even put a phone number at all. The possibilities are endless here. Another part of having a website up is that it adds legitimacy to your operation. Everyone wants to know what your website address is and they want to “investigate you” by going to the site and checking it out. The biggest piece of this is that you can direct market to specific situations and cater to that market by using a website that is specific to that situation. You can market to heir property specifically and have a website catering to this topic. You could also attack people facing bankruptcy by doing a site that gives them information about bankruptcy and how it will affect their home during the process, which would be a “educational site”. I am sure you get the idea now. So what is the next piece in the puzzle? I think you are now up to looking for vacant houses and trying to contact the sellers. You should grid the areas that you want to buy houses in, I like to use a mapping program like Microsoft streets and trips. You determine the grids that you will drive and you can print the maps out, so that you can highlight the ones that you have driven as you drive them. All of this so that you can find vacant properties. When you drive the neighborhoods you want to write down the houses that you see that are in need of work or obviously vacant. You can tell this by the rotten wood and peeling paint, or the overgrown yard, or in most areas a missing meter from the power company. You take your list back to the office and look up the mailing addresses for the owners using your local courthouse data site for your county. You should then mail them a letter telling them that you want to buy their house. The more simple the better. This is where having a website can also come in handy, you can put the address on the letter to make it easier for them to contact you. There are a few other ways that direct mail can work as well, and we will talk about them tomorrow.

Preperation for Your Marketing Success

The next thing that we will cover is your product. You have to have “product” if you are going to market, and in our business your product is a multitude of things. The first thing is realizing that you are going to be marketing yourself, and in this business you are marketing your ability to solve people’s problems. You have to be ethical and believable to start with, especially since you will be hearing about all of the clients family issues and financial problems. People don’t share that type of info with people that they don’t trust, so keep that in mind. The next thing to think about is “proving” your knowledge level and your ability to actually do something about the problem that they have. You must be confident and knowledgeable when it comes to talking to the client so that they will believe in your abilities. The next part of the ability is the ability to actually close, or have a network that can help them out of their situation in a timely manner. Conveying this to the client is usually where the average investor is separated from the great investor. Ok so you have person on the hook to sell you their house, what is next? Next is having the paperwork together to complete the transaction and being able to explain that paperwork to the client so that it is easily understood. A lot of investors use the standard realtors type of contract, but I think that you should have your own version of a contract. Without digressing too much, you want to have a contract that is best for you as a buyer, because most of the BOR contracts are slanted to the seller. In reality you should have a contract for every occasion and from any point of view, but more on contracts at a later date. They key here is that a contract is a road map for the closing, and a legal document, and most “civilians” get scared when they see legalese and think about contacting a lawyer immediately. Your job is to ease that feeling so that they are confident at your ability to convey the meat and potatoes of the contract sufficiently so that they do not need a lawyer. This does not mean tricking them or fooling them, but it is full disclosure to a point of them understanding and believing in you and your ethics, and trustworthiness. So what does that mean, well much like other parts of this business it takes practice and knowledge. You must educate yourself on contracts, and especially yours, and be able to convey what yours says. Knowing all of the parts of your contract to the point where you can easily and confidently paraphrase it when you are at an appointment sitting in someone’s living room is a skill that every investor must have. Now all of this is great, but there is another part to think about and that is design. You have to design something that everyone can recognize in the market place. Now I am not saying reinvent the wheel or something, but you need to have a consistent color pallet. Choose colors and stick with them. If you are going to use red, white, and blue, that is great but do your business cards, signs, car magnets and everything you do in those colors. With this in mind you have to think a little ahead of yourself. You need “I buy” types of signage, along with sales signage, business cards (marketing ones, and professional ones), car magnets, flyers, letterhead, and website design as well. I am sure you may even think of a couple of others as well. Once you have your product set and feel sufficiently educated so that you can deal with your clients, it is then time to start your marketing plan. When working on a marketing plan you are going to have to take it on the chin that you are going to have ups and downs, and hits and misses. The key is to keep the misses as small as possible, and the key to that is to track all of your leads and know what gets you the best bang for your buck. So where do you start from here? That is going to depend on the type of budget that you actually have and can spend on marketing. So be honest with yourself, and make sure that you can handle the amount of money that you are going to commit to. Start small if you have to but nonetheless start. So now we have to cover one of my pet peeves……..answering the phone, or at least not answering it. If you drive around your town and call every one of the “ buy houses” advertisements, I promise you will get a 50% or less answer rate. If you are going to market be ready to answer the phone. If you have a job and cannot answer ALL the time then hire a answering service. Another part of it is the call system itself. I use Onebox.com for our call service, it is a PBX system that is internet based, so you forward your land line to the call center or you market the number that you choose from Onebox. You can make the Onebox number forward to your cell phone, or have extensions (up to 4 for $49). It also has the capacity to have an outgoing message if you would like, or accept faxes for you. So it is very powerful for your business to use. Once you have people calling in you need to be prepared for the volume of calls, so ask yourself if you can handle it or if you need someone to answer it for you. Once that is settled you can then take calls right? Well I would say wait a minute, do you know what you are going to do with the calls when they come in? You need a call log so that every time the calls come in you know where you are going to record the information. The next thing is to determine is how you are going to prepare to meet with your potential appointment. Do you know where you are going to get the comparables from for the meeting? We use a service called Site X that is web based and pulls all sales, not just MLS sales. How are you going to figure out the amount of the fix up on the property? What LTV will you need to offer for it to be a deal for you? These are all questions that you need the answer to BEFORE you go to the appointment. You must be prepared to make an offer when you go and meet with the seller, not afterward. These are motivated sellers here and they want their pain, which is why they are motivated, to be eased. The only way that will happen is by you fixing and agreeing to buy the house. The level of professionalism that you portray is what they will remember and will most likely determine if they are going to shop your offer. Seem like a lot? Well it is, and you have to prepare for it. If you thought that you could just get a call and go out and buy a house, I guess you now know you were mistaken. The preparation is the key to get a house bought at the right price. I guess that is enough for now, I will attack some more of this tomorrow.

More Marketing Thoughts

Now I know most people that are in this business don’t think in terms of this being a REAL business, but just them buying a house and selling it or renting it out. But the first thing that any of us would do in anther business would be to try to get “leads”. It doesn’t really matter if your leads are for new customers for you clean clothes for, or if they are multi-million dollar software customers, you still have to get that lead to be in business. So why don’t we in the real estate investment business treat this like a “regular” business? First of all how many of you that are reading this have a business plan developed for your investment company? How many of you even started a real company before you bought your first house? Those are the getting started places that you have to go, and within that business plan you have to determine how you are going to get the leads to buy houses so that you can make money. Think of it this way, if you are not prepared to be in business, are you surprised when you fail? Are you surprised when a banker turns you down? Would you take a risk on you if you were the banker? So business development is another thing that I feel strong about, but I will save that for another time, but I said all of that to say, don’t leave your business to chance, make a marketing plan to start and figure out what works for you. So let’s talk about some of the types of marketing that we mentioned in the last blog. How about the psychology of the referral side of our business. Referrals are one of the easiest and best ways to get leads in our business. Think about this minor fact; if someone refers a person to you the likelihood that they will call anyone else is very slim. In their mind you are the professional that someone referred them to and they are going to deal with you and only you. This is position that you want to be in. The idea is that everyone has a sphere of influence, meaning a number of people that they come into contact with on a regular basis in their normal day to day life, be it business or personal. The obvious ones are the business contacts that all of us think about like your banker, a realtor, a mortgage broker, etc. but what about the other just as obvious ones. How many people do you think the girl at the local 7-11 talks to daily? I am sure a bunch right? Well over the last few years that conventional knowledge says that 1 in every 4 people are either selling a house, buying a house, or know someone that is. That being said, I always tell my buyers if you have talked to 4 people that do not know that you buy houses then you have already missed a referral. Think about that for a second…….do you have a number of houses that you probably missed a lead on in your head now? So before you kick yourself in the butt, let’s talk about what to do to fix it. First make a list of the 200 people in your sphere of influence. Trust me the first 100 or so are easy, the next 50 are pretty tough, but the last 50 or so you will be pulling your hair out. You must then come up with a way to “ask” for this referral. It doesn’t need to be an obvious type of an ask, but a very soft sell version. We use greeting cards for this message.We get anyone that we come in contact with to give us a mailing address, especially the business contacts. Then we start a mail campaign to all of them. We like to do a set campaign of the contacts birthday and then seasonal communication from there such as happy holidays, a summer (maybe 4th of July), a spring greeting, and a fall greeting. This puts you in your contacts mind at least 5 or 6 times per year. The message can be very slight, just a “enjoy the season from xxxxxxxx for all of your real estate needs” will be fine. The average that we have experienced is about 1 lead in every 6-8 mailings. We average somewhere around $1.70 per card so if you do the math that is a $13.60 cost for that lead. If I use my other experience for buying I know that I need about 20 leads to result in 10 appointments in order to result in one buy. That works out to $272 per buy, that I will average somewhere around 10k-20k on for profit!! That is a pretty good return if you ask me. So here is the exercise, write down the people on your list and see how many of them you do not have an address on. I wager it will be a bunch. In this digital age we have everyone’s cell phone and email, but could not tell you their address to save our lives. Now we, as real estate investors, have an advantage here, we are used to finding peoples mailing addresses since we are always tracking down a seller of some sort or another. So use this power for good not evil and find all of the addresses of the business contacts that you have, along with any others that you have. Once you have all of this info you are ready to start building your referrals. Keep in mind you are giving out business cards as well to these same people. In fact you should put a business card in everybody’s hand that you can. Business cards put your contact info in people’s hands that may at some point think enough of you to give you a call. So design you card to convey the message that you want out there. You may even want two different ones, one for official contacts and one for the average contact. A professional version and a marketing version so to speak. I love to have a in-your-face version to make everyone look twice, but my wife always wants me to have a professional version to give to serious business contacts. Your business card should feature a USP or unique selling proposition for your company. This is basically a “what you do” in a sentence type of thing for your business card. So how do you handle all of this greeting card mess, and addresses and mailing?Well, we use an automated system that you can check out at www.sendoutcards.com/36601 that handles all of the hard stuff. It has an integrated contact manager built in and allows you to program the campaigns of greeting cards that you want to use. You can even customize them with photos that you upload and you can even upload your own real signature as well. The total price that we pay per card averages a $1.60-$1.70 per card, including postage and everything. There is not magic in the system that you use, you could just as easy use an excel spread sheet and do the work to stuff them and mail them yourself, however I feel like all of us as investors have things to do that return us a higher amount of money than $1.70 per card. So whichever way is not important, however getting the job done consistently is, which is why we use this type of a system. Once you set the people and when you want the cards sent out, it does itself, nothing for you to even worry about. So this should be leg number one in your referral system, start sending out those cards to all of the people in your sphere of influence and watch those calls start to come in. And while we are talking about the calls coming in please also remember that referrals are reciprocal in nature if they are going to work. You must also refer people to other business professionals. This is called Karma at its best. If you refer people that you come in contact with to your network the network will refer back to you, so make it all about you.