The commercial real estate industry faces a dismal forecast for the next 5 years. Nationally, 2010 looks like an unavoidable tsunami of foreclosures and short sales for a multitude of borrowers, investors, and lenders - are the reports from the mainstream media.
Each year through 2015, there will be $250 billion to $300 billion in loans that will come due on office buildings, malls, shopping centers, Multi-family Apartment Buildings, Manufacturing Facilities, Warehouses, Self Storage and other commercial properties, according to PriceWaterhouseCoopers, a New York-based professional services company.
Scarce capital, high vacancies, declining rents and sluggish job growth will continue to place stress on the commercial sector all across the country. Although there will be spurts of positive activity, it may take until 2012 for a sustainable recovery to take hold in this country.
However, with adversity, comes opportunity. These less than positive predictions and negative economic conditions could create the opportunity of a lifetime for investors this year and next. The values of commercial real estate are at all-time cyclical lows, presenting one of the best acquisition environments this country has ever seen.
Not to get over excited - as not all notes coming due will default - some investors will be successful in refinancing. Others will find buyers and avoid default, and still others will work with lenders on short sales. And certainly, there will be investors who will buy foreclosed and bank-owned properties that lenders put back on the market at bargain prices.
PriceWaterhouseCoopers also projects commercial property foreclosures to accelerate across the nation. To build up their loss reserves, financial institutions delayed "dropping the hammer" on distressed borrowers. Now, due to government bailouts, they are ready to take action.
Due to higher vacancies and falling rents, the nation's commercial property values are starting to reflect deteriorating financial performance in some areas of the country. Problems with maturing debt, specifically again, the inability to secure financing, will cause a surge in defaults by some investors.
As a result, loan defaults will continue and in some cases increase at a dizzying pace this year. We can also expect the number of bank-owned and short sale opportunities to be abundant throughout the next 2 years. Although this is an unfortunate situation for the distressed owners who are being forced to dispose of these properties, or have lost them in a short sale or foreclosure, it will bring a tidal wave of opportunities for investors who will play a major role in this correction.
These "Well-Financed" and "Well Funded" investors are going to be snapping up these bargain-priced, bank-owned, and commercial short sale opportunities. The way we see it, property prices will likely continue to decline through 2010 even as sales of buildings increase. This is in large part due to the # of distressed properties being sold at depressed values, and the new and more conservative commercial underwriting guidelines that lenders are now using to value these commercial assets.
The Good news is that this may be the best time since the Great Depression for the savvy commercial investor to take advantage of the current conditions. And we all know, more millionaires were made during the Great Depression than any other time in our nation's history, and they did this with Commercial Real Estate! And as Commercial Real Estate investors focusing on the Self Storage Sector, this is music to our ears!
The road to recovery begins now! Are you ready to take advantage?
Foreclosure Frenzy
2011 Bargain Hunters Advantage
by Kenny Rushing
Today it is hard to avoid stories surrounding the current foreclosure epidemic. You can open any newspaper and find an article about the increase in the number of foreclosures in the United States.
In 2000, the stock market plummeted, the dot.com era had come and gone and investors were frightened. Therefore, many fled to what they believe to be safer ground and poured money into real estate. This caused housing prices to accelerated upward more rapidly.
With the volatility of the stock market, the Feds lowered the interest rates, easing the slowing economy. This helped make housing affordability and speculation even more attractive ushering in a real estate boom.
This real estate boom was also fueled in part by easy to get Adjustable Rate Mortgages (ARMs). Young families and other first time homebuyers, who could not qualify for the traditional, fixed rate mortgages, were able to get out of the rental apartments and into a home with the ARMs.
It was a sweet deal until the first time the mortgage interest rates adjusted upward. Then it happened again and again and before long, the sweet mortgage deal turned sour.
There are also several other reasons why a property owner may go into foreclosure. Few choose to go into foreclosure voluntarily. It's often an unpredictable result from one of the following
• Divorce
• Business failure
• Laid-off, fired or quit job
• Inability to continue working due to medical conditions
• Excessive debt and mounting bill obligations
• Job transfer to another state
Right now, as I write this article, foreclosures are worse than ever before. In 2008 alone there were over 3 million foreclosure filings in the United States. States like Nevada, California and Florida were hit the hardest.
What is Foreclosure?
Foreclosure is the sequence of legal proceedings by which a lender sells or repossesses a home when the homeowner has stopped making payments on the mortgage. When a homeowner becomes delinquent on their mortgage obligation, their only option is to make up the back payments, file bankruptcy (to buy some time) or sell the house.
As a Deal Maker, purchasing foreclosed properties can be a terrific real estate investment and divestment for the troubled home owner -- and it might spare the home owner's credit rating before things get any worse. It is your job to sniff out clues to find out why they are in foreclosure so that you can try to help solve their problems.
The Two Types of Foreclosures
The foreclosure process varies from state to state. There are basically two main types of foreclosures and depending on whether it is a title or lien state, will determine whether a judicial or non-judicial form of foreclosure is involved.
Judicial Foreclosures: These pertain to mortgages, rather than deeds of trusts. They are processed through the courts and take significantly longer to complete.
Here are the steps:
• The Lender hires an attorney start the foreclosure process once the loan is 90 days past due.
• The lender sends a "Notice of Intent to Foreclosure" or a "Demand Letter" to the loan borrower.
• This letter informs the homeowner that the lender will take legal action if the loan is not brought current.
• A Lis Pendens/Complaint is filed.
• This is when the foreclosure becomes public record. You can get this info from your county courthouse or foreclosure list provider.
• The homeowners are served the foreclosure papers. A court hearing and notice of judgment is set for the sale of the property detailing the time, date and place of the sale.
• The auction is held--The highest bidder gets the property.
• Redemption Period--In some states there is a "right of redemption" period which last from 30 days to 6 months depending on the state, where the owner can buy back the property.
Non-Judicial Foreclosures: These pertain to deeds of trust where a third party, called a trustee, handles the entire process in a matter of two to four months after a borrower has defaulted and stopped making payments. Once the property passes through the non-judicial phase, it is then ready to be sold at auction to the highest bidder.
Here are the steps:
• The Lender hires an attorney start the foreclosure process once the loan is 90 days past due.
• Notice of Default is filed. This is when the property is public record giving notice that the property is in foreclosure.
• The sale is advertised as Notice of Trustee Sale.
• Auction is held.
• The highest bidder gets the property.
• Redemption Period. There is no redemption period after the auction.
The Three Stages of Foreclosure
Now that you know the two types of foreclosure, you also need to know the three ways to acquire distressed property, based on where the property lies in the foreclosure process. The three stages are as follows: pre-foreclosure, foreclosure and post-foreclosure.
Pre-Foreclosures
This stage is before the auction. This is the area of foreclosure where your main focus should be where you will likely be able to do the most good for the distressed homeowner by helping them with a short sale.
Traditionally, when a homeowner got behind on their payments, the bank would foreclose on the property, sell it at the foreclosure auction, or buy it back and list it with an REO broker to resell. However, this can be a very expensive process (foreclosure legal fees, maintaining insurance on the home, property management, repairs, and other expenses) that some banks are cutting their losses by allowing a short sale or short payoff with the property owner. This can create a perfect opportunity for a Deal Makers to make a lot of money.
To be successful doing deals with pre-foreclosures it is important to know how to access these leads so you can contact the homeowner (BEFORE other investors do) first. Your best potential leads to locate a property at this stage may come from attorneys, mortgage brokers, real estate agents, or through business associates and friends.
Foreclosure Stage
This is the stage where the auction takes place. In the case of a judicial state- after the lis pendens is issued, if the homeowner has not cured the back payments, a sheriff's sale, or public auction, follows the judgment, and the court will confirm the sale and issue a sheriff's deed to the highest bidder.
In the case of a Non-Judicial State – after the Notice of default is issued, the lender or their representative (the foreclosure trustee) will set a date for the home to be sold at the auction called a Trustee Sale. The Notice of the Trustee Sale is issue if the homeowner has not cured the back mortgage payments. The sale is published, recorded and posted publicly, and a public auction will be held for the sale of the home.
Post-Foreclosure
If an investor does not purchase the property at the foreclosure auction, the lender takes ownership of it. Then, the property becomes what is called a bank-owned property, also known as REO (Real Estate Owned).
If the property becomes an REO, the bank will try to sell the property below the amount owed since they do not want to own property. These properties are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market; or they are put on the Multiple Listing Service (MLS) so that local buyers' agents can show and sell the property to a qualified buyer for a commission.
However, if the property does end up in the hands of a private investor, rather than with the lender, you may still be able to make an offer and match that property with one of your buyers.
It is critical that you identify one of the three foreclosure stages and become an expert in that particular process.
Short Sale Overview
by Kenny Rushing
At the time of writing this, home values are dropping, investors are running scared, foreclosures are at all time highs and climbing daily. Homeowners are feeling the pressure because of the weakening housing market, especially those who have mortgaged their property to the max. They have no equity in their homes and are behind on big loan payments. Most investors don't even touch these deals because there is no money to be made with them (so they think). This is where short sales come in. Short sales are a must if you want to be successful in the current real estate market. Investors doing short sales are making staggering profits of $20,000, $40,000, even upwards of $60,000 per deal right now!
So, What Exactly Is A Short Sale Anyway?
A short sale (also known as a short payoff) is a sale in which a mortgage holder agrees to accept less than what is owed on the existing mortgage to avoid foreclosure. However, just because an investor submits a few documents to a lender and asks for a discount does not mean they will get it. Banks hate to lose money and will never accept a discount on a property just because some ambitious investor asks them to. The investor must be able to build a case for a discount. Building a case requires being able to identify and document any damage to the residence, proving the homeowners insolvency and pulling good comparables to support their offer.
Why Are Banks Willing To Do Short Sales?
Banks will do this for several reasons. Lenders are in the business of lending money, not owning homes. A foreclosed home—especially one that cannot be sold at a public auction. Lenders know they could lose a lot of money with all the costs associated with the foreclosure process – attorney fees, damages to the property, eviction process, delays from the borrower filing bankruptcy and all the cost associated with a resale. Lenders want to avoid a foreclosure auction or bankruptcy at all costs. When a bank forecloses on a home, it becomes a non-performing loan on their books. This affects the amount of money a bank can borrow from the Federal Reserve, ultimately affecting their bottom line profits.
If an investor's short sale offer is economically more feasible than the costs associated with foreclosing, then the lender is more likely to accept the offer. It all comes down to dollars and cents. Banks do not care a borrower's spouse has suddenly grown ill and cannot work nor do they care if a borrower's husband is divorcing her for his secretary, thus leaving her with the financial responsibility of caring for the house. They definitely do not care about saving the credit rating of a borrower. The banks only motivation for accepting a short sale is cutting their losses. They would rather cut their losses and get less money now than dealing with the headaches of going to auction…plain and simple. The best time to consider doing a short sale is in the pre-foreclosure stage. Find homeowners who are more than three months behind on their mortgage payments with a notice of default.
It is best to perform short sales on distressed properties that are in need of repairs or updates. When a bank forecloses on a property, the home is eventually assigned to a realtor for resale as an REO (real estate owned/bank owned property). It must then compete with the thousands of other homes on market in its class. In spite of what the bank loss mitigation departments may tell you, lenders do not have a list of eager buyers fighting one another to buy their properties. Many foreclosed homes never receive bids at the sheriff auctions. Therefore, if the home is distressed or in need of extensive repairs or updates, the bank knows the property will be a tough resell on the market and are usually inclined to take what they can get from the short sales investor and get rid of the property.
It is important to create a win-win situation for everyone involved. The banks are happy because they recouped some money, and kept a non-performing loan off their accounting books. The homeowner avoids foreclosure, and saves their credit while you are left with instant equity in the house to make a nice profit when you sell the property if you decide to do so.
Who Are Good Candidates For Short Sales?
A good candidate for a short sale is a borrower who can no longer afford their monthly payments or someone whose mortgage is upside down, meaning what is owed far exceeds the current value of the home. Negotiating a successful short sale gives you the satisfaction from knowing you saved a homeowner from having an ugly foreclosure blemish on their credit report. Contrary to popular belief, not every homeowner in pre-foreclosure wants to keep their home and welcomes anyone who can release the heavy burden of mortgage payments while allowing them to maintain their credit score.
Be wary of uncooperative homeowners who hold on to the dream of one day keeping their home. These candidates make for a long and arduous short sale process. To complete a successful short sale transaction, the investor must have full cooperation from the homeowner. Homeowners who resist your efforts should be avoided.
Homeowners who have houses that are over leveraged with second mortgages also make great candidates for a short sale. When a house goes to auction the second mortgage holders' note is usually wiped out. These lenders are very motivated to negotiate a short sale to insure that they get something rather than nothing at all. If you were in their shoes, wouldn't you rather recoup something rather than nothing? The second mortgage holder usually gets between 5-10% as full payment for the second loan. It doesn't always happen like this, but on average that's what they may accept instead of getting nothing at all if the home goes to auction.
Doing $1 Deals With Short Sales
Let me guess. You must be wondering if you can also make deals with the bank with $1 doing short sales. Absolutely!! Short sales are the new method for creating instant equity in properties. With the number of foreclosures on the rise, the opportunities for investors to make money are everywhere and will only increase in the coming years. The short sale process allows the investor to discount the retail purchase price of a home by simply submitting a few documents to the lender and working out a compromise with a bank loss mitigation negotiator.
Doing $1 deals when buying pre-foreclosure homes is no different than buying any other type of distressed properties. However, it is important that you are more sensitive and understanding to the homeowners' situation than at other times. In cases like these, the seller may feel distraught and embarrassed.
Lessons from 2010: Real Estate Trends
to Watch in 2011
by Kenny Rushing
Two thousand and ten was full of mixed economic news, glacial growth, and most of all, financial uncertainty. So where are we headed from here? What are the trends that need to be watched? What lessons can we take away from 2010, to improve profitability in 2011?
Unemployment
The unemployment rate, and particularly private-sector jobs, can't be overstated as the most critical predictor of recovery, both generally and for the real estate sector. Unemployment is what's fueling the foreclosure spike (and subsequent value drain), it's what's causing people to default on their lease agreements (and subsequent vacancy problems), and is generally what's preventing people from participating in the overall economy. Once job growth is back on track, the foreclosure boom will turn around, and the rental industry will stabilize.
Supply: Shadow Inventory
On the supply side, prices are further driven down by foreclosures, in the form of a massive shadow inventory (properties scheduled for foreclosure or taken back by the lender, but not yet listed for sale, and therefore not included in the normal real estate inventory statistics). Currently, there are 2.1 million residential properties in shadow inventory, or an eight month supply, which has to be tacked onto the normal supply of housing available for sale (which is 4.2 million homes, or a fifteen month supply). Real estate markets nationwide (including lease markets) aren't going to see substantial value growth until this shadow inventory dissipates, and that will take several years, especially given the current long wait times for foreclosures caused by lender documentation issues. As a final note, it's worth mentioning that Fitch Ratings currently places the number of vacant residential dwellings in the United States at 14.4 million, and that does not include the shadow inventory described above.
Demand: From Deeds to Leases
Without the artificial boost in real estate demand caused by the tax credit (R.I.P. June, 2010), demand has dropped off, causing real estate sales and prices to languish. But even taking a long-term view, homeownership rates are dropping, for reasons ranging from the high unemployment and foreclosure rates, to household consolidations, to the tightened credit market. The all-time peak for homeownership in America was reached in 2004, at a rate of 69.2%. This number is now down to 66.9% and still dropping, which means tens of millions of Americans who were in owner-occupied dwellings are now signing a lease agreement instead. In a study by Trulia a few months ago, over 27% of Americans report that they have no interest in buying a home in their lifetime, and fewer Americans believe that homeownership has any relation to the American dream (72%, down from 77% only six months earlier). This is actually good news for landlords and real estate investors in a position to buy, as it will create a more stable tenant population, and a survey by Fannie Mae in late 2010 showed that the average predicted change in lease pricing over the next year is a 2.8% increase.
Conclusions
A year ago, there was simultaneously more hope for a healthy recovery, and more fear that we might slip into a double dip recession. It's now far more likely that neither will occur, and that we're in for a long, painstakingly slow recovery, which will lurch and splutter along over the next three to five years. Home prices are still dropping in most cities, and while the decline is leveling off, we are still down by over 25% from 2006 prices (comparable to the home value loss in the Great Depression, which was 25.9% from peak to valley). Here are a few take-home points from the trends in 2010, which are expected to continue through 2011:
• Now is a good time to buy real estate investment properties, but only if you can profitably hold the property as a rental unit for several years to come.
• Most real estate markets will continue to be soft through 2011. Exceptions will be cities with job growth.
• Real estate investors should be careful not to over-improve rental properties in lower-income areas, as tightened lending guidelines and diminishing demand for homeownership will prevent investors from being able to "retail" these homes to first-time homebuyers.
• Beware of rising bed bug infestations and litigation, and be pro-active in establishing a bed bugs policy.
• Protect your cash cushion: stay liquid, as lease default rates are up and vacancies are prevalent, and selling properties for quick cash may not be an option.
Stay profitable, stay liquid, and stay in business for another year!
Making Money in a S-L-O-W Real Estate Market
by Kenny Rushing
If you are looking to profit from the real estate market, do not let a slow market scare you away from the potential to earn a bit of extra money and seriously increase your cash flow. There are ways around a slow market that will allow you to earn an income, even while the home sales in your area are low.
One of the best ways to make real money in real estate is to buy and fix distressed properties, or to "rescue" foreclosed properties from auction. Buying houses at such a discounted price means that you can fix them up and sell them under the market average and still make a tidy profit in the mix.
If you are not a handyman, and don't want to learn, you can still hire out the work on these properties, but be prepared for a much slimmer profit margin. Focus on the less expensive but more valuable repairs, and you will have yourself a saleable home in no time at all.
If you are looking for more than a quick fix of income, consider keeping the property on as a rental property or lease it out to tenants. A residential rental agreement can keep the cash flowing your way for years to come, and if you find yourself reliable tenants the income could be a steady thing for decades. If your tenants move, it is a perfectly simple procedure to touch up the house and re-rent it. If you play your cards right, one property becomes two or three, and soon you will be able to live on your real estate income alone.
The question is if you can make money in a strong or hot market, wouldn't you be able to make money in a cold market? In a hot market, property is scarce and finding a "deal" on a property just becomes that much more difficult. Let's face it, in a cold market there are more houses on the market than the demand. This creates a great opportunity to acquiring wholesale properties. The truth is investing in real estate can net you large profits no matter what type of market were in. Just play your cards right, invest in one property that can soon become two then three, and before you know it you will be able to live on your real estate income alone.
Making Money in a S-L-O-W Real Estate Market
by Kenny Rushing
Here's another awesome question I received from my discussion board. The question; Why bother keeping property after it's rehabbed? Why not sell it after the rehab and GET PAID!
Of course, the first questions that you must answer is how emergent is your need for quick cash? You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.
If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long term financing (at 85% or 90% loan to value).
The short answer is an investor is going to make considerably more money by hanging onto a property after it's rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don't think it's too bad as long the landlording is done correctly.
Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example:
Let's say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhoods investors buy in is $100,000. Let's also say there is Bill and Fred.
Bill sells his properties after rehabbing and makes $15-18,000 per house. Good boy Bill!
Fred keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Fred trades his 70% loan-to-value (LTV) ratio hard money for long term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio. He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)
Bill (rehab and sell) makes a great living. Ten houses per year is $150,000-$180,000 per year...nice jingle! The downside is that Bill has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.
Fred (the rehabber) also makes a great living. Ten houses per year makes him $100,000 or so in tax free, spendable cash. But, Fred controls a million dollars in real estate and it's going up in value year after year. Also, Fred pays no taxes on that money he gets from the cash-out refinances. It's part of a mortgage, so must be paid back, therefore is not income! I love that part!
Let's look at what Fred's doing more closely.
Let's say Fred bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate...which is pretty conservative)
:
Purchase year - 10 houses x $100,000 = $1,000,000 Year 1 - Same 10 houses X $105,000 = $1,050,000
Year 2 - Same 10 houses X $110,250 = $1,102,500 Year 3 - Same 10 houses X $115,762 = $1,157,620 Year 4 - Same 10 houses X $121,550 = $1,215,500 Year 5 - Same 10 houses X $127,627 = $1,276,270
Essentially, Fred makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.
Remember
- Some parts of the country will appreciate much faster than 5%. Heck some places properties will double in value in 5 years. - No tax benefits of keeping the property is included here. That equates to thousands of dollars in real income. - This is ONE ten-house year. Let's say you want to "top out" at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you'll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life? - What if you hold these houses 10 years? The numbers get pretty exciting.
If you're like me and you don't want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don't have much personal money invested in them.
So what of poor old Bill? Chances are, Bill will satisfy his need for short term cash, then start holding property. What do you think?
Real Estate Investor Question:
Rehab and Sell, or Rehab and Keep?
Since initially writing my best-selling home study course on wholesaling / house flipping, I get an ongoing stream of e-mails from people asking me a lot of the same questions.
Many of them are from nervous would-be house flipping investors who are understandably anxious about making those first few real-live offers. The idea of signing their name to a contract is petrifying, and the images of what they might be doing wrong are all too vivid to the newbie's imagination.
A lot of these emails go a little something like this one:
"Dear Steve, I recently looked at 20 homes for sale in my area. After inspecting the houses, I decided to make 2 offers, but in each case the seller's Realtor just laughed at me. I mean, they really laughed hard! I'm not getting any offers accepted and I'm becoming very discouraged. I don't think that we have deals like you do where I live. Can you help me? It just seems like most homes in my area sell for the full asking price or more. -Discouraged Newbie"
Looking at the facts in this email, its obvious to me that "Discouraged Newbie" is making at least one -- maybe even two mistakes I see so common to new investors.
• Not targeting motivated sellers, and/or
• Not making enough offers.
The Elusive Motivated Seller
In my neck of the woods (Baltimore, MD area), most homes tend sell for their full asking price and above as well. It wasn't that way when I first got started investing, but it's been a hot market for a good while now.
And while it can be a good deal easier for me to sell a house than many people, I find that many people in my area complain about not being able to find a good deal anymore. With the market so hot, even a fixer-upper can be sold at-or-near full value. So why would a seller want ot deal with me, an investor?
Sounds like a picture similar to the one "Discouraged Newbie" just pained, right?
Understand this: The only difference between me and "Discouraged Newbie" is that I concentrate on the sellers who are motivated to sell. I mean they have a REAL REASON to sell, not just "want" to sell. And this reason is big and weighty enough to make them willing to sell to me for notably less than full price.
Typically, these are banks or individuals who have a VACANT property which needs work. I stress the word "vacant" for two reasons:
• Vacant properties are nothing but trouble for the owners, and
• 99% of the properties I have bought over the past three and a half years have been vacant.
Now maybe you've heard all this before. Maybe you KNOW you're supposed to only deal with motivated sellers. But the problem is that you can't seem to lay eyes on one. I frequently help people in our flipping homes online newsgroup who feel this way.
Here's the secret: They're out there -- yes, even if you're in a hot market like mine. You just haven't found them yet.
How do you find them?
• Be strategic, aggressive and effective. Have a specific and proven plan for your marketing/deal-hunting approach. And stick to your plan.
• Keep looking. A big part of it is a numbers game. Many newbies give up just one or two steps shy of the big deal they thought they would never find.
Handling Rejection
Even though I focus on motivated sellers, most of them I speak to aren't typically motivated enough to actually accept my offer.
Get this -- if I make 30 offers, experience has taught me my chances are high that in 27-29 of them the seller is going to say "No," or someone else is going to offer more.
That's right; I strike out much more often than having a seller say, "Yes," to my offer.
But I'm not concerned about all of the, "No's." I accept them as part of the process and forge ahead, knowing that if I make enough offers someone is eventually going to say "Yes," -- particularly if my offers are targeted toward sellers who have some degree of motivation.
It's truly a numbers game. Any salesman worth his salt will tell you that -- and that's just what you're doing (trying to "sell" someone on the idea that you're the best solution for their house problem).
How To Keep Your Deal Funnel Full
In this business you cannot make money without inventory. It is extremely important that you always keep your pipeline of deals and potential deals full. And the way to do that is to constantly make offers.
Many people come and tell me that they look at homes all the time but never buy anything. They say they find motivated sellers but none of their deals ever goes through. My next question to them is, "How many times have you put an offer on paper?" They are usually able to counter their answer on one hand.
In order to buy properties, you must make offers. He who makes the offers gets the deals.
Sounds simple, right? Yet it's surprising how many new investors I see time and time again who are really struggling to overcome this mental hurdle.
Personally, I average 40+ offers per month, sometimes many more. Over the course of one weekend, I made about 40 and bought 9 houses on Monday. To this day, this stands as one of my most productive offering sprees, netting about 1 out of every 4 properties (each was sold separately, by the way, not as part of a package).
And you know what? I never would have bought all of those homes if I hadn't made those 40 offers. I would rarely, if ever, buy anything if I only made one or two offers a month.
Have you ever made 40 offers in a weekend before? Seriously, you should try it. It's intense. It's a learning experience. You need some rest afterward. But DID YOU HEAR THE PART ABOUT ME BUYING 9 HOUSES! HELLO???
When Should You Make Offers?
Quick answer: Always.
That's right. Every time. Every SINGLE time you consider a house that even remotely smells of potential seller-motivation.
When I look at 20 homes I make 20 offers, not just 2.
In fact, sometimes I make 30 offers when I look at 20 homes. I make offers even on the homes I couldn't get out to see. If I'm targeting the right properties (i.e., those with sellers who may be motivated), odds are in my favor there will be several of those 20 sellers with enough motivation to seriously consider my offer.
What I don't try to do is select who those 2 or 3 sellers might be. Experience has taught me the chances of me picking the right ones are fairly slim. And why should I? Why take that chance? My low offers will fish out the sellers motivated enough to respond and thereby tell me where I should invest my time following up.
Too many wholesalers try to pick the motivated sellers from a group by themselves when making offers is the easiest way to find out.
I make offers on every single home that interests me if I even suspect the seller might be motivated.
Some I inspect; some I don't. Some are priced ridiculously high; others are priced ridiculously low. Some are in great areas; some are in bad areas.
Regardless of location, condition or price, there is a number that works for every home and that is what I offer.
Get this: On occasions, I've actually asked sellers to PAY ME to take their homes! Why? Simple: because no other number worked for me.
Sure, most of these offers are rejected (just like most of my other offers). Even on the weekend that I bought 9 homes, most (31 of 40) of my offers were rejected. In general, though, some of my offers are accepted, and those are the only ones that count.
Your Assignment (And You're A Wimp If You Don't)
Here's my personal challenge to you:
Resolve that you're going on an offer binge. Pick a weekend to sniff out possible deals (i.e. potential seller motivation) and resolve you're going to match my "40 offer extravaganza!"
Or go to two of your friends and tell them that you're committing to making at least one written offer every day for the next 30 days. Come on, even if you can't do the weekend thing, you can handle one little offer per day, right?
And tell your buddies that they have to confront you at the end of 30 days, and forcefully collect $250 each from you if you've not kept your solemn promise!
Trust me. Do it, and see what happens. You'll see what comes to the surface. Deals -- and probably more than you bargained for.
Ok, I'm being a little cute with this. But I'm also being serious.
I hope revealing my "numbers game" to you will inspire you to quit whining about the lack of deals in your area and get out there and start making more offers.
If you make it your goal to make one good offer a day, then the deals will come. Trust me. If your offers are at the right price, then you will sell properties and make a nice profit.
Do your homework, get your questions answered, and overcome your fears. Then make it your goal to average an offer a day because, as we all know, "An offer a day keeps the bill collectors away!"
- Happy Investing!
"Knowing what you know now, what would you do differently?"
This is a question that so many people have asked me, and it's a tough one. Based on my current position and the blessings I have experienced, I really would not have done anything differently. I'm very pleased with my current situation as an investor, and I fear that if I had done anything differently, then I wouldn't be where I am today.
In my opinion, a more appropriate question is:
"Based on your experience, in which direction are you going from here and what advice do you have for a new investor?"
While my plan for the future is still in process, I have some advice to offer new investors.
Tip Number One : Quality Over Quantity
In the past, I set goals to complete a certain number of deals and as a result, found myself at times pursuing volume over quality. This sometimes put me into bad situations, costing me both time and money. For example, I might have paid too much to buy a home just so I could say I did a deal and hit my target. While I did experience many situations that other investors never encounter, this is not the way to do business.
Today, I realize that I didn't need to do as many deals as I've done. Now I pass over a ton of opportunities that I would have taken years ago. Rather, I sit back and cherry-pick, waiting for the "home runs" to come along.
That's not to say that beginning investors should wait for the big deals. Most don't have the resources to compete with the experienced investors, including myself, who don't need the smaller deals to survive but can afford to be patient. We can bide our time until the best deals present themselves and still have enough resources to take advantage of them when they do.
What I am saying is that beginning investors should do what they need to do to survive, keeping in mind that it is better to do one quality deal than a multitude of average deals. As a beginner, you must get into the game, but do it carefully with good deals. Then go from first to second to third to home, taking it one step at a time. Crawl before you walk and walk before you run. Otherwise, by rushing into things, you run the risk of making mistakes that will set you back months or even years.
Tip Number Two : Set Goals And Put Them On Paper
I did not have concrete goals when I began, so two years after getting started, I was in about the same place as when I started. I ran around in circles and covered a lot of ground, but didn't get too far from my starting point. Only then did I develop a plan (smart, huh? Only took a few dozen "seminars" and a few more whacks upside my head).
So I teach my students to put together a plan sooner rather than later, preferably before they even start investing. Anyone who drafts a realistic plan and sticks to it can achieve as much in one year as I did in three.
Not that creating a plan is easy, especially when you don't know what to expect. Accurate goal setting is actually very difficult, and not many people teach you what you need to set REAL goals. Most teach goals that get people excited, good in the sense that it usually prompts people to take action, but bad in that it develops unrealistic expectations and sets people up for disappointment.
To set realistic goals, speak with experienced investors in your chosen field (wholesaling, rehabbing, lease-options, "subject to") and get their honest opinions regarding profits per deal and the average time required to complete a deal. Then, based on this and your current resources of cash and credit, set your long-term cash, cash flow and equity goals for one year, three years and five years. Once you have these long-term goals, fill in your short-term goals of three, six and nine months by outlining the steps you need to take to accomplish your long-term goals. Unless you draft a plan similar to this and truly commit to it, you are going nowhere.
Tip Number Three : If Possible, Keep Your Best Deals
Looking back, I have owned a lot of homes that I wish I would have kept. I don't regret having sold them since every sale contributed to my success, but I did have some gems that have more than doubled in value since I sold them.
When I sold, I just didn't believe that the areas would take off like Realtors and others were telling me. So I cashed out and used the profits for other things. If I had held the 50 best deals that I have sold to others and done nothing else, my net worth would probably be three times higher than what it is today.
Not that I'm complaining. My net worth used to be negative, and today it is pretty respectable. I'm just advising you to hold onto your best deals if you can. Sometimes, though, it is necessary and understandable to sell a property for cash profits even though it would be nice to keep it. Use your best judgment.
Tip Number Four : Don't Limit Your Profits
When you purchase a great deal, don't feel obligated to pass all of the savings on to your buyer. I could have generated more profits than I did from many of the properties that I wholesaled. Often, when I purchased a SUPER deal, I passed along the SUPER savings to my buyer with the attitude that I should only make $2k-$4k per transaction.
Well, this was a mistake. My advice to you is to take what you can get. Don't inflate your prices above the market and gouge people. Give them a good value. However, don't think it's necessary to limit your profits just so a buyer can benefit. After all, this is business. Let the market set your price. There will be plenty of times when your profit isn't as large as you expected. Take advantage of the big hits when they come.
Tip Number Five : Separate Business And Charity
Sometimes, I used my business as a charity when I shouldn't have. My recommendation for you is never to do the same. Don't let someone live rent free or give someone else more for a service than what it makes good business sense to give.
I've learned that I need to run my business for a profit, and that I need to do all I can to keep it profitable. I've also learned that it's OK for me to be charitable with my profits, but that I can't be charitable with my business. Giving your business away before you make profits cuts your wellspring off at its source. It's not prudent, and your business will suffer greatly as a result if you choose to do so.
Tip Number Six : Hold On To The J.O.B. As Long As You Can
I know it's hard to hear this, especially for those of you disgusted with your current position, but I recommend that beginners with good jobs hold onto them for a while. They provide a safety net while you are learning and particularly allow you to establish yourself with banks and credit card companies. Convincing these organizations to work with you as a self-employed person is tough.
Tip Number Seven : Start As Early As You Can
I first became interested in investing at the age of 18, and I wish I had pursued it from that age. Instead, I waited 10 more years to get started. As of this writing, I've only been investing for 5 years and it's hard for me to imagine, based on my current position, where I would be if I had started when I was 18 years old. It's never too late, but you need to start NOW!
Tip Number Eight : Use Partners Wisely
Use a partner only when you need them. In other words, choose someone with time, money, knowledge or skills that you don't have. They should bring to the table something that you need. All too often, two people with a dream and nothing else decide to be partners. Not good. Partners need to complement each other, not have the same qualities.
Today, I teach others to use partners strictly on a deal-by-deal basis. The form of partnership I teach most often is one where one person puts up all of the money and the other is responsible for everything else.
In retrospect, I would not have taken on the one partner I had. In time, I didn't need a partner anymore, yet I still had one and felt as though I was giving half of everything away. He probably felt the same way.
Tip Number Nine : Dare To Dream
Finally, I'd like to stress that if you can dream it, you can do it through effort and perseverance. Having money, a decent job, and good credit make investing easier, but are not necessary.
When I began my career as a real estate investor, I had no money, no job and poor credit. In the past five years, through the grace of God, I have come a long way. So set your goals and start taking the steps necessary to achieve them. Reevaluate and adjust every so often, but don't quit and don't let anything stop you.
