Popularity Contests!

Rental demand in San Diego is crazy right now. Who knew?!

A few years back, we accidentally started a rent payment bidding war on a 3/2/2 rental house. We had already been scheduling cattle calls for our units, but this once, we had prospective renters actually offering to pay more rent than we had advertised.

Obviously we didn't know our market. Obviously we had advertised too low a price. Obviously we got a hint when our phone rang off the hook.

It's fun knowing what we offer is in high demand.

However, it's a hidden sin to lease out a house for less than it's worth. Sure, we get all giggly listening to all those voice mails.

But it's smarter asking for more money and being OK with fewer calls. This seems self-evident, huh? Well, there's lot of landlords that are too ignorant, insecure, if not impatient to negotiate top dollar rents.

Today we can spot an amateur in a nano-second that doesn't know his market, when he brags about how fast he leases up his units, and the numbers of call he got. Uh, huh. After he finishes indirectly bragging about how ignorant he is about his market, we ask facetiously, "Wow, you got ninety calls for your unit and rented it in less than a day!? That's just fantastic. So how many more dollars do you plan to continue to drop in the toilet each month so you can remain popular?"

That's our polite way of asking a braggart how much money he plans to lose by negotiating stupidly, if at all. Maybe that's not more polite... Oh well.

Meanwhile, several years ago now, we advertised a 3/2/2 in Orange County for a $1,300 bucks which we reasoned was probably market value. At the time, this was actually $300 under market. We're guerilla market testers, and just needed some feedback. Our phone r.a.n.g. o.f.f. t.h.e. h.o.o.k from prospects!!! We scheduled our routine cattle call, not realizing the full impact of our offering price on demand. We had a stampede of "Lookee Lous".

After all was said and done we had negotiated the rent up to $1,600 a month, received a gigantic (probably illegally large) deposit, and had the unit re-rented within seven days of the last tenant moving out. We probably could have reduced the down time by three days, if we had scheduled our cattle call the day we had the house ready for re-renting. However, a week is acceptable in our book. A month used to be acceptable until we learned better.

"Are auctions always good?", one might ask. Yes, we believe they are. However, at the auction, we don't want prospects feeling like they are being treated like suckers, or they bail in disgust and contempt for us.

The secret we think in having a successful auction, especially if the prospects are not expecting an auction, is first to create scarcity through the cattle call itself, and then "let the cat out of the bag" to the prospects privately, that there is an outstanding bid from "x" dollars for the house. Then we give the prospects the chance to mull it over, while asking which of them would be willing to pay this much, or say Twenty-five dollars, more. Frankly some prospects that were only curioius, but not really prospects will leave immediately. We want them gone!

Meanwhile, as experienced negotiators, we can deftly go round robin with the prospects until we get the rent we sense we can command under the circumstances. We've had tenants pull out wads of cash trying to get to the head of the line. It's important to remember that the most likely prospects to win the bid, will have terrible credit. For us that's great. It just gives us that much more leverage on deposit sizes, co-signer requirements, and higher rents --- and longer leases.

It's OK to say, "We'll rent to you, but we want a 24 month lease, so we can cover ourselves in the event you get 'flakey'". Or to be a tad more professional, we couch the demand as a benefit to the lessee (who is paying over retail rent) by saying, "...to give you time to improve your credit and establish a positive rental history, we need to commit to a 24-month rental agreement."

Notice what we said here. "time to improve your credit", "establish a positive rental history", "we need to commit". We're saying.... The tenant "needs" time... The tenant "needs a proof positive history of on-time rent payments... and we've included ourselves, as the Landlord, in the tenant's problem with the use of "we need to commit" [to a long term lease].

The only thing we're committing to is gobs of extra cash for two years from this guy! Yay!

I love auctioning off gargantuan rent payments, collecting confisicatorily huge deposits from desperate, anxious, credit challenged people!

Anyway this might be an alternative way for some to positively get retail (or more) rents, from people happy to pay --- and not throw money down the drain trying just to be popular. You can be "popular" and get all the money due you! Who knew?!

Old MacDonald Had A Farm, Too!

If you stare at this picture long enough, you'll discover a smile on this couple's face. Look closer! See them smile?

Yes, this couple is out front of their house letting everyone know they're making a killing in real estate. He's got a pitchfork in hand ready to poke any trespassers that try to send any postcards to his farm prospects.

She's ready to back him up with that "ol' school marm warning" expression, which barely hides her exuberance over the $40,000 they pocketed as a down payment yesterday from the house they just seller-financed.

Yup! This couple flips houses bought from desperate, anxious sellers, and then turns around and seller-finances new credit-challenged buyers. More specifically, they take over loans and resell those loan terms to those that couldn't borrow a rake (or a pitch fork) at this point.

Two years ago, this couple found out what kinds of houses were selling the fastest and in what area over the previous 90 days. They discovered that the three and four bedroom houses in the 37237 zip code were the most common, and fastest selling properties. So they staked a claim in that zip code and mailed postcards to all the three and four bedroom home owners letting them know they buy houses. This stake, or claim is referred to as a "farm". Not to be confused with raising crops of course, but cultivating a profit nonetheless.

Farms are important to investors for several reasons. First, they focus the investor on an area that he can become intimately familiar with. This is important, because familiarity with values/comps trumps about anything else, even cash, when it comes to finding, funding, and flipping houses.

Others may have cash, too, but the professional investor that is cultivating a well-defined geographical farm area (defined here as something one can drive to and back from in 45 minutes) can and will beat any potential competitor to the punch because he can first instantly recognize the deal for what it is --- and land the deal like a seasoned airline pilot, before anyone else knows there's a deal.

Meanwhile, the amateurs are still compiling comps, addresses, computer print-outs, and pouring over last-minute CMA's (comparative market analysis), biting their nails, second-guessing themselves, if not simply flying blind. That's no good.

The best way to start and maintain an investing career is to first choose, and cultivate a farm area. It doesn't really make difference where the farm is, as long as the investor has enough prospects to pick over in a given geographical area, and become more intimately familiar with it than practically anyone else is/can/will.

The fastest way to fail in real estate investing then is to fail to have a farm defined. "Southern California" is a "region", and for our purposes of discussion would be considered a lousy farm. Any one zip code in "Southern California" would be superior to the entire region.

I'll just say, nobody can be an expert in a region, but few can be more of an expert than the investor who cultivates a familiarity around a one mile square. Of course the uniqueness of a property may dictate the size of the farm. For instance, say we're looking to buy a slightly used nuclear power plant, we might have to resort to a farm the size of a "region" just to get enough prospects on our mailing list!

Short of this, however, we need to focus on a specific territory, or farm area, so that we can be the fastest, most reliable buyer around.

After all, there's no such thing as "stealing in slow motion".

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A Little "Yellow Padding" Goes A Long Way!

OK, pull out your ugly, yellow note pad! This cheap thing is what separates the sheep from the goats in negotiations.

What do we do with a seller who wants to believe his house is worth say $325,000, but is really only worth $285,000? Do we walk away, and say, "Next!"? Or do we lead the seller back to reality, in an attempt to get a bargain? Well, if you're patient and answered, "Lead the seller back to reality to get a bargain", then you'd be the one making the big bucks!

In the Fall of 2003 I sat at the kitchen table of Denise, a lady who was in pre-foreclosure. She was NOT upside down, but had lost her job, could not afford her payments, and wanted out --- for a good price.

Well, of course not being in the business of paying retail for anything, I empathized with her plight, but politely reminded Denise that, "The only way I could help her was to steal her blind, equity-strip the crap out of her house, and pray that she didn't sue me later for buying her house for half of what it was worth". In the nicest way possible, of course.

Nah. Just kidding. I didn't say that!

Actually I simply went through a checklist of "Yellow Pad" questions that started with what she thought her house was worth. She told me. I said "Fine", after suggesting that I wanted to analyze the rest of the numbers with her in order to find a reasonable sale price that we could both agree on (How does anyone disagree with that, I ask.).

Let me show you exactly what I did for Denise.

BTW, my approach is used by professional negotiators worldwide, and isn't a proprietary strategy, BUT it's amazing how many professional negotiators don't use this simple tool. Also, this negotiating approach is successfully used to buy anything for a decent price --- without insulting the sellers, or worse.

This is a powerful tool, and we should be careful not to use this to cheat sellers, or take advantage of their ignorance. Used legitimately, this is a fair and honest way to analyze the numbers for any purchase, and may be used to talk yourself OUT OF BUYING. I've come to the conclusion not to buy property using this analysis tool, when the seller failed to cooperate with the discussion, or the numbers didn't make sense after all. It's also the most fantastic way to show the seller, using his own numbers, why he is unrealistic in his expectations on a certain sale price.

So, here was Denise's scenario --- analyzing the numbers with my over-size calculator, my ugly, yellow note pad and bold blue Sharpie.

Jay: Denise, what do you believe your house is worth. (She lies and gives me a huge, over-retail figure).

Denise: I think my house is worth $550,000.

Jay: Ok, fine. (Writing that figure at the top of the yellow pad) Would you be willing to take five percent off that price in order to sell more quickly. (She wants to know what 5% is equivalent to so I calculate it to be -$27,500).

Denise: Yes, that would be OK.

Jay: So that would be a -$27,500 discount, correct. (listing that amount with a minus sign in front of it with my bold blue Sharpie)

Denise: Yes.

Jay: In a conventional sale the real estate commissions runs between 5 and 7 percent. For our purposes we'll use 6%, ok. That comes to -$33,000. (We use the full retail price as our working number, not the discounted price. I list that figure in bold black numbers with a minus sign in front).

Denise: OK, $33,000.

Jay: Now we have conventional closing costs of about 3% of the purchase price. That comes to -$16,500, ok. (I list that number with a minus sign in bold fashion.)

Denise: OK, -$16,500

Jay: Now, we have about $26,000 in repairs; new paint in and out, new carpet, roof repair, tree removed, pool resurfaced, and driveway replaced (we previously discussed and estimated repairs immediately before we started the yellow pad analysis), ok (This is stated as a fact, not a question).

Denise: Yes, -$26,000, that's about right, but maybe less.

Jay: Yes, it could be less, but we only use competent, licensed professionals, because we're not in the contracting business, you understand, ok. (Again, not a question, but a statement).

Denise: Yes, I understand.

Jay: Now, if you remember a few minutes ago, we showed you that there was 23 months of inventory on the market for used houses. So, as a result, it will take 23 months to get a house like yours sold at full retail only if the agent is competent, correct (a statement, not a question).

Denise: Yes, 23 months I think. It's taking a long time to sell these days.

Jay: You showed me that your monthly payments on the house are $2,844 per month plus taxes, insurance and the HOA of $750 for a total of $3,594 per month, correct.

Denise: Yes. -$3,594.

Jay: Well, if you continue making payments on this house for the next 23 months (as "carrying costs"), it's going to cost you an extra -$82,662 to hold things together until a buyer comes along according to the market data, correct. (I list that number under the rest of the numbers with a minus sign, of course).

Denise: Yes, but -$82,662 is quite a bit, and if I discount the price, it might sell it faster, right?

Jay: Yes, maybe, and for discussion, let's agree that it takes half the time to sell with our -$27,500 discount. That's still -$41,331 dollars.

Denise: But I'm going to have to pay to live somewhere, so I don't see that figure really meaning anything to me.

Jay: Yes, but you won't be living here by then. (She will lose the home, and will have to find someplace MUCH cheaper anyway, maybe not $3,594 a month cheaper, but we don't go into that unknown. She might have to live with relatives, or even in a shelter if she can't find a job. Who knows?).

Denise: Yes, that's probably true.

Jay: Now you said you owed approximately -$450,000 on your first, correct.

Denise: Yes.

Jay: Well, let's 'add up' our numbers here (we don't say "subtract") and see what we come up with.

$550,000 Current Value (Actual Value was $520,000)

< $27,500> Less 5% Discount for "quicker sale"
< $33,000> Less Realtor's Commission of 6%
< $16,500> Less 3% Closing Costs
< $26,000> Less Repairs
< $41,331> Less 11.5 months of PITI paid until sold
<$450,000> Less Mortgage Balance
----------------------------------------
<-$44,331> Seller pays this amount just to sell home conventionally.

Jay: Not a good solution is it.

Denise: No, I can't afford that.

Now Denise sees her numbers used, and realizes that she used an inflated value of about $30,000 to throw me off at the beginning of my analysis. Whoops, even with her over-stated retail value, I still showed that she was upside down. Who knew?!

I offered Denise $1,500 to move out. Promised to get her house sold and refinanced asap. She gave me the title. I did as I promised, and re-sold the house immediately to a credit challenged buyer, offering no credit check, for $572,900, with -$30,000 down, at 7% interest for 30 years, or $3,611 a month P.I. I got the buyer refinanced in twenty months.

Using the "Yellow Pad" I negotiated a gross equity spread of $122,900, and a payment spread over 20 months of $15,340 (my buyer's principal/interest payment to me of $3,611, minus my $2,844 on the original mortgage --- $767 dollars per month cash flow).

So that's $122,900 plus $15,340 for a grand total of $138,240 in gross profits --- over 20 months, all while using the yellow pad analysis to redefine the seller's expectations and perception of value.

BTW, Denise went and bought a brand new, cheaper house with zero down from a builder, got her credit improved by me, and lives happily ever after.

What was the actual retail discount I achieved? Well, $520,000 was the true retail, less the first mortgage of $450,000, which comes to a 13.5% discount. That's not much! But when we sell to a credit challenged buyer for a premium of about 10% more, we've effectively achieved a 23.5 discount! This all without having to go pull our pants down to have the bank do a financial anal exam on us, require us to put down 20% in order to secure new purchase money loan! It's a beautiful thing.

Caveat: Sub2 does work in a falling market! However, we may have to offer longer term financing, focus on lower LTV prospects, and/or become much more aggressive in our final offers. Today, I just tell the seller, I have to make $50,000 on this deal, and discount that much at the end of the analysis, and say, "Or I can't help you." This means there actually has to be that extra fifty thousand somewhere. Meanwhile, sellers know I'm an investor, and seller's expect something like this, and they call me anyway. I advertise myself as an investor, so there ya' go.

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Row, Row, Row Our Boat --- In The Same Direction!

Partnerships can be juicy shortcuts to creating massive increases in wealth.

Donald trump is the master of profitable partnerships. Everything he builds and produces is a result of sophisticated, mostly profitable partnerships.

Meanwhile, after talking with many, many investor wanna-bees, the average of them are suspicious of partnerships. It seems like they all have uncles that got screwed somehow or other. I, too, have a bad partnership story from, whom else, an uncle. Who knew.

However, bad partnerships are a result of bad partnership agreements, or partners with bad characters, or a combination of both. Primarily partnership are ideally a team of individuals "rowing together" toward a common objective. Some call these partnerships "teams". But "team" is overused, mis-applied and otherwise a bit pedestrian for our purposes today. That said, this post is a primer on how to qualify partners, and partnership agreements so that we can increase the likelihood of a good, profitable partnership --- rather than listen to our “loser” uncles!

That aside, again partnerships can be extremely profitable when large amounts of cash are needed to take advantage of “value-added” projects. Value added projects are anything with a HUGE upside, or potential that the investor isn’t necessarily paying for up front.

At the same time, it can be very difficult to attract partners for value-added projects unless the managing partner has a good track record, or the partners have experience and can visualize the potential, or the managing partner has the ability to paint a vivid picture of what’s possible, probable, and profitable to the partners.

On the other hand, it’s seems easier to attract partners for otherwise low-return, pride of ownership investments, or high profile buildings. It's about safety and bragging rights it would seem with this niche. On that last account, I don't have extensive experience, because I don’t buy anything pretty with partners.

Meantime, I've formed several partnerships that were critical to my forward momentum financially. All were value-added investments requiring extensive personal involvement and cash. I’ve also endured a couple of real dog partnerships, so I know both sides of this coin).

Nevertheless, just like marriages, partnerships have similar qualities and maintenance requirements. First, you have to have "partnership vows" that each member of the partnership must agree and adhere to. All the partners need to have the same goal, and agreement on when to get out. If this is not established, things fall apart, and spectacularly.

Here's a few points to consider that can help assemble a “good” partnership that is more likely to function profitably, effectively and smoothly. (in no particular order)

• Each member of the partnership needs to contribute something that the remaining partners don't have. Uncle Joe doesn't get to be a partner because he's got a funny laugh, and has a supportive "spirit". Nuh, uh.
• Again, nobody gets to be a partner who isn't supplying a critical piece of the partnership puzzle; money, contacts, or expertise.
• There has to be a managing partner with 100% control of the asset/partnership. Zero exceptions. That doesn't mean the remaining partners can't chime in, but they have no vote, or veto power.
• It's ok to turn down money partners that can't agree to a managing partner. They would be partners from Hell anyway.
• There's lot of folks who just want a return, and if they trust you, and you aren't emptying their retirement portfolio, they're happy. It's the members who are investing all/most of their cash that are insecure, itchy and scratchy, and insist on input, votes, and veto power of the partnership decisions. Again, reject these low-quality investors. They'll make your life miserable, and ultimately can cost you the partnership profits.
• There has to be a buy-out clause available to any of the partners, but especially the managing partner, based on some pre-arranged parameter.
• Talk to those who've assembled and dissolved successful partnerships and get their advice before you write up a partnership offer and make any presentations.
• All the terms and expectations of the partnership are put in writing; everything.
• Only those who can afford to lose the money can join the partnership.
• Only those that fulfill their obligations as stated in the partnership agreement can stay IN the partnership. That means that "Buzz" the manager expert, better actually be a management expert, and actually manage, or he's out without compensation. This goes for every contributor to the partnership who's not contributing what they promised.
• There must be a dissolution instruction to follow if the investment goes bad. That is, the remaining assets are split according a pre-planned distribution schedule if the project does not perform. This may or may not mean that everyone gets all their money back in full. This has to be negotiated up front without making promises that can't be kept.
• Make it clear in writing that you are presenting a "horribly risky venture, where all the partners are likely to lose every last dime" --- which also supports why the upside is so ridiculously juicy [If this is a high risk venture, that is].
• Keep the agreements as simply worded, and clear, consistent as possible.
• Let the potential partners either offer a, "Yes, or a "No" to the partnership offer.
• Remember it's hardest getting the last 10% of the partnership assembled. Unfortunately, the last to join, are the mostly likely to want to negotiate.
• Partnership agreements aren't open for negotiation as far a you're concerned. If so, then plan to start giving away everything to make it work for "everyone".
• Have a minimum investment amount to keep out the amateur, insecure, call-you-every-other-day types from investing. Unless you're desperate and are happy with high maintenance folks.
• Try to form partnerships with fewer than four partners. This would be a goal, not a requirement.
• Partners get a monthly profit and loss statement. Period. Always. No exceptions.
• Books are audited for everyone's benefit each year. Period. Always. No exception. This alone will remove a lot of grief and management headaches and lawsuits.
• Always pay yourself based on benchmarks, and performance, and don't be shy about being paid generously. If you can't pay yourself generously, then you're not going after good enough investments.
• Bad partnerships are bad regardless if the project makes money or net, it seems to me.
• Exit strategies are a must, and can include partial splits of the partnerships, or include options for each partner to buy out the others, or make buy out offers, and maintain the partnership --- with the managing partner's written approval.
• There should be a clause prohibiting any partner from selling their interest without the written approval of the managing partners. The last thing you want is a loose cannon, ex-husband, mixed up in your deal because of a divorce settlement, and suing to liquidate the partnership so he can get his hands on the ex-spouse's contribution, plus profits. Trust me on this.
• Be friendly. Be honest. Be consistent. Be reliable. Be firm. Be fair. Be bitchy when necessary.
• Leave out any of the above recommendations (plus ones I can't recall off the top of my head), and you should NOT go into a partnership.
• Partnerships are reserved for people with character. Otherwise, if things go good, the bad characters will take advantage. If things go bad, same thing.
• If anyone suggests that they are religious, in order to secure a partnership position ---- run!

Think about finding character-driven partners with more than enough cash to do your WHOLE deal. That's the best scenario.

I believe that that most partnerships go bad because of failed expectations --- in either the management, or the quality of the partners, and of course the outcome of the deal. The latter is why I think it's real good to temper everyone's expectations at the outset, so that anything remotely good just looks like frosting on the cake. Meanwhile, again it's better to involve the fewest people with the most money, rather than including lots of wanna-bee investors with little bits of cash.

Don't be afraid of partnerships

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Pitching "all" the "Don't Wanters"

My first attempts at getting sellers to accept my offers were painful, embarrassing efforts. I had a poor pitching arm at the beginning.

I had almost no idea how to present an offer in an elegant, efficient and effective manner. What's worse I failed to understand why it's important to have all of the decision makers present while the offer was being presented, discussed and negotiated.

Few things give a negotiator more of a sinking feeling then to make a smooth presentation, work through tough negotiations, get agreement from all parties, ask them to sign --- only to be told that "Uncle Henry has to review your offer before we sign." "Uh, huh. 'Uncle Henry', you say?"

After a few minutes plummeting into a verbal debate over whether Uncle Henry really has any real authority, blah, blah, blah, I walk out the door with only a polite verbal promise under my arm that, "After Uncle Henry let's us know, we'll let you know --- for sure!"

"Yeah right.", I say to myself, adding, "Next!"

Today I refuse to make a presentation to the sellers until "all the decision makers are present during the presentation".

I get objections anyway that include: "My wife doesn't need to be present, because I make all these types of decisions anyway so just give it to me." [Yeah, sure Bud, whatever. I'll bet she chooses your clothes, too!"] Or, "My husband's out of town on business, so I just relay the offer to him over the phone. [Nah, you've never heard of the word amortization before tonight. I can't imagine how you'll explain "intestate" to him.] Or "I'm the only one on title, so my wife/husband doesn't need to be there". [Really and you've making making all the family decisions for how many days?"]

These are just disqualifying objections as far as I'm concerned. If the seller won't cooperate, then I just move on. I only want to negotiate with desperate anxious sellers that will follow my lead, because they don't know about any viable alternatives. Not ones that believe they have other options and want to weigh ALL of them at my expense.

Of the very most important things that I needed to know about making "hard sell" offers [low-ball offers, sub2, etc.] was that ALL of the decision makers had to be present; husband, wife, and Uncle Henry, or I would wait --- or walk. Without all the decision makers present, the trail that led the negotiations to a closing disappears, and the absent parties can never clearly translate how those negotiations progressed, or how each conclusion was reached, or "why" all the targeted elements of the transaction were satisfactory.

All Uncle Henry hears is that somehow the investor is equity-stripping his nephew and wife, because Uncle Henry didn't get to help "work for the deal" and wasn't led through the "assumed close" --- and didn't hear that the nephew had tried to sell the property through an agent three times in a row, and finally wasn't educated by the "yellow pad" analysis that his relatives were now upside down on the deal in the first place with all the repairs, real estate fees, and closing costs included. So Uncle Henry's operating with blinders on, and meanwhile offering uninformed feedback on the quality of the transaction.

Here's a incomplete list of reasons why all the decision makers must be present for the presentation/negotiations:

• There is no "higher authority" the seller can appeal to. Seller's will say they need to consult someone else, when in fact, they want to shop our offers by going back to Mr. Investor #4 and see if he'll pay more than us.
• We have about 40 minutes to make our presentation, analyze the numbers and look over the house and get the offer approved. If we leave without an accepted offer, we leave without a deal, and the likelihood of ever getting a deal signed is nil --- all because the seller was given the opportunity to consult the phantom higher authority, but in actuality was shopping our offer.
• We need the decision makers to fish or cut bait, because we can't be strung along with too many pending offers at the same time. We make offers on what we can do today, not what we might be able to do a week from today. Things change. Money gets spent. Opportunities rarely present themselves twice. So we need to know now.
• If the seller's insist on the need to think, I offer to go outside on the (back) porch, until they've reached a decision. Of course they want me to leave them alone, but I don't. Meanwhile, I don't go to the front porch, as they may decide never to open the door! j/k! Somehow sellers get a tad "itchy and scratchy" when some guy's out sitting on a lawn chair in their back yard waiting for an answer. This hurries things along in our favor --- either by disqualifying the seller, or seeing them cave to our terms.
  
• If the sellers insist on thinking about my offer overnight, and I know there's no other offers, I might allow this with the caveat that the offer expires at "x" o'clock that evening. And put doubt in their minds about whether I can extend my offer at the current price and terms --- since things change daily in my business.
• I don't want my offers shopped

So correctly "pitching don't wanters" includes making sure you pitch all of them at the same time. Otherwise, it's like pitching with a missing arm! :)