Subject To "financing" still works in this down market!
In fact there so many prospects willing to give us their deeds its ridiculous. Of course most of these folks are also way under water equity-wise, and we have to be just as choosy over what we're willing to accept as we ever were. After all we're taking title and taking responsibility for paying a mortgage that doesn't have our name on it!
[The portrait above is called "Subject". Hey it's close to "Subject To" in name -- and reflects the non-conformity of creative financing, huh?]
Notwithstanding, SubTo is NOT a hard sell right now.
I overheard an investor in 2007 say that, "Sub2 is dead in this market." Now we understood what his reasoning was even without hearing anything else he said. His reasoning was typical of amateurs who don't have an adequate understanding of the SubTo financing tool. Nevertheless, we knew exactly what he was thinking.
What he was thinking was, that prices were correcting too fast, and too far, to make a profit flipping a house using SubTo financing. If not that, then he probably thought that he couldn't seller finance a property and wait for a new buyer to refinance in the typical 12 or 24 month time period, because the house wouldn't appraise well enough by that point. Ho hum.
Sub2 is meanwhile an extremely valuable, effective and simple, if not an aggressive financing tool, but that's what it really is --- a financing tool. And since folks with equity in their houses still need to "Get out of Dodge" every month of every year in every cycle ---- for any number of reasons ---- regardless of the market, then we'll always have opportunities to solve yet more problems using SubTo. What solves people's problems faster than a cash buyer? Nothing, except SubTo financing! It's a beautiful thing.
The issue then isn't that SubTo can't be used to finance our deals in a down turn, or can't be used to finance long term holdings in a down market. No, that's not true. The issue is locating those desperate anxious sellers (which are the only ones we talk with regardless of the market), that are ready to deal and give us the equity we need to both protect their credit, make a quick transaction, and allow us to make a profit by offering appealing down-line terms and financing to our desperate anxious buyers waiting in the wings. Simple.
Someone might ask, "Isn't your marketing, prospecting and buying requirements stiffer now then they used to be?" My answer is, again, "No."
Everything is the same including the critical necessity of knowing what current "retail" is in our farm. The amateurs crash and burn all the time, because they don't drill into the farm consistently enough to really understand values in a particular farm --- if they work a defined farm in the first place.
Knowing our farm values allow us to effectively and dramatically re-educate the seller regarding his opinion of the value of his house. The problem remains for the amateur investors that don't know their numbers and are effectively unable to negotiate the sweet deals we do --- in any market. It's all about negotiations and facts supporting the negotiations.
I can just hear someone say, "Jay, you mean that negotiations are the only barrier to successfully using SubTo?" Pretty much. Along with a tailored direct market list of the low LTV homeowners that are ready to deal for whatever reason (usually inexperienced homeowners that get themselves into financial trouble within months of buying).
And I'm saying that these types of folks are everywhere. However, we've got to get to them before the competition does. And the best way to accomplish this hasn't changed a bit.
So, is this is a GOOD time to put our SubTo financing to work with desperate anxious sellers in this market cycle?
I came across this fantastic explanation of how social networks can actually work for us in creating profit without appearing to "sell" anything. One marketer claimed to be the "The Top Twitter Dominater" on a nationally publicised PR site...and got slammed on Digg instead as being the "The Top Twitter Douch Bag!" Whoopsie. This video shows us how to keep from becoming slandered as "DB's" on Twitter, FaceBook, and MySpace" by accident.
So very thankful am I for God's blessings on my life. My life is abundant and full. It's only just a few days before my family gathers around for a traditional Christian Thanksgiving feast.
A meaningful thing we've done in the past, is to spend time rehearsing all the things we have to be thankful for. After a while, you'd think that we were special or something.
However, as we've all made a point to center our lives around the Word of God, and intentionally live our lives as a reflection of the living God --- loving others as ourselves --- and doing our best to surrender to the Will of God --- our lives really are continuously filled with thanksgiving, joy and peace --- even when bad things threaten to shake up our lives.
The word of God says that the "rain falls on the just and the unjust". As a result we don't spend time licking wounds. We don't live our lives in denial either, when things are going wrong, or even against us. We don't say to ourselves, or to anyone around us that we "have no problems". However, we live thankfully, joyfully and in peace despite what we face. That's one beauty of putting our faith and trust in someone bigger than ourselves.
Meanwhile, most folks around me are starting to gather for annual Thanksgiving festivities. I have a fun family and this is a tiny number of them that are spread literally around the world.
Here's a shot from my uncle's 80th Birthday celebration five years ago. The lady on the far right in Navy blue is my mom Neva --- affectionately referred to as "The Neva". She was my primary financial backer back in the day. The others include from left to right, back to front: Chris (Carolyn's husband), my Uncle Marion, my Aunt Dorothy, and again my Mom; Carolyn my cousin with son Kevin in her lap and finally Kyle in the center. Such a nice bunch of folks they are!
Yours for an abundant Thanksgiving holiday where you can count your blessings, and let your blessings count!
I'm now officially sixty days behind schedule in launching my training course. It's been unbelievably complicated and time consuming. I'm glad I'm not having to hold my breath --- or my bladder!
I've still got writing, editing, and tons of loose ends waiting to be nailed down. Who knew how much brain power was required to put together something like this, I ask.
Meanwhile, I'm motivated by the fact that one of my mentors offered two-day training camps every two months for about ten students at a time for about two thousand dollars each person. If my math is correct that's about ten thousand dollars a month gross before expenses. He probably spent about thirty percent on overhead. He told me that it wore him out and he's no longer offering the training camps. Hmmm. Maybe it was too inexpensive?
My other mentor meanwhile is grossing nearly four hundred thousand a month selling a newsletter! I'm almost tempted to go into the newsletter writing business! :) Nah.
Yesterday I was writing advertising copy. It read well enough that I was halfway tempted to pull out my VISA card and order my own course from myself! Ha! Maybe I should do that anyway just to make sure everything works?
During my research of various account providers I discovered that PayPal has a LOT of restrictions, including holding back money from it's clients for six months in the event they suspect fraud. I also learned that one of the merchant account providers held up several hundred thousand dollars of my mentor's VISA receipts because the credit card processor was surprised by and consequently suspicious of the huge amount of money they were processing. They are still holding back several hundred thousand dollars of his --- after six months! Another vendor is still holding about thirty thousand dollars. Wow. That would be scary and irritating!
I just learned that my credit card company wants to know what my sales estimates are before they "approve" my merchant accounts. With all the 9/11 security checks and money laundering schemes they want to know what to expect. I have zero idea. For safety reasons I'm going to say, "Exactly Six Quadrillion Dollars a month."
That's a start, huh?
Meanwhile, back to the writing, editing and marketing "stone." I'm so anxious and excited about my course launch that I'm giggly on my way to bed every night!
I'm having "Halloween" moments all month long scaring myself half to death thinking that a well-manicured and smooth-talking socialist may make it to the office of the president. Frankly I would rather have the Wicked Witch of the West, who lets us know exactly what she's all about --- scary details and all!
I hadn't planned on talking about politics on this blog, but the case can be made that George Bush's tax economy has made a bunch of us a LOT of money since 2000. Despite the downturns attributed to the greed and power grabs of the left who pushed lenders to offer non-sensical loans to those with no ability to perform, there is hope.
There is hope if enough folks realize that socialism hasn't put any country that has practiced it, into a "fatter" position than the worst economies of the United States. All the socialist European economies including Russia and China aren't even close to the US in it's economic power. Yet socialsim seems to draw some like flies. You know what draws flies, right?
After all is said and done all of our problems and challenges devolve down to the characters of those we put in office. There's 545 people in congress that absolutely control the future of the United States economically. Unfortunately this mostly failed class of people DO control our Destiny on several macro economic levels --- mainly through regulation and taxation gyrations.
It's important that we vote for character-driven people for congress and the white house, because character drives decisions that affect all of us. More immediately and specifically, we have a choice of putting a polished, wealth- spreading socialist clothed as a "tax cutter" ---- or a crusty un-smooth, Viet Nam era fighter clothed as a quasi-conservative into the presidency. I'm pulling for the quasi-conservative. Otherwise I'll just write in, "Wicked Witch".
Maybe if I click my heels I'll get better choices.
Meantime let's vote for honest, character driven people that won't fake us out.
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?!
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".
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 -$27,500discount, 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.
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.
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! :)
I am a strong advocate for ugly, non-threatening postcard ad copy. With years of experience, and a boat-load of wasted money sending "pretty" postcards ---- I recommend a bigger boat-load of profits made by only sending non-coated (not shiny), plain 60#, 4x6, "Insane Asylum Green" postcards with bullets of information...
Meanwhile, check this out. This guy's approach is even more low budget! And I actually thought that was impossible until now! Take a look.
In a future post I'll give you some proven ideas for simple ad copy that really works at sifting out the "don't wanters" and converting them.
We rarely are given what we want. Rather we negotiate for it.
Even more, we HAVE to fight for it, or the deal is likely to fall apart. Part of negotiating successfully is offering satisfaction in “reaching” a conclusion, and also knowing what the other party wants and needs to come to a suitable settlement. Simple Win/Win negotiating is inadequate in many situations as illustrated in the following scenario.
Two hunters went hunting together looking for a large buck to take home. Finally a trophy animal showed up and both hunters shot at the same time. The deer fell over dead.
Upon investigation, they could only find one bullet hole in the animal, and neither of the hunters knew whose bullet killed the animal. Now it was a "win/win" dilemma to figure out which hunter “owned” the trophy.
Well, there’s no conventional “win/win” solution to this dilemma. After all, in this instance, both hunters wanted the rack, and so one or both is screwed. At best, one hunter has to settle for the left hand side of the rack, and the other has to settle for the right hand side, or one must give up the whole rack. Or they have to have a tug-o-war match to decide who gets what ---- and/or shoot each other to come to a conclusion?
Well, a mutually satisfactory solution has to be worked out nonetheless. So I say, “Win / Win is for amateurs!”
There’s a better solution to win/win.
For starters, we ask more questions of these hunters. Do they actually both want the racks, or is this an assumption? Do both hunters actually want the skin? Or is there anything else they want specifically? Is there a focus of need or desire that doesn’t clash with the other party?
Barney Zick calls this “targeted negotiation” or, “He who talks first “wins”. Yes, instead of making assumptions that each party wants the same thing, we instead ask lots of probing questions before we ever begin negotiations.
To our ultimate surprise, and sake of discussion here, we discover that the one hunter wants the rack, and the other hunter wants the meat, and neither wanted the skin.
Well, isn’t that convenient?
So after some questions we achieve a satisfactory "split" of the animal. In this case we discovered what is beyond the “obvious” --- in this case the real needs --- the non-negotiable needs, if you will and achieve a successful, targeted negotiation.
Well, this is no less true in real estate negotiations. We have to get beyond price in many cases and target our negotiations toward a specific objective. Price then isn’t always the primary motivation for all parties. However finding out what the true motivation for selling is the professional negotiator’s responsibility. And “win/win” for sake of “win/win” in these cases is not adequate to reach a solution.
To illustrate further, I bought a house from a bank at a huge discount. The price wasn’t the most important factor for the bank at that moment, but regaining the ability to borrow several times the value of that bad loan from the government, and making ever more loans was ---- way MORE important than price. Who knew?
In another case, a seller couldn’t complete a remodeling project because he was in jail. Who knew? His wife needed cash to pay legal bills, and she was willing to discount the price heavily to get the cash quickly. So, because we asked lots of questions, we got passed all the normal lies sellers tell us about why they’re selling --- and used that information to help solve her problem --- quickly --- because we couldn’t steal in slow motion.
Meanwhile, we ask lots of questions until we get down to the meat of the motivation, and use that information to go after the kill. Sounds a bit too aggressive for you? Then you’ll be a victim of someone who knows better than you. Keep reading.
We make profitable offers after we get all the facts, and then let the sellers say “yes” to our offers because they now “want” to, because we will solve their “real” problem.
Here’s a list of problems we’ve uncovered and solved over the years:
assumed seller’s liabilities and negotiated a discount after we closed on the property.
purchased appliances for seller to use in new house
negotiated discount of seller’s second/third mortgages.
paid off seller’s vehicle loan
bought life insurance for seller
bought down (shorted) the seller’s second mortgage
paid off seller’s bad debt (at a discount) and upgraded their credit
gave seller moving money instead of conventional down payment
took over seller’s mortgage payment to protect seller’s credit.
took over seller’s car payments
gave seller cash in return for car in the garage
These are qualified win/win examples. We uncovered the real motivations the sellers had for dumping their property, and focused on solving THOSE problems. It allowed us to buy cheaper, whether through speed, discounting, assuming debt, or whatever. But we wouldn't have known without uncovering the seller's true motivations for selling, and negotiated those problems away in return for a great price.
To illustrate this more closely to home...
A few years back, my true motivation for selling a house had nothing to do with price, but just getting rid of a tax burden. I wanted to dump the house a.s.a.p. by discounting the price by 20% off retail to a friend (who didn’t know the market) --- just to get it out of my hair.
What’s interesting is that since I didn’t force my friend to “work for the deal”, and he was not appreciative of the facts of the deal --- I had a much more difficult time selling to him. It's like trying to get a horse to drink, that doesn't know he's thirsty!
In other words, I removed all the road blocks and normal marketing ploys I used, and it resulted in taking longer to unload the steal, than if I had listed the stupid thing conventionally and marketed it professionally. I guess I learned that, “No good deeds/deals go unpunished”, huh?
This was a classic, amateurish, albeit inadequate win/win” solution. I assumed that my discount would be immediately obvious and create motivation, but I failed to take into account that part of the “win” for the other party was “fighting” for the steal deal. So taking away the “fighting” part, nearly destroyed the deal, because the satisfaction level of the buyer (and myself) was short-changed.
The fact that because the buyer didn’t know the market, hadn’t been “working” to find deal in the first place, and that I made it too easy to buy, the buyer then resorted to “creating work” for himself in order to feel some satisfaction in an otherwise negotiation-free situation. Moreover, the buyer second-guessed the terms and price I offered --- with stalls, over-analysis, but finally grinding himself down to the conclusion that I was actually giving him the deal I said it was.
You’d think my credibility was enough? Nope.
Finally I also should have tried to “take away” the deal, by informing my friend of my “other buyers”; my reluctance to sell so cheaply to a friend; my “other alternatives” I had in mind about selling; etc., etc. This would have lit a fire under his feet and not allowed him to "steal in slow motion" ---- which is how it turned out.
So, asking the seller's why they're selling (repeatedly until we get to the root of their motivation), forcing both parties to work for a solution, and focusing on solving problems rather than on price is what defines a better win/win strategy called "targeted negotiations". In a future post, I’ll discuss the “Take Away” in more depth and why it’s the “be all, and end all” in motivating "wanters".
This is for any newbie who wants to come out punching and immediately establish credibility, reliability and professionalism when meeting sellers and prospects! Yes, in order to make that first $125,000 on paper I've mentioned before! Here goes:
1) Get a business license. 2) Get the tiniest, cheapest PO Box rental you can find. 3) Open a business checking account and order the cheapest checks available NO ponies, sunsets, or logos either. 4) Go to a little league team and donate just enough cash to get them to give you a team photo that you place into your CB ("Credential Book", I'll cover this again later) $100.00? 5) Sign up with the BBB and get a certificate. People think this gives you credibility. (BBB is a scam, but they've been a scam for 50 years...and those who know, know... and those who don't, don't) Buy their approval anyway. 6) Get a cheap one or two page personal website with a domain like http://www.mylastname.com , or if your company name is unique enough try http://www.Ialsobuyhousesat65percentofarv.com (Wtvr!) Put your bio on it, and add all the things I'm going to suggest you include in your CB. 7) Get a Vonage Phone Line with a toll free number attached (This is good for making flat-fee long distance calls, not to mention people can call you free on the toll free line.) 8) Get 1,000 business cards printed without graphics, logos, or fills. Just name of co.; your name; your title, ie: "Acquisition Manager". Don't call yourself the "President" . I've lost count of the number of people who called themselves "President" that I saw drive away in some beater Toyota Camry. And few people come in contact with real "presidents", so unless you're driving a newer 500 series Mercedes, you sound cheesy. Include PO Box, Cell #., Fax #.(??), 800 #, Email, Website, and never a home address. (think "attorney business card")
Next... 1) Go to Office Depot and buy the $40.00 leather, 3-ring, zippered binder with calculator, and pockets for 8.5x11 yellow lined note paper pads. This is your "Credential Book" (CB). (The CB shall be treated with more reverence and care than your family Bible ever will!) 2) Go online and download the following: a) Little League web page and Photoshop your company name on it somewhere and insert it into your CB across from your team picture (remove from plaque if necessary, or make a copy). b) BBB web page and Photoshop your company name on it somewhere and insert it into your CB across from your BBB certificate. c) find and print about 5 separate negative news articles (Yahoo, Fox, Newsmax, etc.) regarding the real estate market and insert it into CB. d) find and print FSBO website photos of houses for sale in your farm area similar to the ones you want to buy and insert them individually into the CB....and separately print the property details including the address for future reference, but do not insert in CB. 3) Assemble all the contracts you need to open escrow and insert them into the CB.
4) Load 50 business cards into the CB.
5) Download and print maps of where all the child molesters are lurking in your farm. Map To Child Molesters
6) Reference letters. Get two or three friends (if you have no friends to help you, then reach back into your childhood and bring up the imaginary friends you had) and write glowing reports on your character, integrity, and professional performance, etc. I knew someone that wrote a glowing character reference of himself, and asked a friend to sign it. After all, he told me, who would write about him better than him? Plus the friend was a tad bit completely illiterate, and preferred to write with crayons, used the word "ain't" a lot...and well?
7) Referral letters. Write them yourself describing the situation you helped someone out of, and have the person you helped sign it as if they wrote it themselves. People will always do this, even if what you wrote was a bit "gilding of the lily", as it were. Get them from all the professionals you come across and have good relations/experience with.
8) NOW>>>> Take your credential book to all your appointments.
FAQ’s
a. What are the house pictures for?
You thumb through these pictures and show prospective sellers the kinds of houses you buy (you are not saying you owned these...these are just examples) If the prospect stupidly assumes you own them, then just let them continue in their ignorant bliss) Perception is reality, not reality itself. And we have no business trying to bend their reality to fit our reality, if you get my drift. Later when we have some houses under our belts then we can show them off in another section of our CB called "My Kills!" j/k!
b. What are the Little League photos for?
This says you are stable, local, established, and a family person who loves kids and families...and little league!
c. Why the BBB certificate?
Hopefully its obvious that you are an honest, reliable, and character driven company/individual (apart from BBB's reputation!) Just a note here. You won’t be able to get a BBB certificate until you’ve been in business for 24 months. SO....just Photoshop a page with the BBB logo, your company logo, your picture with a bold statement saying you “support the BBB”. This doesn’t say you’re a member...yet, but you DO support them. The inference of course is that you are a member. Well, since they won’t let you be a member, you’ll let everyone know you “want” to be one. It’s a little sneaky, but unfortunately, there’s a lot of sheople who actually take the BBB seriously, and don’t think it’s a scam. So, capitalize on their ignorance, and don’t fight it!
d. Of course the map to the child molesters should be obvious.
MY thanks goes to those 12 virgin "profitable investment strategies" survey responders!
According to our survey, the top two most important issues we face are, 1) "Finding Deals, and 2) "Finding the strategies that work today". Well, thankfully that is the purpose of this blog; to offer, discuss and brainstorm the best ways to find "deals", and what is working "best" today.
Of course, the "best" strategies for finding deals differ for each particular niche we mine. For now, we'll talk about short sales. For instance, driving neighborhoods, and looking for "short sale" candidates would be really inefficient, and the long route to success.
On the other hand, a more efficient strategy would include focusing on those prospects who've been sent a Notice of Default. That's obvious, except some prospects want to try a short sale, when they can't sell, but their house payments are current.
Meanwhile, even more efficient...is focusing on those in default, who also have more than two mortgages.
Uh, yes! To continue, the even more efficient strategy is to focus on those who have mortgages with two or more lenders --- and those with mortgages older than 18 months old.
Still further...those with mortgages that have been sold more than once. Wow! There's more. The owner is also bankrupt, cannot recover, has a story to tell, has a house that's in terrible shape, and requires more than 10% of the value in repairs.
Do these houses exist? Of course they do. However, the amateurs don't know that they need these criteria to line up before "messing" with them. Short sales are already "hard sells" with lenders, so it's important to focus on the most likely candidates. The fact is finding these gems takes patience and work.
This is a "wholesaling" approach to short sales, not to be confused with the approach a typical real estate agent would use to help a residential buyer negotiate a "mild" discount.
Here's a more comprehensive list of things we look for in a true wholesale transaction:
all loans in default
more than 2 loans in default
each loan with a different lender
loans are older than 18 months
loans sold more than once
2nd loan exceeds 30% of current LTV
3rd exceeds 10% of current LTV
Combined junior liens exceed 35% of current LTV
borrower cannot recover financially
borrower is insolvent
borrower has a "sad story" (less useful when negotiating with with larger lenders)
house has more than 10% worth of repairs needed (the worse the "better")
lender has local loss mitigation dept.
Focusing on homes with these qualifications will put the investor way ahead of the pack, if not massively increase the likelihood of a successful negotiation.
Of course I'll just add here that we're building a case in our short sale package submission for the senior lien holders. In a gross nutshell, the junior lien holders typically discount their face values roughly 90%. That is a $70k 2nd might be sold to us for $7k without much hassle, and sometimes with just a couple phone calls to the lender and very little paperwork. So we'll focus less on these, and more on the mechanics of discounting senior liens.
Meanwhile, we want to make sure we've built a convincing case that can be easily understood by the lender...and make it as easy as possible for the lender to accept our proposal. That doesn't mean they'll just roll over. However this does mean we include pictures, and supporting information that sells our proposal...including making sure the bank receives our photos of the dump which requires both faxed and FED-EX'd, copies of the short sale package.
When/if the bank counters us, we would then supply negative demographic information. On the second counter we would include as much negative market data as available. In the third and final counter, we include criminal data, and anything else that offers a negative picture of the situation.
Why do I say "final". Our experience has been we've got three chances at bat. After this, there is a diminishing return on our investment of time. This doesn't mean we have "no" chance, but at this point, we've pitched the price a half dozen times in conversations with the lender.
With experience, one can read the writing on the wall, and know when to fold.
I am a real estate marketer, merchandiser, investor and trainer. I am currently buying apartments and mobile home parks, and often merchandise single family homes. I am also an experienced direct mail marketer and trainer. I offer a professional real estate course called "Screw The Bank!"(c). This is a detailed training program, that offers even the most seasoned investor insight and instruction on how to more efficiently and quickly find, fund, and flip any type of real estate --- without any competition --- and most importantly, without having to have a lot of money, or any credit whatsoever.
In my spare time, I enjoy advising beginners and consulting with seasoned professionals on effective prospecting, merchandising and marketing of real estate. I also enjoy learning from others and discussing sophisticated, advanced strategies for making obscene profits. Thus this Blog!
Subject To "financing" still works in this down market!
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