Three Reasons “For Sale by Owner (FSBO)” Is A Mistake!

by | Feb 2, 2017 | Blog

The more time you spend in real estate, the more you will see things and wonder if they make sense or not. One of those is certainly the decision to list your property on the MLS with a broker or go the other route: For Sale by Owner (FSBO). When I was getting started, I thought FSBO was a great way to market a property and didn’t see any value in using a real estate agent. At the time, I didn’t think it made sense to pay someone a commission just to list a property. I have a sales background, so why would I let someone else sell my property when I can do that myself. Once again, this was one of the things I learned the hard way.

Early in my investing career, I sold many houses FSBO, which skewed my thinking even more. The first few I sold were rentals I had owned for a while, and it was during a time when financing was becoming easier to obtain. You are likely very familiar with the story of subprime lending and the subsequent mortgage crisis that followed. If not, well, it was very easy to get financing which made it easier to sell houses. This made selling to tenants customary. If you didn’t sell to a tenant who was looking to buy, they were eventually going to vacate because they had seen their friends, neighbors, and co-workers get mortgages, and they too wanted the dream of homeownership.

Selling FSBO does the following:

  1. Limits your market exposure
  2. Taints the market’s perception of you and your property
  3. Costs you more than hiring a real estate agent

Limits Exposure

Think this through with me: If your property is not on the MLS, it is receiving ZERO market exposure from every other broker/agent in town. If all you have is a sign in the front yard, you only get local traffic. No exposure means no buyers. Why would you limit yourself to such a small buyer pool? Even if you paid too much for this deal, or repairs spiraled out of control and you are going to lose money, you still need to move the property of your books as quickly as possible. The fastest way is with an agent/broker listed on the MLS.

Taints Your Property

There are two things going on here with regard to perception:

First, you are being cheap and don’t want to pay a real estate commission. Whether that is true or not, that’s what is going to be perceived. This will certainly prevent many agents from even showing your property to one of their clients, because they know they are going to have to deal with you personally (and not another agent), and they will have to negotiate some form of compensation/commission with you.

Second, if the asking price for the property is higher than the average sales price for the area, and/or is in an area that is more affluent, the perception will be that your property is not worth it. But you just spent $20K on the hardwood flooring, $18K on the custom cabinets, and $15K on the appliances. You put travertine in the kitchen and baths, modern chrome fixtures, and a number of other upgrades. No one knows this because they would have to call you to get the info. You are asking $750,000 for this house on the same street as another house that is listed with a local, brand named brokerage sign, who also has a stellar reputation. That house has a description of the same things in yours, but theirs is on every real estate site on the Internet. When buyers drive by, they see your $3 sign you bought from Home Depot that says For Sale By Owner with your phone number scratched in the white space at the bottom. Please don’t do this!

If you think that all an agent does is enter the property address and description in the MLS and wait for the deal to close so they can get a commission, you are absolutely mistaken. If that’s all your current agent does, it’s time to go out and find a good one. I can personally guarantee you from experience, this will make all the difference in your ability to make money flipping properties.

Costs You More

In most cases, you are going to have to pay someone a commission to bring you a buyer as most homes are sold by agents/brokers that are listed on the MLS. Also, in most cases, FSBO is going to keep your property on the market for a much longer period of time. The longer it stays on the market, the more interest, utilities, and property taxes you pay, along with the more landscaping you have to maintain. If you don’t have any experience working with buyers, you may end up going with someone who is not really approved for financing, wasting even more time. It’s much safer and faster to list the property on the MLS, with a good real estate agent, as it will certainly be more profitable.

If you have a property deal and you are looking for an award-winning hard money lender in Austin, please contact us today!

Setting Expectations on 2-4 Family Deals

by | Jan 26, 2017 | Blog

Since I’ve been in real estate, I’ve seen investors infatuated over 2-4 family dwellings (i.e., duplexes, triplexes and fourplexes). The reason: these properties have the ability to produce high cash flow, and conforming loans are available (30-year, fixed-rate mortgages) for long term financing.

When a real estate investor finds one of these deals where the returns look compelling, they are often frustrated by the fact that the ARV is not proportionate with the income it produces, and many times that blows up their deal. How does this happen? Most of the time the investor is using a rental multiplier approach or the NOI approach to determining the value, and that gets them into trouble.

Consider the following example. Our client John was recently looking at a duplex that had 3 bedrooms and 2 bathrooms on each side and would rent for $950 per side per month. With $1,900 per month in total rent, John assumed the value could be based on a gross rent multiplier (GRM) of at least 100 (meaning 100 X rent), making the ARV worth $190,000. Although appraisers do look at the GRM on investment properties, it’s not going to be used to determine the value for a conforming or conventional loan.

Even worse is when investors start to analyze fourplexes as small apartment buildings using a net operating income (NOI) calculation, which is the commercial property approach. This approach to value takes the total rent minus total expenses, not including the debt service. Although it’s always good to know what the NOI is, the lender in the transaction will not allow the appraiser to use this method to determine the value.

The Challenge and Reality

Although they are multi-family by nature, 2-4 family properties are considered 1-4 family from a lending perspective. This means they will be appraised just like a single-family property does use a sales comparable approach. In many markets in Texas, there are not enough sold comps to support a value equal to what you would get by taking either of these approaches. Why is this the case?

To answer this question you have to ask yourself: who buys these types of properties? With some exceptions, most of the time the buyers are investors. How do investors buy? Most investors try to buy at a discount to the market value, and many times are buying off-market. When there is not enough sales data available, the value becomes more difficult to determine, and this, in turn, tends to lower the value of the property.

Conclusion

Many times (but certainly not all) we see the value in the 2-4 family deals coming in at the purchase price plus the repairs. In the scenario above, John’s purchase price was $152,000, with $16,000 in repairs. The appraised value was $170,000. However, his positive cash flow is almost $800 per month with a cash-on-cash return of 24%. He had to bring $40,000 to closing but wanted the returns this deal offered. The point here is don’t get too disappointed if the value is not where you think it should be for these types of properties. Just set your expectations upfront and know what returns you need to make the deal happen for you. You might end up finding a deal that works.

The Power of a Mastermind Group

by | Jul 20, 2016 | Blog

Most of you have probably heard the saying, “No man is an island” by John Donne, a 17th Century English author. I heard someone say this at the first mastermind meeting I attended as the reason they wanted to be part of it. It has resonated with me to this day. Translation: no one person is 100% self-sufficient. We all rely on others at different points in our lives. Not only in our personal lives but also in business. Having a team that you can depend on in a business environment is critical to your success.

Now this might not be intuitive if you’ve never been in a mastermind group before, but I want to make it absolutely clear that one of the most valuable assets you can possibly have for taking your real estate investing (or any business endeavor) to the next level, is a mastermind group. I can tell you in all honesty that I would not have the portfolio, the resources, or the knowledge base I have today, without my mastermind group. In fact, most of what I know about real estate investing came from being part of my mastermind group.

I learned how to buy deals correctly, protest property taxes, find the best real estate attorneys, create special provisions to my leases, find my property manager, find my CPA, as well as excellent tradesman for any type of work—all from my mastermind group. I’ve learned more than I can possibly relate here, but literally, I’ve found resources on anything involved with real-estate investing from difficult situations with tenants and clients, code enforcement, the city, contractors, etc., from my group. I have also done multiple deals with everyone in my group—we all do business with one another. I cannot stress enough how it’s more powerful than you can possibly imagine. So if you are currently not in a mastermind group, I encourage you to get one started ASAP.

So What Is a Mastermind Group Anyway?

The mastermind group concept comes from Napoleon Hill’s book Think and Grow Rich. If you haven’t read it, I highly encourage you to do so. At least read the chapter on the mastermind concept. For now, you can watch YouTube videos where Napoleon explains the concept if it’s completely brand new to you.

Basically, the concept is this: the whole is greater than the sum of the parts. That is, 1 + 1 = 3. The point is that 2 brains together are actually equivalent to 3 brains on their own. This principle works exponentially the more minds you add. So imagine the power of 15 people. This synergy will produce valuable information that will propel your real estate investing faster than anything else.

Who Do You Need In a Mastermind Group?

There is no hard and fast rule about who must be in your group. For example, our group consists of full-time real estate investors and everyone owns rental property. We have agents, brokers, an appraiser, some lenders, an accountant, a financial planner, and some wholesalers as members. However, we weren’t looking for those types of backgrounds when we got started, it just happened to evolve with those individuals over time. Just to give you an idea of the volume of business we do, combined we close over 100 transactions each month.

What’s key is that those in your mastermind group are open, honest, and trust each other. We have no secrets, and no one would ever go behind anyone’s back in a deal! We discuss everything openly and I consider everyone core members of my real estate investing team.

Starting Your Own Mastermind Group

So how do you start a mastermind group for yourself? Begin by networking with people in the real estate investor community (i.e., local investor clubs, meetup groups, etc.) Find those people that are at your level or higher—those that have different backgrounds but share your goal of getting to the next level in their real estate career.

Focus on finding someone with similar interests (wants to build a rental portfolio, flip houses, etc.) and start meeting with them on a regular basis. Then, add a 3rd person that you both agree to bring into your group. Have a meeting or two with them and then find another person and add them. Don’t rush into adding too many people at one time or feel like you have to build a large group immediately. This is about quality, not quantity. You need those individuals where you can build strong relationships of trust.

Setting the Ground Rules For Your Mastermind Group

As with any organization, it’s important to have a set of rules or guidelines that everyone can follow so that meetings will be taken seriously, and you will make the most productive use of time. After a few meetings, it will become easier to get a feel for how you want to structure it. You certainly don’t have to do it the way I am going to describe, but after 10 years of meetings, I have found the following to be most effective:

  • Group Size: No more than 15
  • Frequency: Every other week for no more than 2 hours
  • Agenda: Roundtable discussion where each person has about 5-7 minutes to discuss what they are working on and/or bring up any issues they are seeing or experiencing in the market. Maybe have a guest speaker occasionally that adds value to the entire group.
  • Participation is Key: You want a group where everyone participates in the roundtable discussions. If you have this, meetings take on a life of their own. This is where the real “mastermind” takes place. Once everyone has heard from the rest of the group, the meeting can take on a new form where members can jump into the conversation and share what they believe would add value and benefit the entire group.
  • Attendance Policy: Try to get everyone to commit to attending every meeting
  • Adding New Members: Pace yourself here and do this slowly by getting consensus from the group on specific people to add.
  • Removing Members: It’s important to have the right people in your group to have the most success. From time to time you may need to remove more than one person, so don’t be afraid to do this. Anyone who never shows up, is toxic in the group, is a pessimist, or brings the meetings down, needs to be removed. If you don’t, you will regret it because other members will leave your group. To remove someone, simply send an email with a message like this: We have had some members that have not attended any of the meetings. I am requesting that anyone who does not want to participate, to please let me know and we can remove you from the group email list. Or, give them a call them to explain the fact that you (and your group) feel that they may not be the right fit for the group and that you are going to remove them from the email distribution list.

Conclusion

Find the right people, the right venue for having the meetings, and have fun with this. After your first meeting, you will experience the value I have described, will look forward to every meeting, and will soon watch your real estate investing accelerate to the next level.

If you are a Real Estate Investor, looking for a Hard Money Lender, contact us today!

Portfolio Loans and Advice on Using Them

by | Feb 24, 2016 | Blog

Recently, one of our biggest clients had a large package of houses where he was going to refinance out of a hard money loan and into long term, permanent financing. One option he was considering was doing a portfolio loan with a small bank. For those of you who are unfamiliar with this type of loan, let me explain it.

A portfolio loan is a loan that is serviced by the underwriting lender (to be held on the lender’s books in their portfolio) and is not sold on the secondary market. These loans (also called blanket loans) allow a borrower to bundle or package more than one asset into a single loan with one monthly payment. Over the years, I have used portfolio loans with different banks where I have packaged multiple properties into a single loan.

In theory, they are easier. Hey, it’s one loan with one payment. If you have 30 houses, it’s much easier to make one payment vs. 30 payments. And let’s face it, we all pay enough bills every month, so who wants to pay 30 more! One payment each month sure sounds good. But before you consider a portfolio loan where you package several of your properties together, read the rest of this to understand not only the advantages, but also the disadvantages of using them.

The Challenge

If you are buying houses and keeping them as rentals eventually you are going to be exposed to portfolio loans. Why? As you may know (and as of the date of this writing) Fannie Mae allows 10 non-owner occupied mortgages before you have to seek other financing options. I reference the date here as Fannie Mae changes their rules frequently and so do the lenders who underwrite Fannie Mae loans with their overlays (additional rules on top of the Fannie rules).

To qualify for a Fannie Mae loan you must have good credit, a low debt-to-income ratio and some cash reserves. I have encouraged many clients over the years to do as many of these loans as possible as they have the best rates and terms, which ultimately leads to much higher cash flow. If you do not qualify for a Fannie Mae loan or you have exhausted your loan limit, small banks can be a great resource.

Small Bank Financing

When I refer to small banks, I mean any bank that is not considered a money center bank. Without going into the financial requirements that technically make up a small bank, they would not include Bank of America, Chase, Wells Fargo, Citibank, etc. which are large money center banks that do not offer these types of products. I have done a number of portfolio loans with small banks and so have several of my clients. The thing to keep in mind is small banks (that like to do real estate loans) like for you to package multiple properties into one loan. They get more collateral which helps lower their risk, and they are easier to manage internally for the bank. Here are the advantages and disadvantages based on my experience:

Advantages

  • You can finance a large package of properties as long as it is under the loan limit of the bank. Banks have limits based on their size as to how much they can loan. With the banks I have used over the years I have seen it range from $1M to a $60M loan limit per borrower. Individual loan limits are based on your creditworthiness along with the bank’s appetite at a given time for that particular loan.
  • In the most recent market, I have seen banks offer up to 75% loan-to-value (LTV) and you can get cash out if you are refinancing up to the LTV, if you have owned the property for over a year. It’s going to vary by bank, so you will have to call around to find the terms that work best for you and your situation.
  • Very competitive interest rates, which are based not only on market conditions, but also your creditworthiness and possibly the deposit relationship you have with the bank. Some banks have no deposit requirement and just want to do loans whether you open an account there or not.
  • There is one set of loan documents that you have to execute, vs. a separate set for each property, allowing for much lower closing costs.
  • One payment each month vs. many.

Disadvantages

  • Tracking the P&I (principal and interest) for each individual property in a portfolio loan is a time consuming battle and almost too difficult to administer. Also, if you are like most investors, you (as well as your CPA) will want to know the profitability of each individual property by itself. Running a P&L (profit and loss) statement without the P&I factored for each one will be not only time consuming, but extremely difficult.
  • Probably the biggest disadvantage is when you decide to sell a property (or properties) that are under one loan.

  1. The first thing that happens when you sell is your bank will need to determine what the payoff amount will be. If you have been paying on the loan for a while there could be significant principal reduction that is applied to the overall loan, but this will not necessarily be applied to the individual property (or properties) that you are selling you’re your bank sends the payoff. So what does that mean? That means that your lender may adjust the payoff to an amount that is much higher than what it would be if you did an individual loan with a single promissory note and lien (not good!)
  2. Your bank will not automatically modify your payment unless there is a provision in your loan to accommodate this. You need to read your docs carefully to make sure there is a provision in here to do this, prior to going to closing. If it’s not there (which it most likely will not be) your cash flow will certainly be lower. This is because your payment remains the same, while you are now collecting a lower amount of rent.
  3. If your bank does make the adjustment for you, they may make you re-qualify for the loan again before any modification. What? Yes, that’s correct. If you have been in the loan for over a year, and sell a property (or properties) in your portfolio loan, you will probably have to submit your financials in order for the loan modification to take place.
  4. Your bank is more than likely going to charge you a fee to modify your loan. There will be some document fee from their legal team and there may also be some administration fee to complete the transaction.

My Advice

Personally, I like portfolio loans with small banks. Sometimes they can be easier to get than a Fannie Mae loan depending on the bank you are using and your experience with them. However, I think the disadvantages far outweigh the advantages of packaging properties together in one loan.  As an alternative, I would recommend doing individual notes and deeds of trust (the mortgages) and set your payments for each on auto-draft with your bank. After discussing this option with one of my biggest clients, they decided to go the individual route and are very happy they did. The cost was a bit higher, because you have individual docs that need to be created for each property, but these costs can be recovered in a relatively short timeframe.

Wells Fargo does offer a portfolio product but it is different from most smaller banks and not for purposes of this article.

Marketing Your Property Early

by | Feb 4, 2016 | Blog

Many investors think marketing a property before it is totally complete will give them a jumpstart on finding a buyer and that it will help them sell the property faster. While in theory this may seem to be an advantage, it will more than likely hurt rather than help.

I consider marketing a property early as any of the following: listing the property on the MLS, putting a for sale sign in the yard, letting potential buyers in the house, or posting ads online (through real estate sites, social media, Craigslist, etc.) all before it is 100% complete. When you do any of these things, you potentially lose some of the desirability, along with any market momentum that comes from a house that has been structurally and of course cosmetically completed. As my friend and realtor Mike Perry says, “When your house goes live on the MLS, it’s the Belle of the Ball. It will get the most attention the first week more so than any other time. You want to capture as many ready buyers as you can during this timeframe”.

Think about this for a minute. If you are a real buyer, what are the chances that you are going to want to make an offer on a house that isn’t finished? Minus a new build where the builder is offering buyer incentives, along with selections on the flooring, paint color and maybe the fixtures, in most cases you are going to want a finished product ready for move in. In fact, you cannot close until everything is completed anyway as the appraiser will inform the lender as to the status of the property.

As a seller, one thing you may experience, whether there is a for sale sign in the yard or not, is the buyer who will stop by the house when there are contractors there, claim that they love it and would like to buy it. They also want to know if they can make some changes, even though they more than likely have a lack of imagination and really don’t know what they want. I have seen some of my clients actually work with these so-called “buyers” without a contract in place! About 90% of the time, these buyers don’t close, but love the fact that they can have a say in the finish out and be put in a position to control the seller.

Most of these buyers are not even approved for financing (especially someone who is not represented by a good realtor who would verify this before even showing a house). They are tire kickers who like to look at houses they cannot afford, but think they can get a “deal” by negotiating a seller down in price, since they are working with them directly. This turns into a big waste of time and money. I am not implying that the buyer is doing this intentionally. Some just don’t realize what it takes to get approved for a loan and for whatever reason, think they are, or that it will be easy. Also, just because someone says they like your house, doesn’t necessarily mean they want to buy it. Many times they are just being polite.

I have sold many properties over the years and just like you, I am always ready to sell ASAP. To get the fastest and best results possible, you want to list when everything is completed. This includes the landscaping and curb appeal. If you are working with a good realtor (which you should be doing) they are going to make sure it gets listed at the right time so you can have successful showings that result in qualified offers.

Making That First Offer Work

by | Nov 30, 2015 | Blog, Uncategorized

This advice is very timely for many of our clients who are selling property right now, and what I learned years ago the hard way. Even if you don’t have a property for sale, or are not flipping property at this time, you might hang on to this for future reference.

Making that first offer work is fundamental to maximizing your profit. Consider the following scenario. Your contractors finish remodeling your house and do an amazing job. It takes a little bit longer than you would have liked (but what deal doesn’t?) After 60 days, you finally have it on the market (you correctly decided to list it on the MLS to get maximum market exposure and not do something crazy like FSBO).

You list it on a Thursday afternoon to attract the most buyers for the coming weekend, and get 3 showings on Friday and 4 on Saturday. You realize with this amount of showings, you probably have it priced right (because showings are a key indicator of correct pricing). On Sunday, your agent informs you that you have 2 offers. One is a low-ball, investor offer that you reject and the other is a full price offer for $200,000 with no concessions! Sounds great, right?

Your agent verifies that the buyer is approved for financing and that the buyer is actually putting 20% down, with 1% earnest money and a $200 option fee for 7 days. You accept the offer and are now officially under contract. The option period starts and the inspection is taking place in a couple of days.

You finally get a copy of the inspection report and discover that the electrical panel is a Federal Pacific and the inspector flags it as a known fire hazard. The hot water heater doesn’t have a pan underneath it, and the roof has hail damage that was never discovered during your initial walk through with the contractor. In addition, there are multiple little things that were not part of the code requirements when the house was built. The buyer is very scared as this is their first home and they are requesting that everything be repaired/replaced!

I know what you are thinking (minus the expletives), because I have been there many times – “There is no way I am going to agree to this! I just spent $45,000 on this house and I’m not spending another dollar on it”. Well, I totally understand.

This is where you really need an experienced real estate agent to negotiate this for you, and keep you at a safe distance from the buyer. If your agent is a good negotiator, they can try to have some of these things removed from the buyer’s list. If you are dealing with the buyer’s agent directly, it may be difficult for you to maintain your composure. You don’t want to lose your temper, say the wrong thing, and blow up your deal thinking, “Who cares about this offer, there are more buyers out there and this is a hot market! I’m telling them NO to everything!” If this is your attitude, you are making a big mistake and here is why:

Statistically (and commonly known between brokers and agents), your first offer may be the best offer you are going to get. Now of course this isn’t always the case as there are no absolutes in anything. However, if you have given the property market exposure, and had a number of showings with 1 or more offers (especially a full price offer), it’s probably going to be your best one. In fact, if everything checks out with the buyer (approval letter, earnest money, and option fee), you more than likely have a solid offer. If you don’t get the sense that this buyer is solid, and something is telling you that this buyer is going to be difficult, by all means, don’t accept the offer and wait for the right one.

Another thing to mention here is just because this buyer wants all of these inspection items resolved, doesn’t necessarily mean they are being difficult. This is a normal part of the negotiating process. In fact, if the big items (bad electrical panels and/or a damaged roof) are not addressed, you are more than likely going to have to deal with this with the next buyer on their inspection. Solution: do a more thorough inspection before you buy the property.

Once your property is under contract, the status changes in MLS and there is a history with your property. If you don’t close, the status is going to change back to Active again, potentially raising questions to other agents as to what happened. Yes, they can see that the status changed and may question what happened to the first buyer. If this happens more than once, you can be certain there will be some questions as to whether there is something wrong with the property.

There is something else going on here as well and that is time is elapsing. Even though your days on market stops once you are under contract, time is elapsing and that is costing you money. Remember, once you close on the purchase, the clock starts ticking. It’s ticking on any interest you are paying, utilities you are paying, and pro-rated taxes that you have to credit to your buyer at closing for the time you owned the property. It may also be ticking on that ideal time of year you want to market the property.

The longer you take to sell the property (and the higher the days on market), the more pressure there is for you to adjust your price. If you don’t lower your price after a certain amount of time (each property and market is different), you will probably see an offer that comes in lower because that buyer sees you’ve had it listed for a while and it’s still active. When they see this it can prompt them to throw a lower offer out there. Also, they see that there was some activity but now it’s back on the market.

If you cannot come to terms with the buyer on what is going to be fixed and the buyer decides to terminate (remember the buyer is the only one that can legally terminate the contract and they must do so during the option period) it may be a while before you get another offer. Depending on market conditions, your property may look tainted and showings will come to a screeching halt. These are all reasons why you need to do your best to make that first offer work.

In the previous scenario, I would probably agree to replace the panel, install a new roof, and negotiate the other items off the list through my agent. This is very reasonable based on my experience. You are not giving in to everything, but you are focusing on the most important items that are going to come up again and impact the next buyer. If the buyer agrees to this, you are more than likely good through closing.  If they do not, you may be forced to move on to another buyer.

The point in all of this is keep your emotions in check and focus on your main objective which is to get the property sold, make money, and moving on to the next deal. No two situations are the same and there is no way to document every scenario that you will encounter. If you are on your 1st deal or 51st deal, my advice is use an experienced realtor for all of you sale transactions. I am speaking from experience because it has worked well for me over time. If you have any questions about this, we are here to help you. Feel free to reach out to us by phone or email and best of luck on your deal!