There is a class of investors out there who believe that, because they are investors and not lawyers, they don’t need to trouble themselves with the details of the real estate contract.  These investors couldn’t be more wrong.  The contract is what lays out exactly what you are buying, what you are bound to, and what is owed to you.  It is essential to know exactly what you are getting into on every deal that you make, so that you can plan accordingly and protect your profit margin.  The good news is, the real estate contract is pretty standard, simple, and easy to navigate and understand.  In simple terms, here is an explanation of a basic real estate contract.

The contract will clearly identify both (or all) parties involved, as well as the property in question.  This means an address and description of the property.  The main ingredient in the contract brew is mutual agreement, whereby both or all parties agree to the same terms of a deal, following an offer, usually a counteroffer, and finally acceptance of terms.  These must all be clearly laid out in the contract.

In addition to identifying parties and mutual agreement, here are some other elements which all real estate contracts should and in fact must possess.  It must be in writing in order to be enforceable.  An oral agreement is nice, but unfortunately if things go south, then the victimized party will be out of luck trying to cite the contract is binding.

A price for the property must be stipulated.  This does not necessarily mean a number of dollars that the buyer must pay (although it could); rather, it has to point to a value which can be reasonably ascertained at a later date, such as an appraisal value.  This, like everything else in the contract, must be as specific as possible: not just “an appraisal value”, but a specific appraisal done by an agreed-upon appraiser at an agreed-upon time.

Usually, a contract will include some consideration.  Consideration is essentially the value of the agreement itself (as opposed to the transaction), and it comes in the form of a small good-faith fee paid by the buyer to instill confidence in both parties.

Finally, signatures are required, as in all contracts.  No third parties or notaries have to be used, but both parties (or representatives thereof) must ink the contract.  Beyond that, it’s just about filling in the particular details of your transaction.  As stated above, the real estate contract is standard and simple, but you need to know what you are looking for when reviewing a contract.

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There is nothing unethical, sleazy, wrong, or dangerous about knocking on doors to generate some leads for your real estate investment business.  The truth is, it may be the best way to get good information on exactly the type of property you want to buy.  If you only had 3 days to close a deal, wouldn’t you show up at the doors of the homes you wanted, gauging any interest in selling?  People are generally deterred by one of three factors: it’s too dangerous, it’s a waste of time, or it’s an invasion of privacy.  All are false presumptions.

Here’s what you do: target exactly the kind of home you want to buy, in a neighborhood with a number of comparable options; knock on the door on a weekday evening, and politely explain that your business is interested in purchasing a home in the area, and you are wondering if anyone in the neighborhood is interested in selling.  It’s that simple.

The responses you will get will range from being told not to return, to being given a list of motivated sellers.  Generally speaking (and assuming you are not targeting destitute neighborhoods), you will not have anyone yell in your face, no doors will be slammed, and you certainly don’t have to be concerned about having a gun pulled on you.  But if you are concerned about safety, consider these common sense tips.  If you are a woman, bring a man with you.  If you are a man, bring a woman (people tend to be less threatened that way).  If you are invited into someone’s home, use good judgment and consider your safety; if you have a bad feeling at all, stay outside.  Don’t overdress when knocking on doors, as people tend to put their guard up when suits show up at their door; for house calls, business casual is best.  Be mindful not to intimidate anyone who might answer the door; take a step back after knocking to maintain the homeowner’s sense of personal space.

If you follow these guidelines and remain unfailingly polite, you will be amazed by the response.  People love to talk, and if they do not have their own reasons to sell, then you may still be likely to hear all about this neighbor’s divorce, or that neighbor’s impending foreclosure or debt.  In five minutes of work, you could walk away with 2 or 3 really solid leads that just happen to be right next door.  It is not a waste of time—you can easily cover 5 target neighborhoods in one evening of work (between 5-7pm), and even if that only generates one sale, it has been a good use of time.  Imagine if it generates three!

Don’t be put off by showing up at people’s homes.  If they don’t want to talk to you, they won’t.  No harm done, you can simply move on to your next target home, having spent a total of about one minute on this failed lead.  For those who want to find deals quickly, why not go straight to the source?  Find motivated sellers in target neighborhoods simply by knocking on their doors and talking to them.
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There are a lot of different names assigned to real estate investment strategies, and each have their own advocates and detractors.  But really, all investment strategies in real estate boil down to the same thing: buy a property cheap, then fix it, sell it, or rent it to generate profit.  Short sale flips are no different, and really they are the quintessential example of that fundamental formula above.  In short sale flips, an investor finds a seller who is behind on his payments, negotiates a contract to buy from that seller, then negotiates with the seller’s lender to do a short sale, then lines up a new buyer on the backend before closing with the seller.  By the time the first deal closes, the next is ready to open, and the investor simply signs the contract with the backend buyer.  It’s a caricature of all the other investment strategies: buy low, sell high.

If short sale flips are such a prime example of what we all hope to achieve as a real estate investment, why do so many people insist that they are illegal?  If not illegal, at the very least unethical?  There seems to be a notion that the short sale flipper is defrauding the seller and lender, based on a strong undercurrent among the population which maintains that the investor owes full disclosure to the seller and lender about his intentions to resell the property for profit.

The investor owes no such disclosure legally, so calling the process fraud is absurd.  But let’s consider it anyway.  The nature of a short sale dictates that the seller cannot walk away with any money; the deal is taking place because he owes too much money, and the bank would never allow a transaction which afforded the seller some profit.  So that takes care of disclosure to the seller—what does he care?  I don’t think that disclosure should be required to the lender; rather, I think the intentions should be assumed.  Making an investor state that he intends to turn his investment into profit is like making a baseball pitcher say, “OK, I’m going to pitch the ball now,” every time he throws it.  He’s a pitcher, we know that’s what he does; you are an investor, lenders know you want to make a profit.  On all other deals, you don’t have to specify such intentions; but something about the short-term nature of a flip makes people uneasy.  If you held the home for a year, and then resold it for a profit, no one would care.  If you started renting the home for profit, no one would care.  But sell it right away, and suddenly the rules change?  I don’t buy it, and neither should you.

Short sale flips mean big discounts and even bigger, one-time profits.  It requires luck, timing, foresight, and the ability to discern rumor from law when it comes to the ethics of real estate investing.

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Capitalization (CAP) rate is a measure of the potential return on an investment property.  It is a relatively simple parameter, but it can help you to evaluate a set purchasing price, or to set one of your own which will allow you to meet your profit margin goals.  You should calculate a CAP rate before undertaking any property investment, as it is a very helpful tool in the evaluation of whether or not to proceed and close a deal.

As stated above, the CAP rate is relatively simple to calculate.  For any given property, divide your annual Net Operating Income (NOI) by the total purchase price of the home.  Where CAP rates are concerned, assume you pay for the property in cash and in full, otherwise it becomes a very messy calculation.  For example, if a home sold for $200,000 has a NOI of $20,000, then the CAP rate is 10%.

Easy enough?  Like most things, it’s simpler to talk about than to actually enact, and the most difficult part about determining your CAP rate will invariably be predicting your NOI.  This is a consideration of every single expense paid throughout the year pertaining to the property, and it should include (but not be limited to): taxes, insurance, electricity, gas, heat, water, repairs, landscaping, etc.

CAP rates that are too low (1-6%) should be avoided, but something in the range of about 7-10% is good to shoot for.  Of course, consideration of CAP rates does and should change from neighborhood to neighborhood, property to property.  A low-income property for which repairs may have been neglected will produce a higher CAP rate due to the lost cost of purchase and the high cost of repairs.  You must understand the context when analyzing a CAP rate.

You can use this process backwards to try to determine a reasonable price for a home.  Basically, calculate the CAP rates of similar homes in the area which have sold recently, and look for ones which produce CAPS in the range you are looking for, then simply use that sale price.  Without clearly knowing the NOI of your new property, similar homes with similar CAP rates can be a reasonable way of determining sale and purchase prices.

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I have often asked myself why anyone would buy and hold a property in the 21^st century.  This is not fifty years ago, when any real estate—across the board—was a sound investment, bound to appreciate rapidly before your eyes.  Now, relying on market trends for capital growth is one of the riskiest (and least savvy) ways of navigating the investment waters, and quite simply put, it doesn’t work consistently enough to make it worth your while.  If you are someone who was planning to buy and hold a property, why not take the extra step to repair the property while you own it, and generate as much as 30% more profit than you could possibly hope to get from market expansion alone.

There are a few qualities in both home and investor which make this very possible, and often easy, for investors.  The first is, you must know more than just a thing or two about repairing a home, hiring contractors, and calculating the cost of repair and maintenance.  If you don’t, you are guaranteed to underestimate that cost, and therefore overestimate your profit or cash flow.  The good news is, it does not take a genius to learn something about repairs.  Establish a relationship with a good contractor or an experienced investor who can help guide you through your first set of repairs, to give you an idea of the kinds of things that need to be replaced, updated, tweaked, or left alone.

Another important quality to consider is the location and design of the home.  Although with enough money and ingenuity you can alter pretty much anything about your home, some things are simply not worth the cost and trouble.  You cannot change the location, and so this should be a huge factor considered before purchase.  Be sure to think about the neighborhood, the access to shopping, culture, and transportation.  Sprucing up the house is great, but these are the features of the home you will be stuck with.

When it comes to financing, bear two things in mind: 1) you make your profit when you buy, not when you sell, and 2) you don’t need to spend your own money to make the deal happen.  Once you purchase a house, you are stuck with not only the house, but the market conditions and the set of particular buyers available to you.  The only thing you really control is the house itself, so make sure you’re making the right purchase.  Once you’ve spent the money, you can’t get it back.  If you want to eventually turn a profit, be sure you’ve found yourself a low enough purchasing price that will allow you to make all of your repairs, own and maintain the home for a while, and still make enough money when you resell to make it worth your while.  As always in real estate investment, there are opportunities to be creative with the financing of your purchase; there is little or no reason to dip into your savings and simply buy a home with cash.  Use as little of your money up front as possible, allowing you the reserves required for the cost of repair and ownership, until the profit of resale.

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While investing in single-family homes can generate a fair amount of income, multi-unit properties provide investors with a wide—nearly unlimited—array of opportunities to profit.  Although I would not argue that multi-unit investments are any safer than houses, for those investors who do not wish to subscribe to the income potential limits of single-family homes, multi-units is the place to be.

The biggest advantage of multi-units is the cash flow.  Obviously, if renting multi-units, an owner generates as many separate income streams as he has units occupied.  By contrast, a single-family home will only generate one.  Of course, the expenses associated with owning and maintaining a larger building and property are greater than with a single home, so the margin of profit on each of the multi-unit income streams is not staggering.  However, income is that margin multiplied by however many units are occupied (which only you yourself can limit), which gives the investor a blank check to expand.

Based on that information, the argument could be made that an investor wishing to make more money could simply buy more and more single-family homes.  True, but there are many other factors to consider.  For example, the cost of maintaining each of those homes.  Consider how much more expensive it will be to maintain 12 separate homes on 12 separate properties (each with their own unique problems and idiosyncrasies), as opposed to maintaining a single building that just happens to be divided up into 12 sections.  And to maintain that single building, you still have the financial backing of 12 income streams.

Another advantage of multi-units is that there does not tend to be too much competition in the market.  Of course, it’s not a free ride to great deals, but you won’t find the kind of cutthroat competition you find in the single-unit market.  Although it’s not certain why, it may simply be the fact that start-up and amateur investors (who flood the single home market) are intimidated by the bigger, more expensive prospects—which are perceived as riskier, as expensive investments often are.  Whatever the reason, if you are accustomed to having single home deals snatched away at the last minute, or not being able to get your hands on any in the first place, it will probably be a relief by comparison to hunt for deals on multi-units.

There are myriad benefits of multi-unit investments, mostly stemming from the increased income.  Although I won’t and can’t cite them all, they include hiring assistants, hiring management companies to basically do the work of ownership for you, and anything else money can buy—which is almost everything.

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This is an article filled with the drawbacks of becoming a landlord, but understand that it is not meant to argue that owning property for rent is a bad idea; rather, it is based on presenting a complete and balanced picture, and it just happens that there is only one major advantage (but it’s a big one).  Real estate prices, which have been falling rapidly for years, have now reached such a depth where it is reasonable to project positive cash flow investing in rental properties (conventionally speaking, this has not been the case for quite some time).  It is an amazing opportunity, and many investors are turning to the rental side of investment for the first time, because that door is naturally opening up for all of us.  While the benefits are obvious—more cash flow—it is important to be cognizant of the elements of being a landlord which may be slightly less attractive.

The first and most prevalent issue is simply having to deal with tenants.  You will discover this instantly: tenants can be a constant headache.  Obviously, there are dead beat tenants out there who make a career of moving from landlord to landlord, taking advantage and living for free.  Hunting down rent checks and ultimately dealing with evictions will be a source of stress, but you will need to protect yourself and your assets.  Even the best of tenants will not come without problems.  Remember, what should reasonably be considered just a problem for you (for example, a malfunctioning toilet), will be a full-fledged emergency for your tenant.  Because you are the link between tenant and repair, this now becomes an emergency for you.  While a Doctor has hours where he is on-call and must report to duty, you have no hours; rather, you must be available in the event of any emergency faced by any of your tenants (strong argument to hire a management firm!).

As the landlord, it follows that you will have to have excellent established relationships with various contractors and repairmen, from roofers to plumbers to electricians, you name it.  Before jumping in, make sure you talk to someone who owns rentals similar to the one you want to invest in.  Find out the actual cost of repairs, as it often far exceeds the expectations of first-time investors.  Bear in mind when considering the cost of repair, that anytime your units are unoccupied or someone moves out, not only will you bear the financial responsibility of painting, making repairs, and generally making the unit rentable, but you will also not be earning an income from that unit during that time.  It is a safe and conservative assumption that one month of rent annually will be devoted to repairs, and one month annually will be devoted to vacancies.  Be sure to consider that before purchasing.

You will need constant marketing and advertising, which will also be highly expensive, as well as many other elements of ownership and management that will dip into your profit margin.  Although there’s an incredible opportunity to make money in rentals right now because the prices are so low, be aware of the things that will cost you money after you close the deal.  If you can factor in repairs, vacancies, taxes, and even decreasing rental payments (as has been the trend), and still come out with a positive cash flow, then you’ve found yourself a great deal.

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You don’t have to be a multinational real estate investment conglomerate in order to have employees.  Even if you are a start-up investor, there are real advantages to hiring relatively cheap labor such as assistants and scouts, freeing up your schedule for the elements of your business that require your direct interaction.

One very cheap form of help is to hire one or more bird dogs.  Bird dogs are essentially people out in the community searching for deals on your behalf.  This can be an official, organized effort (if your business hires a team of bird dogs to systematically scan an entire community), or it can be very informally structured (asking friends to keep an ear out for any motivated sellers).  At the most unstructured level, having bird dogs could come at no cost to your business, and even if it generates only one deal worth $500, it’s been worth your efforts.

Especially in a struggling economy, finding success in real estate is all about finding the best deals, since no one can simply ride an appreciating market toward profit anymore.  Since it’s such a huge part of your business’ destiny, you need to be prepared to devote a significant portion of your time to finding those deals—this means calling, posting ads, calling leads, writing emails, calling, writing letters, and more calling.  Or, you could hire someone to do all of that for you, and you can move on to the more pressing matters: negotiating, closing deals, writing proposals, etc.

I can’t even imagine how part-time real estate investors (who work a full-time job on someone else’s terms) keep up with deals without hiring bird dogs.  Imagine instead working 9-5, then coming home to a highly filtered list of a few strong leads, pulled from an indecipherable list of thousands.  Wouldn’t that make getting your investment business off the ground easier?  Wouldn’t it be worth the money?

The key to successful bird dogging (from the investor’s perspective) is to be very specific and clear about what types of properties you are looking for.  It doesn’t do you any good to get yet another list of leads that are irrelevant to your business’ interests.  Be sure to clearly outline to your bird dogs what you need, as specifically as you can.  And make sure they understand.  That way, your dogs can go hunt with a target in mind, and sniff out the best deal on the market for you and your business, while you work your day job or enjoy a relaxing round of golf.

What do you think? J

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Not to be confused with, “Real Estate: A Recession-Proof Industry”.  Clearly, over the past ten years, the real estate market has been falling to a catastrophic point.  This title is not meant to suggest that real estate is not affected by the economy; rather, I mean to say that an informed investor can profit in any type of market or economy, simply by knowing what he’s getting into and modifying his strategies accordingly.

Sure, there are buyer’s markets and seller’s markets, but truth be told, there is no true good or bad time to make an investment.  You can make money any time by making intelligent, informed decisions; and you can lose money in any market by making hasty or ill-advised decisions.  If you are waiting for changes in the market to hatch your plan, maybe you should consider adjusting your plan and hatching it now.  Real estate, unlike stocks and bonds, is not something that fluctuates dramatically day-to-day; it follows long, drawn-out cycles and trends which must simply be endured during the course of any investment career.

The extremely oversimplified version is this: in a rising market, finding deals is very competitive and difficult, but they can be quickly resold for reliable profit; in a falling market, those same good deals become more abundant, but because you cannot expect to quickly resell the property for profit, your good deal must now be a great deal to compensate either for the cost of ownership or repair as you await an opportunity to sell or rent for profit.  Obviously, there are a million factors with which you could complicate that equation, but it illustrates the potential to make money even during hard times.

The best advice for making good decisions is—quite obviously—to be well-informed by doing thorough research.  Study market trends at every scale (from international all the way down to the specific target neighborhood).  Find local professionals who can help interpret highly localized trends, for example the amount of time a home spends on the market, asking vs. sale prices, etc., and how all of those figures compare to previous years.  Having a solid foundation of knowledge is the key to understanding a neighborhood, where it’s been, and where it’s heading.  This is the only way to effectively shape and mold your strategy to fit the circumstances.  You cannot simply always rely on flipping homes, or always rely on long-term ownership.  Depending on the market conditions, one or more of these approaches could be a dead end.

Let us know what you think. J

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There is never a shortage of investors, young or otherwise, that are looking to get their start in real estate.  There are plenty of success stories and the allure of working a job on your own time and terms, where there is no cap on your income potential, is very attractive.  But for every success story, there must be 1,000 failures—those who never made it past their first or second investment.  In most cases, early failures can be avoided by simply doing the proper research, and navigating away from some of the more common mistakes.

The first great error made by new investors is one of mentality.  Real estate is no longer the kind of market and industry that allows you to throw some money in any random direction, shut your eyes, and wind up with a 1,000% profit.  For a long time, it was safe to assume that, considering the rapid growth in our nation’s cities and suburbs, any piece of property you purchased was sure to be more valuable 5, 10, and certainly 20 years down the road.  Now, in a struggling economy that sees financial institutions in the straits, and homeowners and renters strapped for cash, it is not such a sure bet.  Today’s real estate game is not about riding a wave of appreciation, but rather about finding good individual deals.  This can only be done with diligence—consistently generating and following up on leads, crunching numbers, and making good decisions.

Finding good deals—properties which you are absolutely certain can be purchased (and probably repaired) for at least 10% below the retail market value of that property—is a recession-proof investment strategy.  In tough times, like all other opportunities to profit, finding good deals becomes more competitive; more people looking for fewer deals.  But desperate sellers lead to creative financing opportunities, and never underestimate the power of less money now (versus more money later).  You can find or create deals in any economy.

It follows that the second major error to avoid is investing blindly in a property.  This means just reading the price tag and signing your name, without a thorough knowledge of the property’s problems and equity, where it will cost you money, and where it bears the potential to earn you income.  Do your research; hire a credible appraiser and contractor, and know what you’re buying.  Risk is inversely proportional to knowledge.

Foresight generally derives from knowledge and understanding.  Now, with a thorough understanding of what you are getting into with your investment, you should have a concept of cash flow.  Cash flow kills new investors, because when the chips are down, start-up investors with no cash reserves are forced into very sticky situations (reduced rates, improper maintenance and repair, etc.).  The key is to have some back-up cash prepared for the tough times, so when they hit you are prepared to maintain your investments and hold out for better times.  Sometimes it’s better to take bigger loans, even when you have your own cash, to finance investments, just so that you have a contingency plan in the bank.  It might hurt your wallet some (as the tough times always do), but it will save you from ruin.

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