There is no denying that—with the extreme burden of dead inventory on lenders and the government, combined with home-owners being squeezed financially and at risk of foreclosure—short sales are the wave of the current real estate investment market.  Short sales are any property transaction in which the proceeds fall short of the amount owed in loans on the property, and they can be excellent opportunities for penny-pinching investors to find a great deal or turn a hefty profit.  The problem is, we are entering a relatively unprecedented period of short sale abundance and popularity, and many investors know neither what to expect nor how to protect themselves.  The fact is, a short sale is one of those processes that is not regulated that closely, and the transaction can turn sour in the blink of an eye, at any given stage, and at the hands of virtually any party involved.

The number one advice for short sales is to be prepared and have options.  The nature of the commodity dictates that, as an investor in short sale properties, you will most likely be dealing with people of pretty significant desperation.  This can work for or against your interests (in one case, a seller desperate for cash now may sell for an extremely low price; on the other hand, a seller may pit you against other investors against constant bank loan extensions—anything for an extra week in the house or an extra thousand in the bank.  Dealing with desperate sellers is an unpredictable business, and as such investors must always be prepared.  Since it’s so difficult to prepare for specific circumstances based on the behavior of an individual, the rule of thumb is to always expect (and plan for) the worst.

The most common issue centered around short sales is the failure of the deal to take place.  Many investors find themselves walking through a great (and pricey) neighborhood, only to come across this incredible and out-of-place deal—and they think they’ve found that absolute gem that no one else has discovered.  They make an offer quickly to pounce on the low price, and think they have a once-in-a-career deal.  Unfortunately, gems are rarely left undiscovered, and you might be the 4^th investor that day to come across and make an offer on the home. Short sales can happen quickly, and they are often associated with relatively extreme behavior.  So it is extremely important—even moreso than usual—to not put all of your eggs into one property basket (even if it’s the best deal you’ve ever seen).  Remember, the seller is—by contextual definition—not the most financially responsible citizen on the block, so always protect yourself and your assets.  Have options, and never become so emotionally consumed by a property or deal that you can’t bear the reality that it can be taken away from you for no reason, at the whim or discretion of any of a number of individuals involved.

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This article will not answer your questions about the fate of the real estate market or the economy as a whole as we move into 2011.  It is not designed to predict the ups and downs, or to assure you that the recession is over.  Rather, the intent of this article is to provide real estate investors with insight into what they can realistically expect from markets, communities, and government in 2011, as compared to 2010.  Regardless of the overall market and economy trends, one thing is for sure: some investors will make money, and others will lose it.  Although—as you will see—some of the chips may be in the favor of investors in the year to come, profiting will as always require thorough preparation followed be careful and conscientious implementation and decision-making.

The first major difference going into 2011 is going to be the dramatic (continued) rise in real estate supply.  As part of the federal government’s effort to unload the unbelievable property burden incurred by lenders, government, etc., there will be an enormous number of new REO and short sale listings, driving down sale prices (and eventually listing prices).  Investors, more than anyone else, stand to gain from this upcoming surplus resulting from the mass unloading of dead inventory.

If it’s good for investors, it follows that there will be an increased availability of funding from lenders and private investors.  The low selling prices and general state of the market dictate that property is a good place for investors to put their money (and smart investors will).  As a result, there will be more money available for investors to fund projects.  So: more supply, lower prices, greater funding.  Nice, right?

Furthermore, the more conventional financing options—for both investors and homeowners—from traditional lenders JP Morgan, Wells Fargo, etc., are going to become increasingly attractive and flexible.  This, too, has already taken shape in 2010 with historically low rates, and it will continue into the coming year.

Although there are clearly quite a few advantages to being a ready investor going into 2011, perhaps the greatest is the class of investors still hanging around.  In the great investment periods over the past couple of decades, the markets were ultimately inundated with amateur, up-start investors looking to ride the wave.  While there will certainly be some of those in 2011 (there always are—and that’s OK), there is something different about the character of this investment opportunity.  Perhaps it’s the residual effects of a particular difficult few years financially, but there does not seem to be the same flood of young rookie investors chomping at the bit to get the good deals.  The air this time around seems to be more civilized, professional even.  For those investors that have some funding available and can capitalize on the great financing opportunities available in 2011, it is sure to be a year of great deals and career-making opportunities.  But—as usual—be smart with your money, and always have a thoroughly-prepared plan.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

In real estate wholesaling, finding your buyers is the most important step.  However, once you have your buyers, you need to market your property to them.  Marketing involves work: it is not simply showing a picture and talking up the location.  Marketing requires due diligence because in wholesaling, you are generally working with buyers who are experienced with real estate.  They are looking for facts and figures, and unless you can give them that information, you are wasting their time.

The presentation of your property to a potential buyer is very important.  In your presentation, you should know the general market data of the area.  This includes the average rents, average holding time of a house, the gross rent multiplier, and the actual after repair market value of the house.  If you’re dealing with a buyer who generally deals with properties out of town, this data will be more useful and help develop a level of trust. The presentation should also include data specific to the property you are selling.  If it needs rehabilitation, you should have some general bids from contractors (this is also especially useful for an out of town buyer, as they don’t know which contractors to use).  You should have the property inspected and include the highlights from their reports, such as any plumbing, electrical or infestation issues.  It’s also important to have cash flow data, which includes the management fees and any other expenses that make up the total expense of owning the property.  These facts and figures will help an experienced real estate buyer know if the property is a good deal and they can make a quick, informed decision.  They will appreciate your work and will likely agree to look at other properties you own.  Before you know it, voila! They are an active buyer who repeatedly buys from you.  Treat all your buyers with professionalism and show them the work you’ve done to research the market and the property, and you can build a reputation that allows you to wholesale properties in minutes.

The effort involved in locating buyers, properties and marketing is substantial.  Of course, if you wholesale a few properties now and then it is not as labor-intensive, but you must make sure your buyer-list is up to date.   Wholesaling can be a rewarding experience after you’ve completed a successful sale, but in order to get there, remember to line up your buyer first then market your property.

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Real estate wholesaling can be a streamlined, straightforward process if you know what you are doing.  The absolute key to wholesaling is having your buyer lined up before you place a property under contract. Many rookie wholesalers make the mistake of finding a house selling well below market price and think that they can find somebody to buy this property because it’s a great deal.  Sometimes this does work, but more often than not, thirty days have passed and still no buyer, the house that was once a good deal is now a burden.  In wholesaling, any good deal will go sour if you can’t find a buyer for it.  The simple solution to avoid the pitfall of having a contract on your hands that you can’t sell is to make sure you have an active buyer first; and that the property you have under contract fits your active buyer’s criteria for buying.

In order to be a full-time wholesaler, you only need four to six active buyers that buy two to three homes every month.  Some real estate investors suggest building a list of tens of thousands of buyers, but honestly that is a waste of time.  Out of those thousands of buyers, only a very small number of them will be active.  Why not cut through the effort of assembling that list and go straight for the active buyers? Then your list of five buyers is just as good, if not better, than their list of 50,000 buyers.

The way to find buyers goes back to networking.  You can attend the local real estate investment clubs or national meetings with other investors.  Get to know who the players are at the sheriff auctions.  You can even ask realtors to find sales with cash closings (meaning these buyers have an accumulation of wealth) and send letters to those people to see if they’re investors.  You may find a buyer who wants to dabble in real estate, and those are great but they won’t make the majority of your wholesaling business.  You want active investors who are familiar with real estate, understand a great deal and are actively buying every month. You want the players!  This means you are looking for people with money and real estate experience.  If the above venues aren’t fruitful, use your imagination to find these people!  Get creative and try to target this select group of people, but don’t waste your time contacting thousands of people.

Finding active buyers can be difficult in this market because some people are afraid to invest.  However, others understand that there are properties below market value that can turn a very large profit, and your mission as a wholesaler is to find those people.  Focus your efforts on finding the buyers before the property and you’ll never find yourself in a sticky situation.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Real Estate wholesaling refers to the process in which an individual places an undervalued property under a purchase agreement that is then assigned to a third party.  The person or company to whom the purchase agreement is assigned now becomes the owner of the purchase agreement, while the wholesaler who assigned the purchase agreement to the new buyer earns a fee for finding a great deal and assigning the purchase agreement to the new buyer.  The wholesaler leaves the majority of the profit for the end buyer, who may rehabilitate the property and resell it, rent it, or flip it.   The profits for the wholesaler come from the fee paid by the buyer, and the specifics of the fee can vary depending on the size of the deal. The wholesaler need not concern himself with rehabilitation costs, contractor bids, tenants, or the other myriad of things that come with owning a property.  Due to the quick nature of wholesaling, the majority of the wholesaler’s time is spent finding the property and the buyer.

An advantage to wholesaling is that the wholesaler does not need to have large amounts of cash or good credit because if the wholesale is done correctly, the wholesaler’s name will never appear on the title.   The wholesaler places a property under a purchase contract that has legal terminology allowing the wholesaler the right to assign the contract to a third party.  The third party buys the wholesaler’s rights to the property and the title is put into the third party’s name.  The wholesaler’s credit never enters the picture because of the assignable nature of the contract.

Another prominent advantage of wholesaling is that it is possible to do many wholesale deals in a short amount of time.  Real estate investors have built businesses around wholesaling, earning their livelihood by finding undervalued properties and passing them off to buyers.  If done correctly, wholesaling is a fast process and in some cases, deals have been completed in a matter of minutes. If you find yourself turned off by the idea of owning and managing a property, wholesaling may be a good option.

Wholesaling involves a unique skill set that requires knowing how to spot a good deal and finding interested buyers.  Wholesalers do not need to worry about renovating a house, but they do have to evaluate which properties would fit the criteria of their buyers.  If scouting for properties selling below market value and lining up interested buyers sounds exciting, then wholesaling may be for you.

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If you’d like to invest in real estate, but are new to the field and do not want to own property, you’ve most likely come across the REIT.  REIT, or Real Estate Investment Trust, is the mutual fund for real estate.  The managers invest multiple investors’ money into real estate and they distribute a share of their income back to the investors as dividends. There are many different kinds of REITs, just as there are a dizzying number of mutual funds.  Initially, REITs may seem like a good option for the inexperienced investor, just like mutual funds appeal to those who do not feel comfortable to navigate the complicated world of stocks and bonds.  However, real estate, stocks and bonds are all different and they each have their own unique characteristics.

REITs can be a good choice for the individual that wants to be a passive investor and knows absolutely nothing about real estate investing.  However, understand that the REIT does not distribute all of their profits back to the investors.  The REIT has overhead expenses, employees, as well as other costs of doing business.  These expenses are covered by the so called management fees.  These management fees can be quite expensive and can draw down the actual performance of a fund.  Pay particular attention to these management fees. These fees may or may not be directly tied to the performance of the fund.  In other words, you may not receive much of a dividend, but the people managing the fund may not see any change in their income.  (Ouch!) It doesn’t exactly make you feel like their interests are in line with your interests does it?

An alternative to the REIT would be participating in a private placement offering or seeking out an individual that is active and successfully investing in real estate. Then become a private lender or equity partner with them.  This approach puts you much closer to the action and places you in a position where you can reap a larger share of the profits than what the REITs will provide.  You still do not need to be the person that is actually doing the work, but you are much closer to the decision maker and can have some actual input into the deal.  This aligns both your interests and the person you are working with much closer together.  The potential for greater returns and lower management fees is greatly enhanced.

Although most fund managers will tell you that this approach is extremely risky, keep in mind that the ethically experienced real estate investor inherently wants to make your money perform very well.  The reason being is because he wants to use your money again for another deal so that both of you can make more profits.  If you are happy with how your money has performed the first time, do you think you are more likely to invest with him again?  Absolutely you are!

So the answer to the question: “Are REITs a Good Investment Option?”  will depend upon your experience, your risk tolerance and the type of returns you want to achieve.  In my opinion, the fewer management fees involved the greater probability of higher returns. This is assuming of course that the quality of the deal merits your investment to begin with.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Perhaps the most commonly-issued advice pertaining to negotiating as a real estate investor, is to be prepared.  Preparation is, in fact, the key to negotiating success—but what does that mean?  A great deal of time and energy has already been spent thoroughly explaining the process of setting prices and knowing when to walk away, but one of the more overlooked (and equally significant) aspects of negotiations is the agenda—the sequence of items to be addressed during the course of negotiations.  Controlling this facet of the discussions can be crucial for gauging and maintaining the tone of the negotiation, yet the vast majority of relatively small-scale real estate investors fail to even propose an agenda, let alone implement and take advantage of one.

On the largest scale of negotiations (multi-million dollar contracts, treaties, international business, etc.), it is common knowledge that there is a great deal of leverage associated with control of the agenda.  Determining the time and order at which major issues are raised and discussed can be crucial for both parties involved, but the specific details of the agenda are a matter of circumstances and preference.  You want to find yourself in a conversation within your comfort zone.  In many instances, the best strategy may be to discuss the most non-contentious issues first, using initial discussions to either establish the proper rapport with your opponent, or to feel out his strengths and weaknesses for use in later discussions over more significant matters.  At other times, it may be prudent to raise certain major issues concurrently with events happening outside of the negotiating discussion (a new law taking effect, the end of a contract, etc.).

Perhaps the reason formal agendas are so overlooked in most real estate investment is the relative simplicity of the deals in question.  Generally speaking, these deals don’t require negotiations that drag on for months (although sometimes they do—all the more reason to be prepared).  This is no reason to sacrifice a major tool of negotiations, though.  Even for small deals, come to the negotiating table with a plan of items you want to address, and the order in which you want to address them.  When one party shows up prepared, and the other has no competing agenda to propose, an immediate balance of power is established—and power in negotiating always favors the prepared.

At the scale of most real estate investments, an agenda does not have to be a formal, 50-page document presented in bound leather.  It may help to scratch out some notes for yourself (list of items and issues, in order), but the subtle presentation of an informal verbal agenda can be just as effective as the alternative.  If your opponent sits down and starts to talk money, consider an acknowledgement like the following, “Yes, we need to discuss money.  But before we get into that, I just wanted to talk about a few things first…”, after which you can list a few of the items on your agenda.  Gently guiding the discussion in such a way that can have a dramatic impact on the outcome of negotiations—you will be amazed how often the establishment of a simple agenda can cause your opponent to take a “back-seat” in the discussion, following your lead toward a goal.

Establish a plan that works in your favor, present it early in the discussion, and adhere to that plan as stubbornly as possible.  Generally in negotiations of this scale, you will not face a great deal of opposition when you propose your agenda.  Control the discussion, and control your financial destiny.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

A private placement offering, or private placement memorandum, is a way to secure funds.  The reason for the fancy name is that the person securing the funds does not need to be a licensed broker.  This type of method is a legitimate way for an experienced real estate investor to raise capital for deals which he/she does not personally have the adequate capital to invest.  If you’re interested in real estate but don’t like the idea of holding your own property, lending to an investor is a great way to earn a profit without having the hassles of rehabilitating a home or confronting unruly tenants.

The first step to investing with a private investor is finding them.  There are people out there who want to start private placement memorandums and are looking for investors.  The trick is linking up, and the easiest way to do that is through networking.  Start by asking people you know if they have any real estate background, or know anybody who does.  If they do know somebody in the real estate business, then ask to be introduced.

It’s important to remember that the rules of networking apply.  You have to build a relationship with your potential investor before you begin to discuss specifics.  Meet them for lunch, get a feeling for their lifestyle, and what they are looking to accomplish.   It’s ok to talk about your past experiences in real estate and why you are considering investing.  It’s not a good idea to say that you’re looking for a deal with 10% returns.  The reason for the relationship building prior to negotiating a deal is that it develops trust, and trust should never be underestimated when it comes to investing.  You will have to trust their judgment and that they have your best interests at heart.  If there is a tense period where the returns are not where you’d like them to be, you have to trust the investor to make the correct adjustments.  If the property is foreclosed, you have to trust the investor to have enough honesty to reimburse your investment before attending too their own.

If networking is not successful, either because you don’t know enough people or the people you do know are very removed from the real estate realm, you can try other venues.   If there is a local real estate investors association or something similar, you should consider joining it.  Getting spam email and mail is a light price to pay for potentially meeting some very experienced real estate investors.  You may want to take an instructional course on real estate, because some of the teachers are sure to be experienced investors.  Additionally, you may learn something useful!

If you’re the investor, you can find lenders through websites like angel-investor-network.com, but those investors are generally interested in large deals.  It is illegal to post ads looking for lenders on Craigslist or similar websites, because the SEC considers that public solicitation and the penalty can include jail time.

Just remember to be persistent, and you will find an experienced investor that you think has the potential to make a large profit.  Real estate isn’t going anywhere, (contrary to what some of the sensational media stories may have you thinking ) and you want to make sure that you don’t just find any real estate investor, but one you can trust and you believe will be successful.

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A private placement memorandum (PPM) is a way to raise funds under certain regulations of the Securities and Exchange Commission (SEC).  In real estate, a non-licensed broker may start a private placement memorandum and find willing investors for various real estate deals.  The regulations are flexible, and so the terms of the deal may vary widely.  A PPM requires the services of an attorney to make sure all of the legalities are in order.  Fees to start a PPM can range anywhere from $5,000 to $50,000, and so they are usually only done for large deals.  However, from the investor’s perspective, investing in a PPM is not as complicated and can offer some great advantages.

Lower Management Fees:  A private placement memorandum can consist of a few funders to a rather large number depending upon which set of REG D rules the sponsors chooses to proceed under. The terms of the deal vary widely from deal to deal, but are required to be spelled out in detail.  Management fees, as a general rule tend to be much lower than in REIT’s.

Personal Relationship: Investing can be stressful, especially if you’ve invested large amounts of money.  With PPMs, the lender and investor are required to already have an existing relationship.  The sponsor will provide the potential funder  all of the necessary details of the deal, the research that has been completed and the specific business plan to be able to make an informed decision. The sponsor of the PPM is usually very much involved with the deal and already has an existing relationship with the funders. This can provide peace of mind as well as foster trust, creating a positive investment atmosphere. This is very different than when you invest in a REIT where you rarely have any direct contact with the investment committee.

Flexibility: Private placement memorandums are regulated by the SEC under Regulation D.  Regulation D is essentially a set of six rules that specify exemptions from the 1933 Securities Act.   This exemption means that securities do not have to be registered with the SEC, and that avoids up to two months of paperwork.  This way of raising funding is an alternative to obtaining credit from banks, the Small Business Association, the government, or other lending institutions.  The types of real estate that an investor uses a private placement memorandum for are not restricted, allowing for greater freedom of investments. However, the details of the investment, risks, expected returns, length of investment etc. must all be spelled out in advance and followed explicitly.

The private placement memorandum is an option for the individual who already has some experience investing in stocks, bonds and mutual funds, and is looking for a much higher return. The risk is higher because you are usually investing directly into a project.  There is no guarantee of principal protection. In other words, you could lose every dime that you put into the deal. However, the ability to make significantly greater returns is available.  A PPM is more for the experienced investor who has the ability to absorb any lose that may happen.

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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

One of the real oddities of life occurs when kids can—simply put—just do stuff.  Have you ever experienced this?  You may struggle and struggle to learn a new skill, and you turn to the left and see a 6-year-old pick it up and master it in five minutes.  Sometimes we chalk it up to the increased synaptic plasticity associated with youth, sometimes we call it instinct.  But you might also say that, somewhere along the line, those of us that aren’t kids lost the inherent ability to do some of the things we may once have done naturally.  Now it’s time to observe, and learn those lessons once again.

The classic example of a kid’s ability to stump an adult (other than perhaps learning languages and new video games) is a kid’s simple ability to get what he wants.  This is not done artfully, skillfully, or even tactfully; rather, kids are successful be means of the bluntest, broadest, but perhaps deadliest tool in the arsenal: persistence.  Consider:

CHILD: “Can I have this toy?”

MOTHER: “No.”

“Please? Can I have it?”

“No.”

“But I want it!”

“No, honey.”

“I want it! I want it! I want it!!”

“No! Stop it!”

“I want the toy NOW!!!”

“OK, I’ll get you the stupid toy.  Stop screaming.”

Sound familiar?  The mother didn’t do anything wrong, but the child did two things right: relied on his relationship with his mother, and refused to give up (despite his repeatedly rejected requests).

This is a skill set many investors have lost, and need to find.  Implemented with perhaps a bit more control and precision than the child in the above example, persistence and the establishment of a rapport with your negotiating opponent can be the recipe for getting exactly what you want out of the negotiation.  Most investors now realize that negotiating means compromising, and you must be prepared with an asking price and a more reasonable price for which you would settle.  But where those investors go wrong is by jumping too quickly to their compromise price.  Instead, they should learn from their children or the former version of themselves that sometimes when you ask two, three, even four times for the exact same thing, you might just get lucky.

This becomes especially true when you’ve established some sort of relationship with your opponent (not necessarily friendly, but he shouldn’t hate you going into the discussion).  This ensures that—provided your opponent has some degree of conscience—it will be more difficult to write off your repeated requests (just as it was for the mother to refuse her son over and over).  If your opponent has no connection to you as a person (rather only as an opponent), it will be infinitely easier for him to simply get up and walk away from you.

The combined effect of this relationship with a bit a juvenile persistence is often your opponent’s—albeit reluctant—willingness to accept your offer.  And the difference between achieving your asking price, and settling for your compromise price, is the very difference between being an average investor, and a great one.

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