There is no safety in playing life safe - really playing it safe is the most risky investment strategy of all.
The first months before you make your first deal are the hardest.
The first thing you have to do is convince yourself, you are an investor.
Too many wannabe investors spend their lives avoiding taking action that will make them money in real estate, because they are afraid of failure.
Winning Deal Formula
10% Property and Location
30% Financing (Price and Terms)
You make your profit when you buy (not when you sell) - then harvest the profit when you sell.
60% Seller Motivation (why is the seller selling the property?)
Foundation of all great Real Estate deals.
KEY #1: Find a seller who has strong motivation to sell.
The single greatest time waster in real estate is trying to make a deal with a non-motivated seller.
Having a motivated seller creates the motivation and situation for a win-win deal.
Motivation - Compelling reason to sell and a time crunch.
Situation - Seller has a lot of equity or doesn’t need to cash out immediately.
Enough equity allows them to provide a discount.
If they don’t need all cash, they can participate in financing with a terms deal.
Ex: Is a deal for a new house contingent on selling the old house? Do they need the cash for their next down payment or house?
Financing:
To make money on a deal, you need to either purchase the property at a steep cash discount or get great financing terms.
The right price / terms and financing guarantees you a profit.
Dialing:
Recommends dialing direct to the home owner (FSBO) to find deals with motivated sellers - find out the seller’s motivation.
On an average of 20 dials:
10 go to the owner.
2-3 pass the Quickcheck - see book for questions / scripts (P. 29)
1-2 are motivated sellers (5-10%)
Let the seller know you are a buyer - but don’t sound too smooth on the phone, you don’t want the seller to think you are taking advantage of them.
Five fastest ways to find Real Estate Deals:
1. Dials
100 calls each week for 90 days (use scripts - P. 42)... 20 calls at a time.
2. “I buy houses” signs with phone number and email.
Put in areas of interest.
3. “I buy houses” ad in classifides (paper, zillow, websites, craigslist)
4. Post Card Campaign (mailers)
To people who own properties - or use a probate list.
Use google voice
5. Ask friends for referrals.
How to get over the “I”m not an investor” self negging:
Buy business cards
Put signs on your car
3 Steps to Any Real Estate Deal:
1. Find a Motivated Seller -
You bring value to the deal by helping the seller solve a pressing real estate problem.
2. Meet with the Seller to Structure the Deal -
Must meet the seller’s most important needs and have a conservative profit for you (the buyer)
3. Execute your Exit Strategy for the Property -
Sell to a new buyer or begin renting the property out. (buy and hold)
Cash Deal - No more than 70% of its “as is” value. (NOTE: Many say ARV - After Repair Value).
“As is” value - ARV - the cost to get the house in 8/10 (B) condition.
Is the seller receiving all of their money at closing? - if yes, then it’s a “Cash Deal.”
Terms Deal - Property must pay for itself and have profit built in from day 1 (don’t depend on appreciation… appreciation should be icing on the cake, not built into profit formula).
Buying With Cash:
Money can be yours or borrowed from a third party (family / friend / bank).
Cash deals are more risky than terms deals - because you get a lot of money tied up into the property.
Smart investors never speculate, they buy intelligently, so they make money no matter what happens.
Ideally, a deal for cash should be 60% or less the value of the house “as is.”
Must factor in holding costs for the property and closing costs to buy and sell the property (if flipping).
Figure 3-6 months holding costs
Estimate Trick: Closing costs + holding costs + selling/holding costs = ARV x 10%.
Don’t buy an investment property straight up with your own cash unless you are getting the house under 50% of its “as is” value.
How to get Investing Money?
Money is NOT an issue.
Other sources of funding exist.
If the deal is good - money will find you.
Begin negotiations at 50-60% “as is” value.
This will kill many deals quickly - this is good, eliminates time wasting. NO money in these deals anyway.
Terms Deals:
In most terms deals, you will be hanging onto the property for some time.
Rent the property out for higher rate than monthly terms payments.
Terms deals are more generous on price to the seller.
Should have little to no money down, since the seller is motivated.
TERMS DEAL RULE #1:
The property must be able to pay for itself. (cash on cash return).
Minimum profit should be 10% CoC.
Higher if the property is in a good area that is strongly appreciating, a closer to breakeven deal might be OK.
TERMS DEAL RULE #2:
Don’t take on domino debt.
Non-recourse debt is one of two criteria of good debt because it isolates and partitions off your risk.
Buy on terms where each property is isolated and a distinct deal (be careful of portfolio buys where one property is a bad deal or has clouds).
Seller Financing is ideal - so you don’t need to personally guarantee the loan through conventional bank financing.
THREE MOST IMPORTANT TERM DEAL ACQUISITION STRATEGIES:
***Learn to buy without using your own money or using a conventional loan, it makes you a much more savvy investor.
STRATEGY #1: LEASE OPTION:
Long term lease plus agreed upon option price.
Control possession of the property, including the option to sublease (fixed rate rent).
Option Portion: Locks in fixed price at which you can buy property exclusively at a specific period of the lease term.
STRATEGY #2: BUYING SUBJECT TO EXISTING FINANCING:
Seller deeds you the house and you make payment every month on the existing loan in the seller’s name.
You get all benefits of the loan, but no risk or downpayment.
If the owner is in financial trouble, behind on mortgage, or owns little equity - this can be a great option.
STRATEGY #3: OWNER-CARRY FINANCING:
Seller accepts a promissory note for some or all of the money owed to them.
A good option if the property is owned free and clear, or if the owner has a large amount of equity.. Or if the owner is an older investor with multiple properties and might like a monthly check.
Structure the deal with the purchase price, downpayment and deal with very low interest rate where the balance is financed by the owner.
This is a good strategy if you want to hold the property (or live there) for some time.
Benefits:
No seller fees
Below market interest rates
No recourse on the loan
The best place to fund a deal is within the existing financing.
For flips:
Tell the seller you will pay all closing costs, if he waits 6 months to receive the down payment.
This way you can fix the house within the 6 months and wholesale the deal to someone new. ASSIGN THE DEAL
SIX BEST SOURCES TO FUND DEALS
Ranked from First to Worst:
1. The Seller - Lease Option Deals, using the seller’s existing financing (give seller mortgage payment).
2. The Buyer - Use who you are flipping the house to - to fund the payments on a quick flip… ASSIGN THE DEAL.
Simultaneous closing - slow close from the seller, aggressively market the new property for a higher price - use the buyer’s money to pay the seller.
Receive cash for the rights you negotiated for the property.
3. Private Money - Find someone looking for an investment and offer them a rate of return on their investment or a percentage of the profit for funding the deal… friends, family, investors.
Or take out a loan with them and give them a decent APR on the investment.
4. Your Own Cash or Credit - Use your own liquid assets, 401 K, credit.
Only do this if the value of the deal warrants the risk.
Best way to use your own money is to find a foreclosure or pre-foreclosure, then cashout the seller and make their back payments.
5. Hard Money Lender
6. Equity Money Parter - Someone loans you money for a percent return on the deal.
FIVE MOST IMPORTANT EXIT STRATEGIES
1. Retail the Property - Sell for the highest price you can.
If you use a real estate agent, find a good one - interview at least 3.
FSBO - Sell without listing on MLS.
DOWNSIDES:
1. Competition in the area lowers the selling point.
2. Must pay agent commissions.
3. Takes a lot of time to sell in a buyers market.
4. Bank as a lender doesn’t net you as high a profit as if you are the lender (exit strategy #5).
2. Flip the Deal - Sell your contract to another buyer or investor for “fast cash.”
Only do this when you first start out and never flip your best properties.
3. Buy and Hold
A lot of long-term benefits, hire someone to do the regular maintenance (handyman - on call) and don’t hire a property manager (waste of money).
Renter turnover expense is a large problem - always look for long-term leases or make a lease-to-own contract.
4. Offer on a “Rent-to-Own” basis
2-3 year lease with an option agreement at a locked in price to purchase the property at any time during the lease.
For the fixed option, the tenant buyer will provide an option payment 3% to 5% (non-refundable) of total value of the option price.
Also, higher than market rent.
Tenant buyers must take care of the HOA, day-to-day maint. And keep the property in better shape than normal renters - bc they might buy it.
Only 2-5% of properties sell under these terms.
Saves the 5-6% agent commission.
Faster sale, less options for buyers looking for this type of home arrangement.
You can have the buyer split the mortgage, so they will have an easier time acquiring financing. (ie: one mortgage with you, the seller and a second with the bank.)
5. Sell with Owner Financing
You get two down payments (second mortgage) for financing the property for the new owner.
You pay the bank on old financing terms and set up new financing terms with the new owner who can’t get the loan from the bank at a higher interest rate.
REAL ESTATE MARKETS:
Differ by local markets and trends.
THREE TYPES OF MARKETS:
1. Hot Market - Prices keep going up. (Seller’s Market)
Demand for homes rises above the supply of available homes.
Best time to acquire investment properties.
Buy subject to the seller’s existing loan.
Buy on a long-term lease option.
2. Medium Market - When the supply and demand of the market have reached a relative equilibrium.
3. Mild Market - (Buyer’s Market)
Supply of homes for sale is much higher than the demand for homes.
Biggest investing mistake is buying too many properties at the same time in a buyer’s market.
FIVE STEP NEGOTIATION SYSTEM:
1. Build Rapport with the Seller:
Key: Listen to the seller’s needs and do your best to achieve them by winning for yourself too.
Act as a consultant here to solve their problems.
Don’t be overly aggressive.
Bridge Q: “Thank you for inviting me over, can you show me around?”
Build a relationship with the seller, see how you can help them.
Only share positives about the owner and the house out loud.
2. Get the Seller to make an Upfront Agreement:
Where you get a yes or no answer and aren’t left hanging.
Bridge Q: “Where’s a good place for us to sit and talk this thing through?
3. Discover Motivation:
Help the seller emotionally connect with his reasons for needing to sell and his limited time to do it.
Key Q: “So what were you hoping I could do for you here today?”
Help the seller connect why he needs to sell.
Eliminate the seller’s other options.
Find out the seller’s timeline.
Always be a reluctant buyer.
Force the seller to sell you and convince them they don’t want to lose you as a buyer.
“I don’t know if I can do this…”
Remain skeptical.
Seller’s are more motivated by loss than they are by the desire to make a profit when selling a house (the house is often most people’s greatest “asset.”)
Negative phrasing works well to convince the seller they are not doing very well.
Ask them how the selling is going, but do it in a way that makes you sound naive or optimistic instead of sarcastic, “has that been working well?”
Put the seller at ease by playing dumb / naive… if you are too intellectual, they might feel they are being “played.”
When a seller comes to their own negative conclusions of their property out loud, use selective hearing to make them restate their point.
KEY: Have the seller self-realize their motivation before discussing money.
4. Money:
Bridge Q: “So what was it you were asking for the property again?”
Goal: Gather financial details to craft a win-win scenario with the seller and also lower the seller’s expectations.
Use the “Three R’s (below) to dramatically lower the price.
5. What If Step:
Guide the seller through various solutions (where you win) to help him pick a way to sell the property to you.
This turns the solution into the seller’s idea - and you accept their offer.
Bridge Q: “I don’t know if I could do this or not, but what if I were to make you payments for a period of time and at some point down the road I completely bought you out of the property? Is that something you might be interested in?
Three R’s to Lower Price:
1. Range Technique:
Investor: “How much were you asking?”
Seller: “$350,000”
Investor: “Oh, okay… you were asking in the $340,000 to $350,000 range… got it.”
2. Realistic Technique:
Seller: “$350,000”
Investor: “What did you realistically expect to get?”
Seller: “at least $340,000…”
3. Real Estate Agent Technique:
Create a hypothetical agent and say, “If they could sell the house in 30 days for $340,000 would you do it?”
This lower price by 6% if you buy it for this price w/o agent - no closing costs.
Use all three techniquest together.
Three Real Estate Investor Levels:
1. Prove Real Estate Investing Work:
Make profit / cash flow on a few deals.
2. Master the five core investing skills and build a real estate business.
Build a business with positive cash flow - driving the business yourself. (day-to-day)
FIVE CORE SKILLS:
1. Create a deal finding machine.
2. Deal analysis - Know you are getting good deals.
3. Structure Win-Win Deals for all parties
4. Negotiation - Get the other side to say YES
5. Contracts and Agreements - understand the language of real estate.
Positive cash flow of $5,000 - $50,000 per month.
3. Put Investing on Auto-Pilot:
Passive cash flow with minimum to no work.
Less than 10 hours of work per month.
Can do big real estate deals on commercial real estate.
SEVEN CRITICAL WEALTH SKILLS OF THE SUPER SUCCESSFUL
1. Learn to generate massive pay days of cash and equity.
2. Convert cash and equity into passive streams of cash flow.
3. Recruit and direct a core team of business and money professionals to aid you in wealth management.
4. Learn to feel worthy of your wealth.
5. Learn to make intuitive, accurate and prompt decisions.
6. Create a peer group of friends and associates who push you to be the best you are capable of being.
7. Learn how to intelligently share your wealth to the world.
THREE WAYS TO OVERCOME FEAR
1. Take action right away - Just do it!
2. Don’t wait until you know it all!
You will never know it all - too much info. Out there!
3. Facing fear and accepting it is a good thing.
Makes you better and stronger.
Learn to act in the presence of your fears.
Don’t choose known failure.
“In essence you would be choosing to fail comfortably than have a great chance to succeed, but experience fear while doing it.”
Don’t freeze at the edge of the cliff - commit to jumping and taking a chance.
OTHER NOTES:
If a property has multiple owners - make sure all are there when you meet them.
Tell them you are more comfortable this way.
Remember - Find motivation to sell before discussing money.
Keep a log of your appointments:
List the good and bad things that happen so you can self-correct.
Always remember not to be overeager. Let the seller become the overeager party.
Try to be seen as reluctant.
A tenant buyer is a better option than a regular renter. It’s a big time win-win.
Higher AAV rent
Option payment (3-5% of the property value)
Daily maint. Must be kept
Tenants stay for a longer period of time.
Property is treated with more care.
Do this unless the property has good holding value and low maintenance.
Most Value:
1. Cash
At most only use $1 of your cash for every $4 of equity.
2. Non-recourse financing (seller financing)
3. Recourse financing (traditional lender)
4. Equity of the property