Constructive Receipt: A Hidden 1031 Exchange Danger

By Dr. Robert G. Hetsler, Jr.

When done correctly, a #1031 exchange can be a fairly straightforward process. However, there is often one area that catches potential exchangers off guard. The concept of constructive receipt often torpedoes the tax deferred nature of an exchange, and subjects the exchanger to immediate capital gains taxes.

So what is constructive receipt and how is it different than actual receipt? Actual receipt is easy to identify – the exchanger directly receives the sale proceeds from the relinquished property. It also doesn’t matter what form the funds take – cash or wire transfer into an account. The bottom line is if the exchanger has direct access to the funds at any time, the transaction no longer qualifies as a 1031 exchange.

But constructive receipt is slightly more elusive. Constructive receipt occurs when the exchanger has the right to receive or control funds, even if he or she does not have direct access to the funds. As an example, if an exchanger receives the proceeds in the form of a check, then he or she is deemed to have constructive receipt even if they never cash the check.

The mere act of accepting the check, made payable to the exchanger (even with no intention of cashing it themselves), cancels the exchange before it really begins. Even if the exchanger plans to immediately endorse the check over to the qualified intermediary.

Because of the concept of constructive receipt, it is critical that any investor planning to conduct a 1031 exchange brings a qualified intermediary on board before the relinquished property is sold. This eliminates the possibility of constructive receipt.

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If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.

Why Banks Do Not Allow Junior Liens

By Edward Brown

Ever wonder why bank’s voluminous real estate loan documents usually include a covenant that the borrower has to accept which prohibits junior [or secondary financing]? Most of the time, these covenants don’t even have language that allows for secondary financing with lender approval. They merely state that no junior liens are allowed. In fact, the language is strong enough to imply that placing a junior lien behind the bank’s 1st mortgage constitutes a default [most likely a curable one] {curable defaults are ones that can be remedied, such as placing insurance on the property if the current insurance expires or is cancelled, as compared to incurable defaults which cannot be remedied (or, undone) such as the borrower filing a Chapter 7 bankruptcy}. Placing a junior lien behind the bank’s 1st mortgage is usually curable if the junior lien can be re-conveyed and the property is put back in the same condition [title wise, that is] as it was at the time the bank made its 1st mortgage.

One might ponder why banks are so strict about not allowing junior liens. After all, a junior lien is behind the 1st mortgage. In fact, some non-bank lenders actually prefer subordinate financing because it is as though there is additional security – another party has an interest to protect; however, traditional banks do not view it in the same way. There are a few reasons for this. First, banks have strict underwriting guidelines wherein they look at the DSCR [Debt Service Coverage Ratio]. The DSCR is a ratio that analyzes the cash flow after normal expenses compared to the monthly requirement for the loan in question [both principal and interest]. Many banks have changed their DSCR ratio requirement, since The Great Recession, from 1.1 to 1.35. This can place a tremendous burden on the borrower to have to come up with a larger down payment, in most cases, thereby requesting a lower loan request by the bank, which, in turn, produces a lower monthly loan payment. Many borrowers find that they have to come up with upwards of a 35% down payment as compared to 25% [pre Great Recession] in order to satisfy the 1.35 DSCR. Adding junior liens may place the borrower in the default provision of the DSCR if the junior lien requires monthly payments.

Another point to consider is that the bank priced its loan based upon original underwriting guidelines and being the only mortgage and that no junior financing would be added. The potential risk of negative changes in the DSCR or possibility that the borrower stripped equity away by placing a 2nd mortgage had not been considered, and the bank was not compensated accordingly. The more debt on a property, the more likely there is for a chance of foreclosure. Although the bank may be protected in its 1st position [presuming that the property has not substantially declined], when a foreclosure is triggered, there is a strong likelihood that the bank may have to alter the asset class of the property from performing to non-performing or it may be categorized as a “troubled asset” or put on the “watch list” by regulatory bodies even if the bank is not at risk for losing money. For example, if the borrower put 35% down on a $1,000,000 building and borrower $650,000 from the bank, the bank’s 65% LTV loan may be considered conservative. However, if the borrower obtained a 2nd mortgage for 15% LTV, the property now is 80% leveraged. If the borrower defaults on paying on the 2nd, he may or may not default on paying on the 1st. If the borrower defaults on both the 1st and 2nd, the bank’s loan clearly has turned non-performing. Non-performing loans can have a devastating effect on a bank, as they are required to set aside reserves, and defaults exacerbate this situation. The more reserves required to be set aside means the less money the bank has to lend out and generate income. Since banks lend out in multiples of their deposits, any money that is set aside [that cannot be lent out] has a negative multiplier effect.

The 2nd may or may not cure the 1st and start its own foreclosure. Even if the 2nd cures the 1st, the bank is still left with a possible foreclosing party [the 2nd]. When banks make loans, they are usually looking/hoping for those loans to continue until maturity. Once a loan is made, there is less work the bank has to do. They collect the interest income and hope they do not have to use other resources to babysit a loan. The cost of these resources tax the bank’s bottom line. Banks are not in the business of taking over borrower’s properties. They do not want REO’s [Real Estate Owned properties]. It is much better for them to carefully underwrite loans in the beginning and avoid problems. If the 2nd ends up with the property because nobody outbid the 2nd at the foreclosure, the bank is faced with a new borrower. The bank may have to underwrite the new borrower. In fact, if the 2nd is outbid at foreclosure, the bank is still faced with a different borrower than they originally underwrote. This new borrower may or may not qualify under the bank’s lending guidelines.

What about the scenario wherein the borrower borrows on a separate property and cross-collateralizes against the bank’s subject property? In this situation, the borrower is not attempting to strip out equity from the original property. The borrower may just be faced with the reality that he cannot obtain a loan for the target property unless he is willing to allow the new lender [on property two] to place this same loan on property one for added security.  Unfortunately, although this seems innocent enough, if the bank finds out that a junior lien was placed on the property, [original one] they still may consider their loan in default. A lender who cross-collateralizes against other properties may trigger a foreclosure on all properties they encumber in order to get the borrower to move toward a solution to satisfy their loan that is in default [under their terms…usually for non-payment of mortgage payments].

Public policy may state that a bank is not allowed to interfere with a borrower’s business and force him not to purchase/borrow on other property that the bank has no involvement. There also may be a question as to the validity of the “no junior liens allowed” as this may technically interfere with the borrower’s business, especially if the bank’s 1st mortgage is extremely low. For example, if the 1st mortgage only has a balance of 20% [either because the borrow put a substantial amount down or the 1st loan is so seasoned, that it has been amortized down to a low balance], there is very little risk of the bank not getting paid in full. Even if a 2nd is placed upon the property, one has to question how the bank is impeded should the 2nd start a foreclosure. In previous scenarios above wherein the DSCR was negatively altered due to a 2nd mortgage, a 20% LTV on the 1st should still satisfy a 1.35 DSCR in most circumstances. After the 2nd obtains the property [or a new owner should the property end up in a higher bidder’s hands], most new borrower’s would hopefully be qualified to service a low LTV. Of course, each circumstance is independent, and most banks will want to preserve their right to enforce the “no junior lien” clause.

Usually, only if the bank pulls a preliminary title report, are they aware of the junior lien. They are not usually automatically notified. The main question is whether the bank will automatically declare a default if a 2nd is placed on the property behind their 1st? When banks find out that a 2nd exists, they may either ignore it or send a letter requesting/demanding that the junior lien be removed as per the terms of the bank’s loan documents. Whether a bank decides to pursue its demand that the junior lien be removed is up to the bank; however, they want to preserve their rights by notifying the borrower that they have requested removal, and thus, have written evidence that they contacted the borrower, so the borrower cannot claim ignorance or non-notification of the break in the covenant of the bank terms. This notification protects the bank should the bank choose to start its own foreclosure due to the default.

Most borrowers who have asked permission for a junior lien to be placed behind the bank’s 1st mortgage have usually been told, “No”. That is why most borrowers figure it is better to ask for forgiveness than permission in hopes that the bank will not find out about the junior lien until the borrower either sells or refinances the property in question.

 

Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

REHABBING FOR BIGGER PROFITS

By Reggie Brooks

A thorough inspection of the subject property will serve as a basis from which to begin the rehabilitation. Until you are experienced enough to perform this inspection yourself, it is wise to seek the services of a competent professional. Most contractors will give you a free estimate of repairs when they know they stand a chance of getting the job.

You may consider exercising your option to do the work yourself. In the beginning, it might be worth while to spend your time working on your properties, but as the number of properties you own increases, you’ll be better served to delegate your fix up work to some one else, while you focus on finding more deals. If you are going to do a fair amount of work on your properties, always keep in mind that if you’re not a plumber, electrician, roofer, carpenter or such, don’t try to tackle jobs that are beyond your skill level. Leave those jobs for the professionals.

Another word of caution. Many times you’ll find that a little cosmetic repair will bring a property back to life, thus saving you lots of money. It is important not to over-rehabilitate your project. If the property is in a low to moderate income neighborhood, the amount of money you spend on such items as flooring, plumbing fixtures, door hardware, etc. would probably be lower than that of a property in a high dollar neighborhood.

Do a little shopping around for the best prices on materials. While your local hardware store may fill your needs when it comes to small items, rarely can they compete with the large contractor warehouse type stores. If you are planning to do some or all the work yourself, I recommend that you purchase good quality tools. Much money is wasted on cheap tools that have to be re-purchased over and over again. If you’re performing a small job and have no desire to do your own contracting work, then it doesn’t matter as much.

Be aware that you can rent almost any tool you’ll ever need from an equipment rental yard. Look in the local telephone directory under “Rental”. While rehabbing the property, pay particular attention to the following:

  • Curb appeal: Exterior paint and landscaping are the first and the last thing a buyer or renter sees. Don’t skimp – make a good impression. More than likely they’ll drive by at different times of the day and night. Give them something pleasant to think about.
  • If you’re remodeling (moving interior walls around), try to create a design that will give the property an open feeling.
  • You may find it more cost effective to replace old, outdated kitchen cabinets with new ones. Look in your local phone directory for cabinetmakers and compare prices.
  • Consider using ceramic floor tile instead of sheet goods. It may be a little more expensive, but it will pay off in the long run.
  • Consider installing ceramic counter tops instead of the formica type. Not only are they more durable, they are also more attractive to potential renters or buyers.

When rehabbing, some of the areas to focus your attention are:

  • Foundation
  • Plumbing system
  • Electrical system
  • Roofing
  • Interior walls
  • Exterior walls
  • Landscaping

Foundations

The two most common types of residential foundations are the concrete slab, and the raised foundation. Properties that are built on a concrete slab are secured by anchor bolts protruding from the concrete. Also, they have no crawl space to allow a person to get under the property.

The raised foundation is one where the property sits on top of a continuous concrete foundation that extends around the perimeter of the building. This type of foundation does have a crawlspace which allows a person to crawl under the property.  Some of the signs of possible foundation problems may include, but are not limited to:

  • Major cracks in exterior walls
  • Major cracks in interior walls
  • Doors and windows operating improperly
  • Floors not level

If the subject property shows signs of possible foundation trouble, and if the profit potential is great enough, have a foundation expert take a look at it before you make a commitment to purchase.

Plumbing Systems

Water flows to your property from the serving utility company through a water meter, usually located at the front property line. In very cold climates this meter may be located inside the house. The main shut-off valve to the property should be mounted above grade, and can usually be found near the front of the property on the same pipe as the outdoor faucet.

The pipes that carry water underground to the property are usually galvanized, copper, or plastic. The interior pipes are usually galvanized or copper. Since building codes vary by jurisdiction, check with your own local building department for current codes.

Water Heaters

A typical water heater is approximately 5 feet tall. At the top of the water heater are two pipes, one with a shut-off valve (the cold water inlet side). This is the valve that shuts off the hot water to all the fixtures in the property. The water pipes are usually connected to the water heater by flexible connectors.

A gas water heater has a vent at the top to allow heat and unburned gases to escape. It should be connect to a venting system which terminates at least a foot above the roof. At or near the top should be a temperature and pressure relief valve. The purpose of this TPRV is to prevent the buildup of excess heat and pressure. If it leaks, it can be replaced.

At the bottom is a valve that is used for draining the water heater. This too, as well as every other component previously discussed can be replaced if they prove to be defective. However, if the water heater is old, and looks like it may give you problems, it’s better to replace it now than to have to be bothered with it later.

Stall Showers And Bathtubs

Your property might have any combination of standard bathtub, shower over tub, shower enclosure, or stall shower. If the shower or tub has a glass enclosure, it must be tempered safety glass or approved plastic. The shower head, faucets, and spout should all be in good working condition. If not, they can all be replaced. Check and replace if necessary any worn grouting and caulking.

Toilets

Make sure the toilet is secured properly to the floor. Check for leaks around the base. If it does leak, it’s probably as simple as a new wax ring that goes under the toilet. Flush the toilet and let it fill. If it keeps running, either the tank ball assembly or the flapper may need to be replaced, or the water level should be adjusted so that it shuts off before it reaches the top of the overflow. If the toilet is cracked either in the tank, the bowl, or at the base, or otherwise causing too many problems, replace it.

Sinks

Turn the faucets on and off. They should operate smoothly. If they drip a little, replacing the seats and washers should take care of it. There should be two shut off valves under the sink, unless you have a wall-mounted faucet. The shutoff valves should operate smoothly. While you’re under the sink, check the drain lines and the trap for signs of leaking or rotting. If any of these items do not operate properly, they should be replaced.

Electrical Systems

Every circuit should have a standard circuit breaker or should at least be fused. Each room should have at least two electrical receptacles. The kitchen should have at least two receptacles that are on separate circuits. Replace all broken or cracked cover plates on light switches and wall receptacles. If possible, replace all pull-chain type fixtures with standard fixtures and wall switches. Don’t hesitate to seek the services of a professional whenever appropriate.

Roofing

Only if it is necessary should you consider adding a new roof. If the ceilings show water damage and a close inspection reveals that the present roof is deteriorated beyond repair, then you should consider the possibility of adding a new roof.

Contact several reputable roofers in your area. They will usually give a free roofing inspection. Some roofers may charge a fee, then credit that fee toward the total cost of the roof if you hire them. Gather several estimates and do some comparison shopping in order to get the best deal.

Consider another option: if you do some inquiring at your local roofing supply house, you may find roofers who are between jobs, and will re-roof your property at a very reasonable rate. You might consider buying all the materials, and getting the contractor to supply the labor.

Interior Paint

Pearl White, Navajo White, and Antique White are the common colors used in residential properties. Using a shade of white paint in the interior will make the rooms feel larger. If you hired a painter, he would probably suggest that you use flat paint in every room except the kitchen and bathroom, where you would use a semi-gloss paint. Some investors use semi-gloss paint through their rentals, because it’s easier for a tenant to wash the walls.

Water-based paints are usually easier to work with, and they usually do a sufficient job. Consider using an oil-based paint in the kitchen, bathrooms, service porch, and on the trim. You’ll find that oil based paint is more durable than water-based paint.

Exterior Paint

The exterior of the property may need to be painted. Choose a color that will resist fading and will add to the “curb appeal” of the property. If you’re not sure about a color, drive up and down various streets and see what you like. More people are attracted to the lighter colors. Choose a complementing color for the trim, and consider painting the porch the same color.

Whether you do the job yourself or you get a professional painter to do the work, insist on a good quality job. Old paint should be scraped and sanded, and any holes should be filled before primer and paint.

Consider using the same color combination on all of your projects. This way you only have to keep one color combination in storage for any touch up that might be needed.

Landscaping

Landscaping the front of your property to give it “curb appeal” is essential for getting the most from your property whether you plan to rent or sell. If you’re planning to rent the property, the nicer you make the front of your property look, the better the tenant you’ll attract.

If the grass needs cutting, you can usually hire some of the neighborhood kids to clean it up. A schedule of watering and fertilizing should bring it back to life. If it’s necessary to get the yard looking good right away, then “sod” is your answer. Most gardeners and landscapers can do a neat job with sod, and the end result can be instant lawn.

Top off your landscape with some strategically placed shrubs and some pretty flowers. You’ll be surprised at what this can do for your properties curb appeal, and ultimately, your bottom line.

It is important to continue your education in creative real estate practices. The more you expose yourself to creative real estate principles and techniques, the more you’ll learn. The more you know, the better prepared you are to solve a seller’s problems. The more problems you solve, the richer you get.

I’ll see you at the top!

Reggie Brooks

 

Reggie Brooks, is an international speaker, author and educator, dedicated to inspiring others to achieve personal success through real estate investment. He is also the #1 Vacant, Abandoned & Distressed Property Specialist in North America.

Having risen above a life of poverty, he has achieved what many people consider to be impossible. He went from making $36,000 per year at the local telephone company, to making over $40,000 per month in his real estate business. Today, Reggie delivers his personal philosophies for success at major business venues and expositions throughout the United States. Reggie attributes his success to faith, dedication to success, and to the invaluable coaches he has had along the way.

 

Working With Motivated Sellers in the Spanish Speaking Market – Even if You Don’t Speak Spanish

By Kathy Kennebrook “The Marketing Magic Lady”

One of the things I discovered early on in my business as a real estate investor is that there are many ways to reach all kinds of motivated sellers. The main technique I like to use to reach specific sellers in my market is by using a targeted approach, which for me is direct mail. We do add to the mix other types of marketing tools including business cards, signage, bus benches, ads, bird dogs and flyers to name a few.

I also discovered that there is another segment of the market in addition to English speaking sellers with folks who have homes they need to sell for all kinds of reasons. The market segment I am referring to is the Spanish speaking seller.

The obstacle I ran into was that many of these folks don’t speak any English and I don’t speak any Spanish. So I needed to develop a system to market to these folks effectively since they have the same problems every other seller has.

Many of my students were also contacting me to find out how they too could use direct mail and other types of marketing techniques to reach the Spanish speaking sellers in their areas. They are finding, as am I that these folks have homes they need to sell for a variety of reasons and no one is tapping into this market. Part of the reason for that is the difficulty caused by not speaking the language and not being able to be understood. I found the way to solve that problem for these sellers and for myself as the investor.

I had all of my marketing pieces including my direct mail campaigns for finding motivated sellers translated into Spanish. It was a huge undertaking but it was well worth the effort. The first thing I had to do was to address all of the dialect differences in the Spanish language.

I then sent these letters to the specific market areas where I wanted to buy houses. I sent them out written in English on one side and Spanish on the other. I also had all of my other marketing tools translated into Spanish as well such as signage, ads, lumpy mail pieces, business cards, and flyers which were also causing an influx of leads into our pipeline. Not only that, I even had my tenant referral program materials translated to Spanish since we have a lot of Spanish speaking tenants.

One of the things I discovered very quickly was that while I was getting a lot of response from the Spanish speaking market, I was unable to process the deals due to the language barrier. I solved this problem in two different ways. The first was to send the calls to a 24 hour recorded message which I had recorded in Spanish. I used a professional translator to do this for me so that the grammar, the dialect and the language are correct.

The second way I solved this dilemma was to use a Spanish answering service to take the calls and translate the responses into English so I could read them. We provided the telephone scripts for them to use. I have them both in English and in Spanish so I can provide these to the answering service in whatever format they want it.

You can do the same thing. You can take your own telephone script, give it a bi-lingual answering service, have them ask the questions in Spanish and then translate the responses for you in English so you can read them.  This gives the seller two different ways to contact us, depending on what was the most convenient and comfortable for them. I also provide these potential sellers with a response mechanism at the bottom of the letter I use so they can mail, e-mail or fax their responses to us as well.  The more ways you give a seller to contact you, the more of them are going to.

I then use an interpreter who meets with me and the seller so I can put the deals together. We meet at a location that works for all involved. The interpreters are very reasonable in their fees for their services and they are easy to locate. I found one in the yellow pages listed under “interpreters”. Do try to find someone who specializes in real estate. This makes the whole process a lot easier. By putting a system in place to deal with this market, we were able to do a lot of deals, make money and solve these seller’s problems.

The other method you can employ is to use a Spanish speaking Realtor to help you with your deals and act as an interpreter, and then pay them a fee for doing this for you. If you already have a Realtor on your team performing a variety of services for you, this shouldn’t be difficult to do. I would suggest paying the Realtor a fee separate from their Realtor commission. This is just another way to find a reliable person to act as an interpreter for you when you need to structure these deals.

If you are using hard money or private money to fund your deals, or you are getting the deed, you will be closing these properties with a title agent or real estate attorney. Almost every title agency in the country is bi-lingual. If yours isn’t find one that is. This is a very profitable part of the market that none of your competitors are going after because they simply don’t know how.

Once you get past the language barrier, there are lots of great deals to be made within this marketplace and with these sellers. Remember, these sellers have the same problems everyone else does when it comes to needing to sell a property. You can set up a system in your business that will bring you many deals from the Spanish speaking market.

In my system, Marketing Magic-Spanish Upgrade, I have all of my marketing pieces, both in English and in Spanish for you on CD Rom and I show you exactly how to set up an automated system to reach this marketplace and process these deals. I have basically done all the work for you so all you have to do is get busy and find some properties to purchase with no competition from anyone else.

Be sure and check out my website at www.marketingmagiclady.com for more information on how to find all the Spanish speaking sellers you need for your real estate investing business. While you are there be sure and sign up for my free monthly newsletter and receive an additional $149.00 in FREE marketing tools for your real estate investing business.

Kathy Kennebrook

Kathy Kennebrook is the ultimate success story. She spent over 20 years in the banking industry before discovering the world of real estate. After attending some real estate seminars this 4 foot 11 mother of two got really excited and before you know it she’d bought and sold hundreds of properties using none of her own money or credit.

Kathy holds a degree in finance and has co-authored the books- The Venus Approach to Real Estate Investing, Walking With the Wise Real Estate Investor, and Walking With the Wise Entrepreneur which also includes real estate experts Suze Orman, Robert Kiyosaki, and Dr. Wayne Dyer.

She is the nation’s leading expert at finding highly qualified, motivated sellers, buyers and lenders using many types of direct mail marketing. She is known throughout the United States and Canada as the Marketing Magic Lady. She has put together a simple step-by-step system that anyone can follow to duplicate her success.

Kathy has been speaking throughout the country and across Canada for over 14 years and has shared the stage with Ron LeGrand, Dr. Phil, Dan Kennedy, Mark Victor Hansen, Ted Thomas and Suze Orman to name a few.

Kathy is going to share with you how she generates a seven figure income by mailing a handful of letters throughout the year to highly selected targets by knowing exactly what to send them, who to send them to and exactly how to deliver her message. She will teach you the secrets of pre-screening and automating your marketing and follow up systems to put your entire Real Estate business on auto-pilot.

 

Some Real Estate Lessons

By Bruce Kellogg

Introduction

This is the story of the property in Fig. 1, which is a 3,800 square foot Victorian house that was built in 1898 ( i.e., age 120).  Some years ago, it was converted into five studios and three 1-bedroom apartment units. The purpose of this story is to illustrate many lessons that can be learned about rehab, “flipping”, and syndication.

History

The property was owned by a woman who lived outside the country, an “absentee owner”. She “milked” the property for the cash flow, allowing maintenance to be deferred, and keeping rents low to sustain a steady occupancy. The management company performed to her low standards.

Fig.1

Along Comes “Frank” (pseudonym)

Frank was a newly-minted “real estate entrepreneur”, who had recently completed training in “Apartment Rehab and Re-positioning” by a national trainer. Being a bright fellow and a smooth talker, Frank decided to form a syndication to raise the money needed.  He didn’t have any money of his own. (Actually, he was living with relatives!)

The Syndication

According to title records, Frank raised nearly $600,000 from six partners in a Limited-Liability Company (LLC) structure. He gave each partner a security interest in a deed-of-trust that was secondary to a private first loan of $465,000 from a group of dentists who owned “Novocaine LLC”. Frank didn’t care if his partners were “accredited” or not, as long as he got the money for the project.

The Purchase

An LLC, Frank’s investment vehicle, paid $775,000 for the property. (He thought he “stole” it since the per-unit cost was quite low in this particular market. Actually, counting the deferred-maintenance, Frank had overpaid!) With the loan from the dentists, Frank’s partners put in $310,000 plus closing costs. They had a little under $300,000 left for rehab and holding costs.

The “Rehab”

Fig.2

At first glance, the rehab was fairly thorough. New composition roof, laminate and vinyl floors, tile kitchens and showers, new kitchen cabinets and vanities, new vinyl windows, new stoves and refrigerators, new interior and exterior paint. Frank said he spent $200,000 on seven units. For some reason, one unit was not done. (Did Frank run out of money, and the partners said, “NO MORE”?)

On second glance, not so great. Three years on, the cheap/thin laminate floors are peeling. Frank replaced three gorgeous stained-glass windows with cheap imports. (Fig. 2 is one that survived.) The stoves and refrigerators are “discounted/blemished” with some of the blemishes obvious. (The national trainer probably taught Frank this “money-saver”.) The exterior was pressure washed before spraying on the cheap paint, but not scraped or caulked at openings, so it’s looking ragged now.

Selling the “Flip”

All of the tenants were either helped to vacate or offered a rehabilitated unit at about 40% more rent. (That’s how apartment “turnarounds” are done!)  Frank listed the apartments for sale for $1.5 million. There were a few showings, but only after the price was reduced below $1.4 million did it go under contract. Even then, two parties backed out based on discouraging inspection reports.

Frank hired a new broker who worked “high-end” homes rather than apartments, and Frank did not have the new broker give the prior inspection reports to the buyers (which is legally required). For some reason the final buyers were not made aware of: 1) low water pressure (old, clogged pipes), 2) inadequate electric service, 3) crumbling masonry foundation (not concrete), 4) termites, wood-eating beetles, 5) dry rot and fungus damage at kitchens and baths, 6) faulty exterior drainage system (basement floods in the rain). But the broker made a commission of over $50,000 on the $1.3+ million sale!

Fig.3

The Current Situation

The present owners are still using the same property manager as the overseas woman, the manager with the low standards. Recently, the owners decided to replace the masonry foundation with a concrete perimeter foundation. They hired a state-licensed contractor, who started work. However, probably to save time and money, neither the manager nor the licensed contractor obtained a permit for the new foundation. Someone, a neighbor probably, complained to Code Enforcement, who issued a “Stop Work Notice”. Fig. 3 shows the boarded-up foundation going into its third month.

Additionally, Code Enforcement has “red tagged” the unit that had not been rehabbed. It cannot be rented. Management has removed the range and refrigerator, indicating the unit has been abandoned for the time being.

Conclusions

  • Frank lost money.
  • Frank’s partners lost money
  • Frank has left town
  • The present owners are going to lose lots of $money
  • The contractor’s license is in jeopardy for not getting a permit
  • The owners will likely sue the manager, the contractor, and their broker
  • The broker and the property manager could face disciplinary action by the Bureau of Real Estate

Below is a List of Lessons. What can you add to it?

List of Lessons

  • Don’t try to flip a 120 year-old Victorian (unless that’s your specialty)!
  • Hire only top-quality property managers (and pay them well).
  • Invest only with experienced syndicators with a proven “track record” and plenty of “means” behind them.
  • Borrow only from “accredited” investors, or those who know you.
  • When buying at a discount, make sure it’s a genuine discount. Corollary: Don’t fall in love with the “opportunity”.
  • Rehab with quality materials and workmanship.
  • When buying or selling, use brokers or agents with the appropriate specialty.
  • Invest in all appropriate inspection reports when buying.
  • Obtain permits for all construction work/repairs where permits are required.

 

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 36 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

Mr. Kellogg is a contributor and copy editor for two national real estate wealth-building magazines: Realty411, and REI Wealth Mag.

He is available for listing, selling, consulting, mentoring, and partnering. Reach him at [email protected], or (408) 489-0131.

Yikes! My Marketing isn’t Working!

By Sharon Vornholt

My marketing isn’t working is a statement that I hear just about every week. When I start to ask people about their branding, I always get the same surprised look. Then that person usually says something like, “I’ll worry about branding when my marketing is on track”.

I have to tell you, that’s not how it works.  Branding and marketing go hand in hand, and you need to be working on both things simultaneously. Think of it this way:

Marketing is how you get leads.  Branding is what makes them choose YOU.

Really think about that for a minute.  You’ve just dropped a chunk of cash sending out direct mail campaigns that are pretty much getting you zero results.  One of the main reasons for that is most likely because you have completely neglected to build a brand. There are also a couple of other reasons what we will go over in a minute.

Taking Stock

When your marketing isn’t working, the first step is to take stock of everything you are doing. What are all of your marketing activities?  List them all out.

  • They might include:
  • Direct mail
  • Bandit signs
  • Networking
  • Websites (you must have a website)
  • Craig’s list, Zillow etc.
  • Calling expired listing
  • Or anyone of a dozen other strategies

Then, ask yourself these 3 questions.

  1. Am I marketing consistently?
  2. Am I targeting the right group of people?
  3. What is it I should be doing that I’m not doing? (You know what that is.) No judgement here, but you do have to own where you are to get where you want to go.

Once you have listed out all your marketing activities, be honest and list the exact frequency of those marketing activities. List everything you are doing whether it is daily, weekly, monthly or some other frequency.

If you have big gaps in your frequency, I can almost promise you that’s one of the problems. Marketing cannot be a hit or miss thing. Consistency is one of the keys to generating a steady stream of leads.

The Next Piece of the Puzzle: Building Your Brand

So what exactly is branding?

There’s no doubt that the physical components of a brand are important. Those are things like logos, brand colors and other things that make up the “look” of your brand.  But that’s not what branding really is.

Branding is the way people feel about you. Another way to say it is, “It’s what people say about you when you leave the room”.  That my friend is why you need to build a brand, and you need to be the one in charge of doing that.

If you don’t consciously build your brand and the way you want to be perceived to your potential clients, one of two things will happen: 

  1. Someone else will do it for you. Many times this happens by folks saying negative things about you. They will be in charge of what they want other people to think about you. The way you combat this is by building your own online reputation.
  2. Or you will simply be invisible in your niche which is the kiss of death.

What Has Changed?

For those of us that were around before the internet (I know, it’s hard to believe we grew up without it), only the big companies like Coca Cola had to worry a lot about branding.  The local heating and air-conditioning company could run a few local ads, give great customer service and stay in business.

That’s not true anymore.  When your marketing isn’t working, your failure to build a strong brand is almost always part of the problem.

Whether or not you intend to have a global brand, because of the internet you can be found by everyone. It’s no longer optional to build a brand for your business.  In most cases, you will be the brand in our business.

Remember, that all your marketing has to touch people in some way that makes them take action. Whether that is to call you, to fill out a form on your website or take some other action, once they have found you, what exactly is it that they will find?

You need to ask yourself these questions:

  • What makes you special?
  • How have you branded yourself so that you are memorable?
  • What makes people think you are the authority in your field?
  • The big questions is why should they choose YOU? What makes you different than your competitors?

You must be able to answer these questions before you can really build a brand that stands out from all the rest. Remember that marketing is how you get leads, and your branding is why they choose YOU.

Where Does Branding Count?

Everywhere!

It counts everywhere people have contact with you whether that’s on your website, social media, on your marketing pieces or even in the way present yourself when you’re networking. Your goal should be to build a consistent presence both online and offline.

Here’s a little exercise for you.  Google yourself and see what comes up. Having nothing come up can be as bad as having something negative come up.

How Do You Build a Rock Solid Brand?

You can do that many ways. However one of the best ways is through content marketing. and I’m going to talk about that in my next article.  I want you to be clear on one thing; you don’t have to write a single article to create great content. There are other ways to create content and that’s what I will go over next time.

I also have a free “Brand Assessment Guide” that you can get over on my blog.  So be sure to stop by the Louisville Gals Real Estate Blog and get your free copy. It’s a great way to see where you are now, and what steps you can take to create a brand that leaves your competition in the dust.

Author:  Sharon Vornholt

Louisville Gals Real Estate Blog

Investment Strategy: BRRRR vs. Filthy Riches

By Larry Goins

Larry Goins on the BRRRR strategy and Filthy Riches…

Not too long ago, founder of Realty411 Magazine, Linda Pliagas and I were hanging out with some fellow investors in Texas. If you know Linda, she has a fantastic personality, is a serious magazine editor, and is great at bringing people together. She also actively invests in real estate herself. She mentioned that she was just getting ready to refinance some of the free and clear rental properties she had purchased for cash. I’m like “oh, you’re are doing the BRRRR method.” She hadn’t related the term to what she was doing, but it is a popular model being thrown around on the online forum BiggerPockets.

So, what’s BRRRR? How does it work? Is it the best solution for investors?

What is BRRRR in Real Estate Investing?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat.

This is a cash and cash flow real estate strategy. Investors will purchase properties for cash, or use short-term, hard money type loans to purchase property. Then dig into repairs and improvements to add value and get them rent ready. Then once that property is in shape and performing, investors attempt to refinance to get cash out and/or get better long-term financing terms, which create more cash flow. The cash extracted can be used to acquire another rental property, while keeping the previous one as a rental.

An example scenario may look something like this:

ARV: $100,000

Purchase price: $50,000

Rehab costs: $10,000

Refinance: $75,000

Ongoing rental income: $800 per month, gross, before debt service and expenses.

The Pros & Cons of BRRRR

This strategy has both advantages and disadvantages.

The Pros:

  • Can be a way to gradually scale your rental property portfolio.
  • Acting as a cash buyer to acquire houses fast and at good prices.
  • Achieving lump sums of cash and cash flow.

The Cons:

  • Slow approach to cash and wealth building.
  • Long term debt, and skimming equity can leave investors in tight spots.
  • Lots of equity tied up.
  • Headaches and risk of rehabbing and renters.
  • Reliance on refinancing.

The reliance on being able to refinance has been a risky stumbling block for many trying to use this strategy. Some have tapped out credit cards or home equity loans, and have been unable to complete renovations to a stage where they can rent or resale properties. Others haven’t been able to find lenders who will give them cash out loans. There is never a guarantee that refinancing will be possible down the road. There are just too many variables, from personal credit and paperwork requirements, to construction challenges, and a changing lending landscape.

Filthy Riches: A Simpler Strategy for Profiting from Real Estate

‘Filthy Riches’ is all about making great money, on cheaper houses. There are some similarities in these strategies. For example; the ability to generate both lump sum paydays, and cash flow.

However, the Filthy Riches plan stands out with a few additional advantages, including:

NO loans needed.

NO bank loans needed by buyers to resell your properties.

NO problem finding deals.

NO getting stuck on the next step.

NO taking on wild risks or gambling on the market.

NO fixing up properties.

NO credit checks.

NO financing delays.

NO limits on where you can buy or sell.

NO competition.

With this strategy, you can make more money on a $5,000 house than the average investor makes on a $100,000 house with the BRRRR strategy.

In fact, you can make 141.88% returns, on a $5k house, with no rehabbing, and no tenant hassles. That’s $45,563.06, back on a home bought for just $5,000! You can take those returns in monthly cash flow, lump sum payments, or a combination of both. This system allows for far easier scaling and diversification, which can rapidly put 19 deals under the control of an investor, within about 12 months.

About Me

I’ve been investing in real estate for over 30 years. I bought my first house in 1985. I’ve been a licensed broker, contractor, and lender. I’ve done all types of real estate deals during this time. This is by far one of the simplest and fastest ways to get started and grow your income through real estate. I still use it today. I have students making over $1M with this strategy in 12 states, and from at least 8 countries.

Whether you’ve been struggling to just get started, got stuck on a BRRRR deal, or want to grow your results faster, you can find out more about how this works in a FREE 7 part video series at FilthyRiches.com .

The Bottom Line

BRRRR can work. Many investors are trying it. Yet, many could get going faster, and make far better returns, with less work, and less risk, by using this proven system instead. Check out the free videos, and see exactly how it works, and if it is the right fit for you. You may be very surprised at how much easier this is!

All-Inclusive Trust Deed or Mortgage

By Al Lowry

An all-inclusive trust deed or mortgage is also sometimes referred to as a wraparound or overriding trust deed or mortgage. This is a trust deed or mortgage that is subordinate to, yet includes all the encumbrances to which it is subordinated. But sometimes in connection with refinancing. It is easier to illustrate than to explain.

A few years ago, I knew an owner who wanted to sell a property on which he was paying off a twenty-five year loan. The unpaid balance was $30,000. He was paying 6% interest. He found a would-be buyer, and the two of them agreed on a price of $60,000, with the buyer to put up $10,000 in cash, leaving $50,000 to be financed somehow.

One possibility was for the buyer to try to refinance the $30,000 first mortgage with a new, larger loan. However, the money market was tight at the time. Any new loan he might get probably would not be for more than $42,000 and would cost him 10 percent interest plus at least two points. In addition, there would be a prepayment fee on the existing loan equal to six months’ unearned interest, or another $900.

A second possibility is that the buyer might assume the $30,000 existing loan and have the seller carry back a purchase money second trust deed or mortgage for the remaining $20,000 of the sales price. The interest rate could be whatever the buyer and seller agreed on up to the maximum legal rate, which in their state was 10 percent at the time.

A third possibility (and the one they finally decided on) was to use an all-inclusive deed of trust. The buyer gave the seller a promissory note in the amount of $50,000 with interest at 8 ½ percent. The note contained a clause to the effect that it’s face amount included the unpaid balance of the first mortgage, and that the seller would still be responsible for making payments on that underlying obligation as it stood. So the seller was in the comfortable position of receiving interest at an annual rate of $4,250 (8 ½ percent of $50,000) while paying out interest at an annual rate of $1,800 (six percent of $30,000), thereby netting $2,450, or 12.25 percent on the $20,000 difference between the two notes. This is 2.25 percentage points higher than could legally have been charged if he had carried back a $20,000 purchase-money second. The arrangement put an extra $450 per year into his pocket.

The buyer made more money too. He avoided completely the $900 prepayment penalty and some $1,000 in loan-origination costs he would have incurred if he had taken out the new 10 percent $42,000 mortgage. Furthermore, he ended up paying 1 ½ percentage points ($750) less annual interest than he would have paid on a new first and second totaling $50,00 fortunately, the option to use an all-inclusive note is limited to cases where there is no acceleration or other alienation clause in any of the notes or mortgages against the property, or if there is such a clause, the lender agrees to waive it. He will seldom waive it unless he has little to lose by doing so. In that case, the borrower may also have little to gain from the lender’s willingness to allow the loan to stand intact. When there is no clause in the existing loans that blocks them, all-inclusive loans can be good to use when:

1. There is a locked-in loan that cannot be paid off – at least without severe penalties.

2. The buyer is a poor risk and is making a small down payment.

3. A property is overpriced and the seller sticks to the price but not to the terms of sale.

4. The existing loans are at lower interest rates than you could get on new financing.

5. There is little time to shop for new loans and little chance of the buyer’s qualifying for them.

6. The down payment offered is so low that the only practical alternative would be for the seller to carry back a large purchase-money mortgage.

There are so many ways to make money with real estate.

Albert Lowry is an authority on real estate investing and a nationally recognized lecturer. One of his 20 books, “How You Can Become Financially Independent In Real Estate”, was on the New York Times Best Seller List for three consecutive years. He has a Doctorate in Business Administration, and taught the first Masters Degree Program in Real Estate.

Albert has bought and sold hundreds of properties, run multiple corporations and started many of the investors associations throughout America. He has taught over 350,000 students worldwide and is in the Academy of American Exchangers “Hall of Fame”.

Is Timing The Real Estate Market Possible?

By Fuquan Bilal

Can investors really time the real estate market, or is it wiser to just consistently invest, and hold?

We all know that there can be fluctuations in real estate prices, even if values are constantly going up over time. So, is it possible to time the market? If so, what does it take? What’s the best way to do it?

Why Try to Time the Market

Trying to time the market is critical in publicly traded stocks. Stocks are now believed to be 70% or more overvalued. It can take a decade or more to recover from that, just to get back to par. There isn’t anything you can personally do about the stock prices. You just have to wait. Worse, there is no downside protection. If it goes too deep, there is a PR scandal or the industry changes, all capital may be lost. It is vital to sell before the market begins to dip, and buy again before it begins to go up, if you want to avoid negative returns.

Real estate is a little different. You can absolutely find greater bargains during tougher times, and sell high in bullish times. This strategy can absolutely help to maximize returns.

However, real estate is a tangible, hard asset, that will be there no matter what. It can also produce income, which doesn’t vary much as asset prices fluctuate. Plus, you can control the value of your real estate assets with improvements and repositioning.

Reasons Not to Try and Time the Real Estate Market

There are two main reasons that most individuals and investors shouldn’t try to time the property market. The first is that investors are notoriously bad at it. Most almost invariably wait too long to sell, and end up folding at the bottom of the market. Then they wait far too long to buy, and miss all the gains.

The second reason is that transaction costs can be high. Between time spent on due diligence and hard closing costs, you stand to lose a decent chunk of change if you sell and rebuy the same property in an effort to time it. Depending on where you are, and the fluctuation, this may be more of loss than if you just held, and received income from the property in the meantime.

Factors Involved in Timing the Market

There are an enormous amount of data points and factors to watch when trying to time the market, including:

  • Affordability
  • Interest rates
  • Treasury bond yields
  • Taxes
  • Rents
  • Building costs
  • Seasonal fluctuations
  • Supply and new constructions
  • Default rates and bank balance sheets
  • Days on market
  • Population growth and migration patterns
  • Jobs and wages
  • Local economic trends

Best Moves

There is a lot to know, learn, master and monitor to effectively time the market. If you are epically good, you can do far better than most in timing the market. Even then, you may not want to sell all your holdings, as you’ll probably want to reacquire them within 48 months or so.

At NNG, we leverage a strong research team, deep data that is way ahead of what the public sees, and maintain a strong mix of assets and strategies, so that some are being turned at their ideal timing, while others are held for consistent yields

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund