WHOLESALING REAL ESTATE FOR BEGINNERS

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By Joe Arias

Wholesale real estate is a great way to get some real estate investor experience without spending tons of money. Like any other real estate investing method, you should make sure this aligns with your goals and personal interests before getting started. In this article, we’ll help you better understand wholesale real estate for beginners so you can identify if it’s the right choice for you as you get started in real estate investing.

What is Real Estate Wholesaling?

Essentially, you would act as the “wholesaler.” Your job is to acquire a contract to sell from someone looking to sell a property. You would then find someone interested in buying the property – usually a real estate investor – and you will sell them the contract. Never at any point do you buy or sell the property. Instead, you find properties selling from slightly less than market value and connecting them to buyers for a fee. Many people like wholesaling real estate as beginners in investing because it doesn’t require you to invest any money in the properties. It’s relatively low risk and can have a low turnaround time.

Real estate wholesaling is completely legal, despite the debate around it. This is because the wholesaler is never actually selling the property, just the ownership of the contract to buy the property.

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How do You Make Money Through Real Estate Wholesaling?

As a wholesaler, your job will be to find properties that are being sold under market value. Once you get into contact with the property seller, you will work with them to get a purchase contract. You will have to do your research and provide your seller with information on the value of their home and why they should work with you. Once you get the contract, you will find a real estate investor interested in the property. You will then sell the purchase contract to the buyer. You earn your revenue through a wholesaling fee attached to connecting the buyer and the seller. This is typically a percentage of the overall cost. To reiterate, you are only selling the contract to purchase the property, not the property itself.

Many buyers like working with wholesalers because they do all of the work of finding the properties, assessing the value, and negotiating with sellers. Despite having to pay the wholesaling fee, it’s often still worth the extra cost.

The Pros of Wholesaling Real Estate for Beginners

Valuable Real Estate Knowledge and Experience

If you want to gain connections and knowledge about real estate without the financial risk, wholesaling real estate is excellent for beginners. You still learn the basics of real estate through negotiation, organizing, finances, and legal aspects. Through wholesaling, you’ll deal with many different properties and investors, and you can start to identify what you like and what you don’t. When you switch investment styles, you’ll know what to look for.

Quick Turnaround

After you learn what you need to know to get started, the best way to learn how to wholesale is to get the experience. You can get this experience quickly, as wholesale real estate can be a relatively quick turnaround. This is great for beginners because it means you get your money faster and build your connections faster. Things like house flipping can take months, and when you don’t have a lot of revenue coming in, that can hurt your potential to succeed in real estate. Wholesaling, however, has about a month turnaround for each business dealing. If you think you can handle more than one, you can time them out to make sure you’re getting paid more than once a month.

No Capital Required

The best part of real estate wholesaling is that you, as the wholesaler are not obligate to dish out any money. When you start off in real estate, money is often the most significant barrier to becoming successful. Choosing beginners who opt to start with wholesale real estate set themselves up for success because they make all of the valuable connections and gain experience and knowledge without investing all of their money. If you are worried about getting started because you do not have a lot of capital, wholesaling may be your best method.

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Cons of Wholesale Real Estate

No Guaranteed Income

Unlike other real estate investing methods, wholesale real estate has no guarantee of working out and ending in a paycheck. Beginners who decide to invest in property management can usually guarantee a steady income through tenants paying rent. The only time you will get paid is if you can successfully match a seller and a buyer and complete a deal. Even then, you’ll have to wait to get paid until everything goes through. As you get better, you’ll have more confidence in your income, but it’s never something you can count on.

Networking Heavy

Your paycheck is entirely dependent on your ability to find a buyer who wants to invest in the property you’ve found. Suppose you do not have the type of personality that does well with networking or negotiating. In that case, that is something you want to really consider before choosing wholesale real estate as your career. If you are unable to find a buyer, you may be financially obligated to purchase your property. As you build your references, this risk may be avoided. It’s still something you want to heavily consider if reaching out to a lot of people makes you uncomfortable.

Is Wholesale Real Estate Hard?

The short answer- yes. Wholesale real estate can be complicated when you’re first starting off and don’t have many connections. After you make your first couple of deals, things will start to get easier. You will begin forming a buyers list and have connections to pull from when you find properties under market value. The hardest part is having all three components in sync. If you are missing any of these three components, you will not have a successful wholesale real estate business. First, you must be able to identify properties being sold for well under market value. Second, you must have good negotiation skills to make deals with the seller. Lastly, you need to find and partner with cash buyers who are willing to purchase these properties. To be a successful real estate wholesaler, you have to build strong connections with buyers, create robust lead lists, and network with others in real estate.

Real Estate Wholesaling Explained

Wholesale real estate is a relatively simple concept once you lay it out in a scenario. Let’s start at the beginning of the process with finding a home for under market value. You find a homeowner looking to sell their home. The house isn’t in great shape and will not be able to sell for market value. The seller of the home has two options. They can spend the money to rehab their home and fix it up, hoping to sell for market price. Or, they could enter into a wholesale contract with a real estate wholesaler. Essentially, the contract between the wholesaler and the homeowner would give the wholesaler the right to buy the property at an agreed-upon price under market value. The real estate wholesaler will then look for an end buyer willing to pay slightly more than what they agreed upon with the seller. The end buyer is usually another real estate investor. The wholesaler will sell the rights to buy the house to this new investor. Essentially, they are selling the contract. They are not selling the home because they never bought the home. The wholesaler negotiates a contract, then sells that contract, which gives the buyer the right to buy the property.

Essential Skills to Become a Successful Real Estate Wholesaler as a Beginner

Real estate wholesaling comes down to a few key concepts. Once you capture these concepts, you’ll be able to succeed and start making a profit.

Negotiation Skills: Real estate wholesaling revolves around negotiating with both the seller and the buyer. For the seller, you have to convince them to sign a contract with you to sell the right to buy their home for under market value. Then, you have to convince an investor why they should be interested in buying your property. Having to convince one person is difficult, but convincing two takes some serious skills.

Technical Skills: If you are tech-savvy, you can quickly get ahead of your competition. Not everyone in the industry fully utilizes technology. If you take full advantage, you will become successful. Ensure you have a fast, modern website that makes it easy to get in touch with you. Develop a presence on social media and connect with real estate investors in your area. Utilize software to handle your finances, help you find properties under market value, and keep you organized. All of this will make a massive difference in your business.

Time Management Skills: You need to understand the value of your time and your own personal limits. If you take on everything all of the time, you’re going to get burnt out. This will not only affect your mental health, but it could also lead to errors in your business. Understand what you can personally manage, then outsource or delegate the rest.

Create Your Business Plan for Real Estate Wholesaling

If you’ve decided that wholesale real estate is the right next step for you, it’s time to develop a business plan.

Identify Good Places to Find Leads

This applies to both your real estate investors looking to buy and your homeowners looking to sell. If you can’t get leads, you’re not going to make any money in real estate wholesale. To find leads on homeowners looking to sell, utilize websites like Craiglist.com, Loopnet.com, Propertyshark.com, Realtor.com, etc. These websites provide tons of data that can help you find leads for your business. For leads on real estate investors, use your networking skills. Put yourself in real estate groups and places where investors will be and start making valuable connections. Establishing an excellent social media presence can also help you build rapport with other real estate professionals.

Build Connections with Buyers

Every time you complete a sale to a buyer, have a conversation with them about how you can be mutually beneficial to each other. Take the time to understand what they are looking for in properties they invest in. Keep a spreadsheet of all buyers you work with and what types of properties they buy. Reference this sheet every time you find a property that you can wholesale and pair it up with the buyer who it matches. This could take time but will build an invaluable relationship.

Do Your Research

Both your seller and your buyer expect you to offer them a well-researched and honest price for the property. For your seller, you need to give them a price along with information on comparable sales in the area, estimated cost of repairs, and the after repair value of the property. All of these numbers should be included in your offer to both the seller and the buyer. Do not try to edit the numbers to profit more. Sellers who see through this will be offended and cancel the deal. Buyers will have done their research and will know what you did. You’ll get a bad reputation, and the buyer will never want to work with you again.

How to Find Buyers for Real Estate Wholesale Deals

You can find sellers who have great properties under market value, but you will never make a profit if you can’t find any buyers. The more deals you make, the more buyers you’ll form connections with, and the easier it will get. Until then, you need to learn some strategies on how to find buyers when you are a wholesale real estate beginner. These are a few creative ways to find buyers when you are first starting out in wholesale real estate.

Craigslist

Craigslist is a great place to start when looking buyers. The site allows you to place ads and start collecting leads on interest buyers. Aside from that, you can use Craigslist’s “housing” section to identify property owners in the area who may not be ready to buy right now but could be valuable connections later on.

Social Media

Social media is a great way to find real estate investors in your area and connect with them. Sites like LinkedIn, Instagram, Facebook, and even NextDoor could be good places to start. Many investors have Instagram accounts where they post about their house flips or deals. Start building a connection with local accounts that could turn into buyers. LinkedIn is a great place to make business connections and post about potential deals. Facebook has lots of local real estate groups you can join; they also have Marketplace features that include real estate options. You can either post in those or look for leads later on.

Networking

Networking will be one of the most valuable things you do in your real estate career. If you are not already a member, join your local real estate group, either online or in person. Go to every networking event and meet as many people as possible. Mention what you do and ask around to see if anyone knows of real estate investors who utilize wholesale real estate in their businesses. You may also want to build connections with real estate agents, as they have access to lists of recent cash sales.

Website

Establish your presence online as a real estate wholesaler and optimize your SEO so that you rank well on Google if anyone searches in your area for wholesale real estate. Create a lead capture form on your website where potential sellers and buyers can submit their information.

Courthouse Auctions

Buyers must have all cash at courthouse auctions, so this is a great place to go if you are looking for buyers for your deals. Visit these auctions regularly and start to build connections with the people who attend. Get to know these buyers and the types of properties they look for so you can reach out if you find one that fits their needs. Ask for their information and follow up.

Important Things to Remember for Real Estate Wholesaling

Utilize Buyer Preferences

Every buyer has their preference of properties they like to buy. Once you know what your buyers are interested in, you can start prioritizing deals based on that. Keep a spreadsheet of all of their preferences and reach out to them when one of your properties align with their interest. Do not reach out to buyers with every single deal if you don’t to. If one of your buyers is not a house flipper, don’t have them a house that needs a ton of work. Utilizing your knowledge of your buyers will help you guarantee a sale.

Understand Your Seller

Although you want to get your properties contracted for a low price, you need to be fair to your sellers. While you may understand why you are offering them a specific price, if you do not communicate all of those reasons to them, they will not. When speaking, you will want to show them your reasoning without making them feel bad about the state of their property or the value it’s at. While this all comes down to numbers in real estate, it may be a much more emotional process for them. There could be other buyers communicating with them for all you know, so make sure you form a good connection during this process.

Another important aspect of your wholesaling real estate business should be transparency. Sellers need to know that they can trust you. If they know that, they’ll be much more likely to work with you. Be honest about them with pricing, risk, and updates.

Keep Everyone Up-to-Date

Your buyer and your seller will feel more at ease if you are transparent with them every step of the way. Make sure to communicate with both of them any time something new happens. Even if you did your part and got the contract handed over, stay involved until the end. These are relationships you may need to use in the future for more deals, so you want to make sure everyone feels comfortable and happy. Do what you can to ensure open communication and complete transparency throughout the entire process.

Maintain Connections

Your business with your buyers should not end when you get your cut. Always follow up with them to make sure they are happy with how things went. Discuss with them in further detail how you can be an asset to each other and continue to build your working relationship long after the deal is closed.

The Last Step: Closing the Deal

Once you have done all of the work to find the property, work with the seller, and identify an interested buyer, you are finally at the last step: closing the deal. To do this, you will assign the contract you made with the seller at the beginning of this process. Once you assign the contract to the buyer, they will then be able to purchase the property. Once the buyer purchases the property, you will send the deposit to the title agency or attorney handling the closing. After everything is complete, you will get your wholesaler fee for connecting the buyer and seller.

This can all sound like a lot of information and may appear to be very overwhelming. Although a lot goes into this, there’s a reason people recommend wholesaling real estate for beginners. It is the most affordable way to get invaluable real estate experience when starting off in real estate. You will build skills, knowledge, and connection so quickly through wholesaling. To get started on your real estate investing journey, check out our website.

Joe Arias

Joe Arias and his partners have flipped hundreds of properties in the Southern California Region. He has developed cutting-edge systems to simplify and scale the entire remodel process that can easily be applied to flipping, rentals, wholesaling, and other passive income strategies. More recently, Joe founded a real estate investing education company called RealSuccess Investments, allowing him to share his tools and systems with hundreds of up-and-coming investors. 

RealSuccess is focused on education on flipping, rentals, passive income, and wholesaling.

Joe is also a best-selling author. He has written 4 books: Finding your RealSuccess, First Steps to Flipping, R stands for Rentals and Retirement, and Wholesaling Real Estate.

“I came from Argentina when I was 20, I am 40 years old now. I didn’t know anyone, I am CERO generation, usually people say, I am first or second generation but I was the one that crossed the border, no language, no friends, no family, no money, nothing, nada… If I can do it, anyone can.”

From a young latino immigrant  to a celebrated real estate investor, Joe is a true testament to hard work and discipline. As an investor, he has made it his mission to help others achieve financial freedom while enjoying living a life of passion, fulfillment, and empowerment.

RealSuccess Website

www.ourrealsuccess.com

Personal Instagram: 

https://www.instagram.com/joeariasinvestor/

Real Estate Investment- Instagram: 

Instagram: https://www.instagram.com/realsuccesseducation/

Video For Finding Money from All Day Training (10 Hour Seminar)

https://vimeo.com/manage/videos/528446162

1 Hour Webinar

https://vimeo.com/manage/videos/530996751

Amazon Book#1:

Amazon Book#2

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Real Property Easements, An Overview. the Purpose & the Risks? (Part 1)

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Image from Pixabay

By Dan Harkey

c 949 533 8315 e [email protected]

This overview of real property easements has relevance to property owners, real estate agents & brokers, mortgage agents & lenders, insurance agents & brokers, escrow officers, and title insurers.

What are real property easements?

An easement is a non-possessory right conveyed from one property owner (#1) to another property owner (#2) to use, enter, or cross over a parcel (or a portion) that is owned by the party (#1). Non-possessory means that party (#2) possesses a right to use, enter, or cross but does not own or have no property ownership claims. claims of ownership to the property.

A non-possessory interest in a property restricts its free use because it is an encumbrance on the property. The non-possessory interest (easement) is generally recorded against the property in municipal public records and serves to cloud the title.

There are two types of possessory interest: freehold and leasehold estates.

Fee ownership Interests are generally subject to certain easements such as utilities and public rights of way.

“A public right of way easement gives the public or organization the right to access and use property in specific situations for limited purposes. A right of way is an easement that established the freedom to use a pathway or road on another person’s property without conferring ownership.”

Easements generally run with the land into perpetuity (for all time) unless expired or canceled by the parties. They may be expressed, implied, by necessity, or by prescription.

https://www.forbes.com/advisor/mortgages/what-is-an-easement/

https://www.lorman.com/resources/easements-in-california-creation-of-easements-16986

https://www.clta.org/page/article6/A-Legal-Introduction-to-Easements.htm

What are reciprocal usage easements?

Reciprocal easements are non-possessory interests conveyed between two or more property owners. An agreement establishes the terms for easements, restrictions, and covenants between two or more different parties. The agreement is mutual between two or more parties to benefit each other, usually equally.

Using the example above, property owner (#1) may use the owner’s (#2) property. Reciprocally owner (#2) may use the owner’s (#1s) property. You scratch my back, and I will scratch yours for mutually beneficial purposes.

https://www.davis-stirling.com/HOME/reciprocal-easements-defined

What are reciprocal easement agreements?

Image from Pixabay

https://www.coxcastle.com/news-and-publications/2013/fall-2013-retail-perspectives-newsletter/understanding-reciprocal-easement-agreements#:~:text=Typically%2C%20reciprocal%20easement%20agreements %20(%22,as%20an%20integrated%20shopping%20center.

https://www.contractscounsel.com/t/us/reciprocal-easement-agreement

Consider two adjacent commercial parcels, each with 20,000 square feet of land. One land parcel has a local grocery store, and the other has a restaurant. The owners structured a reciprocal easement agreement to allow both parcels to provide entry to commercial supply trucks and for parking. With the building footprint, required setbacks, and parking, there is not enough room for large trucks to deliver supplies without overlapping parcels.

What are prescriptive easements?

Conflicts and litigation may arise to prove what may be referred to as claimed rights to pass over a property. A “prescriptive easement” is a “claim of possessory right to pass” across another person’s real property that was acquired by continued use without permission of the owner for a legally defined period. Usually, a claimant has the burden of proof of the elements necessary to establish that the easement has been created over time by prescription (California Code of Civil Procedures 321). In California, a claimant is required to adequately prove that they have possessed the prescriptive easement by continuous use for at least five years. Other states have similar regulations.

The statutory time for prescriptive easements varies from state to state. Each claim is fact-specific, with the possibility of winning some and losing some. Proving the claimant’s rights can take time, resulting in litigation and being fraught with the risk of losing. All this frustration could have been avoided with well-documented agreements.

The issue of exclusive vs. non-exclusive easements must also be proved-up. Will the easement run with the land and bind all future owners? In California, 2d 872 (2002). California Civil Code 1104 provides that a transfer of real property passes all easements attached thereto.

There are many types of easements for dozens of different purposes:

https://en.wikipedia.org/wiki/Easement

Are easements transferable from one party to another?

Image from Pexels

Most easements are recorded and are a matter of public record. When a property is transferred to another party the easements are transferred and remain on title. An easement generally remains with the property.

https://www.findlaw.com/realestate/land-use-laws/easements-and-transfer-of-land.html

Why should property owners, real estate brokers, and lenders make such a big deal about easements? What’s so important?

Owners, realtors, and lenders should be aware of the vast reservoir of property usage limitations caused by property easements limiting property usage and reducing a property’s development potential and value.

“Easements are like having a giant network of squid-like tentacles on your property that you can’t touch, see, or hear but had seriously better handle. Failure to deal with each easement (tentacle) could result in catastrophic consequences, including diminished property value and limited or total inability to develop the property.”

Easements are clouds on the title. An easement is an encumbrance against a property referenced by agreements and claims to enforce rights and obligations. Whether recorded or not, the easement still reflects a clouded title.

When a realtor or lender drives up to a property, they may admire the beauty and tranquility of the setting. The home elevation, topography, floorplan, panoramic views, and hardscape are outstanding. The property location may be the best. Selling the sizzle is appropriate but limited to the realtor’s spectacle performance and buyer’s immediate response. But there is a large prohibitive easement for a neighborhood storm drain running across the yard where the purchaser planned on placing a nice swimming pool. They were not disclosed of the storm drain easement.

Legal risks for an agent may be devastating. “I am the buyer’s agent. I did not read the preliminary title report, ask the title company for copies of all easements, nor ask them to chart out all easement placements on the property.” But the buyer’s confession that they did not read the preliminary title report does suggest a breach of fiduciary duty and constructive fraud. Failure to disclose was felony stupid.

Image from Pexels

“Constructive fraud comprises of any act or omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another, even though the conduct is not otherwise fraudulent.” Salahuddin vs. Valley of California, Inc. (1994).

Constructive fraud means that fraud was created because any reasonable real estate fiduciary should possess this knowledge or know about these facts/circumstances. Failure to disclose constructive fraud.

What lurks underneath the ground is a web of easements that limit land usage, building size, and economic feasibility, inhibiting overall value. A 100,000 sq ft parcel may only have 10,000 square feet of a buildable pad because of restrictive easements.

A 20,000-square-foot property that appears to be worth $100 per foot, but 80% has limited use because of restrictive easements. Only 20% of the parcel is buildable. A buyer may not be willing to pay $100 per square foot for 20,000 of land when only 4,000 square feet are buildable.

Risk and liability flash red for the principal parties and their agents:

Image from Pixabay

Knowledge is the key. On any transaction, the parties should obtain a preliminary title report, obtain written copies of all easements, and request a survey performed by the title company to determine survey boundaries and potential adverse effects on the property. An appraiser will be interested in the results.

Principal buyers and their agents will decide what easements are appropriate and acceptable and what easements are not. Accepting the property as-is, renegotiating the price, or outright rejecting the purchase are possible options.

History:

Image from Pixabay

Many buildings that were constructed in the earlier part of this century, before the 1960s, lacked adequate parking and, in most cases, lacked formal agreements about common on-site usage for ingress/egress for walking and automobiles. In property law, ingress/egress refers to the rights of a person to pass over a real property for entry, leaving, and return across the property.

Familiar transportation sources were walking, bicycles, horseback, and horse-drawn carriages. Building growth clustered around the center of town was standard. The advancement of the automobile, which made transportation more flexible, had not yet matured. The requirement for expanded parking areas had not matured.

In days gone by, two or more property owners might verbally agree that they would build adjacent buildings and use a small portion of one of the land parcels for ingress/egress, as oral agreements tend to do. Many old verbal agreements have gone wrong, as oral agreements tend to do. Handshake agreements broke down, and conflicts arose with future ownership. Problems also arose when descendants and partners disagreed with the interpretation and or benefits of the original verbal easement agreement.

https://www.findlaw.com/realestate/land-use-laws/express-and-implied-easements.html

Municipalities, property owners, and lawyers began memorializing the agreements in written form. At the same time, the creation of municipal planning departments and zoning ordinances came into being. Owners were then required to hire civil engineers to draft a written placement of physical easements and obtain approval from the municipality. It is common practice to hire a land planning lawyer to handle the application process for various approvals with the respective city planning department.

Upon approval by the city, the agreements and drawing of physical placement of the easements encumbering the property were generally recorded in public records. The objective was for the recorded agreements to provide public notice that the easement existed and would bind all future owners in perpetuity.

Many older structures were built prior to creating and enforcing building and zoning ordinances. Zoning ordinances were adopted in California as early as the 1920s and have continued to evolve. Prohibitions related to setbacks, height & density restrictions, floor area ratios, required parking, deed restrictions, necessary amenities, and acceptable building materials all have occurred over time. Laws have been passed that now control aspects of ownership.

(to be continued…)

This article is an overview for a general educational purpose only. The information presented should not be relied upon without the advice of counsel.

Dan Harkey is a contributing author to Weekly Real Estate News and is a Business & Financial Consultant. He can be contacted at 949-533-8315 or [email protected].

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Risk Associated with Selecting Third Party Vendors

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By Dan Harkey

Where does risks begin in commercial real estate lending business?  It begins with your process of hiring highly competent third-party vendors.  Your job is to assemble the most qualified real estate support professionals to eliminate costly mistakes and to ensure the best quality closing.

This includes service providers who originate new loans, process, underwrite, appraise, and eventually close the transaction. This sounds like a broad statement since the process also requires your participation in marketing, to procure the transaction.   Your competency is displayed throughout the process by understanding the borrower’s wants and needs, the loan programs and requirements, property types and characteristics, underwriting skills, geographic locational differences, government regulations, and then hiring professional service providers to match.

  1. Appraiser(s)

It is your responsibility is to identify a well-qualified, licensed, and insured appraiser who is familiar with the geographic location and property type, and various methods of valuation. Hire someone who follows the requirements of Uniform Standards of Professional Appraisal Practice (USPAP). USPAP can be considered to be the quality control standards applicable for analysis and reports for appraisal of real property, personal property, intangible assets and business valuations in the United States and its territories.  A state licensed appraiser must adhere to USPAP standards.  USPAP provides the body of knowledge and performance standards for the appraisal process as authorized by the US Congress (this was part of FIRREA in the early 1990’s and arose from the Bernard Amendment). As noted above, this legislation contains standards for all types of appraisal services, including real and personal property, business enterprises.  It is reviewed annually and revised and updated every two years.  The Real Estate Broker/Mortgage Loan Broker must establish that the appraiser is qualified by license and specific certification to accept the assignment and must be sure the appraiser is state licensed for the type of required appraisal.   This is a mandate by the Bureau of Real Estate Appraisers in California and their equivalent in all states and required in California pursuant to Business and Professions Code Section 10232.6.  In most cases the appraiser must also be approved by or acceptable to the lending source.

The first document you will use is an “order form”, which will document the type of appraisal, by whom and when the appraisal will be paid and “what parties rely on the appraisal”.  If you, as a mortgage broker/lender, are acting as an agent on behalf of private investors/lenders who intend to fund the loan, or you intend to sell or assign the loan following funding the loan with our own capital, then the appraiser needs to be informed that the private investors/lenders have a right to rely on the appraisal report.

You must identify all intended users of the appraisal report or you need to specifically direct the appraiser as to whom the report should be addressed.  To comply with appraisal standards and requirements, and depending on property type, the appraiser will typically conduct a rent survey and an absorption study and will additionally research various market rates for additional indicators such as capitalization rates and discount rates to establish market conditions applicable to a subject property.  In appraising the property, the appraiser typically will research market rents for the property type, research market rent trends in general and analyze historical lease-up or absorption rates for the subject property type.  Depending on the type of subject being appraised the appraiser may also need to include personal property value or may find that the appraisal requires a going concern valuation for an operating business wherein there may be additional value elements such as FF&E, good will or intellectual property.

Choosing an appraiser for a federally insured home loan differs.  It is important to note that neither mortgage brokers, loan officers nor homeowners may select the appraiser for the property on which they want to lend/borrow such funds.  At the current time all such appraiser selections and appraisal orders are handled by Appraisal Management Companies (AMC’s).

“Assumptions and Limiting Conditions” are sometimes thought of as the “legalese” or “boilerplate” of appraisal reports. The “assumptions” relate to the concept of scope of work identified in the appraisal process. The appraiser will lay out in writing assumptions such as the correct legal description, that the zoning is correct for the property use and that the information furnished is true and correct. A “limiting condition” is one that limits the use of the appraisal, primarily by specifying the use and intended users of the appraisal report. That is, who may rely on the contents of the report. However, each assumption or condition must be reasonable and supportable in the context of the appraisal, and not conflict with the “Extraordinary Assumptions or Hypothetical Conditions.”

It is important to review the appraisal section, “Extraordinary Assumptions and Hypothetical Conditions”. This means the appraiser has taken some action or used a method that departs from USPAP standards. The appraiser may have made assumptions that could render the appraisal of little or no value by following outside standards. You may find this when the property is zoned incorrectly for the neighborhood or the property’s intended use, or when comparable are extremely difficult to locate. Some examples of extraordinary assumptions may be: whether all entitlements are complete for a construction project, there is adequate absorption for lease up, that the building conforms to zoning and usage ordinances, that the property construction will be completed timely and on budget, and that there are no environmental concerns.  The appraiser may need to invoke certain hypothetical conditions under some directives by the client.

Extraordinary Assumptions are specific assumptions made and utilized in the development of the estimate of value and which, if found to be false, could alter the resulting opinion or conclusion.  Hypothetical Conditions are assumptions made which are known to be contrary to fact, but which are assumed for discussion, analysis or formulation of opinions.

As a final comment, it is important that you read the entire appraisal. There are issues such as the amount of area vacancy, the applicable capitalization rate, and a discussion regarding verification of zoning or permits that you may want to personally verify. These are not always clear in the first reading. For example, the area vacancy and the application of a capitalization approach may be different in Riverside, CA. than in Newport Beach, CA.

  1. Documentation/ Legal Counsel

I have combined these two together for this reason, some lenders farm out their legal documentation preparation to a third party. Since it is the lender who is responsible for state and federally required documentation, a third party legal counsel or knowledgeable consultant is advised.

Commercial lending is sometimes characterized by loaning to entities such as trusts, corporations, limited partnerships, and limited liability companies. There is a required technical understanding of the laws relating to these entity types, and the documentation differences that each will require. There is another matter of the issue of lien priority. Documentation complexity can be compounded when the issues of lien priority and tenancy are added to the mix. Your borrower may own a property in a family limited partnership, occupy the same property as an operating business which is a corporation, and have other unrelated tenants, who may also own their businesses in different forms of entities.

  1. Escrow Companies

All escrow officers are not alike. A competent, experienced, and highly technical escrow officer is a must. Escrow acts as an intermediary and dual agent, between the principal parties to ensure that instructions and agreements are carried out correctly. The lender’s final closing instructions to the escrow officer should summarize all the conditions that have been met and under what conditions he/she may close the transaction, using the correct title insurance policy and endorsements in place at the recording to ensure lien priority.

  1. Commercial Real Estate Broker(s)

In metropolitan areas, finding a real estate professional who has the background, knowledge and experience of the product type and geographic area is a matter a good referral or inquiry. If the subject property is in a sub market or a rural market, the time should be taken to locate a broker on the front end while the loan transaction is being processed. Brokers in these areas tend to be generalists who list and sell whatever kind of real estate is available. Your job is to locate that one broker who has the specialized skills you may need.

  1. Environmental Engineer

As a lender you have the option of a quick public records search to identify any properties around the subject that may have used contaminants which could affect the property or that would call attention to the need for further inquiry. An example, a data base in California is the State Water Resource Control Board is known as a “Geotracker”. The lender also has an option for a limited phase I, or full phase I to determine whether the property contains or has ever contained identifiable contaminants. The environmental engineer will report that information and will comment on how it may affect the desirability and salability of the property. For properties built before 1978 the issue of asbestos arises. Also lead based paints were commonly used in construction before 1978. Today, the common approach is to do nothing about asbestos or lead based paint if it appears that they are contained or sealed. Adverse findings by the environmental engineer may lead to the need for soils borings, a phase II, or a phase III. Some properties are purchased with the knowledge there is known environmental issues, and that the purpose of the loan may be for mitigation.

  1. Credit report and credit reporting agency

Very little needs to be said about credit reporting agencies. They all use the same data bases to accumulate the historical credit background of a borrower. However, Real Estate Brokers who make or arrange loan transactions in California are subject to 10232.5 of the Business and Professions Code which consists of a summary of disclosures and requirements to investors who may purchase a portion or all the trust deed investment. Section 10232.5 subsection (4) states that the Real Estate Broker must provide the “identity, occupation, employment, income, and credit data about the prospective borrower or borrowers as represented to the broker by the prospective borrower or borrowers”. This is easy to comply with when the borrower is either an individual or a seasoned entity with years of financials, history, and credit. A standard credit report should provide all the information you need. However, loaning to an entity newly formed for the sole purpose of purchasing or holding a property creates an additional question. Do you need to run a credit report on the entity knowing that nothing will show up? The answer is “yes”, and as an abundance of caution, you should also run a credit report on the individuals who created the entity.

  1. Property Inspection/Property Condition Assessment

Some lenders will require a property inspection by a third party who is trained in that field. The Property Condition Report (PCR) is used by purchasers and lenders who take property back in foreclosure, as part of the assessment of value for resale and limiting liability on resale. These reports tend to be very detailed and may require several specialists to evaluate the various components of the property, both real and personal. The process can be expensive costing from $20,000 to $100,000. This form of third party assessment is rarely used in private money loan transactions because of the nature and purpose of the loan request. Limited condition assessments may be available for much less expense.

There are many risks associated with commercial real estate lending, many of which will be written about in subsequent articles. None, however, quite rise to the level of the need to use highly competent and highly skilled third-party vendors. You are the one who has the option to search and hire the most professional vendors. You, your company, and of course your investors, will also be stuck with the results if substandard vendors are used.

Don’t Leave Thousands on the Table at Closing

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By Kathy Kennebrook (The Marketing Magic Lady)

One of the things that never ceases to amaze me in the real estate business is how many investors leave hundreds or thousands of dollars on the table at closing due to errors in the closing documents. This is an area where many investors need to be educated. Many times investors get excited about the bottom line and forget to check the figures on the documents.

It is a mistake to assume that the HUD or closing statement is correct or that the closing documents are correct. The person preparing the closing statement can make mistakes. In addition, the person preparing the closing statement and documents is using figures that they have acquired from other people who could also make mistakes, such as the insurance company, the Realtors, the lender, home inspection service, or the surveyor.

You need to take the time to read all the documents carefully before closing on any deal. I have personally seen errors on the HUD at almost every closing I have ever been part of. Many investors only look at the bottom line and think “yes that’s enough money” but they fail to look at the whole closing statement, and in doing so possibly leave thousands at the table. I just had a closing take place recently where there was a mistake of a thousand dollars on the HUD. They put one of the buyer’s expenses on my side of the closing statement. I don’t know about you, but I think a thousand dollars is a lot of money to leave behind when you are entitled to it.

If you are looking at a closing statement and you aren’t sure why a figure is there, ASK the closing agent or attorney what it is and why it’s on the closing statement. It’s their job to make sure things are done correctly and all the figures are on the right side of the statements at a closing. Until I thoroughly learned the real estate business, I questioned every closing statement I looked at to make sure there were no mistakes.

There are some areas in particular that should be checked thoroughly. If there is a Realtor fee, make sure the percentages are correct and the payment amount to each Realtor is correct if more than one Realtor was involved in the deal.

Make sure you check the per diem interest to make sure this figure is calculated correctly. There are programs online that can help you with these calculations. I recently had a deal where I was the lender and my borrower was paying me off with the sale of the property to a buyer. When I received my check for the payoff on my note, I had been overpaid by $750.00. The per diem interest and pre-payment penalty had been calculated incorrectly. Had I not caught the error and written a check to my borrower, he would never have known there was an error. His mind was on nothing but the bottom line and he left at least $750.00 at the closing table. Compared to big checks, these may seem like small amounts, but multiply these amounts by how many closings you will do over a period of just a year and it adds up quickly! If it’s your money, you are entitled to it.

Make sure that the figures on the HUD from the insurance company, termite inspection, home inspection, survey, realtors or any other fee that should be carried to the HUD are correct. There have been many times when these figures were either incorrect or there were fees on the HUD that I had already paid out of pocket before the closing. If there are home owner association fees, make sure the pro-rated amounts on these are correct. If there is a home warranty to be paid for the buyer, make sure it shows up on the closing statement. These are all errors I have personally experienced on closing statements.

Check to make sure that the pro-rated property tax figures are correct on the HUD and appear on the correct side of the HUD. If you are due pro-rated taxes from your seller, make sure they show up as a credit on your side of the HUD. If you owe pro-rated taxes to a buyer, make sure these show up as a credit on the buyer’s side of the HUD. If there is a new loan amount or a payoff figure from a lender make sure these figures are correct. Make sure that any pre-payment penalties have been properly credited or charged. If you are paying off a mortgage, also make sure you are not charged a pre-payment penalty when none is due. This is another error I recently encountered on a closing statement.

There are other areas where I have frequently found errors so make sure you check your documents carefully before the closing. It’s much easier to deal with problems at the closing table than have them show up later and have to be corrected. If you are assisting a buyer with closing costs, make sure they don’t charge you more money in closing costs than they are entitled to. If you are assisting a buyer with closing costs and you see a big pay day on their side of the HUD, you need to open your mouth and protest it. Most lenders will not allow a buyer to take any more than 500.00 away from the closing table, especially when it is your money. If there is money left over from seller assisted closing costs, it should be credited to the seller who assisted with closing costs. It shouldn’t result in a big payday for the buyer.

Make sure you also check loan documents carefully. Check the interest rate, the balloon date and amount, and the amount of the note. I had a note and mortgage just recently where I was funding the deal for the buyer and the payee of the note and mortgage was the seller instead of me. They also had the balloon date wrong on the note. It showed a ten year balloon instead of a one year balloon because someone accidentally added a zero.

If there is an interest only payment to be made each month, make sure this is clearly stated in the note and mortgage. Also make sure that terms for late fees are clearly stated if you are the person holding a note for your buyer. Make sure names and addresses are correct and spelled correctly. Make sure you get an amortization schedule whether you are the mortgagor or the mortgagee. This is the best way to track a loan.

All of these are important points to check before any closing occurs. Don’t assume the title agent or attorney will catch the errors. They do many closings each day and they usually are unable to catch every mistake. In addition, very often the title agent or attorney is transferring figures they got from other people such as the Realtor, the lender or the insurance agent so they my not be aware that these figures are incorrect. It’s your deal and your closing, make sure the documents are correct so you don’t leave thousands at the closing table or create title problems later that could have been solved at the time of the closing of the deal.

Make sure all the documents that are to be signed and notarized are done properly. Make sure social security numbers or Tax ID numbers are correct on the 1099 so you are taxed correctly. I just recently had a closing where they put my social security number on the 1099 instead of the corporation that was supposed to absorb the income from the sale of the property. These are all real errors that occur all the time. Make sure you protect your interests when closing on properties whether you are buying or selling or simply holding a note so you don’t leave thousands on the table at the closing.

For more information on all the tools you need to find deals and automate your real estate investing business, visit my website at www.marketingmagiclady.com. While you are there be sure and sign up for my free monthly newsletter.

 

Just DO It: BE the difference you want to make

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By Karen A. Walker

You want to make a difference? Start by BEING the difference. And if you’re serious about being the difference, start with trust.

Famed leadership consultant Stephen R. Covey said it best: “Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.”

John Aaron and Gene Simmons, co-founders of Florida-based Prestige Executive Funding, have each independently put mutual trust and the strength of honoring their word primary in their real estate and lending relationships long before they partnered together to better serve their sophisticated clients.

In fact, trust is so fundamental to everything they do in business that it’s second nature to them, and to their team. 

Trust is an integral part of every transaction in which they participate, regardless of client sophistication, background or anything else…. that is, regardless of anything else except the equal trustworthiness of their clients and their arrangements.

Noteworthy

This year, at age 29, John Aaron was featured in Forbes magazine’s “30 under 30” highlight.   He achieved consistent success in the fix and flip marketplace with, according to Forbes, more than $100 million in residential properties purchased and flipped at the time of the article.

Gene Simmons, co-founder and co-president of Prestige Executive Funding, says Aaron has about 80 properties in his portfolio at any given time. Parlaying his residential fix and flip success into the commercial arena, Aaron is also purchasing large commercial apartment buildings, developing modern waterfront properties, condominiums, hotels and retail properties.

But Aaron would rather DO it than talk about it.  He’d rather lead by example than tell you what to do.

For Aaron, his early character traits and principles of good business remain the same as they did when he first started: Focus, Integrity, Quality, Consistency, a lot of Hard Work, and Giving Back.

Just for the record, Giving Back is a core motivator for Aaron.  Years ago he launched a nonprofit foundation and, as Simmons describes his young, motivated and sharp partner, “Aaron is always doing stuff for the community.  He’s at soup kitchens a lot and helping homeless and those in need. He likes going into an area, purchasing retail and bringing much needed jobs and opportunities into areas where people are struggling. He does at least five major service-oriented events a year. That’s a big part of who he is.”

New York to Florida

Gene Simmons comes from the other side of the real estate development and investment business; the lending side.  Originally from New York, he relocated to Florida years ago.

At this point in his career, with more than 20 years experience in mortgage and loan business, he’s seen his share of ups and downs in the industry.  He’s also seen—and chosen to live by—the timeless principles of good ethics and honoring one’s word, regardless of what this or that other lender is doing.

Those principles have served him well, even through some wild years for some sectors of the lending industry.  But Simmons never veered from his core path of excellence in service, good ethical practices, and high-quaiity loans.

For Simmons, it’s not solely about the money or the profit.  He takes a longer view.  For him, it’s always been about building solid, trustworthy and valuable, long-term relationships with his clients.  This makes his partnership with Aaron a solid one.

Early mentors

Both Aaron and Simmons know their area of expertise so well that they practically could do it, excellently, in their sleep.  But when you talk with either of them about their beginnings, they are each quick to point out excellent mentors in the beginning of their careers.

For Simmons it was an early boss in the loan business.  The man was renown for not only his nimble and creative loan solutions, but also, and more importantly, for the ethical way he did business. Every. Time.

For Aaron, it was a real estate investor guru. Again, this mentor was bold, challenging his mentees and always available when a student needed help. Above all, he was ethical to the core, and Aaron valued that.

But mentors without students who are willing to follow the advice of their mentor yields no fruit.  The students themselves have to be willing to DO what they are challenged to do, even if it is out of their “comfort zone” and doesn’t seem to make sense at first. 

Both Aaron and Simmons were willing to take those newbie leaps of faith, to take advised action, to “just do it,” but only because of the high level of proven trust they each had for their early mentors.

Now they, in turn, are trusted guides for their team, for each other, and for their select clientele.

Customized Solutions

“Each deal we do is customized,” says Simmons, whose first-hand, creative, ethical funding examples lie ready for sharing when the need arises.

“We are a full service commercial lending source,” continues Simmons, who often recognizes ethical, creative financial solutions that are unique for each client’s situation long before others even—if ever—figure them out.

“Our staff has over 30 years experience and are able to structure financing requests in just about every aspect of commercial lending. We cater to Corporate Executives, Music Industry Executives, Entrepreneurs and Professional Athletes as well as Entertainers and Actors from Television and Film. We pride ourselves in being extremely competitive and honest . We work closely with our more than 100 institutional relationships in order to meet our client’s customized needs, and to guide our clients every step of the way.”

Prestige Executive Funding primarily serves sophisticated clients since they are capable of, and truly enjoy, providing customized, sophisticated solutions that create exciting win-win-wins for all parties, including the local community.

Summary

In sum, Prestige Executive Funding (FundMePrestige.com) finances and provides a wide scope of investment opportunities and solutions, including Office, Industrial/Warehouses, Multifamily, Mixed Use, SBA, Lines of Credit, International, Churches, Equipment Financing, Factory, Hotels/Motels, Hard Money Loans, Private Equity Mortgage, Bridge Loans, and Development Financing.

What do you call any partnership with two trail-blazing, ethical real estate investing and lending entrepreneurs? Unstoppable. Successful. A win for all parties.

Put a more practical way, Prestige Executive Funding provides access to institutional capital, family office funds, and direct private money for funding all types of real estate investments. Lending in all 50 states. Up to 90% LTV, Prestige Executive Funding represents a group of investors who have financed more than two billion dollars worth of loans nationwide. Loans from $1 Million to 100+ Million.  Learn more at www.FundMePrestige.com.

12 Steps to the Closing Table and the Big Check

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By Kathy Kennebrook (The Marketing Magic Lady)

Okay, so your property is under contract, you’ve pre-qualified your prospect; they are working with the lender and everything is moving right along, right? Not necessarily. There are several steps to a successful closing and we are going to cover those one by one. Now remember, once you have your dream team in place, you will have the people available who will handle all of the details for you. In the meantime, you still need to know what all the steps are so you know everything gets handled properly.

  1. Make sure you get a big enough deposit from your buyer so they have some real dollars invested in the deal. Even if they are going for one hundred percent financing I still get as much as I can in order to secure the deal better. If your buyer puts down a larger deposit they are usually more committed to going through with the closing, so this is a requirement for me. I won’t even consider a deposit less than $1,000.00, but I always try for as much as I can get. The higher dollar the property is, the more deposit I require.
  1. Make sure that the lender or the mortgage broker orders credit and an appraisal on the property immediately. Usually, I will not consider a buyer who has not already been pre-qualified, so usually the credit check has already been done. Many lenders will try to wait until they get the contracts and other paperwork in before ordering the appraisal. This is a no-no. If you wait on the appraisal, it can hold up your closing by two to three weeks. Plus, if this buyer doesn’t end up buying the property, the appraisal can be used for the next buyer. Most appraisals are good for six months and now you have an appraisal that has already been paid for.
  1. Follow up with the loan processor to make sure the appraisal has been ordered and that the other parts of the closing are moving along. Many times your title agent or your Realtor or your sales person will do this for you, after all they want to get paid too. Make sure they have everything they need from the buyer regarding loan documentation.
  1. Follow up and make sure that title work has also been started. You want to make sure that everything is done in a timely matter so that there are no holdups when you go to close. Every once in awhile you may discover some small glitch in the title work that needs to be addressed, such as a deed that wasn’t done correctly. There would need to be an additional quit claim deed done to correct the mistake. Make sure the title agent understands the contract paperwork and what entity the funds are to be paid to. You also want to make sure they do the 1099 correctly so the right entity gets taxed. You will also want to provide the title company with a copy of the existing title policy. This means that they will be able to come forward from the date of your policy which takes less time and this may make the title search cheaper. Make sure the title agent understands who is going to pay for what regarding closing costs.

  1. Call the loan processor to make sure the property appraised for at least the amount of the contract. Make sure your buyer has ordered a termite inspection, a survey, a radon inspection or whatever else is required by the lender in order to close. Is there anything you can do to move things along? If you have a copy of a fairly recent survey, you can provide a copy. This will also save time and move you closer to the closing. Has your buyer’s deposit been credited? Have they gotten the paperwork they need to the lender including employment verification and rental history? These are all things you need to stay on top of.
  1. If your buyers are using city or county funds to supplement their loan, there will need to be another inspection done by the city or county. This is a stipulation of their program. Make sure this gets done quickly in order to address any issues that could come up with the inspection. If your buyers are having a home inspection done, make sure it is done right away. Not getting it done in a timely manner can hold up your closing.
  1. Does the lender have your information in order to be able to order a payoff on any underlying loans on the property? Have they received the payoff yet and have you reviewed it to make sure it is correct? Don’t just assume that just because they have been given figures that those figures are correct. Make sure they fax you a copy of the payoff for you to review. Double check the per diem amounts and make sure you aren’t being charged a prepayment penalty if there isn’t one due. Make sure the most recent payment has been credited against the amount due. These are problems I have had to deal with. If the loan is with a private lender, sometimes it takes even longer to get a payoff from them. Some of them don’t know how to prepare one, so they need the help of the title company or their real estate attorney for this. This is also the time you might be able to negotiate a discount with them. This works especially well if it was a seller held mortgage. We have gotten private lenders and sellers to negotiate discounts on loans on several occasions which just made our paycheck bigger.

  1. Has the buyer’s loan been approved? If not find out what the problem is and how to fix it if it can be fixed. If the loan has been approved find out what the proposed closing date is going to be. Has your buyer ordered insurance yet? You need to check this out and it needs to be done as soon as possible. This is another area where you could have a glitch. Sometimes the age of the property or the location of the property becomes an issue. For example, here in Florida where I live, if there is a hurricane brewing, we end up in a “box” which is a period of time where you can’t buy insurance until a hurricane passes. This can hold up a closing for several days unless the insurance is already in place. A buyer must purchase a homeowners policy for one year and it must pre-paid at closing.
  1. If you are selling a condo or a home with a home owners association, make sure the lender and the buyers have a copy of the home owner association rules and documents and that the buyers have set up their appointment for their meeting with the condo association or home owners association. If they are not approved by the condo association or homeowners association, the rest of the closing is a mute point. You need to make sure your buyer’s get through this process successfully.
  1. So now we have a set closing date. Make sure you contact the closing agent to make sure you get a copy of the HUD or closing statement before the closing takes place and before you arrive at a closing. Very recently we had a closing that didn’t take place because once we got the HUD all the figures including the asking price and seller assisted closing costs had all been changed. The closing price listed on the HUD was several thousand lower than the contract had called for. I have never seen anything like it and the deal never closed. Check the numbers! If there is a Realtor fee involved make sure the percentages are correct. Check the pro rated amounts you are being charged for property taxes or association fees. When you close on a property during the year, say in June and property taxes are due in October; you have to reimburse the buyer for the property taxes from January until the closing date in June since they didn’t own the property during that time period. The same would go for any association fees there might be. You will have to reimburse the buyer for the period during the month that they did not own the property. Double check to make sure these figure are correct. In my contract, if we are assisting the buyer in any way with closing costs, the buyer can’t walk away from closing with more than five hundred dollars. So this is another figure we check. Any amount over the five hundred dollars is credited back to our side on the closing statement.
  1. Call your buyer and make sure they have gotten a cashiers check for any monies they have to bring to closing and make sure they know where it is and what time the closing takes place. Make sure they bring a photo ID with them. The lender will require this. Believe me when I tell you that these are all lessons learned from experience.

  1. Now, Show up at the closing and don’t forget to bring the keys or garage door openers. Take several deep breaths and try to relax. Once you get through the closing take another deep breath, call your spouse and go out to dinner to celebrate.

Here is another point for you to consider. In my business, it is rare that I go to closings anymore since the whole closing process is outsourced. The funds from the closing are directly wired to an account for us so we get paid right away.

If I do go to a closing, I don’t go at the same time as the buyers. I usually go right after they are done with all their paperwork. The paperwork on a closing for a buyer is fairly time consuming and needs to be explained to the buyer by the title agent. I don’t like sitting at closings for an hour or more until I need to sign my documents. If you have done your due diligence and followed all the steps in the closing process, there isn’t really anything that can go wrong at the last minute, so breath easy but expect the worst.

Then when you get through the closing, cash your check or make sure your wire has arrived and go to dinner to celebrate!! For more information on Real Estate Investing tools and Marketing to Find Motivated Sellers, Buyers and Lenders visit Kathy Kennebrook’s website at www.marketingmagiclady.com. While you are there sign up for the free Monthly Newsletter and receive $149.00 in real estate investing tools absolutely FREE!

Approaches To Real Estate Negotiation

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By Bruce Kellogg

Introduction

Negotiation, unfortunately, is not taught much to real estate professionals, or to investors. International, corporate, and purchasing courses exist, even to the extent of Master’s degrees, but real estate has not received the same coverage. This article aims to help that.

Start Out Early

Negotiations begin at the first encounter (e.g., phone inquiry). Many people think the initial pleasantries are just that, and the formal negotiations will begin later. Not so. The superior negotiator will have already begun gathering information and setting expectations. Start early so you don’t have to catch up.

The Three Elements

There are three elements to any negotiation: 1) Information, 2) Time, and 3) Power. These will be described below.

Gather Information

The negotiator who gathers the most information usually has an advantage. Interview people, obtain reports, do inspections, use the MLS (Multiple-Listing Service) and other online resources. Hire a private investigator on the seller if the deal is large enough, looking for vulnerabilities (e.g., bitter divorce). You can’t know too much.

The Factor Of Time

It helps to know if the other party has any time constraints, along with your own, of course. Pending foreclosure, divorce, condemnation proceedings are some examples. If the property is “a steal”, scoop it up fast. If it’s priced at or above “market”, then “grind real slow”. Use time to your advantage.

The Factor of Power

In some negotiations the power levels are uneven. One party has more leverage over the other. Seasoned negotiators assess power levels and devise strategies to take these into account. Then, even the weaker party can optimize its outcome.

Be Generous When Selling

Some sellers believe in “Win-Lose” negotiating. They want “top dollah”. This apparent greed and intransigence grates on everyone involved, sometimes to the extent of legal action or retaliation. Be generous when selling. Paint that bedroom. Purchase a Home Protection Plan for those first-time buyers. You’re on your way to wealth. Don’t be cheap!

Keep Your Word/Perform And Smile

Keep your word. Perform everything you’ve agreed to do. And smile as you do it, even if the deal is going against you and you are taking a loss. Don’t whine. Smile. Builds character….and your reputation.

The “Concession Pattern”

In the back-and-forth of negotiations, your “concession pattern” is very important because it sets up expectations in the other party. Always negotiate fairly tightly. Don’t concede too much because the other party will see that as an opening to seek more. Go back-and-forth more times if need be. Try to set things up so you take the other party’s counteroffer rather than force them to take yours. This way they will feel they won, and you will have less trouble with them the rest of the way. And, please, don’t arbitrarily “split the difference”. Amateur negotiators do that.

“Sharp Practices”

The day will come, if it hasn’t already, when the other party will bring “sharp practices” to the table. If these are illegal (e.g., undisclosed money back after the close), call them on it, and refuse to participate. If these are not exactly illegal, then counter them as best you can, or walk away. Life is too short, and your reputation is too important. Always “take the high road” in negotiations.

Re-Negotiating After Inspections

Y’all know to re-negotiate after property inspections, right? ‘Thought so.

Reading List

Included here is a list of Recommended Reading. Buy all of them, used. Read and highlight them. Then, once a year, re-read the highlights. You owe it to your clients, and yourself, to be in tip-top shape a as a negotiator.

Recommended Reading

Negotiate This, Herb Cohen, 2003

Everything’s Negotiable, Eric Wm. Skopec and Laree S. Kiely, 1994

Guerrilla Negotiating, Jay Conrad Levinson, Mark S. A. Smith, and Orvel Ray Wilson, 1999

The Negotiating Game, Chester Karrass, 1992

The Only Negotiating Guide You’ll Ever Need, Peter J. Stark and Jane Flaherty, 2003

Seal the Deal, Leonard Koren and Peter Goodman, 1991

You Can Negotiate Anything, Herb Cohen, 1980

How to Win Friends and Influence People, Dale Carnegie, 1936