So you’re on board with the idea that investing in real estate is profitable and think you have the right personality to be an investor? Great! Now comes the hard part: Paying for it. This is THE issue that makes or breaks your ability to be an investor. There are opportunities around every corner, but if you don’t have access to money, your investing days are over before they begin.

Unless you are going to owner-occupy a property,  you simply must be able to bring cash to the table. The days of 100% loan are long, long gone. Putting 25% is pretty much the norm for most loans nowadays. Not only that, but other than FHA 203K loans, finding a lender who is willing to finance repairs is nearly impossible. Most of the best deals on the market today involve distressed properties that need work.  So you’re e going to have to find the money to pay for fix-up if you want to be able to get into these deals. At least until the property seasons long enough to refinance.

Whether you are financing properties or not, the reality is that you are going to need at least $25,000 to do much of anything in this market. Even a $60,000 house or duplex is going to take $15,000 cash down to secure financing, and you’re going to be hard pressed to find something that doesn’t need at least $10,000 worth of work. If you can meet that threshold without overextending yourself, you can probably swing a deal.

So now that you know how much you need, assuming you don’t have a truckl0ad of cash sitting around, you’ll need to determine how you are going to get all that money together. Here are a few options in the current market:

• Traditional financing: Local and national banks, as well as mortgage brokers, are still going to be the best source for large-sum and long-term lending on anything four units and under. Expect to pay around 25% down, but interest rates should continue to be well under 7% for the foreseeable future. Make sure you talk to at least one mortgage broker and as many banks as possible before settling on a lender.
• Lines of credit: Pulling out equity from your home or other investments should be done with caution, but is a great way to free up funds. Many investors buy and repair properties with cash from a line of credit, with the intent of financing the finished product six months or so after purchase. You should always check with your lender before taking this route, but it can be a great path to affording multiple properties in a short period of time.
• Hard money lender: If you are looking for short-term money to leverage a property while  you do repairs, this remains a viable option. Interest rates and fees are generally higher and less hard money is currently less available than in years past, but if you develop a successful relationship with a hard-money lender it can really add a lot of flexibility to what kinds of projects you can take on.
• Private lending: Technically, most hard money lenders are private, but I am referring to the type of money that comes from a less seasoned source. Someone like a family member, friend, or even an acquaintance with the desire to invest their money. This kind of money relies mostly on your own personal network, but if you can find a backer with deep pockets, you can both benefit greatly. Since you are generally not competing with other investors for these funds, this money can be more reliable and flexible as well.
• Partnership: In many ways a partnership is a more formal and permanent form of private funding. Instead of just borrowing money under certain terms from someone, they actually have a stake in the property itself. Whether you split profits 50/50 or 75/25, if you need help with managing your investments and/or paying for them, finding a partner can be a great way to open up your options.

Despite the less than ideal lending environment of today, you are not without options. Whatever way you end up paying for a property, just make sure you put any relationship down on paper. Even with family members and lifelong friends, record documents and use caution when utilizing private lending or settling on a partner.If you do your homework and keep your head, the sky is the limit.

So now that you have settled the financing aspect of investing, there is one last thing you need to before you buy: Locate your contractors.

For the last two weeks I have been in a pretty upbeat mood. I had finally got my rehab project at 3969 Humphrey under contract and a smooth closing looked to be all but a sure thing.

Now, the contract has fallen through and the property is back on the market (a steal at $127,750 if you are looking for a house ) . So what happened? The appraisal came in last night. It came in at $101,000! For my gut-rehabbed house! All I can say is that the appraiser in question doesn’t know the area. Every single comp pulled was from south of Utah. Streets like McDonald and Fairview. Anyone that knows Tower Grove South knows that the area south of Utah is almost a different neighborhood. More appropriate comps on streets like Utah, Humphrey and Wyoming were ignored in favor of the lower values streets to the south.

If that wasn’t bad enough, the appraiser adjusted the comp prices downward because I only have a parking pad instead of a garage. That is all well and good, except adjustments are a two-way street. I replaced all the electric, plumbing, HVAC, windows and flooring my rehab. Was that the case for the comps? No. But the appraiser did not make positive adjustments on my behalf. It was clear that the man did not know the area and is totally unfamiliar with the concept that rehabbed properties are worth more than properties with 50 year old systems. According to this appraisers logic, the $20,000+ put in to update the systems was a financial waste.

I am frustrated, but I am not worried. There are quite  a few other interested parties coming forward that can see the realities of the property. That can appreciate it’s REAL value. But take my lesson to heart. Don’t just assume the appraisal on your transaction will go smoothly. Common sense does not always rule. Assume that the appraiser doesn’t know the area and make sure you do a little homework and prep some comps of your own prior to the appraisal. Send these over to the appraiser to help point them in the right direction. Some of the more headstrong in the appraisal trade might take offense to this, but with ludicrous appraisals popping up from time to time, it is clear that some are in need this kind of direction.

The grass is always greener, right? When you hear so many stories about people making a killing on real estate, it can be hard not to feel a little envious.  There is no doubt that real estate can be very profitable,  just don’t fool yourself into to thinking that it is easy money. It isn’t.  When it comes to real estate investing, it takes a lot of work to be successful, and not everybody is cut out for it.

The so-caller “real estate experts,” publishing books and producing television shows about real estate investing, tend to show you the rosy side of things. They are trying to sell their books or get you to watch their show, so why shouldn’t they? They probably wouldn’t  do too well if they scared you off with doomsday scenarios. But if you are considering taking the plunge from watching others invest in real estate for entertainment, and actually doing it yourself, you need to wake up to a harsh reality: Investing in real estate is not easy.

Buying, selling, and leasing properties can be a stressful and time consuming enterprise. It takes a certain type of person to be a successful real estate investor. It doesn’t take any exceptional ability, but it does take determination. It takes someone who really wants to make something of their situation and isn’t afraid to get their hands dirty when necessary. If you want to sit back, collect rents and never have to get personally involved, perhaps investing in a real estate investment trust (REIT) or partnering with a more hands-on investor might be a better idea.

If you want to succeed in this business, you’ll need to be willing to do whatever it takes to make things work. Whether you are fixing and flipping single-families or fixing and renting multi-families, its a lot more than buying a property and collecting checks each month. Even if you are going to be paying others to do any rehab at a property you’ll still have to consider things like arranging loans for acquisition and repairs, meeting with inspectors, hiring contractors, locate tenants or buyers, pay bills, manage occupied units, perform annual tax returns… These things and more will always be hanging over you.

Things rarely go according to plan, so you’ll need to be able to find the time and motivation to occasionally deal with problems as they arise. Over time, as you begin to build relationships and equity as an investor, you might be able to step back from some of the day-to-day stuff. Maybe even all of it at some point, but when you are getting started, you’re going to have to wear various different hats and do what needs to be done. If that is a lifestyle you don’t think you can handle, you should think long and hard before buying any property. However, if you relish in the thought of taking charge of your financial situation, and don’t mind a little hard work to get things going, you might have what it takes to be a successful investor.

If you’re not daunted by the workload, your next consideration needs to be how you are going to pay for your new dream. With the age of 100% financing gone (probably for good), you’re going to need to have access to cash to get anything done. In the next article in this series, we will ask:  How to pay for your real estate investments?

Real estate investing can be a lucrative and rewarding enterprise. It can also be a frustrating and profitless exercise. You could write a 1,000 instructional book on all the dos and don’ts of investing, but perhaps the first and most important question to as is simply “Why?” “Why should I invest in real estate and not put my money in savings or stocks?”

The most important benefits of real estate investing are related to the generous return on investment and the ability to control your own destiny. Real estate offers a great way to make significant profits quickly for the self-starters out there. Here is a detailed breakdown of some of these benefits:

• Cash flow – After paying the mortgage and operating expenses, most rental properties will provide cash flow. The amount varies significantly depending on your equity in the building, actual expenses and rent amount. Cash flows of nearly $1,000 a month on a $100,000 building are not unheard of in this current buyers market. I’ll cover this topic in more detail on a future addition of this article series, but in the meantime, you can play around with property numbers yourself with this investment calculator.
• Appreciation – Although the trend has been reversed in the last couple of years, real estate has historically appreciated in value consistently. In step with inflation or better. Unless you refinance your properties, the amount paid in mortgage each year will remain the same, while the value of the property should continually increase over the long-term. In the current buyers market, many of the foreclosures now available are actually priced well below their actual value. In these cases, appreciation can be extremely rapid. Whether its overnight or over-years, this trend will likely continue.
• Loan paydown – Barring a refinance, over time your mortgage will continually be paid down. On 30-year loans it will take many years before you make any significant impact on your loan balance, but on shorter loans such as a 15-year note, the benefits can be noticed more quickly. For example, with a $100,000 loan on a 30-year note at 6%, your monthly payment would be about $600. After fifteen years, you would have paid down $28,951 of the loan balance. You would still have 15 years to go on your loan repayment. On a 15-year note for $100,000 at 5.5% (rates are usually at least .5% lower on 15 year notes that on 30), the monthly payment would be about $817. A decent amount more, but the loan would be totally paid off after fifteen years. And with no mortgage, your cash flow is going to go through the roof. Either way, you’re making money over the long-term.
• Deprecation – With non-owner occupied properties, there are tax benefits not available on your home. Every year, you can claim this deduction for each of your investment properties. The actual amount is determined by subtracting the value of the land the property sits on (generally considered to be 10% of the purchase price for simplicity sake) from the purchase price of the property. Then you divide the number by 27.5 for residential properties or 39 for commercial properties. This amount can be claimed annually as a tax deduction. This deduction does technically have to be repaid when you sell your properties, but there are various sheltering methods such as a 1031 Exchange, which can indefinitely defer repayment.
• Rate of return – Unless you really play your cards right, the rate of return for your investment dollar in real estate is almost impossible to match. When you get $550 in rent per unit at your new 4-family bought for $140,000, there is no doubt that the cash flow is going to be pretty solid. When you compare how much money you are making compared to how much you actually invested, the numbers can be staggering. Using realistic expenses for this fictional example, with 25% down on this property ($35,000), you would have a monthly cash flow around $890. That’s $10,680 a year. Comparing the two, that is a 31% annual return on your investment. What stock can match that?
• Control your own fate – If you make wise purchases, properly insure your properties, and screen your tenants well, things should go smoothly in your investing career. In most forms of investment, you simply control when you put money in and when you take money out. With real estate, you not only control these aspects, but you control the actual fate of the investment as well. Rather than being beholden to some faceless board of directors, you control your money. Whether you handle all aspects of leasing, management and maintenance yourself, or sub those tasks out, you always call the shots.

Obviously, this breakdown has been very simplified. There are other expenses and considerations to take into account while investing in real estate, to be certain. Regardless, considering all the ways in which you can profit from real estate investing, there is no doubt that there is money to be made. If you are convinced that real estate investing is a winning situation then you must consider the next issue. Potential profits aside, investing isn’t for everyone. It takes a certain type of person. In the next article in this series, we will ask: Who should invest in real estate?

Buying foreclosure properties can be a frustrating, cutthroat enterprise. The best properties usually have investors circling like vultures. You’re never going to be able to win all your bids, but there are things you can do to increase your chances of being the winning bidder. And get the best price in the process.

The following guide will help arm you with information that can help you along your road to becoming a power buyer:

• Financial Viability – Keeping funds available at all times; ready to pounce on that next great deal.
• Earnest Money – How much should you put down, and other negotiating tactics involving earnest money.
• Limiting Contingencies -  Sometimes inspections are unavoidable, but keeping contracts as clean as possible can really help when making an offer.
• Offer Pricing – Offer price is unquestionably the biggest single difference between a dead deal and an accepted offer.  Avoid overpaying, while not letting the good ones slip through the cracks.
• Persistence – Whether it is not letting a lost contract get you down or keeping on real estate agents and banks when an offer is in play, sometimes the squeaky wheel really does get the grease.
• Dates & Timetables – Keeping closings short and sweet can really increase the desirability of an offer.

Link

This might seem a bit off-topic for this blog, but if you are in real estate or any other business, you have likely run into this issue. Clients, agents, and tenants send me documents all the time that are for software I don’t have. Openoffice is a good (and free option) to handle that problem, but there is also a free file converter online that I have been using a lot lately: Zamzar.

The good thing about this method is that there is no need to download any software. This is a webware program that handles all the conversion through a website. The free version can convert just about any file you might have, into a format that you support. I have found this particularity helpful in working with Microsoft Publisher files, which are notoriously tough to work with. It also works with just about any other product from Microsoft, Adobe, Corel, etc.

To use the service, simply go to zamzar.com. Once there, simply select the files on your computer that you wish to convert, what format to convert them to, and what email address to send the files to. It might take a few minutes to process, but when the procedure is complete, a link to the new file will be sent directly to you.

So the next time some sends you a Wordperfect resume that you have no way of opening, consider Zamzar as an option. It just might come in handy.  And its the best price anyone could hope for: FREE.

If you have ever purchased a market-rate or foreclosure property for a quick fix and flip, there is a good chance that you have run into problems with FHA financing. Until now, FHA would not insure any financing on a property that had already sold within the last 90 days.  And since so many buyers are using FHA to finance their homes these days, that is an issue. With a decent sized crew on a smaller property, this timetable required some owners to sit on vacant properties while they seasoned. But as of February 1, 2010 that will no longer be the case.

Due to the current glut of foreclosures on the market, FHA has released a waiver to their current seasoning guidelines for at least one calendar year. Restrictions will still apply to ensure that the program is not abused, but if you are doing legitimate work on a property these restrictions should not pose a problem.

For more on this rule change, check out the official waiver from HUD.

It’s been far too long since I have relayed my thoughts on the state of the investment real estate market, so in the spirit of the season, here is a quick rundown of my current investment market impressions in South St. Louis, Missouri:

• Single-Families – There is no doubt that the $8000 homebuyer credit had a positive impact on house sales in the fall. September and October were especially productive. With the deadline for the credit originally set for November 30th, buyers were in a frenzy to find and close on properties prior to that deadline. Of course, when the program was extended until April 30th, 2010, the sense of urgency wore off. Couple that with the typical slowdown during the winter holidays and the market for these properties has been particularity slow for the past month or so. The good news is that with the holidays now over and the new homebuyer credit deadline  approaching in a little over three months, the market should see a nice resurgence soon. After April 30th though, its anybodies guess what is going to happen. So if you are in the middle of am rehab or thinking of selling a house, I would hurry up.
• Condos – Not much to say here other than to avoid them. There have been some pretty good deals out there as of late, but the big issue is that buyers can’t get condo financing right now. Unless you can make sense of renting a condo or seller-financing it, I would stay away from them until something changes financing-wise.
  
• Multi-Families – Where last year seem to offer a steady mix of 2-family and 4-family foreclosures, the last few months have been very heavy on the duplexes. Since the fall, however, things have been very heavy on the duplexes. Some of the single bedroom properties don’t present the greatest deals, but there heavy been a  fair amount of 2+ bedroom properties that heavy been pretty solid. It seems that a great many of the 4-families out there have already been foreclosed and sold, so it is possible that this might be somewhat of a permanent trend.
• Apartment Rentals – November and early December were great for renting mid-level apartments. We moved a lot of inventory during that time. The properties that seemed to be getting less activity were the cheap units ($450 for single) and expensive ones ($650 for single). There hasn’t been much of a resurgence following the holidays as seems to happen some years. Lots of window-shoppers out there requesting showings, but not many pulling the trigger. Average would probably be the best way to describe the current amount of rental activity.
• Neighborhoods – When looking for investment properties, location and price are always big factors. But the one thing it is hard to control is where all the good inventory is coming from at any given time. Much of last year produced a glut of quality foreclosures and short sales in neighborhoods like Tower Grove South, Shaw and Tower Grove East. But since the fall, things seem to have shifted increasingly eastward, with the best deals coming up in Tower Grove East, Fox Park, McKinley Heights, and Benton Park. Areas further south such as Benton Park West, Gravois Park, Dutchtown and Bevo continue to have a solid flow of inventory coming through as well, obviously rentability and resale remain a concern.
• Best Investment Bets – So what’s the moral to this story? Obviously you should be on the lookout for all types of property in any quality area, but if I had to point you in one direction it would be Tower Grove East. Despite the sluggish economy of the past few years, or maybe even because of it, this neighborhood is really changing fast. There has always been a nice housing base, but the vast amount of foreclosures on derelict and substandard properties recently in the neighborhood has created a huge influx of development in the vicinity. Pricing hasn’t really caught up yet so there remain some pretty good deals. Look out for properties of all types there. Also pay attention to the increasing number of singles and duplexes in Benton Park and McKinley Heights. Benton Park West and Gravois Park within one block north or south of Cherokee is also a place to watch.

The following tables display all the multi-family properties sold in the City of St. Louis south of Delmar, from September 1st to September 30th, 2009. The properties are broken down by number of units.

I always get a kick out of the fact that everybody and their brother is talking about short sales these days. I don’t doubt that you can find some great deals out there via the short-sale route, but these deals generally turn out to be a waste of time. Consider these issues:

• Most sellers and/or their agents don’t know what they are doing – People seem to have this odd impression that even though they owe $200,000 on the loan, they can just put the property out on the market for $120,000 and short-sell it without the bank blinking an eye. No though for protocol, valuation, just a lazy desire to have someone else shoulder the impact of their foolish purchases
• The process is time consuming – A two to three month turnaround is certainly not unheard of to close a short sale. With ever changing lender practices and market environments, what might seem like a good deal today, might not seem so great three months from now when it comes time to close. I have seen buyers get tied up waiting on a short sale, only to pass up other great (and easier) deals while they wait.
• Wasted effort – Considering how time consuming the process can be, its amazing how many owners and listing agents put these properties on the market when they are 15 days from foreclosure. You end up putting an offer on the table, jump through every hoop imaginable, and the property ends up getting foreclosed on before you can get anything done.
• There are plenty of great foreclosure buys – I stay plenty busy, and find tons of great deals from the seemingly endless supply of foreclosures that are constantly coming on the market. That isn’t changing anytime soon either. No matter what kind of investment property you are looking for, there are always plenty of properties that will fit your criteria coming on at any given time. Why jump through so many hoops to possibly make a deal when something just as good is right in front of your nose?

In short, for most investors, the short sale is not worth messing with.  In most situations at least. That is not to say that you shouldn’t consider giving them a look, but don’t let all those so-called gurus make you think it’s so easy. Just like anything else, “there ain’t no such thing as a free lunch.” There is a lot of hard-work that goes into making these deals work and if you are looking for a quick buck you’re better off looking elsewhere.

If you are involved in the real estate industry in any shape or form in the St. Louis area, there is a good chance you have heard of DHP Investments, and Doug Hartmann. If you’re a real estate investor there is also a good chance you were swindled by him or might have have purchased one his many foreclosed properties. Fraud doesn’t go far enough in describing what this guy did.

Of course, none of this is news since it’s been a widely known fact since 2007. What is newsworthy is the fact that just last week, Robert Douglous Hartmann pleaded guilty to the mail and tax fraud charges, which are tied to his infamous schemes. He will face up to 24 months in jail and up to a $1.5 million dollar fine when he is sentenced in June. Hopefully they throw the book at him as he scammed hundreds of investors with phony real estate deals on houses and multifamily buildings throughout the St Louis area. It will be interesting to see what kind of punishment they give him.

For a more detailed writeup, check out Chad Garrison’s piece over at the Riverfront Times.

I’m certainly no stranger to visiting shady buildings. I have been going into vacant houses all over the area for years. Mostly by myself. I understand the risk and accept it. But that doesn’t mean that property owners and their real estate agents don’t have some level of responsiblity in making sure the property is safe.

Case in point: lockbox codes. As a general rule, access codes to enter properties should only given out to real estate agents or in some other controlled capacity. Not that agents are not capabable of commiting a crime or doing something stupid, but I always feel somewhat comfortable in the thought that access isn’t simply given out on demand. At least, that’s the way it should work.

Unfortunately, I can’t tell you how many times I will call a listing agent’s office to get a lockbox code only to be given the code, no questions asked. Not even a “Who are you?” or “What agency are you with?” They just give out the code. Makes me feel real safe. Not that someone couldn’t lie about that info, but its at least something. Don’t even get me started on the fact that banks are stupid enough to reuse the same 5 lockbox codes all over town. And we wonder why copper gets stolen out every vacant building in the area.

The fact is that the real estate industry needs to come up with some sort of system to verify a persons identity to maximize our own safety, the safety of our clients and the properties we list. Only then should you even consider letting your guard down. Until that day comes (probably never), the reality of the situation is that one must never assume a property is secure when they visit it. Never let your guard down. Here are a few ideas on how you can protect yourself:

• If you are visiting a property, try to go with another person or at least let someone else know where you are going.
• Unlock the front door, knock and announce your arrival when you reach a property. Then do your exterior viewing of the house to give any squatters time to leave. Much like a bear, they are usually more scared of you than you are of them. I used to do this a lot at unsecured buildings when I did BPO’s and I saw guys sneak out quite a few times. It works.
• Avoid visiting properties after dark.
• Carry an oversize Maglite flashlight in properties. Not only does it take care of your illumination needs, it also acts as a great weapon in self-defense.
• Carry a can of mace with you. If you really want to protect yourself, a large can of “riot mace” or even the newer “pistol-like” varieties are a good choice. I’m thinking of getting a mace gun myself.
• Carry a gun. Obviously you’ll need to make sure you follow the law on this one, but a lot of investors have concealed-carry permits for this purpose. Just be careful on this one. Bumping into a squatter is not cause to shoot them, so the element of surprise might lead to an unfortunate accident.

Following these basic steps, and having at least one method of self-defense will help you limit your risk. In the perfect world, this wouldn’t be necessary, but I’d rather be cautious than get stabbed with a butter-knife by a hobo. Whether your viewing vacant houses, occupied duplexes or rehabbed 4-families, watch yourselves out there.

I was hoping to have a little more notice, but my interview with St. Louis NPR affiliate KWMU on foreclosures is airing today. In fact, it has already aired twice this morning at 6:35am and 8:35am. The final airing will be this afternoon, April 1st (and no this is not a joke), at 4:45pm. If you missed it, or just can’t wait to hear it, its already up on the KWMU website.

It seems that the story ended up airing only locally in St. Louis instead of going national, but its still great to get the chance to be on air. I hope you can check it out.

UPDATE – The story ended up airing nationally on the Marketplace program. You can check out the slightly altered audio and a transcript here.

We’ve all been there before: you’ve got an electronic document you need read, but don’t have the software to open the file. Whatever do you do? Unless you stoop to pirating software, for the longest time, the only solution was to buy the expensive software needed to view it. If you have ever purchased the latest version of Microsoft Office, you know how expensive this can be.

Thankfully, there is now a free solution, which should take care of the problem for you. It’s a piece of software called Open Office and it is a godsend. It can handle anything from standard text documents to spreadsheets to images. The best thing is that it supports most popular file formats and versions of popular programs such as MS Word and MS Excel. Even if you have the software to read and edit these files, you could run into trouble if your software is newer or older than the software the file was created on. I have Microsoft Office 2003 and I know I have had problems with documents created from newer versions of the software.

There are versions of the software available for all major platforms (Windows, Mac, Linux, etc) so it should work for anybody. And did I mention it is free. Whether you need to supply an office of 100 with productivity software of just need a viable word processor backup for yourself, its worth a download. It’s help me in the real estate business and I am sure it will help you to. For more info on the software or to download it, check out the Open Office website.

When buying a foreclosure, like all other properties, you need to set a closing date for every contract. When setting this timetable you need to consider what kind of affect the proposed dates will have on your offer.As with any point in a contract, if you put the closing out too far you could hurt your bargaining position in the deal. For most situations, the maximum you should request is six weeks. I say that timetable as it is soon enough that most sellers won’t take issue with it, but long enough to give you plenty of time to get everything ready to close. If you need more time than this, unless there are special title considerations or it is a commercial property, that might be a sign that you can’t really afford the building. Banks are often pretty flexible on this point, but it is something to take into account.

Believe it or not, the bigger issue is getting the bank to allow you to close quickly. In early 2008, I noticed a complete 180 on this position. It used to be that banks wanted to close on foreclosures as soon as possible after getting them under contract. I don’t know if it is because they realized this created more issues than it solved or if some other factor is at play, but its now common for sellers on REO properties to actually request the buyer push out closing. If you want to close quickly on a property, list the date you want on the contract, but you should expect it to be pushed out to at least a month. And since it often takes a week or two to finalize all the paperwork on any foreclosure, don’t be surprised if it is more like six weeks.

When it comes to setting a timetable for a financing contingency, you need to be a bit more careful with the time. If you are dealing with a property that could likely see multiple offers, you should try to keep this contingency to three weeks at the most. With so many cash buyers out there you are going to have a hard time competing for the best properties if you ask for five weeks. Do your homework ahead of time so your finances can be put together quickly.

The moral of this post is that you should try to trim down the time until closing and loan approval as much as possible. I wouldn’t worry about scaring the seller away will requesting a quick close, as they will just counter on that point if they need to. If you ask for too much time, however, they just decide to work with someone else, sensing that the property must not be a priority to you.

If you found this story helpful, check out the others in the Foreclosure Buying Tips series: Financial Viability,  Earnest Money, Limiting Contingencies, Offer Pricing, and  Persistence

When buying a foreclosure property, the terms of the contract are undoubtedly the most significant factor in making or breaking a deal. However, there are other intangible factors at play as well. The most important of which is probably communication with the seller and listing agent.

By their very nature, foreclosure transactions are an impersonal affair. The seller and their representatives are usually handling so many other transactions at once, that you can easily get lost in the shuffle. I can’t tell you how many times I have be told something will be completed by a certain date and time, only for that deadline to come and go with no news on the deal. Often, when no action is taken on your part, deals can easily be dragged out for days or even weeks longer than they should. Sometimes this delay creates a mere inconvenience of taking longer to close, but during the negotiation process, this delay can cause you the property.

When I work with a foreclosure property, I keep very active in my communication with the listing agent. Obviously these deals take time to work out, but during the negotiation phase I try to make contact with the seller’s representative every day. That might sound like overkill, and sometimes it does annoy the other parties, but this persistence can shave a day or two off the process. This makes it less likely that someone else will swoop in and outbid you.

The key to staying ahead of the pack is to never rely on the sellers side to take charge and follow through. They often have a staff of multiple people taking care of a large number of properties so it is easy to loss track of where they are at in the process. If they say they will call you at 11am tomorrow, assume they won’t. You should be ready to call them. If a property goes under contract and listing agent says he will call you if the deal falls through, don’t trust in that. Keep tabs yourself. You’re dealing with overly busy individuals who have their own interests and agendas; you need to watch out for your own.

To keep up as best as possible with this persistence theme, you should probably be working with your own buyers agent on any foreclosure deal. Although you might be tempted to call the listing agent and work with them directly, your level of service will probably not be as personal and focused. And don’t be fooled by the misconception that working with the listing agent will get you a better deal on a property. The bank is going to pay out the same commission whether it is split between one agent or two. Since it can be argued that the buyer is really the one paying the commission, you need to get what you are paying for. Have someone advocating for you during the deal with a vested interest in seeing you get what you want.

Whether its yours truly or another agent, make sure you work with a buyers agent who is familiar with the foreclosure buying process. If you put forth your combined persistence and nagging towards your offer, your chances of getting an accepted deal will increase accordingly. Sometimes being a pain in the neck is just what the doctor ordered.

If you found this story helpful, check out the others in the Foreclosure Buying Tips series: Financial Viability,  Earnest Money, Limiting Contingencies, Offer Pricing, and Dates & Timetables

When it comes to making an offer on a foreclosure property, many investors often get caught up in the “How low can you go?” mentality. Since banks can more easily absorb a loss on a property, you might be tempted to do nothing but lowball. At times this is the appropriate mentality, but don’t throw away your common sense.

Like all aspects of a foreclosure offer, if a property has been on the market for a long time, you can take a more casual pace in your negotiation. If you aren’t worried about someone else coming in and taking the building away from you, its easier to justify countering back and forth for a week or two. I have seen this tactic be very affective as a matter of fact. On the other hand, I have also had it blow up in my face.

The biggest negative about dragging out a negotiation is that it gives time for another buyer to come in and outbid you. Two times in the past year I have come to a verbal agreement with a seller on a deal after a lot of back and forth, only to have someone else swing in with a crazy-high offer and get the deal.   That’s a bit underhanded for the bank to do, but banks are entities, not people. Their profit and loss margins are all that count. Until the deal is on paper and signed by all parties, the negotiation is never complete. If you come to a point on price where you are happy, and you really want the building, just agree to the deal already. Is it really worth losing a great deal to save $250 on the contract price? Whether you’re dealing with a small single-family house or a large multifamily, the answer is usually “no.”

When it comes to hot foreclosure deals that have just hit the market, your pricing can be even more important. In most multiple contract situations on reo properties, the bank’s agent will request a “best and final” offer from all prospective buyers. to be returned within 24 hours. The trouble is that you can never know whether you are the front-runner or last in line in these situations (of course there is more than the question of price hear as well). It is especially frustrating when you really want the building because you are also confronted with the fact that you don’t want to overpay for the property.

My recommendation in these pressure situations is to ignore the price that the bank listed the property for. Almost every foreclosure is listed under its real market value so these prices are often intended to start a bidding war anyway. The best deals almost always go above sticker-price.  Don’t think like everyone else. Rather, you should figure out, in reverse order, how much the building is worth to you. If you are dead set on getting a 15% cap rate out of a building, figure out how much you can pay for the building, accounting for repairs and expenses of course, and still reach that number. That’s your price. If that means you will offer $55,000 on a property listed for $50,000 then so be it. You’re making the money you wanted. If you lose out, at least you know that you didn’t sacrifice your profit margin in the heat of negotiation.

As a side note, I should mention that while most multiple offer foreclosure deals end with a “best and final” request, I have been involved with a few in which the bank simply look the highest offer they got on the first day on market. Once I won out, the other time it was someone else. This isn’t common, but it does happen. If you really want a property, never throw out a lowball under the assumption that this can’t happen. Your pricing should be as serious as your interest level. The best investors are all chasing after these properties.

Pricing, like all points of a foreclosure negotiation, is a delicate matter. If you stay reasonable in pricing you offers and take note of the other aspects of the deal (see other foreclosure tips), you stand the best chance of rising above the pack. Pay attention to YOUR goals and YOUR business. Not the other guy’s. You’ll thank yourself for it.

If you found this story helpful, check out the others in the Foreclosure Buying Tips series: Financial Viability,  Earnest Money, Limiting Contingencies,  Persistence, and Dates & Timetables

If you’re a veteran foreclosure buyer, this one is probably obvious., but a little refresher never hurts. When making an offer on a property, do all you can to limit the number and length of your contingencies. Depending on the property, and your personal taste, you might want to get an inspection of the roof, the sewer and possibly the whole property before purchasing. With the fast pace at which many deals are made, many times there isn’t enough time to check out everything before you put in an offer. Speed is always key in the foreclosure business.

Other times, its just not worth lugging a ladder to the property to check out the roof or pay for a sewer scope inspection unless you know you have a deal.  This is a reasonable position as I have worked with clients that have offered on as many as five buildings before they had an accepted offer. You would stand to lose hundreds of dollars in such a situation if you paid for inspection prior to having a signed contract.

Despite the confusion on the subject, asking for a contingency to check out these issues is not only allowed, but expected when perusing a foreclosure. After an offer is accepted, most banks have you sign their own contracts (or addendum) in addition to the original. Almost all of these documents have an inspection period automatically written into the contract. I have seen anything from 5 to 10 days automatically provided.

For all intents and purposes, this means that they don’t balk at such short-term contingencies as they are accustomed to buyers offering on properties sight-unseen. The best advice I can give is to try to limit the amount of time you ask for. I generally prefer to ask for no more than 5 business (or banking) days as it is realistically enough time to finish any inspections and doesn’t seem to scare the seller. Of course if you don’t want an inspection contingency at all, the seller isn’t going to be upset.

The other contingency you might run across is a financing contingency. This is a little more delicate since many buyers make offers that are not contingent on financing. If you have such a contingency in an offer that is equal to that of another potential buyer save that point, there is really no way to win. That doesn’t mean you shouldn’t make it as clean as possible. Try to keep the contingency to a maximum of four weeks. Any longer than that and you start to raise doubts with the seller whether or not you will able to reliably perform. You should also provide the most convincing proof of financial viability as possible. I’ve already covered this topic in a past article, but remember to consider sending bank statements along with any preapproval letter.

If you are going to work with any other contingencies you will probably have a hard time getting any offer to go through. Requests common among market deals, such as repairs or other concessions, are hard or impossible to come by on bank-owned REO properties. With inspections and financing contingencies, just keep them as short and simple as possible. They aren’t big bargaining chips, but every little thing can count in this game.

If you found this story helpful, check out the others in the Foreclosure Buying Tips series: Financial Viability,  Earnest Money, Offer Pricing, Persistence, and Dates & Timetables

Being creative with earnest money in real estate transactions is one of the most commonly overlooked negotiation points in a contract. Especially for foreclosures, with their battle-weary bank-owners trying to cover their butts. They want assurances.This earnest money acts as a guarantee that if you violate the provisions of the contract and walk away, the seller has something to show for their time. The lower the dollar amount, the less meaningful the gesture.

With most corporate-owned properties, if you make an offer, they require a minimum of $1,000 in earnest money to be applied toward each property. Sometimes that minimum is even as high as 3% of the contract price. If you’re unwilling or unable to put down this much money, these sellers will assume you are either not able to follow through on the contract or untrustworthy. As a rule, banks WILL NOT make exceptions to this rule.

So there’s a minimum dollar amount that has to be put down, but does that mean you shouldn’t offer more? That depends. On properties that have been sitting on the market for a long time, the minimum is usually enough. The sellers can’t be picky and choosy in this situations. However, if you are chasing a hot new property or trying to low-ball you should at least consider it. If your contract is similar to the rest on every other point, this could be the thing to push you over the edge and get your deal accepted.

So how much over the minimum should you offer? It doesn’t have to be a lot, but the more you put down the better your chances. Even a bump to $2,000 can be enough in an even playing field. When deciding how much to put down, you need to always remember that if you have contingencies in the contract you will get that money back if you void the contract through one of them. Inspection contingencies, financing contingencies… that money is never lost unless you violate the contract. That being the case, if you really want a property and have your finances solidly in order, why not offer more earnest money. You’ll be putting the money down as cash to buy or as a downpayment on the loan in a few weeks anyway.

Other than dollar amounts, you can also adjust the refundability of the earnest money as negotiation leverage. One of the most affective bargaining chips in an offer is to make the earnest money nonrefundable. You can make the it nonrefundable from the start, after the end of any inspection contingency or even as late as after any financing contingency ends. The early the better, but it never hurts to add the clause to a contract. If you are a cash buyer who doesn’t plan on doing any more inspections there is really no reason not to do this.

If you are worried that the seller could take your money and run, don’t. They have to live up to their side of the contract too, so unless you disappear before closing, the building or the money will be yours. You could never lose both on account of something the seller does or fails to do (unless your wrote the contract that way, which would be a bad idea).

In summary, when offering on a property the higher the earnest money amount and the sooner it is guaranteed for the seller, the better. In cases where you go in at full price and non-refundable immediately or within a few days, your a near lock on getting your contract accepted. If you go for the minimum with no note of earnest money possession, you’ll be at the mercy of other bidders. Don’t forget about this powerful tool in your arsenal.

If you found this story helpful, check out the others in the Foreclosure Buying Tips series: Financial Viability, Limiting Contingencies, Offer Pricing, Persistence, and Dates & Timetables

It’s no secret that many of the best investment properties on the market nowadays are foreclosures.  But the the foreclosure market plays by different rules than the rest of the market. It is often fast-paced and unforgiving. To help you increase the chances of getting your offers on foreclosure  houses and multifamily properties accepted, I am putting together a multiple part series of advice articles. This, the first, is about proving your financial viability.

Almost every offer for a bank-owned property must be accompanied by either a proof of funds or loan preapproval. Offers won’t usually be entertained without one. With the strict lending market, this is now more important than ever. Banks, and their agents, don’t want to waste their time with buyers who don’t have the ability to follow through on the terms of a contract.

Many times, a letter from a lender saying that you are preapproved for a loan is fine, but its not the best weapon. Preapprovals are still pretty easy to come by, even in this market. They don’t hold a lot of weight so the proof of funds is the preferred choice. If you can get a balance statement from a bank account or investment portfolio that meets or exceeds the purchase price, you’ve got the best evidence for financial viability you’ll ever have. Even if you plan on getting a loan for the property, providing this statement makes you look much more able, and therefore likely, to close on a deal.

If you simply can’t pull together enough evidence to cover the entire purchase price, put together what you can. In a world of 25% down payments, proof of funds covering the down payment and a loan preapproval to cover the rest, has to make the seller feel a little more easy. Using both methods in tandem is only slightly less affective than a straight up proof of funds.

Whatever your route, it’s also important you make sure you have these documents on hand at all times. You may wait weeks or months for the right building to come along, but if you take a day or two to get your financial documents together, that might be enough time to lose out on the property. Some sellers will accept documents as dated as 90 days old, but 30 days is becoming more and more common.  To be safe, make sure you have documents on hand, which are no older than 30 days.

It’s not uncommon for quality investment buys to have many offers on them. If you have the appropriate financial documentation on hand, you not only stand a better chance of beating out the less prepared competition in contract terms, you might also beat them out in the speed department as well. In this faced-paced environment when a few dollars can make a difference, drawing first blood might be just the edge you need to get that deal.

If you found this story helpful, check out the others in the Foreclosure Buying Tips series: Earnest Money, Limiting Contingencies, Offer Pricing, Persistence, and Dates & Timetables