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Buying and Selling
In this lesson, you will learn:
- Strategies for raising investment money.
- Making your family your investment team.
- Basics of a marketing plan.
- Different buyer motivations.
- Preparing a property for sale.
How do you get your six properties? You could work and
save. This may be the approach you use to purchase your first property,
but to get from one to six properties through saving alone might be a
long struggle. It's tough to save $10,000 or $20,000 for each real
estate downpayment.
You could work with partners, but one of the beauties
of investment real estate is that you can usually control property
without partners. But, if you have a father or brother or close friend
who has funds, but not the investment skills and knowledge that you have
acquired, then, maybe, you can consider a partnership.
Consider the ambitious young businessperson who wants
to rise up the corporate ladder. He or she may have to agree to several
relocations, moving from Boston to Reno to St. Louis to Seattle with
each new promotion. This is the nature of business. The same may be true
for you as an ambitious real estate investor. You may buy one house and
even if you love that house, you may have to sell it. You need the
profit to buy another house to sell at a profit and so on. You will be
finding many wonderful profitable opportunities. You buy and resell to
capture the profit in order to buy more property.
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Master's Tip: This buying and selling doesn't
have to go on forever. It only has to go on until you are satisfied with
the size of your investment portfolio. This can take a year or five
years. This isn't the stock market. You are in control in this business.
When you choose, you can stop and wait for your properties to appreciate
and your rents to rise.
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You'd have to work a lot of hours at Home Depot to
make enough money to use as a property downpayment. You'd have to be
very lucky to buy a lottery ticket and win enough money to use as a
property downpayment. But, as you should already be observing and
learning from your local research, making five-figure profits from
buying and selling real estate can be quite ordinary and expected. If
you weren't going to make $10,000 or more by flipping a property, you'd
buy a different property.
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Master's Tip: This is the beauty of real
estate. You are dealing with big numbers, so the profits are big.
Profits of ten or twenty percent when buying and selling yield
significant financial rewards to anyone savvy enough to study the real
estate market and bold enough to act upon the knowledge they gain.
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Master's Tip: Part of your job is to help your
spouse to understand your investment objectives. Real estate is a means
to an end. Real estate is your part-time business. You are investing to
secure the financial future of the whole family. You don't want to be
married to a person who is going to balk when you put the house up for
sale or refinance. You need your spouse to be your understanding
partner. You want encouragement and not whining or second-guessing. You
want someone who is going to say with enthusiasm, "Yes, we should buy
the $20,000 car rather than the $35,000 car because we can use the
difference to invest in another property". You must take the time to
explain investing. Investing is when you sacrifice today for a richer
tomorrow. Make sure you have the home team support, routing you to
victory. Read and discuss an Action Principle each day as a family.
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Master's Tip: You don't have to love every
property that you buy. You can sell them for a profit. You pay your
capital gains tax. You buy another property. You do want to love your
six properties that you are holding for long-term investment.
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You have two routes to gaining the investment funds necessary to accelerate your acquisition program. You can buy a property and increase the income through rehab or better management and, then, refinance. Or, you can buy with the intent of reselling at a profit. You must know the fundamentals of marketing real estate.
Poor Wilbur
Nardo was a great real estate agent. He made a great living with less than ten clients. Nardo's specialty was finding opportunities. I was one of his clients and so was a local school bus driver by the name of Wilbur. When a new deal would come along, Nardo would call me with, "Listen, I'll give you a day to think about this and then I'm calling Wilbur". Wilbur would buy any property that Nardo told him to buy if Nardo could put the deal together. All told, Nardo sold Wilbur five properties.
I liked Wilbur, but, to be kind, Wilbur wasn't too bright. Wilbur wasn't very good at keeping his properties up and he wasn't very good at collecting rents. For years, Wilbur had a six-family house with only two units rented because he didn't want trouble from more people. Wilbur just managed to collect enough money to pay off his mortgages and pay the taxes on his properties. Wilbur lived in a run down house. He drove a junk car. Those properties were a burden to him. Yet, over the two decades that Wilbur owned his properties, he became a millionaire. He should have driven around town in a Cadillac. He should have gone to Hawaii. He didn't. Wilbur did one thing right. He bought real estate. Now with Wilbur gone, Wilbur's children will drive the Cadillacs and visit Maui.
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Master's Tip: Money alone won't make you happy.
There are many wealthy people who are miserable. Committing to
self-improvement and service will make you happy.
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Marketing Real Estate
You are going to learn most of what you need to know about marketing through observation. Knowledge is power. Knowledge is your advantage. You are going to study the real estate ads. You are going to go to open houses and see all that you can. You are going to keep a continuing dialogue open with Nardo and with other agents and other investors. You will see how they market real estate. You will learn. You will try to be equal to or greater than their best.
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Master's Tip: You can't find all you need to
know by taking this course, reading a book or surfing the Internet,
you've got to get out into the field. This is your job to research your
investment area. You've got to see the different types of properties in
all price ranges. You've got to speak with sellers and agents and
tenants and lenders and local officials and other agents. And speaking
really means to do a lot of listening.
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Your Nardo may be a great marketing agent and you may let him handle everything. Or, you may purchase a property with a buyer already in mind. As you talk with other investors, you will know which ones are buying different types of property. You can buy and resell to them. Or, you may find first-time buyers who are having difficulty getting into the market. You buy a property and add in your profit and then sell to them on affordable terms. This is not taking advantage of people. This is business. Over the years to come, the young couple that buys a property from you is going to be much better off than the young couple that just keeps paying rent to you every month.
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Master's Tip: If Nardo is your man, fine, but
even Nardo should be willing to give you a complete marketing plan. If
not, find someone else. Who are the targeted buyers and how does the
agent intend to reach them? Don't be afraid to ask for specifics. Who
will write the ads? Where will the ads be placed? What will be the
frequency of advertising? How will the agent split the commission with
cooperating brokers?
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Master's Tip: Some brokers do not like to share
their listings with other agents and other offices. They want to sell
the properties themselves. Be aware that if your listing agent is
cooperating with other offices, the commission split is 50/50. If the
commission split is less than 50/50, other brokers may not be interested
in showing your property to their prospective buyers.
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Two Dozen Quick Ways To
Prepare Your Property For Sale
In marketing investment real estate, putting some "pizzazz" into the sale is important because purchasers weigh emotional and eye appeal as well as financial considerations in making a buying decision. Much of this is common sense, but common sense is not that common. Always, always remind yourself that most people are doing nothing. Following the Action Principles®, being a person of action, is your strength.
- Scrub and clean common areas
- Clean basement and attic storage areas
- Replace mailboxes
- Replace building and unit numbers
- Paint hallways
- Paint egress doors
- Rake yard, sweep walkways, parking areas, porches, etc.
- Mow, sod, seed lawn
- Trim shrubs and add more landscaping, especially flowers
- Decorate hallways
- Add individual storage bins to basement
- Replace light bulbs with higher wattage and leave lights on where possible
- Add spotlights to parking areas
- Write and distribute a tenant policy manual
- Prepare an improvement schedule anticipating buyer reactions
- Have a professional photographer take a photo of the property
- Tend to all minor repairs
- Replace egress and unit entry lock sets
- Scrape off and touch up exterior paint, wrought iron railings, etc.
- Prepare parking plan, if appropriate
- Photocopy all leases, plot plans, building drawings and other relevant building documents
- Arrange representative sampling of apartments with accommodating tenants and rotation schedule for showings
- Discuss resident manager's role or role of on-site maintenance personnel, if appropriate, before showings
- Follow-up showings with your agent
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Master's Tip: Harry Helmsley and Lew Rudin were
two independent investors who owned billions of dollars of New York real
estate. Harry and Lew had similar investment strategies, Never Sell
Anything. This is a somewhat different strategy than what we've been
discussing in this course. That's OK. The means to the end are
different, but the end results are the same - prosperity and financial
independence. There are many roads to success. There is only one sure
way to failure - do nothing.
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How To Make Your Buildings Easy To Sell
You bought your building for investment. You sell for a profit. A new buyer acquires your building for investment. He or she expects to sell for a profit. With time, the process continues over and over. Or with imagination, the process continues over and over. In general, buildings outlive people, and, over a particular building's history, there may be many different investment owners with each owner in succession profiting by time and/or imagination. You can sell your building easily either with time or imagination.
Let's say that you own a six-unit apartment building that you purchased eight years ago for $160,000. For personal, business, or reinvestment reasons, you want a quick and easy sale. Nardo tells you that a reasonable valuation of the property in today's market would be $250,000. Over the period that you have owned the building, time has significantly improved your equity position. Time has given you the option of selling your building easily. If you market the building for $240,000, the property should sell without much delay.
Pre-planning with imagination can bring about the same effect of easy selling. Nardo can often imagine the best next owner of the property, and can target the advertising in his or her direction. Who should own your building next?
Here are some different types of investors and a few copy headline attention grabbers, which Nardo may use to appeal to each of them.
A management-oriented investor A management-oriented investor has time and will be looking for ways to put time to profitable use. This investor will probably be cash flow oriented, interested in supplementing his or her income.
HEADLINING FOR MANAGERS:
THIS BUILDING NEEDS YOU!
EXTRA HOURS - EXTRA PROFITS
HIRE YOURSELF
ARE YOU A PROBLEM SOLVER?
ON-SITE - ON TARGET
An absentee investor An absentee owner doesn't want phone calls. He or she may be willing to sacrifice some cash flow for an up-to-date, well-maintained building with long-term tenants. However, tax-sheltering benefits will be very important.
HEADLINING FOR ABSENTEE OWNERS:
TROUBLE FREE
RELAX AND ENJOY THE TAX SAVINGS
A A A 1!
MANAGEMENT IN PLACE
SELF-OPERATING MONEY MACHINE!
A developer A developer wants to build. A developer also fears the unknown time and money that may be lost through a lengthy approval process. If zoning is clear-cut and/or permits for the adding of units to the property, internally or externally, have been issued, marketing to this type of buyer will be easy.
HEADLINING FOR DEVELOPERS:
ROOM TO GROW
EXTRA LAND TO BUILD - FREE!
ZONING APPROVED!
PERMITS IN PLACE!
CONSTRUCTION OPPORTUNITY
A novice investor An investor new to real estate wishes to prove for himself or herself that all the wonderful benefits they've heard or read about owning income property are really true. This investor will lean toward a property with few potential surprises as he or she gains experience.
HEADLINING FOR NEW INVESTORS:
SMALL INVESTMENT
NICE, QUIET TENANTS
EASY INVESTMENT
NO DEGREE REQUIRED
A SOLID FOUNDATION
A condominium converter A condominium
converter will not be as concerned with the cash flow or tax benefits
of long-term ownership. This investor will look to a property whose
floor plan lends itself to subdivision. A building with few tenants or a
vacant building which would help expedite the conversion would also be a
plus.
HEADLINING FOR CONVERTERS:
DIVIDE AND PROFIT
READY TO GO!
EMPTY
CONDO CONVERTER'S DREAM
UNIT BUYERS IN LINE
THE MARKET SAYS "YES"
A Handyman The handyman wants a chance to put
his time and skills to work. He will be looking for opportunities to
upgrade and modernize, which will result in higher rents and resale
value. The handyman might also be drawn to a property with a secondary
seller-financing offer to keep funds liquid for renovation
expenses.
HEADLINING FOR HANDYMEN:
NOT PRETTY
SMALL DOWNPAYMENT
UGLY INVESTMENT!
UPDATING REQUIRED NOW!
A DIAMOND IN THE ROUGH!
With a target "highest and best use" buyer identified,
you and Nardo can coordinate your management and support the rationale
to bolster your marketing effort. There are always investors in all
categories ready, willing, able, and anxious to buy properties that meet
their specific investment criteria. With imagination, you and Nardo can
anticipate the wants of various investors and prepare your sales
approach accordingly. Given time and/or imagination, investment
buildings can often be sold in a minimum amount of time.
Marketing Apartment Buildings:
How To Maximize Profits
Apartment building ownership is considered a fairly prudent, conservative type of investing. However, apartment building investing isn't a "What the heck? I have a few extra dollars. Let's see what happens" type of investing. Apartment building investing, whether buying or selling, is serious business. The marketing of apartment buildings often puts tens - or even hundreds - of thousands of dollars at risk.
Some owners leave more to chance than is necessary when they decide to sell. They don't think as objectively as they might. Perhaps, having always done business a certain way, they suppose that everyone operates as they do. What may happen? Well, when these individuals decide to sell their apartment buildings, they may receive less than the maximum return.
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Master's Tip: Some investors will let Nardo
know that they are always ready to sell their properties if they can
sell for more than fair market value. If you own a six family house that
you could replace for $250,000, would you sell it for $300,000 or
$325,000? If someone really wants to buy your property, is there a price
at which you will sell it to him or her? Know that price.
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For instance, consider the following situation. Five experienced and knowledgeable prospective buyers look at the same Main Street apartment building.
Buyer No. 1, Apartment Building Buyer, is strictly an apartment building investor. Like many old timers in the business, he hasn't gone wrong yet using his trusty Gross Multiplier of seven times income. Since the gross income from the Main Street building is $40,000, Buyer No. 1 makes an offer of $280,000.
Buyer No. 2, Handyman Buyer, is a contractor by trade. He has been very successful over the years fixing up properties and increasing rental income. Buyer No. 2 sees upgrade potential in the Main Street building and offers $300,000.
Buyer No. 3, Syndication Buyer, is a real estate syndicator. She organizes real estate limited partnerships. She has been anxious to buy a property such as the Main Street building for the tax benefits and cash flow, which she can pass on to her limited partners. To her partnership, the property is worth $320,000.
Buyer No. 4, Condominium Converter, has been very successful converting smaller apartment buildings into condominiums. She sees that the Main Street property has excellent conversion potential. She feels that she could be in and out of the project in less than a year. From her perspective, the property is worth $340,000.
Buyer No. 5, Developer, has an edge. His edge is that he is well connected. He has pals everywhere. Buyer No. 5 looks at the Main Street building and sees not an apartment building, but a new retail and office complex. He has the friends to make the changes. To fulfill his ambitions, Buyer No. 5 would be willing to pay $400,000 for the site.
Give Your Home "Curb Appeal"
There is a very good chance that early in your investing career, you will be buying and selling properties to raise investment capital. Oh, those first impressions. As a seller, you hope the first sight of your home will elicit the strong emotional response from a prospective buyer that says, "This is it". Often, before the buyer walks through your front door, the sale has been won or lost. In fact, many buyers will concede more than a few points from their interior "must list" (the house must have a fireplace, must have a finished basement, must have an eat-in kitchen, etc.) if the exterior curb appeal - what the prospective buyer sees as he drives up to your house - is strong enough. Why? It's human nature.
There is a strong pride factor in homeownership. A buyer lives in a house and can make concessions and make do, but it's the exterior that the world sees. It is the exterior of the home that immediately reflects on the owner. Regardless of price range, the prospective buyer/owner wants the house to look good for that price range. The new owner anticipates meeting his or her friends at the door for the first time and to have those friends smile with approval and sincerely say, "What a nice house". Curb appeal. Things to consider:
Determining the best approach route to the house
- Is one avenue to the house superior to others?
- Can neighborhood amenities (schools, churches, stores, transportation, recreational facilities, etc.) be identified en route?
Finding the best place to park
- At what angle (from the driveway? from the street? from across the street?) does a buyer get the best view of the house and grounds?
Making the landscaping work
- Does the lawn need seeding, sodding, mowing, or raking?
- Do the beds need weeding or mulching?
- Do the shrubs and trees need trimming?
Checking the driveway
- Does the driveway need patching or sealing?
Making the entry door inviting
- Does the door color complement the house?
- Does the door need repainting?
- Does the door open without sticking?
- If there is a storm door, is it in good shape or should it be replaced or removed?
- Do exterior stairs or railings need attention?
- Is the doorway well lit?
- Is the door hardware in good repair and shining?
- Does the entry mat need replacing?
Checking the exterior
- Does the house and/or trim need painting?
- Are the gutters clean and in good shape?
- Does the chimney need repointing?
- Is the roof clear of debris?
- Are the windows and storm windows sparkling clean?
- Do the curtains, drapes and shades, as seen from the outside, complement the look of the house?
- Are the garage doors closed and in good shape?
- Are toys, bicycles, hoses and garden tools in their proper places?
- Is all trash removed or stored properly in containers?
- Can any cars that do not add to the appeal of the house be parked elsewhere?
Creating the special effect
- After dark, are all the lights, inside and out, turned on to give the home a warm look?
- Are seasonal flowers planted in front beds and/or in a bucket near the front door?
- Would a new doorknob, door hardware, house numbering or a new mailbox help?
- Is a seasonal decoration hung on the door appropriate?
- Are floodlights warranted for showcasing or security?
Quick Land Evaluation Check List
Spot a sign for land that looks promising?
See a land ad in the newspaper that sparks your interest?
Receive a call from Nardo?
Have a hunch about a promising area?
What kinds of information do you need to make a preliminary evaluation of the parcel? Here's a handy checklist to get you started on the right track:
Given current and anticipated demand, what is the highest and best use for the property?
Other than the highest and best use, to what other uses could the land be developed and still make investment sense?
What uses are permitted under current zoning?
If zoning must be changed, how realistic are chances for rezoning, a special permit or a variance?
Approximately how long would the approval process reasonably be expected to take and at what cost?
Is the price fair and comparable to the sale price of similar parcels?
Does the acquisition cost reflect a fair anticipated return?
Are land preparation cost estimates reasonable?
Is seller financing available?
Is development financing available for the intended development?
Are adjoining parcels available for present or future expansion?
Continuing Education: http://www.ahahome.com - American Homeowners Association. This is a membership organization but the site offers a wealth of free information, too! Hundreds of helpful tips, from repairs to choosing a contractor! Links to many other useful sites.
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