FACT FRIDAY!!!

Investigating an income property is a lot like a detective story. You're never quite sure if what you're seeing is the whole truth, or even relevant to solving the case. We wade through reams of facts in search of bits of information that, when considered as a whole, point to the right conclusion.

Part 1 of this series discussed Financial due diligence, Part 2 covered Operations. This article addresses the third category, the legal standing and physical condition of the property.

Legal and physical information

The deed, title report, and survey, are often combined into one document—the title report. I always order a title report for a property independent of whether the seller supplies an existing title policy. It is relatively inexpensive and it provides an update for the existing report.

The title binder (a preliminary commitment to issue a title policy) will reference and copy the deed and list all known encumbrances on the title to the property. Pay attention to the section called "Exceptions," as those are the matters the title company is not insuring against.

It is customary and expected for the report to except matters of zoning, easements of record (listed by recording instrument), and any known encroachments and covenants. But a report that, for example, excludes "all matters of survey" is amajor red flag.

The survey is one of the most important documents in real estate. Most sellers will have some sort of survey, but its quality may not be sufficient. The gold standard is a survey drawn to "ALTA" standards. The acronym stands for theAmerican Land Title Association. An ALTA survey is prepared in conjunction with a title report and shows any easements, encroachments, or other burdens on title.

I strongly recommend that any buyer obtain a detailed and accurate field survey of the property. Encroachments and other matters of survey can hide potential liability, and the sooner you know about it the better.

Third party reports and inspections

Standard third-party reports required by lenders and owners are the appraisal, environmental, zoning compliance, and building/engineeringreports. These reports are usually not ordered until all other due diligence has been examined and accepted. They are prepared at the buyer’s expense, so there is no reason to incur the cost if problems are found in the financial or operationalconditions.

The seller may have an existing appraisal and be willing to share it; however don't be surprised if the answer to a request for a copy is "no."  In most cases the property or the market will have changed in the interim, and the value may not be relevant. If you do get a copy of an old appraisal, it can be of some help in gathering market information and establishing the competitive set for the subject property. 

Phase I Environmental Reports are the minimum standard for most lenders. Based on the findings, a conclusion will indicate whether or not any further action is recommended.

For a site with suspected contamination, a Phase II report with sampling may be required. A site with confirmed contamination from a prior user, or with an environmental risk identified in a Phase II project, will require a Phase III environmental report, remediation, and ongoing monitoring. Once closed, an "NFA" (No Further Action) letter is issued. This is a key document for any site with an environmental issue.

An important note about the use of environmental reports prepared for the previous owner: It offers no evidence of performing adequate due diligence (important when establishing liability) for you as a buyer. The report plainly states that it is for the use of the original parties only and not to be relied upon by others [emphasis added].

That means you will not be able to use the report to establish that you performed proper due diligence to avoid liability for any problems found after closing, even if pre-existing.

There are two solutions. First is to commission a new report. Standard Phase 1 fees range from a low of around $1,250 to a high of $2,500. Competition among engineering firms works to the owner's advantage.

If the previous report is available and has a finding of "clean" or "no further action (NFA)," then get a less detailed report known as a Transaction Screen. This is a review of the property conditions brought down-to-date from the previous report.

A transaction screen usually costs a few hundred dollars and does not have to be completed by the same firm that prepared the original report. Most importantly the transaction screen qualifies as adequate due diligence in any future dispute.

Except in the most severe cases, environmental problems do not spell the automatic death of a deal.

Get a zoning certification from the planning office of the appropriate jurisdiction. The current zoning compliance can usually be verified with a phone call--and it is essential. Do not accept anyone'’s opinion or belief about zoning compliance. Make the call personally.

Also read the zoning district regulations, usually online. Land-use ordinances are the rules of the road in real estate. Without knowledge of how they affect the property, you are essentially sitting down to a poker game and asking someone else to tell you what cards you have and how much to bet.

Look for maximum density requirements, development standards, and other information that may indicate the property can be expanded or eligible for a change of use.

The Building/Engineering Report is the commercial property equivalent of the home inspection. The inspector will test the property systems, evaluate structural components, and note any deferred maintenance. Depending on the property type, additional inspections may be required for HVAC systems, Fire Suppression Systems, Elevators, Boilers, health permits or other licensing.

If you're not familiar with building systems, you'll want to commission an independent inspection. Many HVAC contractors will conduct an inspection and give a written report for a nominal fee. It doesn't take but one blown HVAC compressor to eat up an entire year's capital improvement budget.

Leave No Stones Unturned

Don't think that by hiring professionals, the full extent of property condition is known. The pros are human, too, and even the most experienced veterans make mistakes, including this author...

A couple of years ago we had an office building under contract for which we had completed all the above inspections, accepted the property, and set the closing date.

One evening, I had to meet the surveyor to get a corner remarked. It was the first time I had been on the property after business hours, and as I walked through the parking lot, I was astonished to see a huge pothole in the pavement that everyone had missed.

How could that happen?

Simple. During business hours the lot was full, and the cars hid the pothole. Which just goes to show we'll never get it perfect.

For any questions, please comment below. For investment services, leave a message at 314-246-9484 or you can email at dhibb99@gmail.com

DO IT YOURSELF THURSDAY!!!

  

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WHAT YOU NEED TO KNOW WEDNESDAYS!!!

 

Tip 1: Banks do not want to foreclose on real estate

I've seen a lot of investors miss out on huge profits because they just don't understand how far banks will go NOT to take back a property. Banks don't want to own real estate. Banks don't want to have bad loans on their books. All they want is people to pay them on time and take care of the house.

When you understand this, you recognize how much power you have when negotiating with lenders to find creative solutions to help sellers solve their problems. The key is to COMMUNICATE with the lender about what is going on and what you need to make this work for their best interest, which is having the loan brought current.

Many times I'll do a three-way call with the seller and the lender. I'll coach the seller to introduce me to the lender as a, "friend who knows more about this real estate thing than I do and who is helping me to understand what exactly is going on and how I can make sure you get your money."

Then I take over and find out the specific details and exact status of the loan. Many times I negotiate a payment plan, known as a forbearance agreement, with the lender right there on the phone.

One word of caution, don't tell the lenders that you are buying the property because they might not like you buying the property without paying off or assuming the loan. If they ask any questions about who you are, which they almost never will, simply repeat that you are a friend of the sellers who is trying to help them out.

Tip 2: Foreclosure tidbits investors don't know

What happens if the lender doesn't get all its money out of the foreclosure sale? Many homeowners think that once the bank foreclosure sale has happened, all their worries are over.

This may not be true. In many states the lender can get a "deficiency judgement" from the court which means the borrower (homeowner) owes the lender any money that the lender LOST from the whole process.

Does the lender make money in foreclosure sales?

No, they're not allowed to make a profit. Any money made in excess of the amount owed the lender, including the foreclosure costs, will go to the borrower. The reality is that rarely will the borrower get anything for his or her equity in a foreclosure sale.

Lenders can get money for fees like:

·  Late penalties

·  Accrued interest

·  Attorney's fees

·  Court costs

·  Filing fees

·  Title work fees

Tip 3: Other ways property owners default

 

While we usually see property owners default on loans by not making the monthly payments, there are other things home owners do that can trigger the foreclosure process.

·  Homeowner fails to pay property taxes which creates a lien that jeopardizes the lender's security

·  Homeowner fails to pay a Home Owner Association fee

·  Homeowner transfers title without getting the lender's permission

·  Homeowner does something to the property that diminishes it's value

All of these things COULD trigger the lender to foreclose on the property, but rarely will they be the cause of the bank foreclosure. By far the most common reason for a lender to foreclose is non-payment by the borrower.

Tip 4: Don't be afraid to knock on doors

One useful technique to find great deals is to literally knock on the doors of owners who are default.

Can we really mean just show up at their doorstep and knock on their door? Yes!

Let's face it, out of the 50 other investors who have the Notice of Default or Lis Pendens information about the sellers in the early stages of foreclosure, 25 of them will pop a postcard or letter one time in the mail to them.

Five of them will go to the effort of tracking down the owners' phone number and giving them a phone call. And only one or two will actually face their fear and go knock on the seller's door.

Now this is time consuming and takes a bit of finesse to make it pay off for you. The biggest clue that it is worth the time for a personal visit is if you reasonably expect there to be either:

1.    A lot of equity in the house; or

2.    The property is in an area where you are very interested in acquiring long-term keepers.

If one or the other (ideally both) of these criteria is not met, then give the sellers a call on the phone or plug them into your mailing sequence but don't waste your valuable time visiting them.

You might be thinking that the homeowners wouldn't want you to come to their door. In many cases they really are in desperate need of help.

For example, a student of ours in Columbus, Ohio knocked on the door of a couple who were in the end stages of foreclosure. The sellers were a nice couple who had gotten caught up in an unfortunate financial situation.

Our student, Mike, agreed to make up the back payments and stop the foreclosure. Then Mike would fix up the house, take over the payments, and resell it. There was a large chunk of equity in the house so Mike agreed to give 10% of his net profit back to the sellers to make it even more of a win-win deal.

What to say when you knock on the sellers' door

Here are two scripts of what to say when you're knocking on their doors cold:

Script One: This one works well if the sellers are still in pre-foreclosure OR if you're not quite ready to use the gutsier script below.

Knock, knock. [Step back off the porch, turn sideways, assume a passive, harmless posture to put them at ease.]

Owner: "Yes?"

Investor: "Hi, (looking as harmless and Bambi-like as you can manage) my name is Jim and I'm an investor who is looking to buy another house in this neighborhood. I was wondering if you knew of anyone in the area who might be at all open to selling their house if they got a fair offer on it?"

Owner: "Well, actually I might want to sell my house."

Investor: "Oh, okay, but I've probably caught you right in the middle of something, huh?" Owner: "No, I was just making dinner. Now's as good a time as any." And away you go with them showing you the house and following the Instant Offer System.

Script Two:

Knock, knock. Owner: "Yes, can I help you?"

Investor: "Hi, my name is Jim [looking passive and harmless like a small puppy dog], and I'm an investor who helps out folks who have a house that's in trouble. Is your house in trouble?"

Owner: "No, I don't know what you're talking about." Investor: "Oh, [looking down at his clipboard and scratching his head] I'm a little confused here. It says here that the city thinks this house is behind in it's payments. Heck, they even have it listed in the legal notice newspaper. But they probably got all that wrong, huh?"

Owner: "Can I see that paper?"

Investor: "Sure." [showing the owner the clipboard that has a list of the owner's house with the date that the Notice of Default was filed or even a copy of the legal notice publication with the seller's property highlighted]

Owner: [a bit softer now] "Well I guess I must be a bit behind. I thought the bank would work with me longer before they did this."

Investor: "Yeah, I know--banks sure can play real tough with little fish like us.

"You know though, a lot of times banks make mistakes when they send you all that paperwork that can make them have to start all over again from the beginning. I was visiting with another homeowner like yourself the other day when we spotted how the bank misspelled her name on the official notice. I helped her get another 60 days' delay in the process to give her more time to find her best solution.

"If you'd like, I'd be happy to take a quick look over the paperwork they sent you to see if I can spot any mistakes they made. Would you like me to sit down for a second and see if I can spot anything in the paperwork?"

Owner: "Would you?"

And now you're in the house and connecting with the owner.

I got an email from an investor who found a great deal by doing some research at the courthouse to find sellers in default. Next he went and knocked on the seller's door. The seller's wife answered the door, and the three of them sat and talked for and hour and a half.

Our student funded the deal by taking on a money partner, and the two of them will split the $50,000 profit 50/50. The best part was that he helped the sellers avoid foreclosure.

For any questions, please comment below. For investment services, leave a message at 314-246-

TIP OF THE DAY TUESDAY!!!

Expert Real Estate Tips: Shopping for Mortgage Brokers

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Main Question of The Day Monday!

As you start doing more and more real estate deals, as an investor (unless you have unlimited resources--the consummate deep pockets), sooner or later you will reach the limits of what you can do on your own.

Some investors find this upsetting, but I like to look at this as a path to boundless opportunity. I say this, because it gets you into the habit of networking to find private capital, one of the best ways to work the business that exists.

Private capital is everywhere and arguablylimitless

This is because private capital is not limited to banking institutions or subject to the rules that govern the world of commercial finance. In short, anyone you pass on the street could be a private lender.

Those Americans who are sick and tired of seeing their stock investments go in the tank are all potential private lenders. Anyone who see value in real estate but otherwise doesn't really know how to proceed is an ideal private lender.

The key here is that you need to go out and find these people. Most don't advertise or wear t-shirts that say "I have money to lend." You must first be a promoter of what you do.

For example, apartment houses as investments make perfect business sense because when they are purchased properly, they have proven income streams that are almost "economy proof."

Unlike other businesses, apartments put roofs over people's heads, and that gives them lasting value. In fact, it could be argued that apartments are an even better investment when the economy is bad because fewer people are looking to buy homes.

This is the message that you must deliver to potential private lenders, and the business model you follow will be more than logical; it will attract the capital you need.

The pursuit of private capital is critical for your long-term success. So, know that it exists, it does work, and once you know the rules for how and when to use it, the sky's the limit.

For any questions, please comment below. For investment services, leave a message at 314-246-

FACT FRIDAYS!!!

How to make renters feel like homebuyers!

Most rental residents treat their dwellings like renters, not home buyers. That's because rental residents "think" like they are renters, in almost all cases. I've found it is to the landlord's advantage if tenants think like future home buyers.

Residents who think like home buyers:

Take better care of property than average tenants

Pay rent on time and fulfill other obligations

Handle minor repairs and needed maintenance

Add upgrades/improvements to the property

Welcome, Future Home Buyer

Therefore, from the very first month a rental resident moves in, one of my major objectives is to change their mind set from renter to future home buyer. In fact, my opening letter of introduction (or cover letter) to announce my rental policies starts off: "Welcome, Future Home Buyer."

The process to change a resident's mind set from renter to future home buyer is not instantaneous, but gradual yet continual and very effective. Here's how to start the transformation. In the first month, welcome the resident as a "future home buyer" and use that term in both oral and written communication.

Give "On-Time Thank You" vouchers

At the start of the second month after the resident pays the rent on time, send your resident an "On-Time Thank You" voucher valued at $25 or $50 good toward the purchase of the home they are living in (or any one of your homes if that is an option you would consider).

The first time your residents receive this voucher, they probably will not call you up in immediate urgency to buy your home. But this strategy will start their minds thinking a little about the possibility of buying.

Oh, I almost forgot; one small but significant point about how the voucher system works. If a resident is ever late, any vouchers received up to that point are considered null and void. This point is spelled out on each voucher as a reminder to residents.

This is significant because when residents first start receiving the vouchers, it affects them. Even though they may not be sure if they will ever buy something, most people don't want to lose out on something of high perceived value that they can receive. Residents will continue paying you on time so they can keep getting the $25 or $50 vouchers.

The vouchers begin to add up to significant amounts after several months, up to $600 in a year. Residents don't want to simply throw that much money away or lose it. Some landlords offer a once a year only, late payment without complete loss of accrued voucher total.

With a late payment, owners deduct a penalty of 25% or 50% off accrued total instead of penalizing the full amount. Whatever method you choose, the penalty should be significant to be effective.

Your residents will do everything within their power to be able to keep paying the rent on time each month to keep from losing the possibility of using the vouchers. Don't be surprised if the residents begin paying a week to ten days early to insure they don't come close to missing out.

Hold "home-buying" discussions

By the middle of their first rental year, you will want to ask the resident if you can have a "home-buying" discussion with them. Hold home-buying discussions twice a year. They are an important part of the transformation process. During home-buying discussions, you share with your resident the buying possibilities, outright purchase, lease option, land contract, etc.

As the owner, you should also mention your criteria for choosing whom you would sell the home to under favorable terms. Home buyer criteria should include someone with good payment history and good maintenance and upkeep history. As the transformation from renter to future home buyer continues because of your discussions, your resident will take excellent care of your property.

It's important that you understand that the objective of changing the resident's mind set is to get residents to "start" to think of themselves as future home buyers, but it is not necessary that they actually buy a home. In fact, please note that you do not allow residents to cash in on their vouchers until an actual closing to buy the house takes place.

Even though you are starting to change the resident's mind set, in most cases you will not see the final transformation from renter to future home buyer to actual home buyer. However, just getting residents to think differently of themselves as future home buyers will cause them to perform differently.

Even if they don't buy one of your homes, these steps start the transformation from renter to buyer and will greatly benefit you, the landlord. You will get rents on time, residents will take care of minor repairs and maintenance.

You are not dealing with a renter; you are working with a future home buyer whose performance determines whether he or she will be able to buy. Stay in control and make the most of your assets.



For any questions, please comment below. For investment services, leave a message at 314-246-9484 or you can email at dhibb99@gmail.com

  

DO IT YOURSELF THURSDAYS!!!

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