Monthly Archives: January 2010

What the Heck is Probate Real Estate?

Through the magic of technology we’re actually away on a little two year anniversary trip to Whistler… Dave surprised me with a get away to celebrate … but thanks to this guest post from Ron Mead you will barely miss us!

If Ron’s name sounds familiar it’s probably because he was my biggest competition in the Battle of the REI Blogs. He kept us fighting right up until the end.  Ron’s an expert on probate real estate… something I knew absolutely nothing about before the battle. He was kind enough to share a little overview with us, and with you! If you have questions please comment below and I will ask Ron to stop by and answer them for you!! Enjoy ….

What the Heck is Probate Real Estate?

by Ron Mead

For many folks, the first time they hear the words Probate Real Estate, they head for the hills.  Pictures begin floating through their heads of Perry Mason like attorneys, court rooms with judges pounding their gavels, complex legal documents by the bushel full, deals that take forever to complete……Yikes!  What a nightmare!!!

Well, let me assure you none of this is true…..if it was I WOULD NOT have been working in Probate Real Estate for the last 14 years.

But, it’s really pretty simple stuff…….as a wise person once said “It’s easy if you know how!

Hi, I’m Ron Mead, The Probate Guy and I’d like to take a brief moment and explain a little about how I discovered this lucrative field and why I think it is one of your very, very best opportunities in Real Estate investing.

Back in 1995, my Father passed away and my Mother followed in 1996 so I ended up inheriting a house about 250 miles from where my wife and I live here in Oregon.  To make along story short, it took many, many two day trips, lot’s of meetings with different real estate agents, tons of phone conversations, a couple of U-Haul truck rentals, seven months and lot’s of my time before I finally got Mom and Dad’s house sold.  It was a huge time consuming event that I didn’t really need at that point in my life.

One day as I was driving down I-5 during one of my trips back and forth, I envisioned someone calling me and making me a cash offer, even if it wasn’t the full price I was asking.  I would have taken it in a heart-beat.  That didn’t happen but the idea stuck in my head.

So when we finally got the house sold, I thought to myself “I wonder if there would be a way I could contact others who have inherited houses and see if they too might be interested in a quick sale?” If I could figure out a way to contact them and send them a letter, a certain percentage of them would be interested in a quick sale at a discounted price rather than having to go through the same hassle I had.

Right then and there was born my new career in Probate Real Estate.

Well guess what? My hunch was right.  It took me three months to figure everything out but I finally got my first little deal…….a small condo that I bought and resold, making a nice profit of $9300.  Sweet!

But you might be asking “Why would sellers (heirs) be willing to sell their properties to you at a discount?”  Good question!  There’s several reasons.

One, the heirs, just like you and me, don’t need another project in their lives.  Today, we all lead very busy and demanding lives and the thought of having to go through all the hassles of cleaning up and selling Mom and Dad’s house is not very appealing.  Some of the folks you contact will be quite willing to take a discounted price for a quick sale.  Other’s won’t.

Two, the concept I call “Free Money”.  When you inherit a house, you are really the beneficiary of someone else’s work.  Consequently, you are much more willing to negotiate the price on this “gift” than you would be if this was your very own house.

Three,
distance.  Often times the heirs don’t live in the same city as the inherited house and trust me, traveling back and forth gets to be a real pain.  If the kids live in Bangor, Maine and the inherited house is in Tucson, Arizona, believe me, you will quickly have a motivated seller.

Four
, the heirs are making monthly payments on the debt secured by the house.  If they are making these payments, the heirs will be highly motivated to sell very, very quickly.  Nobody likes having to write a mortgage check for a house they don’t live in. There also might even be some back taxes that are coming due and the heirs will need some quick cash.

So I think you can see thee are lots of reasons for the heirs to be interested in your discounted offer.  All you have to do is contact them.

Now you might be thinking, “RonBo, what about all the legal hassles you have to go through to buy the house?”

Well, this is the interesting part that very few know……… Once the court appoints what is called the Personal Representative of the estate and that person has the authority to act for the estate…..and that includes selling all the personal and real (house) property so that’s the only person you need to deal with……no attorneys, no courts, no legal paper work.

So that’s how easy it is folks, just work out the deal with the PR (which normally is a 20%-50% discount) and it’s just like buying your next door neighbor’s house.

Oh, one thing I forgot to mention. Even in times like these, the Probate market is even bigger than the foreclosure market and until someone figures our how to keep us alive forever, it always will be!

Ron Mead, The Probate Guy, bought his first investment property in 1979.  He has specialized in Probate since 1996 when he inherited his folk’s property and found what an ordeal it was to fix up and sell.  He and his wife Sharon live in Portland, Oregon where he now teaches others how they can begin their own profitable career in Probate Real Estate.  For more information, please visit www.BuyProbateProperty.com.

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How To Determine Fair Market Rent for a Property

by Julie Broad

Finding the Fair Market Rent Rate is a Balancing Act

One of the most important things you can do before you buy a property – and then again at any time you find yourself putting tenants in that property – is estimate the rent rate you can charge.

If you set the rent too high you’ll have trouble finding and keeping good tenants but if you set it too low you’ll be leaving money on the table that could have been profit for you!

So how do you make sure the rent rate you think you can charge for a property is fair market rent?

First of all … you need to look around the area.

How much do similar units rent for in your neighborhood?

You can do most of this research from your home … although you’ll have a better sense of the area and the rent rates if you actually walk around

But first thing… go online and check the local online postings for places for rent:

There are tons of websites have local apartment and houses for rent. Do a quick Google search for your area to find the ones that are most used in your area and then check out what is on the market and at what price.

Next walk around the area of the property.

Look for “for rent” signs. Pull out your cell phone and call them and find out what they are offering. Find out what amenities they mention first.

If you don’t want to call then and there write the number down … or even better take a picture with your phone so you have the number on the sign and what the property looks like.

In many areas it’s still worth picking up a local newspaper to see what is advertised. These days it’s mostly just professional property managers that still use the paper to advertise unless there is a good quality online classified ad section that goes along with the newspaper ads. We test it out every once in awhile and just find that we pay a lot for very few leads … with online ads we pay almost nothing and get dozens of great prospects.

Finally, ask people who are area specialists.

We ask realtors and property managers we know. Most of the time they both can tell you, for example, what a 2 bedroom condo will rent for in that area or a 3 bedroom home

Now… before you rush out thinking the property can be rented for the average rent rate in the area you need to determine specifically WHY properties rent for what they rent for.

First of all … make sure you are comparing properties of the same size. Find out the number of bedrooms, bathrooms, availability of laundry, parking and other important features tenants ask about. Then find out more specifics like the exact location of the property relative to transportation options and shopping. Also compare the exact size … if you compare a 600 sq foot 1 bedroom plus den property to an 1100 1 bedroom plus den property you aren’t comparing apples to apples.

Specifically take into account:

  • Location of the property in proximity to amenities like schools, shopping & recreation,
  • Square footage,
  • Number of bedrooms,
  • Number of baths,
  • Utilities included or not?
  • Availability of a garage or covered parking?
  • Amenities included like a washer/dryer, yard, storage space, deck, fireplace?
  • Are pets allowed?

Once you have done all of this you should have a very good sense of your rental market area and the average rent rate so you’re ready to set the rental price.

Determining a fair rental rate can be a tricky task though. Too high and your unit sits unoccupied; too low and you’ve lost vital income.

In general, you want to be in the middle of your neighborhood’s rental range.

Knowing the average rate and what similar properties rent for will give you a good idea of what you can charge. It’s also a good idea to have the sense of the local competition and how many units are available for rent on the market. If the area market is flooded with available rentals, you may have to lower your rent to draw tenants. If the rental market is tight then you can probably go for a slightly higher rent.

This will help you know which direction in the range you need to go, but  what if you’re not sure?

You can always test the market. Your gut feeling about the rent you can charge at this point is probably right but you can always put an online ad out there on the high end of what you think you can get.  If you decide to do this you have to react quickly … you want to make sure you rent your property quickly so drop the rent quickly if you haven’t started to receive responses within 48 hours… and drop it by at least $50 to make a difference in the responses you are getting.

Check out renting your property for more tips on property management and landlording.

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What’s the Missing Link of Success

by Julie Broad

Months ago I shared a daily account of the most life changing event we’ve ever attended … Engage Today 2009. It was the most incredible event we’ve ever attended. It was truly a life changing experience.

And finally you can see a video featuring one of the most powerful moments of the event. Several of the world’s top experts revealed their thoughts on this little-known, but VERY important ‘secret ingredient’ of success.

If your real estate business isn’t where you want it to be right now, watch this 10 minute video.

It’s powerful, and may just be exactly the key you’re missing right now that’s standing between you and everything you want! You have to put in your email address to watch the video but it won’t cost you anything!

Watch the Video Here

While you’re there, check out the backstage interviews and see what Dr. Stephen R. Covey says – it’s powerful!

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REI Expert Interview of Julie Broad

by Julie Broad

Just wanted to share this little video with you. It’s part of an interview I did with Patrick Riddle of Must Know Investing for his Real Estate Investing Expert interview series. He asked me some great questions like:

  • What’s something 99% of the population doesn’t know about you?
  • Who is your #1 life lessons mentor?
  • What book would you recommend to someone that is totally down and out?

I had a little fun with the interview – showing my Olympic spirit by sporting some official Vancouver 2010 Olympic clothing! Check it out:

For the rest of the interview please check out Patrick’s Blog post: REI Expert Interview: The “Must Know” Info on Julie Broad and RevNYou

BY THE WAY – we’ve just finished up a new real estate investing video series!! We’ve got 31 Real Estate Investing Videos … all totally free!! You can sign up to receive all 31 videos right here:

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A Broad Rant About Guru Real Estate Investing Courses

by Julie Broad

Last week Dave and I attended a real estate investing club meeting in Langley, BC. We went for many reasons… the biggest ones being that we like to meet like minded people, we wanted to meet the man behind the club, and we had a few questions about sandwich leases that we wanted to find answers for. Since we weren’t going to be far away from the meeting, we stopped in.

The feature presentation was from a local area mortgage broker. And he did an excellent job of explaining the important things you need to understand about mortgages as a real estate investor. It was a good refresher for us and an excellent talk for those new investors in the room. When we got to the part where we started discussing credit scores the mortgage broker mentioned a couple he just tried to find financing for that had a bad credit score because they had 16 credit cards.

"Get as many credit cards as you can" suggest many guru real estate courses

He went on to explain why having so many credit cards can be very damaging to your credit and how you should keep it to five max. He also gave some other great tips like to keep your credit card limit high but always keep the amount you owe low because your credit will be negatively impacted with balances that are close to your limit. For some other tips on how to effectively manage your credit, check out this article on how to check your credit.

At this point one of the new real estate investors in the room raised her hand. She said “I just took a real estate investing course that told us to go out and get as many credit cards as possible. They said that having all that credit was a good thing.

I actually felt Dave shudder beside me. That brought back memories of the real estate investing courses WE took early on as investors. And some of the advice that causes so much damage that it can take years to recover from (as it did with us). We knew instantly that it was one of a few get rich quick guru programs that had come through town recently … but the mortgage broker was horrified and said “Who taught you that?

Sure enough … she confirmed that a get rich quick guru course had struck again.

And the worst part is I think that this woman didn’t actually believe the mortgage broker when he explained why this was horrible advice. She tried to argue “well you’re not necessarily going to use the cards you’re just supposed to have them in case you need cash for a quick flip.

If it weren’t for the fact that we were trying to keep a low profile –  I would have stood up and suggested that there are many things that guru taught her that were high risk and very dangerous if she decided to act upon any of them without learning the fundamentals of real estate first.

There are also things that the guru taught just because they stand to make money off your fear!!

Here’s some of the horrendous things we were taught at a get rich quick guru program and the motive behind the lesson:

  • You must have a triple tiered corporation – you are stupid and foolish if you don’t have one. They actually used these words, explaining all the horrible risks and extra taxes we’d pay without one. Um… guess we’re beyond stupid because we bought a two tiered corporation and were not able to buy and finance a single property in that fancy pants $3,000 corporation the guru sold us – and for 3 years we tried!
  • Call your credit card company and demand a lower interest rate and higher balance on your credit card. Conveniently they get us to do this during your lunch break in the course. We did as we were told – and by gosh – we were successful. It’s a good thing too because thanks to that call we had $20,000 of available credit on our card that we could use to finance the big mentorship package they convinced us to buy at the end of the weekend. And, they reassured us, with one deal we’d pay it off so why not?! By the way, it actually took us over a year to pay it off and then 2 more years to fix all the problems we created for ourselves by buying several troublesome high leverage properties.
  • Wholesaling, assignments and sandwich leases are going to make you tons of juicy and gigantic cheques within weeks of learning the techniques. These were hot topics at the course we took because the cash looks so much juicier than a ‘boring old buy and hold’ that takes years to get super rich from. And yes, one good assignment or wholesaling deal CAN give you a nice juicy cheque but guess what, you aren’t going to find that deal a week or two after the course because there are still a lot of things you have to learn to do that first deal. But luckily before you leave the program they help you to realize that there are many more details you need to know before you can do those deals – AND they offer just the solution – specific courses on each subject for $3,000-$4,000 so you can go out and learn more.

Listen – we fell for everyone of those things so don’t feel bad if you did too. These folks are master marketers. If there is one thing the get rich quick gurus do know how to do it’s sell! And we were determined to be successful as real estate investors so we believed what they said and dove head first into everything they had to offer.

It’s a good thing we were determined or we never would have picked ourselves up and gone on to succeed after the early mistakes.

But now when I meet people who actually DO all these risky “techniques” that the latest guru has taught them I want to shake them to their senses and save them from the years of stories and pain we experienced.

People – you have to educate yourself in order to be successful as a real estate investor. And good quality real estate investing courses ARE a fantastic way to meet like minded people, get solid advice, and learn what you need to learn to move forward.

But look for the people who are genuinely trying to help. Look for someone that presents a realistic side to the story. I look for teachers who are upfront about risks, the time and the effort you have to invest. I also look for people who are teaching fundamental principles as well as their particular spin on investing. And most importantly, I want to know whatever else they are selling in advance, so if they are telling me I should invest in Florida I know whether they are saying that because they also happen to sell investment properties in Florida or because they just like the market fundamentals. It’s ok either way but I want to understand their bias. Just like if they say I need a 3 tiered corporation I want to know whether it’s because they are going to upsell me their package for  a 3 tiered corporation or whether it’s because it actually saved them from losing everything in a law suit.

As the next guru rolls into the city nearest you … I beg you to think carefully about what you NEED to learn. And if that course will give you what you need then go. But before you sign up for ANYTHING they are selling think about the bias that might be behind what they are teaching. And question what they are saying. Why in the world would anyone ever suggest you take on 15 different credit cards? Can you imagine what a mess your credit would be if you actually started to use them and something went wrong – and by the way some things will go wrong as you get rolling – so why put yourself in such a dangerous position? Just having so many credit cards does serious damage to your credit that takes time to repair without even using them. And as a real estate investor you should covet, love and care for your credit score.

And yes, I do have a real estate investing course to sell that is focused on the fundamentals, and yes I welcome you to purchase it, but no… that is not why I am ranting against guru real estate investing courses. I am ranting because I care about the moves you make as you become a real estate investor – and there are things you can do to make your life a whole lot easier as you start – and spending tons of money on guru programs isn’t one of them!

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The Nuts N Bolts of Holding VTBs

by Dave Peniuk

If someone were to ask me what the toughest part of 2009 was I wouldn’t hesitate in saying it was finding financing for our real estate investments. We’ve spent a lot of time lately talking about private money as one of the solutions to the credit crunch, but it’s been awhile since we mentioned our preferred source of funds in many cases and that is a nice VTB! And for a change of pace I thought I would write about it from the perspective of a seller … because there are many advantages to offering a VTB to a buyer of your property and as a real estate investor you should not only understand why you should almost always want to ask if the vendor will finance a portion of your property, but why you may want to offer a VTB on a property you’re selling!

What is a VTB some of you may be asking? In a “nut”shell (yes, quite clever I know 🙂 ), a VTB is a Vendor Take Back mortgage or loan. It is simply where the seller (Vendor) of a property is willing to provide some or all of the mortgage financing on that property.

When times are good (economy is improving, employment is rising as are incomes, all is well), you often see fewer VTBs. This is because the access to credit (getting loans/mortgages/lines of credit) is often “easier” and houses are selling at a steady to fast pace. Vendors are not as willing to carry financing because it is not as difficult to sell their house. BUT, and this is a BIG BUTT, when the economy is slowing, access to credit is more difficult, and properties are not selling as quickly, Vendors may be willing to get more creative in order to unload that property.

But – for you – a potential VTB holder,  it’s important to understand there are plenty of other advantages to holding a VTB that make it attractive even in a hot housing market.

You will often see investors more likely to hold VTB’s than a regular homeowner just trying to sell their house. This is because investors “get it”. They will likely know what a VTB is and know the advantages, both for themselves and for the buyer. In tough times, a VTB might make it easier to unload a property. But at any time, a VTB can allow a seller to make some additional money on the house by charging interest on the loan, as well as potentially defer some taxes.

Why earn 2% in a “high interest savings account” at your bank when you can earn 7% or more on your VTB?

But, there is risk involved with carrying “paper”. Let’s get the wrench out (remember we’re dealing with nuts and bolts!) and have a look!

VTBs are usually in 1st or 2nd position as a mortgage. If you, the VTB holder, are in first position you will get your money out first (assuming they don’t owe the government anything – because the government gets their taxes first!). You also are often able to get closer to your asking price when you offer a VTB. This is because the purchaser has fewer hoops to jump through, lower costs involved with purchasing (no appraiser is required, no lending fees to pay, less time involved seeking financing), and will often be willing to pay a higher price.

Second position has a few more risks. If you sell your property and your purchaser either assumes the current mortgage or brings in their own new lender but the purchaser wants to have higher leverage (increase the loan to value), they may want a VTB in 2nd position (behind the 1st mortgage lender).

Now, if you (the Vendor) are willing to hold that VTB in 2nd position, that means that you ONLY get your money back AFTER the 1st position Lender gets ALL of their money out first. This is only really an issue in the case of default, and foreclosure, but it certainly can happen! So, you need to think carefully whether you want to put yourself at risk.

So, why would you hold a 2nd position VTB?

  • You cannot sell your property any other way (i.e. the property is “ugly” and needs a lot of work, banks aren’t lending, purchaser can’t qualify for enough financing)
  • There is enough equity in the property even after holding a 2nd that you are somewhat “safe” and can earn a nice return
  • You know the property – because you used to own it – and feel comfortable making a loan secured to that asset
  • In second position you can charge a higher interest rate because there is more risk in the second position. So, instead of charging 7% in 1st position you can often ask for 8, 9, 10 or more percent interest. Of course it all depends on the other terms but you should be earning higher interest than the 1st position mortgage is charging
  • You would rather loan to a qualified Purchaser at a nice interest rate than put your money in a crappy low interest bond, GIC, or unpredictable stock/mutual fund
  • You want to delay Capital Gains taxes until the VTB is paid in full (you don’t pay Cap Gains taxes on any VTB loan amount until it is paid in full – but of course – I am not a tax accountant so be sure to consult your accountant for the nuts and bolts on that subject!).

So, you can see, there are many reasons why someone may hold a 2nd mortgage as a VTB.

And in some markets where people are struggling to sell it might be something to consider offering. As real estate investors we almost always ask for one, but we rarely think to offer one.

Julie and I have yet to carry financing on any of the properties we have sold. We always want our money out for a new investment opportunity, but we have asked (and received) several VTB’s when we have bought! Some were in 1st position (less risky to the Vendor), others were in 2nd (we couldn’t buy them without the 2nd in place), but to date none have been in 3rd position….but they do happen as well!  I do NOT recommend anyone hold a 3rd mortgage UNLESS there remains still some equity in the property (at least 10% available even after your 3rd mortgage) AND the Purchaser/Borrower is thoroughly screened AND, ideally, you hold the mortgage payment in an interest reserve account. (An interest reserve account is where the monthly interest payments for the year are put in a separate account so you get 1 year of interest payments set aside at the start. You don’t have access to it until the end of the year typically but it ensures it’s there for you).

So, the lowest risk place to be a Vendor holding the mortgage is always in 1st position.

The challenge with that is unless you own the property free and clear from any current debt you probably won’t have enough equity to offer the buyer a mortgage large enough to put you in 1st position. Which means you’ll often have to be happier with the riskier but more lucrative second position.

From a real estate investors perspective, we suggest you understand VTB’s even if you’re never going to offer one. You want to be able to explain the benefits to a prospective seller in the hopes that you can secure many of them. A mortgage from the Vendor usually won’t be anywhere near as difficult to qualify for as a traditional bank. AND, quite often the interest rate and terms can be quite good. The Vendor continues to earn money on their now-sold property, they delay their capital gains taxes on the portion that is held as a VTB (still have to pay income taxes on the interest earned through the VTB though), and they know and understand the security behind the mortgage (as they owned that home and the mortgage is secured against it).

In terms of structuring the VTB and getting everything organized for one – whether you’re holding it or getting one from a vendor, you must always always work with a real estate specializing lawyer who will put the documents together on your behalf. Please do not hire the cheapest notary in town to save $100. Get it done right. This will protect you and your ass…ets.  🙂

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Question of the Month: Upside Down – How Can I Buy More Properties?

Each month we select one of our Rev N You with Real Estate newsletter reader’s questions to feature as our QUESTION OF THE MONTH. We respond to everyone that sends in a question but the published question writer receives a Rev N You with Real Estate T-Shirt! Here’s December’s Question of the Month Winner!

This month’s question is from Colleen Bitterman:

I own 3 houses, 2 are rentals. I have learned a lot from your letters. My biggest challenge is to aquire more property to make this hobby profitable. I paid way too much for these houses & am upside down trying to survive.

Our response:

Dear Colleen,
First of all… 2 rental properties is a fabulous start! You should be proud of yourself for taking action and getting into the real estate market… many people never take the step. Have you considered trying to sell them through a rent to own program? This might be a way to get the cash flow positive while setting a sale price in the future that at least allows you to break even.

As for buying more properties…  first of all … spend a bit of time learning the fundamentals of real estate investing. Real estate investing is not a guaranteed path to wealth as you’ve discovered. You need to know what a good deal looks like!!

As for buying without money and making it profitable here’s some ideas (in blog posts and articles we’ve written):

Hope these help you a bit. If not, you know where to find me!

Best regards,
Julie Broad
Rev N You with Real Estate

http://www.revnyou.com
http://www.lifeasrealestateinvestors.com

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