Knowledge is Power

I'm working on a small 4-unit condo conversion and right now I'm collecting the information for my deal binder (all the bids and numbers, zoning ordinances, and other important information regarding the project.  In talking about this project with a potential contractor I suggested he talk with the city about the conversion to make sure that the work he is bidding is the work required by the city for the conversion.

The next day I get a call from this contractor who is concerned about the work above what I asked him to bid (he was bidding the firewall only but discovered that we need a survey, plat map, cc&rs, hoa declaration, etc. and we had to go through the planning commission and city council for approval).  I already knew these things are have bid that work.  BUT...he was also told that a new change in the building code required a pressurized sprinkler system through out the building!  So he started bidding that work as well.  This is where a little knowledge pays big!

I went in to talk with the chief building official (don't talk to the inspectors, talk to the person with the final word) about getting an inspection to make sure I've accounted for all the important changes.  In that discussion I asked him about the sprinkler requirement.  He told me the same thing he told my (potential) contractor.  However, having already had this discussion with him I had him pull out the building code and show me the definitions.  Amazingly, I was right...a town home has 2 sides exposed with no one living above or beneath!  As a town home the property falls into a different category and does NOT require a sprinkler system.  He couldn't believe it (even though we had discussed this a couple weeks ago) and had to double check with the other code book.  A few minutes later he emerges and verifies that I was indeed correct.  So in my pre-inspection he is going to discuss the "new" discovery with the inspector to make sure that he is aware of this vital point as well.  

That little bit of knowledge is going to save me thousands of dollars in upgrades and cost to change.  In fact, it is probably the difference between a successful project and not doing the deal.  In this case knowledge really is power (and a lot of money!).

Seasoned LLCs - A Great Place For Investment Equity!

For people with an unstoppable vision and desire anything is possible. And it is just a matter of time before the way will present itself. One of my friends just started a business brokering seasoned LLCs. Why is there even a market for seasoned LLCs? Because an established business can acquire financing that new business cannot. What does that mean?
A new business has no track record and the lending industy isn't very excited to take a chance on a business that is just trying to figure things out. But the same business, in 2-3 years down the raod is no longer "new." That means they have worked through the initial start-up problems and have survived so now they are worth taking a chance on (less risk). These companies can usually get SBA loans and Business Lines of Credit around $40-50K and very reasonable rates. (Keep in mind this is intended to be business debt, not commercial spending money.)
A saavy investor can purchase any number of seasoned LLCs and each LLC can get it's own line of credit up to $50,000. If they invest it with a company like ours they can take 2 LLCs ($100,000) and invest for 2 points, 12 % and 5% of the net profits. That means they can get $2,000 (for points), $12,000 (for interest for the year), and $5,000 (of the net profits) or something is the range of $17,000 return on the investment. If it costs 7% to borrow the money (or $7,000) and you make $17,000 then you have made an extra $10,000 for the year! Not bad considering that none of the invested money was actually your in the first place. And just about any one can qualify for this type of investing if they have better than average credit (680 FICO score or better).
I've been excited about this idea for a couple months now, ever since I learned about the power of seasoned LLCs. But it wasn't until this week that I discovered a consistent source of seasoned LLCs that could be purchased at will. This can be a powerful resource for investment capital for my real estate projects (based on our Foundation to Success criteria).
Consider...if each client had just one seasoned LLC with $50,000 in available credit...how many projects could be purchased? What if we combined this concept with the Equity Builder Program? Each tenant works to improve their credit to be able to purchase their own home. Once their credit is good enough to buy a home they would also be in a position to become an investing client using a seasoned LLC! If they added an additional $10,000/year in investment income, that gets pretty close to paying a reasonable mortgage payment...so once their credit is good enough they can start investing and the investments would pay for the house they just bought! And it would provide a new source for $100K investment capital on a regular basis!

The Ant Philosophy

Jim Rohn gave the following:

"Over the years I taught children about a simple but powerful concept - the ant philosophy. I think everybody should study ants. They have an amazing four-part philosophy, and here is the first part: ants never quit. That's a good philosophy. If they're headed somewhere and you try to stop them; they'll look for another way. They'll climb over, they'll climb under, and they'll climb around. They keep looking for another way. What a neat philosophy, to never quit looking for a way to get where you're supposed to go.
Second, ants think winter all summer. That's an important perspective. You can't be so naive as to think summer will last forever. So ants are gathering in their winter food in the middle of summer.
An ancient story says, "Don't build your house on the sand in the summer." Why do we need that advice? Because it is important to be realistic. In the summer, you've got to think storm. You've got to think rocks as you enjoy the sand and sun. Think ahead.
The third part of the ant philosophy is that ants think summer all winter. That is so important. During the winter, ants remind themselves, "This won't last long; we'll soon be out of here." And the first warm day, the ants are out. If it turns cold again, they'll dive back down, but then they come out the first warm day. They can't wait to get out.
And here's the last part of the ant philosophy. How much will an ant gather during the summer to prepare for the winter? All he possibly can. What an incredible philosophy, the "all-you-possibly-can" philosophy.
Wow, what a great seminar to attend - the ant seminar. Never give up, look ahead, stay positive and do all you can."

What a great philosophy. I think we all need to think a little more like ants.

Deal or No Deal

My partner, Keith, found a nice duplex that was For Sale By Owner. He called for additional information and discovered that the property was being sold for $355,000 and that the seller would be willing to seller finance everything at 8% with a $10,000 down payment. The 2 units were renting for $1,380/month. The property was intriguing so we set up a time to preview the property and before the showing we had a chance to do a little research.

At 8% (interest only) the mortgage payment would be about $2,367/mo. The rents total $2,760/mo. Figuring a 20% expense rate we'd have $552/mo going towards insurance, maintenance & repair, vacancy and other miscellaneous expenses. So our cost of running this property is approximately $2,919/mo. This creates a potential $159/mo negative cash flow with $10,000 out of our pockets to get into the deal. While the property is in average condition and the basements have been finshed good, we'd have some initial costs for upgrading, maintaining and bringing the property into conformity with the city ordinances. The interesting thing is that the seller was promoting this property as a $200/mo cash-flowing property and as a turn-key operation disregarding the city and the landscaping & maintenance issues.

Our thought going into the discussion was that we could do a twin-home conversion on the property to increase its value. Our researched showed that the property was be worth about $350,000 upon completion of the conversion, $175,000 per unit. Our conversation with the seller revealed that he had done marketing as individual units and had received several (3) offers at $175,000 which confirmed our research numbers. So after we invested money into the property it would be worth less than the purchase price?!

Needless to say we haven't even written an offer. As I stuggled with this property I couldn't find a solution or upside to make this deal work. The seller owes about $325,000 and has a fixed payment (for 5 years) at about $2,600/mo. He lived there about 6-7 months to get the 100% owner financing and now he can't refinance or get out without a sale. We can't purchase the property for more than $280,000 (80% of future value) assuming no additional costs or repairs. We might pay more if the property would cash-flow using seller financing but that doesn't work either. I keep wondering if there was another approach that might work for this property. So far I haven't been able to figure one out.

Equity Builder Program in Action

The Equity Builder Program (EBP) is an amazing tool to help everyone achieve a win-win transaction. The premise behind the EBP is that it works like a rent-to-own (or lease option) but without a specific property to purchase.

The tenant gets an opportunity to build credit toward the purchase of a property while they work through whatever credit issues they need to resolve before buying their home. Imagine, they pay down more principle through this program than if they actually purchased the property!

The owner gets a higher than market rent, has long-term tenants, cash-flow property and an easy to manage property. The tenant must behave in order to get the purchase credit. It makes an average deal a great opportunity!

I have been trying to get a house rented in a traditional fashion for nearly a month. There have been several lookers but no takers. The home is old and needs some updating. We found a family that is struggling with credit issues due to a recent divorce. They are trying to rebuild their lives and need a place to start. They now have a house big enough for the family, building equity, have a home they can eventually purchase and they are thrilled to death. We have a house that would just break even that is now has a positive cash-flow, tenants who proactively want to improve the house and reduces the management headaches of the property. This is truly a win-win situation.

(We advertised this house for rent at $1,050/mo, $1,000 deposit, 1 year contract; we rented it for $1,250/mo, $1,500 deposit, 2 year contract)

Self Deception - A Common Problem

I'm in the process of re-reading the book, "Leadership and Self-Deception: Getting out of the Box," by The Arbinger Institute. This book explains that our lives are shaped and determined by our personal self-deception. I love the examples that is shared in the preface of the book:
"To give you an idea of what's at stake, consider the following analogy. An infant is learning to crawl. She begins by pushing herself backward around the house. Backing herself around, she gets lodged beneath the furniture. There she thrashes about -- crying and banging her little head against the sides and undersides of the pieces. She is stuck and hates it. So she does the only thing she can think of to get herself out -- she pushes even harder, which only worsens her problem. She's more stuck than ever.
"If this infant could talk, she would blame the furniture for her troubles. She, after all, is doing everything she can think of. The problem couldn't be hers, But of course, the problem is hers, even though she can't see it. While it's true she's doing everything she can think of, the problem is precisely that she can't see how she's the problem. Having the problem she has, nothing she can think of will be a solution."
Each of us falls into this category at some level or another. We are getting ourselves into problems, trying harder to get ourselves out and don't realize that we are the problem. Nothing we do will get us out of the problem we have created for ourselves. This books goes into the root of this problem and shows how this self-deception affects our lives and why we can't see the problem we're creating until we know what the problem is. I would recommend the book to everyone.

Fortune Favors the Brave...It's Time to Act!

I heard Mike Watson say something that I remember as, "try to find reasons to make the deal work, not reasons why it won't work." There are so many tools in real estate that can be used to put and keep deals together. The more I work in investment real estate the more I realize that it's easy to get out of contracts and out of deals but that isn't what makes an investor wealthy. Our job is to get into contracts and into deals that make sense and then to do what it takes to make the outcome as profitable as possible (while still maintaining a win-win transaction).

Brian Tracy had a similar thought...
"Boldness is a necessary part of courage but it must be a boldness based on an intelligent assessment of the potential risks and rewards. The wonderful nature of boldness is that, properly directed, it builds the habit of courage in the person who practices it.
"Perhaps the most obvious important part of courage is the courage to step out in the face of uncertainty. Every great venture in the history of man has begun with faith and a giant leap into the unknown.
"General Douglas MacArthur said, 'There is no security in life, only opportunity.' The creed of Frederick the Great, one of history's most successful leaders was, 'Audacity, audacity-always audacity."
He continues with 2 ways to build boldness...
"First, just do it! Step out in faith! If you think some action you can take to improve your life, give it a try. You may be surprised.
"Second, when in doubt, act with audacity. Audacity may get you into trouble but even more audacity will get you out. Go for it!"

The greatest obstacle to a real estate investor is to do something. There are no guarantees in investing. But when you take an active role in creating and enhancing equity your chances for success are greatly improved. When you work with someone who has a plan for adding value, who strives for win-win transactions and opportunities, who has vision and who is willing to act with boldness (and audacity) you have a winning combination. So if the numbers work, so should you. It's time to move forward and make it happen!