Will the Real Estate Investor Please Stand Up?

As an investor (or even homeowner) buying an existing home, you have to be very aware of when your home or investment property was built. This is because homes that were built before 1980 are likely to have asbestos insulation. This is important to know because when you are remodeling / rehabbing your investment property / home, you may expose yourself to asbestos. Asbestos can lead to the deadly cancer called mesothelioma. What’s so deadly about it is that it’s difficult to diagnose, and by the time that it’s diagnosed, it has usually reached a late stage. Investors and homeowners doing remodels / rehabs should educate themselves on the subject, and I wanted to dedicate this blogpost to this issue. The following resource on asbestos removal and environmentally safe insulation options was sent to me by Jesse Herman from Mesothelioma Cancer Center.

“There are many things to consider when remodeling or purchasing an older home. Homes built before 1980 have the strong likelihood of containing asbestos. Due to a steady progression of technology and green sustainable methods, there are many ways to ensure your home or property is asbestos free. If you are interested in saving money, remodeling and improving your carbon footprint, here is some information to get you on the right track.

Used in millions of homes throughout the last quarter of the 20^th century, asbestos insulation can become a real dilemma for homeowners due to causing a variety of health problems, including Peritoneal Mesothelioma and Malignant Mesothelioma. These types of cancer take the lives of thousands each year.

Non-regulated asbestos material can be legally performed by homeowners, regular contractors, or licensed asbestos abatement contractors as long as the National Emissions Standards for Hazardous Air Pollutants (NESHAP) are not violated. Asbestos removal in public facilities, homes and workplaces must be undertaken by a licensed asbestos abatement contractor. Once the removal is complete, green insulation options should be given serious consideration, such as: Cellulose, Cotton Fiber and Lcynene.

The United States Green Building Council (USGBC), in a study conducted in 2003, estimated a savings of $50-$65 per square foot for well-constructed green buildings in the U.S. (see table below) during that year. The numbers continue to improve as more eco-friendly options become available, and those kinds of figures have finally begun to attract those who thought eco-friendly construction was just a bunch of hogwash.”

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There has been quite a bit written in the blogosphere about the “bailout” of our crumbling financial system. I don’t much feel like rehashing what’s been written, but I would like to state my opinion and cite some of my favorite blogposts on the topic, as I have had some time to ponder the issues. And finally, I would like to explore how this affects the real estate market and real estate investing.

First off, when I first heard about the proposed “bailout”, my gut reaction was that a bailout of any sort goes against the notions of free markets and capitalism. You mess up, you pay the price. You do well, you get rewarded. Isn’t that why immigrants come to this country? It sure is why my parents and I came here when I was 14: the opportunity to make something of yourself and your life, regardless of your connections to the KGB. What kind of message are we sending to corporations and other entities? It’s OK to fail. Your job is safe, the taxpayer will bail you out. Corporate greed is OK too.

Then I thought about it, and perhaps some kind of action plan is necessary (well, it was necessary a while ago, but our leaders were too busy telling us that the fundamentals are strong). What we need is not a bailout. Something different. Not sure what, yet. If the financial markets keep spiraling down into this vortex, the impact on the country’s economic health could be catastrophic. But how catastrophic? Would it be more damaging than the $700 billion + bailout is to the taxpayer’s wallet? It’s hard to say. But what if this bailout still doesn’t solve the problem? That’s entirely possible too. To ensure that it works, there needs to be a stronger plan of action vs. a fuzzy “blank check” approach. I find Robert Reich’s blogpost the most illuminating writing on the topic in terms of a strong action plan and concrete rules and oversights to be put in place.

Finally, Paulson’s connections to the Street make the whole thing appear just a bit too fishy for my taste. And the Section 8 is just the last straw. It reads exactly like this:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Did that make anyone else’s hairs on the back of the neck stand up? Eeeekkk! We are headed towards something very very bad in this country. We are allowing an ex-Goldman guy to have unilateral control (without being reviewed by a court of law!!) to make decisions on the Wall St. bailout. That would make it very easy to cover stuff up, wouldn’t it? Hmmm…. And no one can investigate…

When did it become OK for the American public to give up all control of their lives and decision making to folks who supposedly should be acting in the interests of the public, but have way too much conflict of interest to actually do so? How did we allow ourselves to be scared into Patriot Act and the Iraq war? And now we are being scared into passing this piece of steaming shiitake? Are we still a democracy? Sure doesn’t feel like it. Feels like we are headed towards a dictatorship, a military state. I am exceedingly concerned for this country and the ease with which the American Dream and Democracy are being annihilated in front of our very own eyes. Our founding fathers must be rolling over in their graves.

So… I must somehow bring this back to real estate and real estate investing. How does this affect real estate investing? Well, in the same way as this whole mess has been affecting real estate for the past year or so (this mess started in real estate, if you remember). It is close to impossible to get a mortgage for an investor (and now, as of Dec 1, Fannie won’t allow to finance more than 4 properties per person, including primary residence). So forget about conventional channels. If you want to take advantage of good deals, you must learn and implement creative real estate investing (seller financing, subject-to, private lending, etc.)

Everyone is cautious, however; homeowners and investors are waiting for the market to hit bottom before moving. And now that the sky is falling, and we seem to be writing a blank check signed by the American Taxpayer, Joe Investor who is hoping to work the foreclosure market and get some cashflow properties is a bit more afraid of his future and is a bit more hesitant to act. Investing for cashflow, if you follow creative real estate strategies, remains a viable strategy. As far as other exit strategies, it’s a bit more dicey…  Jim Homeowner to whom Joe Investor hopes to sell his rehab is also more hesitant; he is more concerned about keeping his job than straddling himself with a new liability in the form of a new house. And now that Jim Homeowner is funding a bailout of epic proportions, well, there goes his saved up 20%+ downpayment that he now needs to buy a house.

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The credit markets biting the dust, the collapse of Indy Mac (and other smaller banks), as well as the Fannie / Freddie bailout are sending chills down the spines of many real estate investors. It was always tougher to get conventional financing for an investor than for a homeowner. After all, even though you show proof of rental income, the bank would still check your credit, and each mortgage loan would go on your credit. Only so many loans could be on your credit before you became a bad credit risk. But now, it’s hard even for a shiny-new first-time homeowner, reaching for that American Dream of homeownership. If you don’t have a 700+ score and 20% to put down, keep dreaming…

Even before the collapse of the mortgage market, savvy investors employed various creative strategies to pursue investments above and beyond what would “fit” into their credit report. Obtaining private funding is a central strategy (discussed below), as well as subject-to’s, seller financing and other such strategies (discussed in forthcoming posts). Needless to say, becoming fluent in these strategies in 2008 is no longer a “nice to have”, bit a requirement. Below is a discussion of some non-traditional financing approaches. (Traditional lenders are banks, and the loans they give are typically secured by your own credit score and credit history).

Private Lending is a form of a non-traditional approach and can take 2 basic forms: one-to-one lending and syndication (many-to-one lending).

Syndication is basically raising money from a group of investors, who pool their capital together.  The syndicate is the group of investors, and the person raising the funds / project manager is the syndicator. Typically, the SEC requires the syndicate to be in the same state as the investment. After the syndicate is put together, the legal entity is created at that point (typically an LLC).  Funny tidbit: as a wholesaler, you are also a syndicator by definition, because you are putting together two parties. This is just a small blurb about syndication; I intend to write a longer post dedicated just to syndication.

You can also raise money from one person, and not a group. This type of private lending can also take several forms: a private loan and a hard-money loan. A plain private loan tends to be a longer-term loan that you can get from any other individual (not a hard money lender). These are typically better than hard money loans (discussed below), because they are less costly. Think of your private lender as a bank / mortgage guy, but without the silly closing costs. The key here is knowing how to find folks who can invest in your project, and how to position your project to them. Mike Lautensack often writes articles on how to raise private funds and sells a program on his site. Check out his latest article. We will be welcoming Mike to our NYC Real Estate 2.0 Meetup on September 24th via teleconference.

A hard money loan is also a real estate loan received from a non-traditional lender, secured by the property. Why is it called hard money? It is not hard to get, but hard to pay back. Just kidding. But only a little. In all seriousness, hard money loans carry a much higher interest rate than a conventional mortgage; these rates are typically between 12% and 15%, and can go up to 20%. The lender also charges “points” (one point is one percent of the loan amount), which can range from 2 to 6. The amount of points, as well as the rate, are driven by the lender’s perceived risk. As you see, they are quite expensive, so it’s no wonder they are used for short term loans.

A hard money loan is typically used for rehabs, which are tough to finance with conventional loans. Because you typically get up to 65% - 70% of the ARV from a hard money lender, and don’t have to put any money down, this type of loan is perfect for a rehab. You get in with no money down, do the rehab, exit the deal via a conventional loan or via a retail sale, and pay off your hard money lender.

Check out this Wikipedia article for a pretty comprehensive definition of hard money loans. http://en.wikipedia.org/wiki/Hard_money_loan

We hope this is a good kick-off of a discussion of non-traditional lending. We will be exploring this in greater detail in future posts. Talk to us! Leave comments, leave questions on this blog or in our discussion section.

Selling a house in today’s market is not for the faint of heart. But if you are one of those investors who loves to buy shabby houses with lots of problems and rehab them into beautiful homes and sell to retail buyers, these quick pointers ought to help.

1. Price to sell
2. Market and advertise the heck out of it
3. Hire a super-duper agent
4. Consider curb appeal
5. Be frugal, don’t overimprove
6. Instead avoid deferred maintenance
7. Don’t forget the driveway
8. Keep with neighborhood style and current style
9. Have open houses
10. Staging is key

1. Cash is king

Setting the right price is key to selling your house quickly and maximizing your profit. Price is more important than ever in today’s market, which is characterized by inventory that just keeps stockpiling. But each house has that magic selling point at which it becomes more attractive than the competition.

The trick is to price it well from the beginning instead of starting high and dropping the price. Most people selling property, even in today’s market, have an unrealistic expectation of the selling price. Research has found that houses whose prices had been changed sell for less than homes whose prices had never been revised. The longer a house sits on the market, the more it becomes stigmatized in the minds of buyers–and the harder it is to sell.

So you must do your research. Study comps (check out online resources like zillow.com and trulia.com), ask a few realtors whom you trust and who are real experts on the local market. Figure out what your competition is charging.

2. Become a marketer

Marketing and advertising are super important right now. You must capture the buyers’ attention. Place lots of ads in the paper and on the web, as well as post your property on sites like realtor.com, zillow.com, etc. Whatever everyone else is doing, do more of it. Put signs in the yard and around the community, talk to everyone you know, leave flyers around the places that your target demographic may frequent: bars, cafes, restaurants, grocery stores, gyms. Figure out the profile of the buyer. Is your house in a “B neighborhood”? Then your target market may be someone moving up from a “C neighborhood”, because finally the price is right. Leave some flyers around some of those neighborhoods. Are you targeting renters? Leave some business cards on the premises (but don’t break any laws or upset the landlords). Join local investment clubs and send notices through them. And don’t forget about Facebook and other online venues where your target demographic may hang out.

3. Hire a super-duper agent

Yes, you may need to hire a realtor with a proven track record for success. In a market where houses are selling like hotcakes, you may get away with selling it yourself. But today, you must pull out all the stops. Make sure that the realtor can get the job done, ask your investor friends for referrals. You want to partner up with someone who understands real estate investors and what your objectives are vs. a homeowner. And pay them. Pay them more than your competition would. Guess whose property they will show first?

4. Don’t curb your enthusiasm

To be competitive, you must also make sure your property is easy on the eyes. Be sure your home isn’t an eyesore on the outside. At the very least, buyers visiting your home will expect a decent paint job. If the body of your house is in good shape, you may just need to touch up the trim. In addition to being attractive, a quality paint job (two topcoats) also protects against destructive effects of moisture, mildew, and the effects of the sun.

Clean up your yard as well; it’s one of the first thing potential buyers see before entering your home. Depending on the condition of the yard, you may also opt for some landscaping. But don’t go nuts; the NAR recommends that you spend no more than 1 or 2 percent of your home’s value on sprucing up landscaping before you sell. And if the season is right for blooms, place flowerpots around the entry and in the patio.

5. Be frugal, don’t overimprove

As you rehab the property, make it look updated, but don’t sink all of your budget into a state-of-the art kitchen and bathroom. I recently read (the source escapes me now), much to my surprise, that kitchens and bathrooms remodels, long considered the most profitable improvements to undertake, may return only 50 percent to 75 percent at sale–and only if you sell a year after the project is completed.

Making too many changes is a game of diminishing returns. Think twice before adding expensive upgrades, and ask yourself if it’s a “must-have” or a “nice-to-have.” Sticking to a frugal rehab budget will enable you to price competitively, pay your realtor well, and make a nice profit as well. So avoid expensive appliances and state-of-the-art systems. Even swimming pools can decrease resale value, as they cost a lot to insure and maintain, and many buyers don’t want the hassle.

6. Deal with deferred maintenance

Rather, spend your rehab budget on items that will protect the home from deterioration and damage, such as roof replacement, plumbing and electrical upgrades. These items will help preserve the property’s value, and you will be able to score bonus points with the buyer by showing them proof of recently completed work. Brand new equipment and warranties that are in place on move-in day will make the buyer feel secure about this significant of a purchase

7. It’s not your asphalt’s fault

If the driveway hasn’t been resurfaced in a while and doesn’t have major cracks, go ahead and reseal it. Just pick up some asphalt resealer and a spreader at the nearest hardware store. It’s a quick and cheap way to make it appear more attractive.

8. Don’t “One-Up” the Joneses

Make sure your house fits in with the rest of the neighborhood. You’ll get the biggest bang for your buck by keeping up with the Joneses, not by going them one better. So don’t add a third story on the house if all the other houses only have two. On the flip-side, if most houses have three baths and yours has only one and a half, adding a new bathroom will boost the value of your home. The same goes for bedrooms.

Also, remember to update your house’s overall style, if it looks like it’s stuck in the 70s or the 80s. But avoid making it too trendy to where the buyer will anticipate changing everything the very next year. Stick with the basics; simple white or beige walls provide potential homeowners with a clean slate on which they can envision their own personal touches.

9. Open your house to an open house

Hold open houses. A picture is worth a thousand words, but a house that the buyer can touch and feel is worth a thousand pictures. Make sure that your open houses are well-attended, even if you have to invite your friends and fellow real estate investors to make it seem fuller. If a homebuyer sees many other potential buyers in the room (i.e. their competition), she will be more likely to pounce on this great property.

10. All the world is a stage.

Let’s face it, home buying is an emotional experience. Some of your buyers may be buying their first home. Make them feel at home, appeal to their senses and emotions. Transport them to a happy time in the near future when they have already purchased the house and are moving in. When you hold open houses, stage the house: make it look inviting and ready for move-in. Furnish it to make it look like a home, and not just a house, but avoid cluttering up the property. Clutter can make a room seem smaller than it is. You can rent furniture for the duration of your open house. There are even special companies that you may hire that specialize in staging.

A bright, tidy home will sell a lot faster than a dingy one. So open up the curtains, show off the fresh paint job, turn on the lights. Hang guest towels in the bathroom, set the dinner table with the best china, and place fresh flowers in an attractive vase. Appeal to the potential buyer’s sense of smell as well. Clean carpets and drapes. Light scented candles. To make it seem more homey and to make your buyers salivate (literally), bake something right before the open house. You will be able to put out the muffins / cakes / whatever else you make to treat your visitors, as well as fill the house with the smell of freshly baked goods. Yum!