I know, I know that title has you scratching your head. But rest assured, if you’re a rental property owner you’re gonna love this technique.
Yesterday I went to sign a lease on one of our properties. Normally this particular property rents for $750 per month and that’s exactly what we marketed it for. However, after a short discuss with the tenant he happily agreed to pay $815 per month for the property.
So how did we do that?
The answer is simple – we gave him the McDonald’s treatment. When you go into McDonalds what’s the first thing they ask you after you order a burger?
Would you like fries with that?
I love fries and I’m sure you do too – they go great with a burger. Well, let’s pretend we’re McDonalds but we’re not selling burgers, we’re renting houses. What do you think McDonalds would offer their prospective tenants once they agreed to rent? If you really think about it there are hundreds of things you could offer. Here’s our menu of “fries” that we offer to our tenants. You can see that each upgrade increases their monthly rent by a nominal amount. For this particular lease signing the tenant took one look at the list and said:
I want the flat screen…make it happen!
There was no coaxing, no selling, no haggling to increase his rent. This guy took one look at the list and knew he needed a big screen. Heck he was even eyeing the lawn mower but that was “too expensive”. So, just like that we increased our monthly rent by $65. Sure, we’re going to have to go out and buy a TV, but let’s take a look at the numbers.
The TV we’re going to buy is a 42″ plasma TV from Costco at a cost of $399.99 ($424 with tax). Over the course of the first year we will collect an additional $780 from this tenant which means we’ve increased our cash flow by $356 for the year. Now here’s the kicker – if this tenant stays beyond the first year we’ll increase our cash flow in the 2nd year by $780 (I won’t even talk about the 3rd year). The bottom line is that we set the pricing on each upgrade so that it will pay for itself during the first 6 months of the rental. Everything after that is gravy.
This certainly doesn’t work with every tenant, but it’s an easy program to offer. If you don’t offer things like this you could be leaving money on the table…so take a cue from McDonalds and start offering fries with your rentals.
So yesterday we told you that we had completed our Michigan Cash Flow Property Tour and that we hadn’t sold a single property. Well, about an hour after I published that blog post, one of the investors who had been in town over the past couple weeks phoned me on the way to the airport and we arranged for him to purchase one of our properties. So, now we’re well on the way towards our goal.
We purchased this property at the end of March, and here are the list of costs we’ve incurred for the property:
-$15,500 Purchase Cost
-$2,500 Financing
-$2000 Closing Costs (Buy & Sell)
-$15,000 Rehab, & Holding Costs
-$900 Tenanting Fees
+$1,800 Rent Collected
Total Cost - $34,100
Sales Price – $45,000
Profit – $10,900
That’s right where we wanted to be with this property, so we’re very pleased.
This puts us a big step forward in our goal, and we have now earned $12,000 towards our goal of $60,000 in 60 days.
As many of you know, we purchased a condo in Pontiac back in August, and we really like the subdivision that the condo is in. We’ve been scouting this subdivision ever since and we’re looking to purchase more of the condos in there to hold as rentals. So as we’ve been doing lately, we drove through the neighborhood, and last week we found a newly listed condo just a few doors down from the one we purchased.
So we made the call to the realtor and found out it was still on the market. The asking price was $23k, and we decided to put an offer in on the property at $15k. A day later we got the following back from our agent:
Seller countered: $22,000, close on or before 12/20/2010, adding 100.00 per diem. Please advise. Thanks.
Now, you’re probably wondering just like I was what the heck “$100.00 per diem” meant. My first thought was maybe they were going to take us out to lunch if we accepted their counter offer. As you might imagine I was a little less than pleased when the realtor told me it meant that for every day past December 20th that we delayed the closing, the bank would charge us $100. My next thought was, well, we can close in 2 weeks…do we get $100 credit for every day before the December 20th that we close? Again, my hopes were dashed. No lunch, no credit…needless to say this negotiation was not going well.
So we countered back at $17,500 and indicated this was our highest and best offer…take it or leave it. Unfortunately the bank misunderstood our offer and countered back at $21,000. So we again informed them that $17,500 was our highest and best offer…TAKE IT OR LEAVE IT.
A couple of days went by and we thought the deal was pretty much dead. In fact we were working on three other deals, and then surprise, surprise, we received this email from our agent:
They accepted!
Just Sign what you need and I will do the rest…
The agent had attached the addendum the bank had provided and was looking for us to sign the contract with the new addendum. Having seen how this negotiation had gone, let’s just say I was a little suspicious of the bank, so I sat down and started to read the addendum. As I read through it, it contained the most of the standard boiler plate clauses, but then I got to the clause about prorations. The clause again was pretty much boiler plate stuff, but then right at the end of the clause they had the following statement:
Seller shall not be responsible for homeowner’s association assessments that accrued prior to the date Seller acquired the Property.
Now quite frankly I was a little perturbed at this. The bank was not upfront about this at all, and this statement was buried in the addendum. There was no statement about how much was owed to the association, just that the seller would not be responsible. So I read on…
There was more boiler plate fair, and then I came to the clause about transfer taxes / tax stamps. The seller added a clause exempting them from paying transfer taxes and tax stamps. Again, there was no estimate of what cost they were passing on to me the buyer, and it was a backhanded attempt to win back some of the money they had conceded when accepting my offer.
Needless to say, I have not signed these documents. I spoke with my agent, and asked her to talk with the selling agent about these clauses, and quite frankly she has been less than successful at obtaining a clear answer from the selling agent. The selling agent said that these things are normally taken care of by the seller and it should not be an issue.
Well, there’s just one problem with this….THAT’S NOT WHAT THE CONTRACT SAYS!
So this is pretty much where we stand at this point on this deal. We are not going to be moving forward on this deal because quite frankly we have completely lost trust in the seller. If they are using these tactics to extract money from us, what else about this deal aren’t they telling us about? We’re not going to get involved because quite frankly something stinks.
So the point of this blog post is to remind you to read the fine print on your real estate contracts. In this negotiation it was clear that the seller was going to use whatever tactic necessary to extract as much money from us as possible. You would like to think that every negotiation partner you deal with will conduct themselves with a good moral compass, but that is probably just too much to ask for. So please, read your contracts…
Welcome back. Today we just wanted to give you an update on the deals we’re working on. We’ve had a lot of activity over the last week, and we just want to catch everyone up. So here goes…
Pontiac Turnkey Opportunities
As we have been talking about in recent blog posts, we have been focusing on our business plan to set up turnkey rentals in Pontiac. We have been focusing on a number of different aspects of setting up this business including finding properties.
Last week we started on Monday and went through the following progression to find deals.
We had our realtor send us a list of properties that met specific criteria that we were looking for. The list she send had approximately 30 properties
We reviewed this list and found about 15 properties that had “potential” based upon their size, price, condition and most importantly location.
Kelly did a drive-by on these 15 properties and we decided to look at 4 of them.
Of the for, we have submitted offers on 3 of them and we’re waiting to hear back on the offers.
This week, we have begun the same process although the list we start from will be smaller because there aren’t as many newly listed properties on the list.
Rehab Opportunity in Waterford
Kelly was approached last week by another investor that contacted her through one our ads on Craigslist. Initially we didn’t like the property because of the list price, but the investor then told us they would take considerably less and gave us a target price to shoot for.
So, we ended up doing a complete analysis on the property included determining the repairs necessary, conducting a market analysis of the property, and determined our return on investment. After all of t his we were able to submit an offer on the property lat Saturday evening.
The numbers we have are looking pretty good, and we submitted a full price offer, so stay tuned to see how this one turns out…
Today is day 42 in our drive for $60,000 in 60 days through real estate investing. Today we are going to continue our series on the anatomy of a deal. If you remember in previous episodes we talked about the following:
For today, we are going to continue our series on the Anatomy of A Deal. To recap, we have talked about the following in the first 5 parts of this series:
Today in Part 8 we are going to talk about closing the deal. At this point you’ve found the property, negotiated with the seller and you’ve gotten the property under contract. Once your offer is accepted you and the seller will likely have to meet certain contingencies contained within the contract. It may seem a little overwhelming because many times there can be a lot of details to address, but if you put together a checklist as we describe below, you should be able to handle most any closing.
Closing Documents
Generally with any closing, there are four main documents that will guide the closing process:
Purchase Agreement
Loan Commitment
Title Insurance Commitment
Closing Statement
The title company you work with will prepare all of the documents prior to closing, but it is important to understand each of the documents so you can review them appropriately.
Purchase Agreement
The purchase agreement is the sales contract that outlines the real estate transaction. It will contain the purchase price, along with all the contingencies that must be met in order for the transaction to be completed. Some contingencies you may include are the following:
Financing Contingency – if the buyer cannot obtain financing the deal will not transact
Inspection Contingency – inspections can include pest inspection, hazardous material inspections (lead based paint, radon, etc.), home inspections, or any other item you wish to inspect on the property.
Lease Review Contingency – If you are buying a rental unit you will want to review the current lease as well as the rent rolls associated with the property.
Income / Expenses – Again if you are buying a rental property, you will want to review all the income and expenses associated with the property.
Within each purchase agreement you should put these performance contingencies into your calendar so you can manage them appropriately. Failure to perform on any or all of the contingencies could result in the loss of your earnest money deposit, or legal action by the seller forcing you to close according to the contract.
Loan Commitment
If you are obtaining financing on the property, the loan commitment document will spell out the terms and conditions of the loan. It will disclose things like the amount financed, interest rate, payment term, upfront fees, prepayment penalties, and the conditions that must be met to obtain the financing. The conditions of the commitment may include:
Paying off existing debt
Obtaining an appraisal
Securing insurance
Clearing title
Providing funds for closing
Again, you will want to put these conditions into your calendar to make certain you meet all of the conditions for the financing before the closing.
Title Insurance Commitment
The title insurance commitment discloses a property’s owners of record, any liens or judgments against the property, real estate taxes due, and any other documents required to ensure that clear title is being conveyed for the real estate transaction. You should be sure to discuss the title report with your title company to understand what items if any will need to be addressed to clear title before closing. Also, be sure to double check the legal description on the title report matches the property you are purchasing. This way you can guard against receiving title to the wrong property at closing.
Closing Statement
The closing statement (sometimes referred to as the “HUD Statement”) is the document that lists all of the costs for all of the parties involved in the transaction. You will want to review this statement prior to closing to make sure there are no mistakes. Normally the title company should be able to provide this statement 24-48 hours prior to closing.
Use a Checklist
Below are lists of things you should plan on doing along with the approximate timing. With any closing you will want to make a checklist of all the items you must perform on to ensure you do not default on the contract.
Do These Things Immediately Once The Contract is Signed
Pursue financing
Review contract for performance dates and make a checklist
Make copies of the contract and distribute to the seller, title company, broker, etc.
Talk to the title company to determine a closing date
Do These Things One Week Before Closing
Order insurance for the property
Review title insurance commitment
Review the closing statement
Notify utilities of change in ownership
For Rental Properties prepare a letter to tenants announcing the change in ownership and/or begin to market the property for a tenant
If you will be working with a property manager, contact them
Arrange contractrors to begin work on the property
Do These Things the Day Before Closing
Do a final walkthough on the property
Obtain a certified check for the funds required at closing (normally made payable to the closing agent’s escrow account.
Do These Things at the Closing
Sign all documents
Deliver certified check to closing agent
Obtain keys and garage door opener(s)
Obtain copies of leases, warranties, and service contracts in place
And that’s it, by making a checklist on your calendar, you should be able to handle any closing.
Today is Day 36 in our drive for $60,000 in 60 days by investing in real estate. We are continuing to work out the details of our deal in Pontiac, and we are happy to report that this deal has been progressing very nicely. We are dropping the contract off to the title company today, and we need to check on the insurance property and followup with a few more inspections before we can set a closing date. So we’ll keep you posted on how we progress with this one.
For today, we are going to continue our series on the Anatomy of A Deal. To recap, we have talked about the following in the first 5 parts of this series:
For today in Part 6, we will talk about presenting your offer and negotiating the deal. When you reach this point in the deal, you should have a very good idea of the motivation level of the seller as well as a very good understanding of the numbers behind the deal. You’ve done your homework, and you have put together a price that you can offer. You will now need to sit down and structure your offer.
Be Creative
Through discussions with the seller, you should have tried to gather as much information about the seller’s situation as possible. Below are some very good questions you should know the answer to:
How much does the seller owe on the property?
What will the seller be doing with the money from the sale?
How quickly does the seller need to sell?
Why is the owner selling the property?
Are there any problems with the property…are repairs needed?
Is the seller willing to finance any or all of the deal?
With answers to these questions, there are really an unlimited number of ways to structure the deal. What you are trying to do is create a win-win situation. You want to structure the deal so that you are meeting the needs of your seller, but also meeting your need to profit from the deal. There are all kinds of strategies out there that you can incorporate, and rather than regurgitate them here, I will just refer you to some good resources on the subject. Please refer to the book list we talked about on Day 25 and check out the books I have listed under “Real Estate Investing”.
With any deal there are a number of things to consider that may be negotiable or offer you ways to profit on the deal. These include:
Price
Terms
Financing Options
Tax Advantages
So, you can run through different creative financing techniques, and you may even make a few different offers to the seller using different techniques and let them choose which offer will work best for them. This can be a very powerful way to get a seller to say yes.
How Much to Offer?
You have fully analyzed the deal, and this analysis should show you the maximum allowable offer (MAO). Whenever you submit an offer you will normally want to leave yourself room for negotiation. However, you should also realize the power of presenting a full price offer. Many times you can make a full price offer on a property but include terms that are in your favor. For example, you could offer full asking price for the property if the seller is willing to finance 100% of the deal at 5%. With those terms you may even be willing to offer more for the property.
Put Your Offer in Writing
Putting your offer in writing can be done a couple different ways. You can write a formal purchase agreement or you can write a letter of intent. The method you choose will depend on the situation. For example, if you are putting an offer in on a bank foreclosure, you will want to write a formal purchase agreement. But if you are working directly with the seller, you may want to put your offer into a letter of intent. Generally a letter of intent really focuses on the details of the deal (price & terms) but does not include any of the “boiler plate” clauses you will find in a formal purchase agreement. This makes it much easier for the seller to read, and may be much easier for you to talk through. The letter of intent will not serve as your contract, but it can work much more effectively to get to the price & terms that are acceptable to both you and the buyer.
Present The Offer
If at all possible, you will want to present the offer to the seller yourself. This will give you the opportunity to explain to the seller exactly how you arrived at the price. Normally I put a presentation together that walks through the analysis I have completed on their property. Presenting your deal in this manner will provide credibility for the offer you are presenting even if it is a low offer. In many cases I will also put together an analysis showing the costs a buyer may face if they try to wait and get a higher price for the property. For instance, if a property sits on the market for 6 months, there are a number of costs the seller will face including mortgage payments, taxes, insurance, utilities, maintenance, and real estate commissions. If the seller doesn’t like your offer initially, this analysis will give them a better perspective that your offer is not that far off base when all of those additional costs are considered.
Negotiate
After you present the offer, it is up to the buyer whether they will accept, counter or completely reject your offer. Normally, if you present the offer in person you will get an immediate indication of how they are feeling about the offer. Even if they do not tell you, pay attention to their body language, facial expressions and demeanor when you present the offer. You can walk away from the table with a good understanding of what the seller is going to do next, and you can be prepared. If you’re sure that they do not like your offer, you can start to look at other creative ways that might create a win-win situation. Or conversely, if you feel they like your offer, you can be prepared to be a little more rigid if they do counter. It’s somewhat of a cat and mouse game, and there are a number of techniques you can use when negotiating. Again, I’ll refer you to my book list and recommend The Only Negotiating Guide You’ll Ever Needby Peter Stark & Jane Flaherty.
Today we were finally able to sit down and meet with the seller of the property in Bloomfield Hills. We looked at the property almost two weeks ago, but today was the first day we could sit down again with the seller. Now originally, the seller told us that they want to get $200,000 for the property and when we looked at it, we thought it might be worth that much. However, when we pulled comparables on the property we established that the value of the property is really only $110,000. So we based our analysis on this after repair value, and when we figured in repairs, closing costs, holding costs and profit, we arrived at an offer price of $50,000.
So, going into the meeting, we were definitely a little embarrassed by the low offer compared to what they were asking, but we wanted to sit down and present the offer anyway…no matter what it will be a great learning experience for us.
So, we sat down with the seller. We started out by taking them through our assumptions on the property. We showed them our market analysis looking at both the homes on the market as well as those that had recently sold. We showed them that properties similar in price to what they are asking had been sitting on the market for between 8 months to 2 Years. We also showed them comparable properties that have sold within the last 6 months and we used these properties to establish the value of their property at $110,000.
Next we went through our estimates for repairs that are needed on the home. We estimated between the floors, paint, kitchen, windows and other miscellaneous items that the repairs could be completed for $15,000.
Next we went through the numbers showing that our $50,000 offer was the highest we could offer based upon the numbers we had (for market value, repairs, closing costs, etc.). Clearly this offer was not acceptable to the seller, but we did have a very good discussion about the analysis. The seller definitely understood where we were coming from and offered points to where we might be using comparables that are not consistent with their home. So we agreed to go back and take a closer look at the comparables and get back with them in about a week.
So, what we are going to do is look at our list of comparables and do a more in-depth analysis. We will find about a dozen properties that are comparable, and then we will go and drive by them taking notes and pictures. We will be able to get a much finer estimate on the value by doing this. This analysis will confirm who is closer to being right, and we may get closer to deal. We will see…
I know, I know that title has you scratching your head. But rest assured, if you’re a rental property owner you’re gonna love this technique.
