Real Estate Mentor

Goal Setting for Real Estate Investors

Phil Pustejovsky — Wed, 08 May 2013 16:21:32 +0000

Goal setting for real estate investors is critical for achieving what you hope to accomplish in real estate. Several studies have proven the effectiveness of goal setting. When you have your destination in mind, you’re just, flat out, far more likely to actually get there. But are you setting goals correctly? And if you are setting goals, is there anything you’re missing that could take you to the next level? What you’re about to discover is how real estate investors should set goals.

Setting Real Estate Goals Correctly

Although there are far more exhaustive descriptions of how to properly set goals, here is how to set real estate goals correctly. Picture goal setting like performing a Google search. The more detailed and descriptive you are, the more accurate your results will be. However, if you are overly detailed, Google may return no results. There is a balance of the degree of description to hit the sweet spot.

A common real estate goal some new investors make can sound like this, “I want to do my first deal within 3 months.” Let’s dissect this:

1. Timeframe: Giving the goal a timeframe, in this example, 3 months, is excellent. Every goal requires a timeframe. A goal with no planned completion date is just wishful thinking.

2. Specific Result: A result of, “doing my first deal,” is not specific enough to be helpful. In fact, it could be detrimental. For example, you could do your first deal and lose $20,000. That’s probably not what most people would define as a “deal”. Instead, this goal should be much more specific, such as, “Buy my first positive cash flowing rental property that earns at least $100/mo without using my own cash or credit” or “Close my first deal and earn $5,000 or more.”

3. Avoid Detailing the “How”: This example also correctly avoided detailing how the specific result would be achieved within the planned timeframe. Why can detailing the how be such a problem when goal setting? Overly detailing how you are going to achieve your goal can inadvertently pigeon hole you into very few options for making the goal happen. A good example of this occurs when a beginner makes the goal, “Do my first wholesale deal and earn $5,000 within 3 months.” The problem is that this goal restricts this person to just wholesaling. What if a wholesale isn’t your fastest and best route to money?

I recently spoke with a beginner who shared this goal with me and then later in the conversation, said that he got his real estate license but he had no interest in helping a buyer find a home, even if it was a doctor looking for a $500,000 home. Huh? Quick math would reveal that 3% of $500,000 is $15,000. Why would anyone who wants to do a wholesale deal and make $5,000, have an issue with making $15,000 as a buyer’s agent? Money is money. It all spends the same. In fact, if you are licensed, representing a highly motivated retail buyer of a large home can be quick and easy money. Far too many investors, either through pride, or arrogance or just plain ignorance, can get too pigeon-holed in their thinking of how they are going to reach their goals.

4. Review Often: This is perhaps the biggest mistake goal setters make, they write down their goals and then never read them again! At a minimum, review your goals monthly, but far better is once per week. When you review them, ask yourself how far along are you in reaching each goal. Think through what adjustments, if any, should be made to make sure you hit the goal. If you don’t know, ask yourself, who should you ask? What can you read? What can you do differently to get closer to your goal?

Note to Christians: For Bible believing Christians, the most important step in goal setting is to pray for the Lord to reveal to you what His goals are for you. There is an old saying, “If you want to make God laugh, tell Him your plans.” Christians throughout history have discovered that setting their own goals that they think will also serve God were not nearly as productive as asking God want He wanted for their lives and then pursuing God’s plans. Phil Vischer, creator of the wildly successful Christian cartoon VeggieTales, learned this lesson the hard way. His book, “Me, Myself & Bob” is fascinating and a great book for any Christians in business.

Danger of Expectations

Expectations are very different from goals. Expectations can be very dangerous. In his book, Man’s Search for Meaning, Victor Frankel describes a discovery he made while imprisoned in a concentration camp during the holocaust. He watched who survived and who didn’t make it. Who were the first to die? The people who set expectations by telling themselves, “We’ll be out by Christmas.” Well, Christmas would come and go and they would still be locked up. Their spirit would be crushed and they would lose the drive to survive. The future is unpredictable and their are many things that are outside of your control. An example of creating an expectation for real estate investors would be to plan on quitting your job in 6 months. Certainly that can be a goal, bu if 6 months comes and goes and you are still at your job, that should crush your spirit or reduce your enthusiasm.

When You Don’t Reach Your Goals

When you don’t reach your goals, rather than get discouraged, ask yourself what you need to do differently in order to get there? Who do you need to ask? What do tou need to learn?
If your lack of results is bringing you down, you can also take a page from the Holocaust concentration camp survivor book. Associate meaning to your challenges. Frankel found that the people who associated their experiences to something of deeper meaning, such as ensuring such human atrocities would never happen again, were the most likely to survive. Rather than ask yourself the destructive question, “why does this always happen to me?” instead, tell yourself that the roadblocks you have hit, have occurred for a reason. You may not know exactly why you have struggled, but attributing meaning and purpose will ensure you grow from your experiences and become that much more equipped to achieve and exceed your goals.

5 Ways to Save on Real Estate Investment Taxes

Phil Pustejovsky — Sat, 04 May 2013 12:03:41 +0000

There are many different ways to save on real estate investment taxes. Rather than bog you down with the minutiae of tax savings tips such as keeping track of gas mileage for every trip to see a property, you’re going get the most powerful, most effective 5 ways for real estate investors to reduce their tax liabilities. And sorry, you’re not going to be given any creative deductions like writing off cruises to the Caribbean or setting up offshore accounts in tax sheltering countries. The following 5 tips are tried and true methods that allow investors to pay the least amount in real estate investment taxes year after year. Are you ready? Disclaimer: This is not accounting advice nor is the author a licensed tax professional. Consult a licensed tax adviser for any tax or accounting related advice.

NOTE! This video may be difficult to hear at times. It’s often windy in the Keys this time of year.

So I wrote out what was shared in the video as well at just below it.

1. Hire a CPA that Invests in Real Estate

First and foremost, you should hire a Certified Public Accountant (CPA), preferably in your local area, although not completely necessary, who also invests in real estate on the side. Ideally, this person both earns passive income with rental property and creates earned income from buying and selling, or flipping, real estate. Not hiring the right CPA will cost you more in taxes than anything else. When you are making good money, a solid CPA will pay for themselves many times over.

Finding the right CPA can be as simple as asking other real estate investors in your area who they use. However, sometimes your competitors aren’t interested in telling you who they use. In which case, you can also try asking other people on your team, such as closing attorneys, real estate agents, mortgage brokers, and the like, if they know of any CPAs that also invest in real estate. Local real estate investor clubs could even have a CPA as an advertiser in their newsletter. It may take some time to find this person, but it is well worth the search effort. Try not to get discouraged if not a single CPA you talk to owns their own real estate. These types of CPAs do exist out there, you just may need to be persistent.

2. Separate Short Term & Long Term Investing Activities

The first piece of advice my CPA shared with me was to separate earned income activities, such as my flips, wholesales, assignments and rehabs, from my passive income rental properties. He didn’t want my rental income to get taxed as earned income. This is critically important for those just starting out because if you own a rental property in your personal name, and then start doing some flips in your personal name too, that could cost you a lot in taxes. Therefore, if you own a rental property in your personal name, set up another entity to do your flips and wholesales.

What type of entity should you set up? There isn’t a one-size-fits-all answer to such a question. For example, I’ve seen trainings on “the power of the LLC”, which may have some valuable insight. But try telling that to Mr. Barrett in Nashville, TN, who owns over 300 single family homes free and clear in his personal name. Do you think a man that wealthy is missing the boat and should own his properties in an LLC? Nope. It turns out, in Tennessee, if you own real estate in an LLC, you are charged an extra 2.5% franchise and excise tax per year on the total value of the assets owned by the entity. That’s $2,500 per $100,000 property you own per year, even if you have a loan on it for $100,000! The State of Tennessee F&E tax alone can eat up all of a real estate investor’s cashflow. However, sole proprietorships and general partnerships are exempt from that F&E tax. Mr. Barrett isn’t quite so dumb now is he? (In case you were wondering how Mr. Barrett protects his real estate portfolio from potential lawsuits of those 300 tenants, he uses a general liability insurance policy.) Meanwhile, for short term investing activities, you may, indeed, opt for an LLC or perhaps an S-Corp. Who should you ask for clarity on which entity to set up for your short term as well as your long term investing activities? You guessed it…your CPA.

3. Get Organized

The IRS severely punishes disorganized business owners. The list of unorganized entrepreneurs who are either in prison or are no longer rich is both long and distinguished. There are several skills required to be successful in real estate; from finding good deals, to structuring deals so that everyone wins, to executing the most profitable exit strategies. In addition to those skills, you also need to have your books in order. Welcome to the wonderful world of being rich. You have to account for your riches

Every expense and income needs to be organized into a system. Quickbooks is the standard in small business bookkeeping management. There is now even an online version of Quickbooks that is very inexpensive. If you don’t want to learn how to use Quickbooks yourself, hire a bookkeeper. There are plenty of bookkeeping services out there and many charge a very reasonable fee.

When your books are organized into Quickbooks, you also activate the true power of a CPA. Investors that bring a shoebox full of receipts to their accountant once a year miss out on all the creative ideas a tax professional can unleash when you have everything in an easily accessible digital format. In essence, you are allowing your CPA to do his/her job the best way that they can when you organize your books digitally. You wouldn’t provide a painter with a toothbrush to paint your house, would you? That’s effectively what you are doing when you don’t use a system like Quickbooks.

When you begin to get your books in order, you may discover that you are co-mingling personal and business transactions in the same accounts. That’s a big no-no. Every business deposit and every business bill should be transacted through bank accounts and credit cards specifically set up for the business. There is a huge shortcut whereby certain banks like Bank of America and certain credit card companies like American Express integrate with Quickbooks so you can click one button and automatically import all of the transactions. So if you don’t already have a separate bank account or credit card set up for your real estate business, when you go to get these, make sure the bank or credit card integrates with Quickbooks. It saves hours and hours of time each month on bookkeeping duties, which even if you hire a bookkeeper, will still save you money on the costs of their services.

When your books are organized, you can also see clearly what is going on in your business. I learned a whole lot about where the real profits are made in real estate after studying my Quickbooks P&L reports. Your biggest and easiest profits don’t always originate from where you think. For example, I discovered the secret to flipping houses was, in most cases, to wholesale the deal to a contractor investor buyer rather than rehab it myself. I also realized just how potent retail wholesaling was. These were breakthroughs that have earned me a fortune since then…all because I took the time to get organized.

4. Own Some Rentals

Rental income is extremely tax advantaged money. It stems from this wonderful deduction the IRS allows you to take called Depreciation. For a single family rental property, the IRS allows you depreciate the tax basis amount of the property (the amount you purchased the property for minus the value of the land) over 27 1/2 years. For example, let’s say you buy a $100,000 rental home that has a land value of $10,000. Your tax basis would be $90,000 ($100,000 sales price – $10,000 land value). When you divide by 27 1/2 years, you get a tax deduction of $3,272.73 each year. That’s a significant “expense” to have on your tax return! Then, let’s estimate that after all normal rental property bills, including maintenance, you’re left with a positive cash flow of $270 per month. The $3,273.73 in depreciation each year would completely offset all of your positive cash flow. So essentially, you wouldn’t be paying any income taxes on your rental income! It’s incredible. Plus, as your property increases in value, you’re not paying any tax on the appreciation (so long as you don’t sell it). Rental property is one of the most tax advantaged ways to earn money in the United States.

5. Earn Money Like the Ultra Rich

Have you heard folks like Warren Buffett (one of the world’s wealthiest people) share that percentage-wise, he pays less in taxes than his secretary? Or perhaps you remember during the presidential election the big stink that was made over how little Mitt Romney paid in taxes? Technically, the majority of richest people in this country pay a very large total sum in taxes. In fact, the wealthiest 20% in America pay for nearly 70% of the total tax revenue. However, on a percentage basis, the rich pay far, far less than the middle class. Why? Because the wealthy earn some (or all) of their income through investments as opposed to W2s and 1099s created by working for other people. Rental property is one such investment that allows the wealthy to earn great money but not incur a heavy tax liability. Another example is when you sell your investment property after more than one year of ownership. You may incur a long term capital gains tax (15%…soon to be 20%) as opposed to ordinary income tax (15% – 35%+). One example of how this is applied in the real world is when you buy a property, fix it up, and then sell it on a 13 month Rent to Own so that the tenant buys the property in little over one year. The net profit can then potentially be considered a long term capital gain. Not only is your tax liability potentially much less, but you also can usually sell a property on a Rent to Own for top dollar and you typically don’t have to pay real estate commissions. That’s a winning combination!

Another creative way to earn money like the ultra rich is with a 1031 exchange. When you sell a rental property, you can defer your profits from being taxed by doing a 1031 exchange. In simple terms, this is the real world example of what you do in the game of Monopoly when you exchange 4 green houses for 1 red hotel.

How can the richest people in this country pay the least percentage-wise in taxes? They earn their income from investments as opposed to jobs. Shouldn’t you be earning more of your income from investments?

Those are the top 5 ways to save on real estate investment taxes. Do you recommend any other ways to save on real estate investing taxes?

IRA Real Estate Investing

Phil Pustejovsky — Fri, 26 Apr 2013 11:04:07 +0000

IRA real estate investing is a great way for people to invest in real estate in their retirement account. Have you ever heard of buying real estate in your IRA or 401K? If not, you’re going to be pleasantly surprised to discover that you have more retirement investment choices besides mutual funds and real estate can be a great place to grow your nest egg. If you already have some knowledge of investing in real estate in your IRA, hopefully you’re opened minded because you’re about to discover what most real estate investors will never know about IRA real estate investing.

IRA Real Estate Investing 101

The traditional and most popular way that most investors IRA real estate invest is to use a self directed IRA. IRS regulations require either a qualified trustee or custodian hold the IRA assets on behalf of the owner. If you have an existing retirement account with your employer, for example, you could roll over some or all of it into a self directed IRA managed by a custodian. Further, any future contributions you would want to make would need to be sent to the custodian as well. Then, anytime you wanted to make an investment, you would contact your IRA custodian and they would instruct you on what to do and how to do it. In other words, custodians are chaperones that watch over and approve any moves you makes. And they typically get paid on an annual basis based on how much money you have in your account. The more money, the higher the fees.

Little Known Alternative to the Self Directed IRA

Self directed IRAs have been the standard for real estate investors who want an alternative to stock and bonds in their retirement portfolio. But there is a little known alternative to the self directed IRA that can be a much better choice for active real estate investors that very few people know about. It has many benefits over the self directed IRA, which you’ll discover here shortly. It’s called a solo 401K, also known as an individual 401K or i401K.

Solo 401K Benefits

Here are the main benefits of the solo 401k over the self directed IRA for IRA real estate investing.

Checkbook Access & Control: With a solo 401k, you are setting up your own 401k for your company and therefore, you can be the administrator. This will give you complete control over the bank account so you will have have the ability to write checks whenever you want. Direct checkbook access and control is much more efficient than having to go through a custodian for your every move. For example, what if you find a great deal and want to give a seller earnest money on the spot to secure it? With a solo 401k, you can cut the check right then and there, whereas with a self directed IRA, you have to wait for your custodian to give you the green light which could cause you to lose the deal.
Leverage:You can apply the power of leverage by obtaining a non-recourse loan to help with the purchase and you will not incur the Unrelated Business Taxable Income (UBTI) issue like with a self directed IRA. This gives you greater opportunity to do more deals with less expenses.
Less Restrictions: You can contribute more per year with a solo 401k over a self directed IRA and there are no income limits for Roth contributions. This helps those who want to sock more money away as well as those with high incomes.
Second Chances:If you screw up and conduct a prohibited transaction, you can fix it with an i401k whereas with a self directed IRA, making a mistake typically leads to a liquidation of the plan. There are no second chances in the self directed IRA world.
Lower Fees:The costs to maintain it are much cheaper than having to pay a custodian each year as a percentage of the amount in your account.
Borrowing Capabilities: And perhaps the favorite above all of the other benefits is the ability to borrow from it, up to $50,000. And you can do whatever you want with the borrowed money so long as you pay yourself back (since technically, you are taking out a loan from yourself).

You may be asking yourself, “If a solo 401K is so much better than the traditional self directed IRA, why haven’t I heard of it until now?”. First, it is relatively new, only coming into existence in 2001. A lot of people simply haven’t ever been introduced to it. Second, it isn’t as well known and typically, advisors advise clients on what they know best. Third, self directed IRA custodians can potentially make far more money off of people who have self directed IRAs versus solo 401Ks. Since you are the one handling all of the transactions yourself, there is less of a need to pay them for every little move you make. Fourth, it doesn’t fit for people who don’t have their own small business. And that’s what you’ll need to know next…the requirements.

Solo 401K Requirements

With a solo 401K, meeting the requirements can be ideally suited for real estate investors.

Small Business: You need to have a small business. It doesn’t have to even be an LLC or Corp, it can be a sole proprietorship or partnership, but a small business nonetheless and that’s what most real estate investors have.
Earned Income: You need the intent, or already be, creating some earned income as opposed to just passive income from rental property. Many real estate investors fit this requirement because a flip, a wholesale, a rehab and resell, an assignment, a commission or a property interest release fee can all be considered earned income.
No Full Time Employees: You cannot have any full time employees outside of a spouse although you can have 1099 independent contractors as well as part-timers. any real estate investors are sole practitioners while other may have a 1099ed assistant.

There are some others, but those are the major requirements, and as you can see, its almost tailor made for real estate investors.

Solo 401K Drawbacks

As with anything, there can be some drawbacks.

Competent Help & Support: Very few people and/or companies really know what their doing when it comes to setting up and supporting a solo 401K for real estate investors.
Bank Account Set Up: It can be challenging to set up the bank account for an i401k because some bank officers simply don’t know how to set them up.
Title Insurance: Some title companies run into difficulties with getting their underwriters to approve the issuance of title insurance when the purchaser of the property is an individual 401k.
Personal Discipline Perhaps the biggest drawback is also the i401K’s biggest strength…relinquishing the custodial middleman for yourself. Some people have difficulty maintaining personal discipline when it comes to money. You CANNOT use the account for personal use. Co-mingling funds is a very big no-no in the world of self directed retirement accounts. So if you are the kind of person who spends every penny they earn and has little-to-no self control with money, perhaps you are better off leaving a custodian to watch over your nest egg because you may not possess the personal discipline necessary to protect it yourself.

All in all, this is not a very big set of drawbacks, especially when you are working with the right people to get it set up and administered. If you are serious about setting up a solo 401k, email me at phil at freedom mentor dot com and I can email-introduce you to the guy who has forgotten more about individual 401ks than most people will ever know. He knows how to get it set up with the right paperwork, get you connected to a bank that will get the bank account opened quickly and easily and he has the materials you need to educate title companies on how to close and issue title insurance on solo 401k transactions. Again, this introduction is only for those who are serious about setting up a solo 401k.

IRA Real Estate Investing Conclusion

Die-hard self directed IRA supporters have been able to acquire “checkbook power” by setting up an LLC in conjunction with their IRA. But that requires setting up and paying the annual fee for an LLC which, in California for example, is upwards of $800. Plus, these staunch self directed IRA defenders still miss out on all the other great benefits of a solo 401k. Meanwhile, nimble and open minded investors are IRA real estate investing using the individual 401k and loving all the added benefits with such limited drawbacks. I hope this information helps you in your IRA real estate investing!

Hidden Way to Reduce Closing Costs

Phil Pustejovsky — Fri, 19 Apr 2013 12:50:55 +0000

Would you like to know a hidden way to reduce closing costs? More specifically, how about a quick tip to save hundreds on one of the largest closing costs on a closing statement? I am referring to title insurance. Nearly every buyer of real estate requires a title insurance policy. As a real estate investor, in some cases, you are buying the property and pay for title insurance as the buyer. In other deals, you are selling the property and the buyer may require you to pay for their title insurance policy. Either way, as investors, oftentimes title insurance is a significant closing cost you’ll be paying.

It’s surprising how few title companies will tell you about this. It’s such a simple tip that can reduce your title insurance policy by $200 or more. Here it is. Before closing, to reduce the total cost of title insurance, simply provide the title company with a copy of the existing title insurance policy on the property. Then, they will give you a discount on the new policy.

That was easy, wasn’t it? That’s often the way it works in this business. Real estate truth is oftentimes hidden but when you get to it, you can make a whole lot more money.

Where do you get the previous title insurance policy? The seller should have it in their big, thick folder of closing paperwork from when they bought the property. If it isn’t in there, find the contact information of the title company from that paperwork and contact them. It my take an extra few minutes but its worth hundreds in savings and any savings in closing costs is usually pure profit in your pocket.

For the experienced real estate investors reading this, you may be mentally calculating all the deals you have closed whereby you didn’t employ this simple technique. Ouch! But better late than never. For those reading this who are currently on the road to closing their first deal, the good news is that you don’t have to learn this lesson the hard way. Good for you for reading this article. Real estate education pays.

Closing costs can eat your profits alive. I spend quite a bit of time each week pouring over HUD1 Settlement Statements of my apprentices, finding ways to reduce closing costs. In most closings, the buyer, the seller, or both, are paying too much in closing costs. And rarely are the brokers, loan officers, title companies, and closing attorneys going to tell you where you are overpaying. It requires a trained eye, to spot where they may be trying to gouge real estate buyers and sellers.

This tip is just the beginning. But it is simple and applicable to almost all closings. Do you have any other tips for reducing closing costs?

ePartner® Real Estate Software

Phil Pustejovsky — Wed, 10 Apr 2013 11:45:01 +0000

ePartner® Real Estate Software was developed for real estate investors by real estate investors. It is a very powerful tool for creative real estate investors. Watch the video below to learn more about many of the powerful features and benefits of ePartner® real estate software:

ePartner® Real Estate Software – Personal Edition

ePartner® Personal Edition is the most powerful real estate deal making automation software available. ePartner® helps you locate your deals, market your properties, analyze your profits, and close your transactions. All details regarding your deals, including complete information on every property, seller, buyer, tenant, lender, agent, vendor, etc, as well as every contract and crucial document is available to you from any computer anywhere in the world at all times (including directly from your smart phone). This unprecedented accessibility provides you with the ultimate in efficiency and success while also allowing you to literally run your real estate investing business from anywhere at any time.

ePartner® Real Estate Software – Enterprise Edition

With the ePartner® Enterprise Edition, you’ll get all of the amazing features included in the Personal Edition PLUS you’ll get the proprietary live coaching interface features as well. This propels your success by giving you live, real-time “direct interaction” between you and your highly skilled coaches and mentors. For the first time ever in real estate investing education history you can now be coached as if your mentor were sitting right at your desk with you, even if he/she is half way across the globe! All details regarding your deals as well as every contract and critical document is available to you and your coaching team at all times. Here are just a few of many incredible features contained in the ePartner® Enterprise Edition: Messaging Module – The ability to send messages to any individual coaches or the first available coach and all messages appear in the Notes tab of each deal so that every piece of advice is easy to find and is never lost. All of your correspondence is automatically organized so you don’t have to organize it yourself.
Interactive Notes Module: Allows you and your coach to work together in real time on all your deals.
Deal Document Review Module: Every key document you upload is reviewed by a coach to ensure you have completed it correctly. This “second set of eyes” prevents important details from falling through the cracks.
Activity Accountability Interface: Know where you stand in your progress as well as where you need to improve and shows the coach where you need to be held accountable so you don’t make excuses and so that you reach the goals you have set for yourself!
Most Influential Coach Designation Module: When a deal closes, you get to choose who was most influential in helping you get the deal under contract as well as closed. This creates even more incentives as well as some cooperative competition amongst the coaching staff to make sure you are successful.
This system allows real estate coaches to train and mentor students on a level never before seen in the real estate investing education industry. Using the power of technology, this system allows you to have the sharpest minds in real estate investing reviewing your business as if they were sitting next to you in your home office.
Freedom Mentor has a bulk licensing arrangement with ePartner® to allow its apprentices to use it so if you would like to use ePartner® Real Estate Software, consider applying to be my next apprentice.

Should Real Estate Investors Join the Better Business Bureau?

Phil Pustejovsky — Tue, 26 Mar 2013 00:39:13 +0000

Should real estate investors join the Better Business Bureau (BBB)? It depends. Are you a creative or traditional investor? Traditional investors don’t need to join the BBB because either they use real estate agents or auctions to source their deals and are usually paying all cash for properties with no creative terms. However, creative real estate investors work directly with sellers to structure unique terms such as subject to financing, owner financing or lease purchase optioning. The more out-of-the-box your terms are, the more likely reputation and credibility can play a role in getting the deal. The Better Business Bureau is typically where people go to research if a company is legit or not. When they see a good rating, it can ease their fears about working with you. Therefore, real estate investors who operate creatively can benefit from having a good rating on the Better Business Bureau because it can help with reputation and credibility.

How to Get a Good BBB Rating

The Better Business Bureau has a controversial ratings system. If you are a brand new business owner and you submit your business information to the BBB, they will create a file about your company and you will typically not have a good rating. Why? The BBB would probably claim that you are a brand new company with no track record. What do you do if you want a good rating on the BBB but you recently started your business? Pay to become an Accredited member and surprisingly, your rating may instantly increase. This 20/20 BBB Investigation) exposes the deep, dark secret behind the Better Business Bureau, which is that historically, they have given preferential treatment, such as better ratings, to Accredited (paying) members.
Morally and ethically, you may not feel right about paying to get a good grade with the Better Business Bureau. But unfortunately, it can be helpful to have a good BBB rating and the vast majority of the general public is and will remain unaware of the BBB’s dark secret. Therefore, if you have a new business, you may only have two choices; either you pay or you avoid the BBB altogether and hope your business doesn’t show up in their system in the early years of your business.

The Costs to Join the BBB as an Accredited Member

The cost is usually around $400 per year to become Accredited, although this amount can vary slightly across the country. Plus, there can be several hoops to jump through, including getting a local business license for your business. If you have been operating your real estate investing business for several years without a business license and then go to apply for a business license with your local governmental authority, you can get hit with significant penalties and fees for not having set it up earlier. In one particular case, an investor walked into the business license office to inquire as to how to get a business license and left the building with an $800 bill for back business license fees. Ouch!
What if you have been operating as a real estate investor and have had your legal entity, such as an LLC, registered with the Secretary of State for several years? You can certainly become Accredited with the BBB and walk through all their hoops. Or, you can take advantage of a strategy that can get your business on the BBB with a good rating for FREE! Hopefully that got your attention.

The Free Way to Get a Good Rating on the BBB

If your legal entity has been in place for 3 years or more, here’s an incredibly powerful strategy for getting a good rating on the BBB without paying $400 or jumping through the hoops that they require to become Accredited. You simply apply to become Accredited on the BBB website. You can talk with the BBB salesperson who calls you to get you to join, but instead of paying them $400 bucks, you decline joining at that moment. Then, the BBB will post your business on their website anyway, even if you didn’t join, and show it as “Not Accredited.” So long as your entity has been registered, it can be easily searched on your Secretary of State’s website and the formation date shows as 3 years ago or more, the BBB will usually automatically show a good rating. Then, you simply operate a good business and take care of the people you do business with, and your rating will remain good overtime. This is what yours truly has done with his businesses.

What is the Value of Being Accredited

The problem with the free approach is that your business will not show on the website as Accredited. How important is that? Well, when a prospective seller is looking to get rid of their property and they are considering working with you, they may search the BBB website to check out your company. If they see a good rating, that will usually suffice for their research. Seeing that you are not accredited may bring up the objection, “Why isn’t your business Accredited?” To which you can email them a link to this 20/20 youtube video and you can tell them that out of principle, you are choosing not to join the BBB. That objection will only come up rarely though. However, if you haven’t had a business entity registered for at least 3 years, then paying may be the only way to get a good BBB rating.

Should You Join the BBB?

If you are a new creative real estate investor, without an entity that has been registered for 3 years, is it worth it to join the BBB and pay $400 as well as jump though all of their hoops? You really need to be dealing with a good number of sellers each month to make it worthwhile. If you are just getting started and are frightened to talk to sellers, don’t go spend money on joining the BBB because credibility and reputation doesn’t matter to you because you aren’t talking to anyone. But if you are meeting with sellers consistently and structuring creative deals, you may get the occasional question as to whether you are a part of the BBB. If so, then you would know the immediate impact of joining the BBB…you could get more deals. It is better to “cross that bridge when you get there” rather than get set up with them far in advance of being hit with that objection from a seller. When it is all said and done, it can help to show up with a good rating on the BBB, but it isn’t vital to your success.

What are your thoughts and experiences with joining the Better Business Bureau as a real estate investor?

Determining Property Value the Right Way

Phil Pustejovsky — Thu, 21 Mar 2013 17:09:26 +0000

Determining property value the right way is a skill that is helpful for any owner of real estate, but it is particularly crucial for real estate investors because if you determine a property’s value incorrectly, you can make a huge investing mistake! For anyone who is, or is thinking about becoming, a real estate investor, having the ability to correctly determine property values is as vital to your success as any other skill you can acquire. And too often, real estate investors value property all wrong. You’re about to discover the quick, easy and best way to determining property value.

How are Property Values Determined?

Residential real estate is valued through comparison with similar properties. A residential appraiser determines a property’s value by selecting at least 3 comparable sales, or “comps”, that have sold within the past 6 months or less that are within 2 miles or less from the property they are appraising.

You probably do this already in your everyday life. Have you ever bought something on eBay? How did you know you were getting a good deal? You would have to compare the item you were bidding on with similar items that had sold recently. Determining property value works the same way, by comparing recent similar sales.

So if this is so easy, how come so many people get it wrong? It turns out that comparing houses is not quite as simple as comparing eBay items. First, you must make an apples to apples comparison, Second, you must get your property information from the right sources. And third, you must be the one doing the comparing of the data.

Apples to Apples Property Comparison

There are several rules of thumb that appraisers use in determining property value. When you apply these basic tenets, you can create an apples to apples comparison:

Location is within 2 miles, even closer is better.
Similar neighborhoods and demographics (even within 2 miles, there can be drastic differences in neighborhoods)
Same property type (single family home, duplex, condo, etc)
Square footage within 20% (bigger or smaller)
Same number of levels
Same number of bedrooms
Same number of bathrooms
Similar construction (brick, vinyl siding, stucco, logs, etc)

There are several other rules of thumb, but these are the main ones. Next, you need the right information.

The Right Sources for Property Information

The three main sources for property information include the Register of Deeds, the Tax Assessor and the Multiple Listing Service (MLS). However, all three have their strengths and weaknesses. This is where many real estate investors get tripped up. They get certain property information from the wrong sources. In order to get accurate information, you must know which sources are better for which data.

Register of Deeds

In every county in America, there is a Register of Deeds, or Recorder’s Office. NETRonline.com is a great resource for finding the Register of Deeds for any county in the US. The Register of Deeds is accurate for telling you who the current owner of the property is as well as when that person bought the property. It can also tell you what liens are against the property as well as the amount of each lien at the time that lien was originated.

However, the Register of Deeds is NOT reliable for providing the price of what the current owner paid for the property. This is a HUGE problem that causes massive confusion out there. In some states, the sales price is included on the Deed that is recorded, giving public access to sales price data. But in non-disclosure states like Texas, the sales price isn’t always added to the Deed. And in strict non-disclosure states like New Mexico, the sales price is not on the Deed at all.

And, in some states, the “purchase price” on the deed may actually not be accurate at all! Listen to this…

In some states, the standard Deed uses the term “consideration” rather than “purchase price.” In fact, in Tennessee, the standard Deed reads, “sales price or property value, whichever is greater.” This may not seem like much but it is a very big deal. Let’s say you are buying a property for $50,000. Rather than put $50,000 as the consideration amount, you can put the property value, which might be $80,000. What that will do is show in the Register of Deeds that the purchase price was $80,000, even though it was only $50,000! Since anyone can get access to public information, including new prospective buyers, when they are going to make an offer, they may think you paid $80,000 as opposed to $50,000. Is that legal you ask? Of course! And it works quite well, I am told

Tax Assessor

The Tax Assessor is responsible for valuing each property in order to be able to calculate the yearly tax bill, also known as a tax appraisal. Unfortunately, the tax appraisal is rarely an accurate representation of value. Although tax appraisers do their best to understand the particulars of each property, from bedrooms, to square footage, the reality is that property owners do their best to keep them in the dark so that they can keep their property taxes lower. Many counties have homestead exemptions and other policies that give incentives to homeowners by limiting how much the tax appraisal can go up each year. For long term homeowners, their tax appraisal can be much lower than it should be because they took advantage of those incentives. And for those near-bankrupt counties, some have kept the 2005 year tax appraisals in place here in the year 2013, even though property values have plummeted since then, in order to collect more tax revenue. So the tax appraisal that every property is assessed by the Tax Assessor is usually a very crude estimate and in many cases is way off. Plus, you can’t count on the Tax Assessor having the correct number of bedrooms, bathrooms or square footage.

The Register of Deeds can help you figure out who the owner is and if there are any liens against the property. The Tax Assessor can tell you how much the homeowner has to pay in property taxes. But none of that information is helpful in determining property value. So where does successful real estate investors get their property information? The Multiple Listing Service (MLS).

The Multiple Listing Service (MLS)

The MLS is the property information database used by licensed real estate agents and appraisers. Technically, each MLS is independently owned and there are hundreds of them across the country, but for simplicity, I will refer to all of those independent MLSs collectively as “the MLS”. The MLS has a monopoly on the most accurate property data. And they guard it like a hawk, only allowing licensed real estate professionals inside. The reason why MLS sourced property information is so good is because it is updated and maintained by real estate agents. And the MLS requires accurate information as part of their policies. For example, if an agent lists a property for sale on the MLS, and the property information is incorrect in anyway, that listing agent is going to hear about it. A buyer’s agent could show the listing to their client and once at the house, discover that the description is inaccurate, such as being a 2 bedroom vs 3 bedroom. That’s a serious problem because that is a waste of the buyer’s agent and the buyer’s time. And then the buyer gets mad at their agent and then that buyer’s agent tells on the listing agent and the MLS levies a fine…and then no one is happy. So the information in the MLS is self governed and therefore is about as close as you’ll get to perfect next to actually paying hundreds of dollars for a full blown appraisal.

The MLS provides the final sales price as well as the original list price. It can tell you if there were any seller concessions (when the seller pays the buyer’s closing costs). It gives you accurate details about square footage, bedrooms, bathrooms and every other detail you need in order to make an apples to apples comparison.

The one kink in the MLS armor is that it does not include For Sale By Owner (FSBO) sales, which can account for as much as 10% of total property sales in any given area. Since no real estate agents are used in FSBO sales, those properties are not in the MLS database. However, consensus among agents, appraisers and lending institutions is that they all but ignore FSBO comps because of the difficulty with which to obtain accurate data.

Successful real estate investors therefore use the Register of Deeds to help get a better understanding of who owns the property as well as what loans they have against it and then use MLS comps in order to determine the property’s value. (To learn how to get MLS comps, read my article, MLS Access for Real Estate Investors)

But even with the right information, many investors still value properties wrong. How?

Who is Doing the Comparison?

Ahhh, computers. For most, its a love-hate relationship. Computers are great at comparing massive amounts of data rapidly, consistently and accurately. But computers aren’t human. They can’t determine when the human that created them programmed a bug. They don’t know if the original data they were given was bad so they don’t know if their comparison results they calculate are way off. Computers can’t see the context of their work.

Meanwhile, what computers lack are exactly what humans are wonderful at. We can see when things don’t look right. We can see the bigger picture. Therefore, humans should view computers as tools to help make better decisions, rather than engines to make their decisions for them. But too many real estate investors are asking computers to choose and compare comps in order to outsource determining property value. This is asking the wrong person to do the comparison.

Zillow, Trulia, and others like them, are a double whammy. First, they get their information from the county records, which as you now know, can be completely inaccurate. Second, they are unable to determine which neighborhoods within a 2 mile radius are the most similar (which humans are ideally suited to do) so instead, they simply draw an imaginary 2 mile radius circle around the property. So the comps that they choose are not nearly as similar. When you combine these two issues together, you get some really wacky results. Even in markets where Zillow claims they have a high accuracy, it can be way off. Sure, Zillow can get lucky and hit it spot on sometimes, but other times, it isn’t and a successful real estate investor always knows, on every deal, the real and true value of the property.

But many real estate investors look for shortcuts. Such as using every free property valuation tool available online, obtaining the property values calculated by each one and then taking an average. Sadly, I have read real estate investing blogs that champion this approach (see my article Real Estate Truth vs Fiction). That averaging approach doesn’t work. Because each one of those sites is getting their data from the same place, the county records, and they are all doing a 2 mile circle radius around the property. So they are all picking primarily the same comps. Therefore, even though the values may be different because they use slightly different algorithms, in the end, you get an average of several inaccurate property value numbers. I’m tempted to recite a line from Tommy Boy when Chris Farley says he could do a certain something in a box and mark it guaranteed, because he has time. Moving on.

Determining Property Value the Right Way

Determining property value the right way starts with getting your comps from the MLS. Next, choose the comps yourself, as opposed to a computer, based on your own intellect and ability to compare similar properties in similar neighborhoods. Finally, put yourself in the shoes of a buyer when comparing the comps. If one comparable sold for $300,000 while the other sold for $275,000, what was the difference between the two? Did the $300,000 sale have more square footage or a larger yard? Just like you would compare similar items on eBay before you would buy something, do the same thing with the real estate comparables you collect. Don’t feel like you have to be a mathematician and use price per square foot calculations. Instead, compare the two like a buyer would if they were looking to buy a property because ultimately, that’s how property values work. Buyers make offers based on what they feel the value is and offers turn into sales and sales create comparables. And that’s how the country’s most successful real estate investors do it.

Do you agree? Is that the right way to determining property value?

Real Estate Truth vs Fiction

Phil Pustejovsky — Tue, 05 Mar 2013 16:12:41 +0000

Real estate truth can be difficult to find amidst all the fiction. In his fantastic book, “The Signal and the Noise“, author Nate Silver so accurately points out that in this information age, the large and growing amount of inaccurate advice (noise) can drowned out the truth (signal). At local REIA club meetings and in online forums, real estate truth is being smothered by the loud noise of bad advice. And perhaps the most dangerous part about it, is that the fiction is coming from very well intentioned people.

Who is Creating all that Fiction Out There?

So who is creating all of this sincere and the-best-of-intentions noise? It is usually coming from beginners as well as those who have tried but failed in real estate. They typically have the most time on their hands as well as the most inclination to talk or type about the subject. By contrast, the most experienced real estate professionals, who have the most signal to share, usually spend no time answering questions on online forums and rarely speak up at local REIA club meetings. Instead, the best and the brightest of real estate quietly listen, gleaning insight and making distinctions; sifting through all the fiction and noise in order to pull out those rare, few nuggets of real estate truth. They may be searching online forums for answers or attending meetings of their peers to network and learn, but they are rarely doing the talking or typing.

How to Determine Real Estate Truth from Fiction

So how does one find real estate truth amongst all the fiction? How do you separate the signal from the noise? Much like experts in the field of determining monetary counterfeit, you have to know what the real thing sounds, looks and feels like. I was fortunate enough to have a real estate mentor who taught me what the real thing sounded, looked and felt like. I found that real estate truth rarely shouted from the rooftops, but instead, it usually whispered. Most people that have made very insightful distinctions in their business aren’t quick to tell everyone unless it directly benefits them. Are you telling all of your competitors your best secrets? Exactly. (Note: Although I do try to provide fantastic information on my blog and in my videos, you won’t find my best, top secret techniques and strategies in them. I reserve those for the people I work with and share in the profits with.)

I began to pick up on when things didn’t add up based on what someone was saying or writing. A successful investor in my area many, many years ago told me to stay away from short sales. That didn’t sound right considering he was doing short sales himself. Beware of the naked man who offers the shirt off his back.

I learned how to determine when someone was guessing or making conclusions based on limited data versus when they really knew their stuff. I read where an investor complained about how direct mailing to the probate list didn’t work in his area. As I kept reading, I learned that she had only mailed 70 letters. Since direct mail has a 1-2% response rate, I knew that this person hadn’t mailed enough letters to make such a sweeping assessment. But how many readers of that forum thread would not have known? How many would have accepted that noise as signal? Unfortunately, many comments and forums thread replies contain much noise and very little signal.

Real Estate Truth Can Be Counter-Intuitive

Real estate truth isn’t always intuitive either, while fiction can sound very logical. In today’s market, there is a buzz around REOs and Foreclosures since Banks are supposedly desperate to dump their distressed assets as we begin to dig out of the bursting of the great real estate bubble of the mid 2000s. Banks are in the business of lending, not real estate management, so they want to get rid of the properties they foreclosed upon as quickly as possible, right? Sounds logical, doesn’t it? Meanwhile, the real estate truth on the matter is that bank owned properties are selling for top dollar right now and most Banks are patiently waiting for buyers to pay high prices for them. Hedge funds and private equity funds on Wall Street are buying up bulk packages of thousands of REOs and Foreclosures directly from the Banks as well. Foreign all-cash buyers are scooping up as many United States foreclosures as they can. To many around the world, American real estate is a bargain and what better bargain in America can you get than a foreclosure? While competition floods into foreclosures, quietly, wise real estate investors are in the realm of working directly with sellers and avoiding listed foreclosures and REOs altogether.

Finding Real Estate Truth

Separating real estate truth from fiction gets much, much easier the longer you stay in the business and the more successful you become. Successful real estate professionals can distinguish the signal from the noise quickly and easily. Meanwhile, the beginners, the ones most hungry for signal, are most often influenced by the noise. If you are first starting out and are struggling to recognize the signal from the noise, common sense can help and experience is wonderful too. But perhaps the best and most efficient approach is to have a resource, a person or a team of people, who can determine real estate truth from fiction for you. What do think? Do you agree? In what ways do you disagree? I would love to hear your take in this subject below:

Should Real Estate Investors Get a Real Estate License?

Phil Pustejovsky — Fri, 22 Feb 2013 17:11:24 +0000

“Should Real Estate Investors Get a Real Estate License?” is a question that comes up quite a bit. You’re about to discover where it makes sense as well as where it doesn’t make sense to get your license if you are also investing in real estate. The most important fact to start with is that me, as well as most successful real estate investors in this country, are licensed real estate agents. There must be a reason why that is the case. And there is, which we will get into. But you’ll also learn when to get it and when to focus just on investing. By the end, hopefully you’ll be able to make an informed decision as to what to do if you are trying to make this decision right now.

PROS – Why Real Estate Investors Should Get a Real Estate License

Pro # 1 – More Money:

For active real estate investors, having your real estate license can be a “license to print money.” There is a ton of profit in legally being able to collect a commission on the sale of a real property. Although the investor community at large tends to snub their nose at real estate agents, make no mistake, there are some agents in your general area that are bringing in $1M or more per year. Are you taking home that kind of yearly income from your real estate endeavors? Exactly.

Our studies have shown that less than 5% of properties for sale in the marketplace fit for a creative investor. What happens to the other 95%? Almost all will eventually go through a real estate agent. And although most investors don’t have the time to also be a traditional listing agent or buyer representation agreement, you can certainly refer the lead to another agent and get a portion of their commission. You can probably negotiate 25% of their 3% commission for bringing them the customer. That referral commission can translate into some serious money overtime, especially if you are generated a significant number of seller leads.

In some cases, you may actually want to be the listing or buyers agent. What’s 3% of a $1,000,000 listing? $30,000. That’s a pretty good flip profit, isn’t it? And that is the beauty of commission income, it’s a wholesaling-type transaction. You don’t need your own cash or credit to get paid a commission. So one could argue that agents were the originators of no money down real estate!

And what about when one of your friends wants to buy a home? You may want to get paid 3% for helping a friend find their dream home. It may just be some of the easiest real estate money you have ever made. I have helped many friends buy their homes and they trust me more than any other agent they know because they know how many homes I have bought myself. They know that I have been in their shoes hundreds of times. So not only is it good money, but you may also be the most qualified person for the job.

If you are doing short sales, due to some recent, significant changes, it is much more difficult for creative real estate investors to make huge profits in short sales. Although there is still opportunities out there, the vast majority of short sale approvals nowadays do not create enough room to do a back to back flip and still create any profits. The only real money left on the table in the vast majority of short sale deals are the commissions. And now that the banks are no longer approving “short sale negotiation” fees on the HUD, even if there is just a few thousand dollars of extra meat left on the bone, without a license, it can sometimes be extremely difficult to actually collect that money. Those in the short sale game that are licensed though, are cleaning up right now because right now there are more short sale deals available than ever before. But if you are in the short sale game without a license, you are leaving a ton of money on the table.

As you can see, having your license will expose you to more ways to put money in your pocket from real estate. And as crazy as this may sound, I have met plenty of investors who now do a few creative investing deals on the side and for the most part, do real estate agent commission deals. They are making great money, too.

Pro # 2 – MLS Access:

When you have your license, you can get full access to the Multiple Listing Service (MLS). Many investors have blind folds on their eyes and are using non-MLS based comparable sales research, such as free sources like Zillow’s Zestimate or paid services like RealQuest. The MLS is the only true way to fully analyze value and competition of a property. When you don’t know exactly what a property is worth or what it will sell for, if is very difficult to be able to make a wise investing decision.

You can also list your own properties when you have full MLS access. More than 90% of real estate transactions in this country are sold through the MLS so when trying to sell a property, it is very powerful way to get it moved.

CONS – Why Real Estate Shouldn’t Get a Real Estate License

The common reason why some investors avoid getting their license is that they believe it will restrict their ability to do creative deals. It’s true that becoming a licensed real estate will hold you to a higher standard in your business practices. But is having that kind of accountability a bad thing? Don’t you want to be the most honorable investor you can be? Further, I have been licensed for quite some time now and I cannot point to any situation where having a license precluded me from doing an investor deal. That doesn’t mean it isn’t possible so if you have a specific example you can point to, please comment below so that we can all benefit from your experience.

Here are some reasons not to get your license:

Con # 1 – If You Aren’t Doing Much:

Getting your license is a HUGE expense of time and money. When its all said and done, the cost can be several thousand dollars (fees, Realtor dues, E&O insurance, more fees). The time commitment is going to be at least 150 hours, perhaps more. I recently spoke with a beginner investor that has been chipping away as best he can at his pre-licensing exam preparation course for over 6 months and it will probably take him another 6 months to complete it, pass the test and then get his license hung with a Broker. He has 5-10 hours per week to devote to real estate investing and all of it goes to this quest to get a license. The problem is that he is not making any money in real estate and letting a terrific investing time period (right now), slip away. The advice I give (which I did myself) is to go do some deals first. Make some money. Then, use some of the profits from your first few deals to invest in getting your license, if you can squeeze in the massive time commitment it demands.

Then, make sure you stay active in real estate. The ongoing costs to remain a licensed agent are significant and you are required to attend continuing education courses. You can choose some electives, which can be very helpful classes, but the mandatory continuing ed courses can be absolute drudgery.

Investors that ideally fit for being licensed are those that are full time investors. In fact, if you are a part time, successful investor, making the leap to full time will be much easier if you are licensed because it can bring in good money consistently while you are waiting for bigger deals to close.

Con # 2 – For the Education:

One of the biggest reasons some beginners use to justify why they “need” to get their license is for the education. The person I mentioned above fits into that category. Sadly, they come to find out that the course you take to pass the exam to get your license will teach you almost nothing about making money in real estate. The average real estate agent in this country makes below the poverty level in income and rents their home. They weren’t taught to make money when they got their license, they were taught how to answer the questions on the exam. What’s a leasehold estate? Who exercises eminent domain? What is functional obsolescence? Who cares! Memorizing the definitions of terms will not help you put any money in your pocket in the real world of real estate investing. Certainly, you will learn something new while going through the process of getting your license. The problem is, it most likely won’t help you be successful. It’ll just be head knowledge.

Perhaps the more destructive, underlying reason why some beginners jump at the opportunity to dive into a 150 hour pre-licensing course is because education is well within their comfort zone. They are afraid of the real world and far prefer the safe cocoon of Education-ville. If you have no interest in making any money from the education you gather in life, then have at it and enjoy learning about how English feudal law influenced the creation of modern day real estate practice. But if you want to get a return on your time and money educational investments, then avoid viewing getting your license as giving you insight on how to be successful in real estate. Instead, look at it as a right of passage to get the ability to earn a commission.

Con # 3 – For MLS Access Alone:

As powerful and helpful as MLS access is, it alone should not be the reason to get your license. There are several ways to get access to the MLS without having to spend the huge amount of time and money to get your license. This is perhaps better suited for another blog post, but briefly, here are some ways to do it. You can get access through a friendly agent. In some MLS systems, you can go to an all day class and become a non-licensed assistant of a Broker. Many of my mentees have done this. If you have a close friend or family member, they may even give you the taboo (and perhaps against MLS policy) username and password to log into their MLS account. In some areas across the country, much of the most important MLS data is available to the general public due to some anti-trust lawsuits that the Realtor association lost and therefore had to open up their MLS monopoly.

What about the benefit of being able to list your own deals? flat fee listing is usually so cheap that it is practically the same thing.Although t
his isn’t as big of a benefit considering how common flat fee listing services are these days. Even when you list your own deals, you will usually have to pay your broker something upon closing, which may be about the same as a flat fee listing service.

Should You Get a License?

In summary, getting your license as an investor will open up new opportunities to make more money in real estate. It is expensive and time consuming to acquire however, so if you are just getting started, go out and make some money investing in real estate first and then proceed to invest some of your profits into getting a license if you have the time to commit to complete it. Did this completely answer the question, “should Real Estate Investors Get a Real Estate License?”

The Biggest House Flipping Mistake

Phil Pustejovsky — Thu, 07 Feb 2013 19:11:14 +0000

The biggest house flipping mistake most real estate investors make is so simple to avoid, yet so devastating when it happens. Experts and beginners alike fall victim to it and sadly, they rarely recognize it as a mistake at all. Instead, house flipping investors tend to blame the economy, the real estate market or just plain, bad luck when it occurs. The reality is that this mistake can effect any property owner looking to sell his/her property and it has nothing to do with outside factors like the market or the economy. The reason why so many investors make this mistake is because they don’t know any better. In this article, you’re going to discover how to avoid the biggest mistake investors make when house flipping.

House Flipping Fundamental Truth

Studies show that some 60% of signed real estate contracts never make it to closing. In fact, this figure was taken from a period of time when the real estate market was booming, in the mid 2000s. That means that less than half of the buyers who make offers on houses ever actually close. That should be a wake up call to anyone who earns any income from selling real estate, especially those who specialize in house flipping. If any of your money is ever dependent on a prospective buyer purchasing your house and statistics prove that in 60% of cases, that buyer won’t make it to closing, wouldn’t you like to know how to ensure that the deal closes and you get paid?

How to Avoid the Biggest House Flipping Mistake

The most successful house flipping investors have at least one technique in common. Wait for it. The moment you’ve been waiting for is here. Drum roll please….The way to avoid the biggest house flipping mistake is to control the buyer, always, on every deal. What does that mean, “to control the buyer”? When you control the buyer, you are the one calling the shots in the deal. The problem is that most sellers of real estate are so scared of losing a prospective buyer that they let the buyer and his/her agent run all over them. This is especially true with house flippers because oftentimes, they are a twinge desperate to get rid of the property so they can realize their profits. Every day that the property is not sold is either costing the investor money from holding costs or at the very least, is not putting any money in their pocket. Real estate investors are notorious for allowing buyers to take control, call the shots and push them around because they are so scared of losing that buyer. Fascinatingly enough though, the more desperate you are, the more you need to control the buyer. If you don’t control your buyer, you will experience the 60% failure rate that is the norm. The only way to prevent it, is to control the buyer.

Top 3 Ways to Control the Buyer

My mentor is the one who introduced me to this concept of controlling the buyer when house flipping. I vividly recall being apprehensive to such a concept because I wasn’t keen on the idea of controlling anyone. I don’t like the idea of forcing anything upon anyone. I far prefer letting others make their own decisions. My fears subsided though, when he shared with me that applying this technique actually helps all parties involved. It helps the buyer purchase a home that they truly want to own. It helps the buyer’s agent representing the buyer get their commission. It helps the closing company get their fees. It helps the mortgage company originate a loan and it helps you get your property sold. Plus, you flush out the tire kickers and time wasters so that they don’t waste your time and you don’t waste theirs. So rather than feeling like you are being manipulative when you control the buyer, you are actually creating a better outcome for all parties involved. Here are the three main ways to control the buyer.

#1 – Pre-Approve the Buyer with Your Preferred Lender

Controlling the buyer starts before you ever get in contact with a Buyer. It starts with the listing remarks. We have our students add a sentence into the Realtor remarks on the MLS listing of any house flipping deal that reads, “Buyer may use their own lender to purchase this property but Buyer must get pre approved with Seller’s preferred lender upon submission of offer.” Why? Because a pre-approval letter from a buyer’s lender is not nearly as powerful as one from your own. When your preferred mortgage professional reviews the buyer’s ability to get a loan, you will then have a much more accurate and reliable picture of the likelihood that the buyer will actually close. Plus, for many house flipping deals, if you are not the owner of record for at least 90 days, other lenders may not be able to get the buyer a loan due to title seasoning restrictions whereas your mortgage person can. (and if you haven’t developed a relationship with a mortgage banker who can get no title seasoning loans closed, if you are flipping houses right now, you best get that fixed real quick!)

The scary thing you will actually experience out there is that Buyers’ Agents will drive prospective buyers around for days, weeks, even months, showing them houses and once they get knee deep into a deal, discover that the buyer can’t even qualify for a loan. It sounds crazy but it’s the real world. Some buyers’ agents are so desperate for a commission, that they will throw up a Hail Mary pass hoping for a miracle to occur in the end zone. You don’t need to tie your property up with these wing-and-a-prayer buyers. Instead, verify the buyer with your mortgage person.

What if the new buyer is an investor paying all cash? Then have that buyer send you an official statement from their bank showing the money is available in an account.

What if the new buyer is an investor who will be getting a hard money loan? Talk to the hard money lender directly, verify that this person is actually a hard money lender and not the buyer’s cousin and finally, make sure that the hard money lender is willing to fund the deal.

What if your mortgage person thinks the buyer is shaky and getting a loan for them would be very tough? Move on. If the buyer isn’t solid, you will tie your property up for a month or more, and when a real buyer does come along, your deal will be tied up with the lousy buyer and you will miss out. Have the courage to say no, or otherwise it will cost you more later. Besides, there are hundreds of buyers out there for your property. You only need one. Don’t sweat it. If the person can’t get a loan, don’t sell them your property, move on.

#2 – Require Non Refundable Earnest Money

This is hands down the most not-followed advice we give in house flipping. Hopefully you won’t have to learn this lesson the hard way. The concept is so simple yet rarely implemented. Simply put, you require that the buyer’s earnest money become non-refundable once the inspection period is over. Our experience over the past decade with more than 1,000 real estate transactions is that if the buyer will not agree to allow their earnest money to go non-refundable after the inspection period, they are not a real buyer at all, but instead, a time waster. Most house flipping investors are too scared to make this demand until they have been burned a few times. Then, magically, they muster up the courage to take the non-refundable-earnest-money stand because they don’t want to experience the pain again. Hopefully you don’t have to touch the hot stove to know that it will burn your finger. I’ve got news for you. It burns. And it hurts.

But you may say, “getting non-refundable earnest money is much easier said than done.” Yes, it can be against the grain, out of the box, and not the norm, but it helps everyone in the deal, including the agent representing the buyer. In fact, the buyers’ agent is usually the biggest opponent to the whole idea of non refundable earnest money. They will use phrases like, “In my 10 years as a Realtor, I have never done a deal where my buyer’s earnest money is non-refundable.” To which you can reply, “There’s a first time for everything.”

When a buyer is serious about your property and is not concerned about being able to qualify for a loan, they won’t run away when you ask for non refundable earnest money after the inspection period. But the more a buyer balks at a non-refundable earnest money request, the more likely they can’t get a loan or they aren’t serious about your property. The end result of NOT requiring non-refundable earnest money is that a buyer will string everyone in the deal out for 30 days or more and then, when the loan doesn’t go through, or they find another home that interests them that week, they will leave the deal scot-free having wasted everyone’s time. Requiring non-refundable earnest money on house flipping deals is the essence of controlling the buyer.

#3 – Your Post Inspection Response

After the inspection is complete on a house flipping deal and the report is provided to the prospective buyer, the buyer sometimes freaks out. Inspectors are paid to find problems. If they provide a report to a buyer that is basically blank, the buyer gets upset and wonders why they paid someone $300 for a blank piece of paper. So the inspector must justify their existence on beautiful. perfect, even new built homes. In other cases, inspectors find legitimate issues that were crucial for the buyer to discover prior to purchasing. Be prepared for a mini-meltdown from the Buyer when they read the inspection report. It’s normal. However, your post inspection response is critical to controlling the buyer.

If they send you a list of demands that must be fixed prior to closing, you have a few options. The first option, which most people do, is to frantically call contractors, licensed and bonded electricians and plumbers, and other tradesmen, to hammer out the huge punch list the buyer required. This response is the opposite of controlling the buyer. The second option is to ensure the earnest money is non refundable and then to go to work on knocking out the post inspection demands of the Buyer. Although better, its not the best response. The third option is the one we usually recommend, which is to whittle down the list with the Buyer (or buyers’ agent) to just the absolute necessities, the things that must get done or they will walk away. The deal killers on the list. Then, with help from a general contractor or handyman, come up with the cost to fix those items. Then, reduce the purchase price by that amount and let the new buyers decide on their own if they want those things fixed or not. They may just take the reduced sale price and leave everything as it is. Meanwhile, you didn’t have to come out of pocket to fix anything or deal with any further delays that could occur if the contractors didn’t get the work done on time. But most people choose option 1, they handle all the line items on the post inspection counter, and then, once all the work is done, the buyer doesn’t close for one reason or another and the investor is now out more money out of pocket, is blaming the economy, the real estate market or just plain bad luck and then vow that house flipping doesn’t work. I’ve seen that unfortunate result from beginners and experts alike.

The way to avoid the biggest house flipping mistake is to control the buyer. You control the buyer by having your mortgage banker per approve the buyer, requiring non refundable earnest money after the inspection period and offering to reduce the purchase price for just the deal killing inspection items. You’ve heard my take on this subject, what’s your response to all this? Any house flipping horror stories you want to share about letting the buyer take control of the deal?