Archives for September 2012

How To Bring Your Investment Property To Market

When you know it’s time…

Let’s say you’ve decided it’s time to put one of your properties on the market. Maybe you need the cash to finance a new deal…maybe you need it for a financial emergency…or maybe you’re (God forbid) in the throes of a divorce and own property jointly, and now must place it on the market. Regardless, these times are definitely still a buyer’s market. So how best do you maximize your sales price when attempting to sell? Well, consider this investment property advice before you place your building on the market…

Do your asking price homework

Always remember that setting your intial asking price is everything. Don’t try to dissuade yourself that other variables matter even close to price. They don’t. That’s because all roads lead back to price. Got a great rent roll and low expenses on your property? Great. What’s your “standard” multiplier for rental property in your area? This will lead you back to price. Got a tremendous location near shopping, employment and transportation? Great. That should be reflected in your rent roll. And here we go back to price again. Willing to offer some amount of owner-financing? That’s definitely going to be reflected in your asking price, since you can certainly place a dollar amount on the lost opportunity cost of not receiving all cash for your property. And that too will have a large impact on the price you should be setting.

Obtain price opinions from the pros

With price being such a huge determinant of the success or failure of marketing your investment real estate in anything approaching a timely manner, it makes good sense, and is basic investment property advice, to obtain other informed, professional opinions as to the current market value of your property. Unless you’re already a real estate appraiser, a licensed real estate agent or broker, or someone who has done numerous comparative market analyses before, you should seek out at least three opinions other than yourself as to the market value. It would then be an OK practice to average these value opinions. Also keep in mind, while an appraisal is costly, it is also prepared with the greatest care and attention to detail. Real estate agent comparative market analyses (CMA’s) are good – just not nearly as involved as a full appraisal. However, you can ask several real estate agents for a CMA, and they will usually provide them at no charge in order to obtain your business.

Do not take the highest CMA opinion because it happens to be closest to your valuation. That’s because, with your subjective eye, you can’t help but render a value that will be the highest. Try to stand back a little in order to get a greater view – and a more honest value opinion. Look at all the comparable properties the pros were using to “comp out” your property (also known as the subject property). Look at the comparables that were common between these disparate, individualized properties, and how they related to yours. Note all the major similarities each common comparable property has to yours. Those common properties are the ones that will most help you in ultimately deciding on a realistic asking price for your own investment property.

Remember too, what every good real estate agent is taught: when asked if an owner’s (usually unrealistic) asking price can be gotten, the good agent will always respond, “Of course I can find a buyer for you at that price. In 5 years or so…” Always understand the relationship between obtaining “your” price and the amount of time it will take to find that one particular buyer. The higher the price, the longer the time span. The lower the price, the shorter amount of time required.

Should you sell it yourself?

Ah, the great debate…While I am a real estate broker, I can make a case for doing it yourself. And here ‘tis: there’s simply no way to accurately quantify that real estate agents obtain higher prices than sellers who sell on their own. Agents may say they can, but data they use can’t possibly be accurate, since sales data for FSBO’s (for sale by owner’s) can’t possibly reflect what a seller would have taken for a sales price if they had utilized the services of an agent, and paid out a commission.

On the other hand, the de facto monopoly that real estate agencies have through the use of their local Board of Realtor’s own multiple listing services (whereby individual FSBO’s are precluded from listing their houses) means that in order to be exposed to the majority of the real estate buying public, you must list with an agency. While inroads have been made in recent years with many online FSBO networks, they pale in comparison to the broad reach of exposure that any multiple listing service (MLS) can offer. And the greater the reach, the greater the exposure of your product. And the greater the exposure, the greater the likelihood that more than one buyer might be making an offer on your property at the same time. And when you only have one item to sell, increasing the odds for obtaining multiple offers yields the key to obtaining the greatest price for your property. And an agency’s commission may be only a small cost relative to the realized monetary benefit of the increased exposure leading to competition for buyers. So put that one in the “case for utilizing an agent” column.

Prepping your property for sale

Once you’ve decided to sell your property, and if you’ll be doing the marketing yourself, or hiring an agent to represent you, you’ll still need to prep you investment prior to bringing it to market. Here’s some simple investment property advice: with rental units, you’ll want to brief each of your tenants well in advance of placing the building up for sale. You’ll need to allay any fears they may have about the running of the property during the transition. This would be a good time to remind them that any lease you have with them will remain in effect with any new owner.

In addition, you’ll want to make sure you’re on good terms with each and every tenant before placing your building on the market. Just one bad tenant can easily sabotage and blow a sale for you to any prospective buyer. (Think along the lines of their not allowing easy access to their unit, or worse – their deliberately not maintaining, or even damaging their unit just to get back at you.) You’ll also want to make sure the exterior, common areas and especially the front of the building are all in good repair, look attractive, are well-lit and have been properly maintained. (In the case of a single family house flip situation, you’ll obviously want to make it shine, since you’ll be appealing to a much greater market niche – homebuyers, as opposed to other property investors.)

Prepare a current income statement

You’ll also want to make bring your financials up to date on any rental property you’re about to sell. Good investment property advice dictates that you prepare a simple income statement on the building, complete with current rent roll, itemized expenses, as well as vacancy rate you’ve had with it. Be sure to add this income statement to your marketing flyers and descriptions about the building.

Once you’ve decided who will be doing the actual selling of your property, carefully researched and selected your asking price, made the necessary improvements to make your “product” shine, spoken with your tenants about the situation and all are on board, and you’ve created all your marketing brochures and flyers, then you will finally be ready to bring your building to market to realize the highest and best price you can possibly obtain.

photos courtesy of catalog.flatworldknowledge.com, joelane.com, cordianosells.com, newdenverrealestate.com, activerain.com, lindafurtado.com, mcclurepropertymgmt.com, nathalykolp.com

The Current State of Investment Property Mortgages

It ain’t all that pretty…

If you are actively searching for investment real estate, it’s a good idea to be aware of the current state of the investment property mortgages market. While credit remains relatively much more difficult to obtain compared to several years ago, new banking regulations have made things even tighter in the mortgage arena since the beginning of the year. So you’ll need to have your creditworthiness all lined up before you try to close on any deal. You certainly don’t want to waste your time searching for a good investment property deal, only to find you can’t obtain the requisite financing.

Increased credit tightening

The most notable change in the credit markets this past year has been an intense scrutiny (and concomitant tightening of documentation) required on all residential investment property mortgages. Private investment from Wall Street has all but dried up completely for riskier loans, and as such, lending in most areas of the country will not allow for any form of “no documentation” (also known as “stated income” or “low documentation”) types of mortgage financing. Pejoratively, these loans have been called “liar loans,” mainly because one could lie about one’s income with impunity in order to qualify for the loan.

Currently, even stated income investment property mortgages that can be had allow lenders to audit your past federal tax returns (usually in case of default) to prove you were not truthful on your loan application. This further places more protection into the banking system to further avoid the wide use of fraud that contributed so strongly to the real estate collapse of the recent past.

Make your mortgage lender your ally

Armed with this investment property information, it is always advisable to discuss your financial situation with a mortgage lender before you start to locate your next investment property deal. This way, if you are self-employed, for example, you’ll be able to prepare in advance what documentation you’ll need for the future. You’ll know what amount of mortgage you can comfortably qualify for, and be able to plan for future financing as well. You can also get prequalified and preapproved for any investment property mortgage loan now, rather than waiting until you have a great deal in place, and then finding you don’t qualify. In that scenario, you could end up potentially losing out on the deal (and all the work you put in on it) since you couldn’t secure your financing in a timely manner.

So try to work with a local lender you’ve worked with before, get to know them, and let them advise you on your best plans of action for qualifying for your next investment property mortgage. Once you, do, you’ll be able to return to them, and cut through much red tape in the process for all subsequent investment property loans you will be trying to obtain.

photos courtesy of worldpropertychannel.com, allstate.com, realtybiznews.com, socalfools.org

The FED and you

Economics 101

The latest reports from Washington point to an anticipation of new actions on the part of the Federal Reserve System to help alleviate the current stagnation in the U.S. economy. Currently, chairman Ben Bernanke is looking at the possibility of having the FED pump huge amounts of money into the economy through the buying of trillions of dollars of bonds. What will the net effect be for property investors down the road if this were to occur? A brief review of some basics of monetary policy will be helpful in deciphering this type of investment property information…

What happens when the FED prints money?

One of my early teachers in Economics at Syracuse University was a gentleman named Melvin Eggers. When I took his upper level class in monetary policy, he had been Chancellor of the university for several years, and because of his “day” job, never taught classes any more. But he did come back to teach this course, and I remember jumping at the opportunity to learn from the master. Basically, I considered him the Milton Friedman of Northern New York.

Eggers espoused a number of key axioms about monetary theory that I hold as gospel to this day. One tenet was that when the FED prints money to prop up a sagging economy, there will always be a time when the economy has to “pay the piper.” In physics, I believe the corresponding law is known as “every action has an equal and opposite reaction.” When the FED prints money to pay for bonds – the types of bonds that spur growth through accelerated borrowing (for example, when government borrows to fund the repaving of a highway, or to build or maintain a bridge) – these bonds will have o be repaid overtime. Just like when you, as a property investor, have to repay your mortgage over a long term – say 15 or 30 years.

Pay it forward economics

The key element of course, is that this source of borrowing has to get repaid. Eggers liked to joke that businesses grew only though increased borrowing. Just like property investing. But, he would add, if you were really into risk and making easy money – just build up your credit – then use it, and fly off to South America to start your new life – preferably in a non-extradition country.

What a kidder…

The fact remains, when the FED eases monetary policy by pumping trillions into the U.S. economy – there will definitely come a time somewhere down the road – maybe not in a few years, but within our lifetime, where the rent’s gonna come due. It’s only hoped that the next generation can shoulder the financial burden. Right now, it ain’t lookin’ too good. As can be seen by the fiasco that the Social Security system has created. (And now some plans call for the privitization of social security with a cut-off at age 55. So much for governmental social contracts. )

Loose monetary policy effects

But loose monetary policy is kind of the same concept. The central component is that you institute the plan now to help alleviate an immediate strain on the economy, in return for shouldering a lot of pain on the same economy down the road (on the collective backs of the next generation).

So how does this help dictate what you as an individual property investor should be doing right now? Well, you’ll obviously want to try to grow your business, your little fiefdom of rental properties, utilizing the easy money policies being put into effect right now. Through these FED actions, borrowing costs for the Central FED banks will be lowered, which in turn will lower borrowing costs for all lending institutions in the country. The net result of this investment property information is that you benefit – when you borrow – for your next mortgage, for example.

The piper is always paid

Just know that your individual real estate portfolio, while set up to help fund the mid-to long term (like retirement), will also have to “pay the piper” somewhere down the road. Consider things a very long time away – like when your properties, as part of your overall estate when you die, get subject to all new sets of inheritance taxes that invariably will be passed on to your kids or grandchildren…the next generation. You may have set it up during this period of easy money, but as I mentioned above, there is always an equal and opposite reaction in the financial markets. Over time, that is. And you can certainly expect your heirs to pay the price after you’re gone.

Or, feel free to borrow up to your neck in debt. And abscond to a sunny beach down South America way…

photos courtesy of thelastembassy.blogspot.com, declineoftheempire.com, gazelleindex.com, theswash.com, business.time.com, csmonitor.com

The Case For Doing Nothing

The nature of the property investing cycle

There are times in any property investing cycle when you will be tempted by an inner voice to “do a deal.” Unfortunately, you’ll get yourself hyped up over what a great deal it will be, and you’ll proceed to ignore many warning signs – signs your intelligent self would normally avoid, with huge red flags waving all around you.

Solid investment property information will tell you that it’s always a good idea to have a team surrounding you to help you out in these circumstances. A team that will honestly evaluate the data you’ve collected, and will help give you a clue as to what a “great” deal” you’ll be making. If you’re the only one seeing how great the deal is, perhaps it will be time to sit this one out…and do nothing. I read recently an axiom I find so true: “wealth is the transfer of money from the impatient to the patient.” Stop being so impatient!

Emotional property investing = death

When you’re anxious to close a deal you feel is a real winner, be on the alert that your emotions may be running away with you. If you get this feeling on all your deals, I certainly hope you have that team surrounding you to give you honest insight, and other sets of eyes on your crunched numbers. After all, it was the child in the crowd who yelled “The Emporer isn’t wearing any clothes!” You’ll want to have some sort of checks and balances in place as well before you close any investment property deal, so you too won’t be caught without any financial clothes on.

Sideline sitting

There truly are times when there is nothing on the market that makes sense for you. Good investment property information says that even though you feel you need to keep to your “schedule” of investment property buys you’ve set out for yourself, be sure to cut yourself some slack, and properly wait for the next good property buy to come along. You can always try expanding your geographic area while searching for your next investment, but be sure not to jump in too quickly. Always be on the alert for any emotionalism in your buying scheme. And make sure you temper it with a system of checks and balances (such as the aforementioned building of a trusted, reliable team behind you) to counter your original enthusiasm on any given potential deal that presents itself to you.

When the master speaks, listen

In this way you can benefit from some of the investment property information (and ultimate wisdom) of Warren Buffet, as he has been previously quoted as saying: “the trick is when there is nothing to do, do nothing.” Or, as I like to paraphrase, when you spot a “great” deal – just “cool your jets.” After all, there are intervals in the property investing cycle when it is best to just sit back and wait for the right opportunities to present themselves. If it’s meant to be, it will materialize. When you remove the emotionalism from your investment buying decision-making, you’ll find you can become a better negotiator overall. And that factor should ultimately produce greater profits for you in the long run of your investing property cycle.

photos courtesy of sodahead.com, colipera.com, singaporepropertycycle.com.sg, advisorone.com, rankia.com