Posts
By Steve Steadele
“Was it good?” my wife asked as I tried to lift my bloated gut from the dining room table. My eyes were clearly bigger than my stomach. I felt like I had gained 10 pounds. I was completely stuffed and ready to take a nap.
“It was very good,” I replied. “You outdid yourself.”
She smiled and started to clear the table. Though the living room couch and my favorite blanket were calling my name, I jumped in to help her. After we finally got all the dishes to the kitchen, she filled the sink with water, added a little soap and started washing them. I grabbed a towel and asked, “Can I dry the dishes?”
She passed out. (Okay, not really.)
But you get the point. Some offers are no-brainers. Others are a little more difficult to get accepted. What I want to talk to you about today is how to get sellers to accept your offer when you expect multiple Purchase and Sale Agreements (PSAs) on an apartment building.
If you find a property that’s not on the market and you’re negotiating with the seller, it’s not so difficult to get an offer accepted. That’s because you’re the only game in town and you have time to negotiate without the fear of someone else coming in to rip the carpet out from under you.
But what if you find a property that’s on the market and the value makes sense? Chances are there will be several buyers writing offers on the same property. If you suspect that to be the case, try these helpful tips:
Standard form
If you’re buying a large property (or a building from a seller who owns several hundred units), they’re likely familiar with the PSA and probably have an attorney who will look at your offer as well. Even so, I’ve found that most sellers are more receptive to offers written on standard forms. Agents are especially appreciative because they know what it says and they’ll sound much more credible when presenting the offer to the seller. The chance of getting your offer accepted, instead of another offer from a different buyer, is much greater if you use a standard form for your area.
Price
Don’t get greedy. If the property makes sense and you think there will be multiple buyers, present the seller with an offer at or slightly above the purchase price. That doesn’t mean you get stupid. The property has to be priced right to begin with, that’s why there are multiple buyers. The nice thing about apartment buildings is that they rarely ever check out exactly as represented. That means you’ll have items to use in the negotiation later.
Closing date
Some sellers will push you to close quickly and others need time to find another property to complete a 1031 tax-deferred exchange. If you can, be flexible. Find out what’s important to the seller. Even if the seller wants a long closing date, I’ve found that writing an offer with a fast closing timeline is usually best, especially if agents are involved. Agents despise extended closing dates and when two offers are similar, they’ll almost always push the earlier closing date. You can always add a clause that gives the seller the right to extend the close of escrow to give them time to find their next property, just be sure to remember the lending process and be mindful of the interest rate. If you play your cards right, this can work in your favor in the negotiation.
Inspection and financing contingency
Most PSAs consist of an inspection period and a financing period. Some brokerage companies will break it into several other contingencies, such as books and records and title report. For the purposes of this article, we’ll assume the inspection contingency includes physical inspection and the review of books, records, and all other documentation. Depending on your experience level and the size of the property, the inspection period usually takes between 21–30 days. Read the agreement. Most of them say that the clock starts ticking once the buyer has received all necessary documentation. For this reason, I’ll usually write a very short inspection contingency because chances are, the seller and/or their agent is going to miss something anyway. Most of the time, I can get through due diligence in less than 10 days, if absolutely necessary. Make sure you give yourself enough time, but be aggressive. Sellers want to know you’re moving ahead as soon as possible.
As far as financing is concerned, I’ve found that sellers and agents alike trip over themselves if I write an offer without a financing contingency. Don’t do this unless you’re absolutely, positively sure you’ll get the loan and you’re willing to do anything it takes to get it. Presenting an offer without a financing contingency tells the seller you have the means to get the loan and ultimately close the transaction, but it’s not without risk.
Earnest money
Some investors refuse to write an earnest money check payable to escrow because if things go south, the seller can make it difficult to get the money back. I’m in that same group. Generally I prefer to write a promissory note, however, if I believe there will be multiple offers, I’ll write a check instead. I usually instruct escrow not to deposit the earnest money check until I’ve removed the inspection contingency.
Resume
If you have bought and sold real estate before, give the seller a list of properties you own. Sellers like paperwork that tells them you are a serious buyer. I’ll also include a letter of interest from a lender if I think it will help.
Good properties don’t stay on the market long. That means you have to position your offer to look like a no-brainer. If the seller is serving a great meal, sometimes it just makes sense to offer to do the dishes. Ask a lot of questions and be aggressive. Put your best foot forward—it’s a small price to pay and the couch will be there when you’re ready to take a nap.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at http://www.stevesteadele.com/
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Thursday, September 4, 2008
Tuesday, September 2, 2008
When Sharks Stop Swimming
By Steve Steadele
In 1975 a young man from Cincinnati, Ohio worked hard to keep his latest project afloat. He was over budget and late, despite the fact that the new film would set the domestic record for box office gross sales of over $470,000,000 and win three Academy Awards. The movie was Jaws and the director was Steven Spielberg, one of America’s youngest multimillionaires.
Jaws, a 25-foot great white shark reminds me of some investors in this business. But not for the reasons you might think. Most people would think of the word shark as someone who is ruthless and crooked. That’s not what I’m talking about.
For a shark to survive, it must continue to swim. If it stops swimming, it dies. And that’s what happens to most investors in real estate. What would happen if you stopped? What would happen if you decided not to work for a year? Most investors are like sharks, their business would die.
That’s why apartment buildings make more sense. You can buy and sell multifamily properties without spending an extraordinary amount of time doing it. And, if you stop, your investment continues to flourish—if you know what to do.
That doesn’t mean you don’t need to go fishing first. You won’t do yourself any favors if you stop swimming before you’ve caught a fish. To that end, what are the biggest mistakes investors make when finding and analyzing properties? How do successful investors “fish” for the right opportunities? They start by avoiding these common mistakes:
It’s a marathon, not a sprint
The investment firm Edward Jones airs a commercial where a man wins an auction on a painting. He paid $50,000 for it and when the auctioneer said “Sold!” the man stood up and announced that he was ready to sell it. Stunned and speechless, the auctioneer glanced around the room as though the buyer were crazy. The commercial continues, explaining that the firm takes a long-term approach to investing.
Buying real estate is very similar. There’s nothing wrong with making a quick profit, but the fastest way to making millions of dollars in this business is tax-deferred asset accumulation of capital. Investing is like running a marathon (think long-term). Marathon runners train differently than those running a sprint. Be cautious of why and how you’re running the race. Those who think long-term last a lot longer and usually make millions more than those who do not.
Smart warriors put on their armor
Buying apartment buildings is exciting. I get energized when I find a property I really like. But we have to be careful to make sure the numbers make sense. Verifying and properly projecting operating expenses are to your investment what armor is to a warrior—you just need to do it right. Too often investors let emotion get the best of them and they begin to justify questionable numbers. Don’t let that happen to you.
Thanksgiving feast
My wife makes a mean turkey. I’m really not a big turkey fan, but when she cooks one up, that’s all she wrote. And although Thanksgiving meals include many other dishes, the main dish is always the turkey.
The same thing is true with apartments. Start by pre-analyzing the property. Does it fit into your investment plan? Don’t worry about the stuffing. Don’t worry about the corn and potatoes. They’re all part of the meal, yes, but put first things first. When you look at apartment buildings there should be three questions you ask yourself first:
Of course the other dishes are important, but the first dish is what holds them all together. Start by doing a quick analysis on the property and then move into the other ingredients. You’ll save yourself a lot of time and mental energy.
Overly optimistic
There’s nothing fun about being negative. Most buyers invest in real estate because it’s not only fun, but it also provides for all the other benefits we look forward to enjoying, such as financial security. Because of that, we tend to be optimists. I encourage people to be a negative optimist. Again, there’s nothing fun about being negative, but you don’t want to be overly optimistic either.
Many investors push expected operating expenses down, as discussed above, to turn a marginal opportunity into something it’s not. They do the same thing when they project rental income. Be careful of accepting any “market rent” an agent or seller claims you can attain. Do your own rent study and understand where the property is really positioned in the market.
Indecision
Good opportunities don’t stay good opportunities for long. Somebody else is looking for property just like you. If you find a building that makes sense—something you’d like to own—don’t wait. The Purchase and Sale Agreement (PSA) gives you plenty of provisions to back out if things are not what they seem. Some investors sit on the sidelines for years waiting for that one property that will make them a million dollars. Meanwhile, the two dozen they rejected are making someone else 10 times that. Don’t be afraid to pull the trigger. You have plenty of outs, if you need them.
No analysis
Some gurus teach that, long-term, you can’t lose when you buy real estate. That’s why some investors buy property without analyzing anything. They don’t do an effective due diligence. They pay little attention to the numbers. The best way to get run over by a steel ball is to try pushing one up a steep hill. If your goal is to lose a lot of money, buy real estate without analyzing the numbers or the property. If, on the other hand, you want to make money in this business, take the time and energy needed to properly analyze the opportunity.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at http://www.stevesteadele.com/
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In 1975 a young man from Cincinnati, Ohio worked hard to keep his latest project afloat. He was over budget and late, despite the fact that the new film would set the domestic record for box office gross sales of over $470,000,000 and win three Academy Awards. The movie was Jaws and the director was Steven Spielberg, one of America’s youngest multimillionaires.
Jaws, a 25-foot great white shark reminds me of some investors in this business. But not for the reasons you might think. Most people would think of the word shark as someone who is ruthless and crooked. That’s not what I’m talking about.
For a shark to survive, it must continue to swim. If it stops swimming, it dies. And that’s what happens to most investors in real estate. What would happen if you stopped? What would happen if you decided not to work for a year? Most investors are like sharks, their business would die.
That’s why apartment buildings make more sense. You can buy and sell multifamily properties without spending an extraordinary amount of time doing it. And, if you stop, your investment continues to flourish—if you know what to do.
That doesn’t mean you don’t need to go fishing first. You won’t do yourself any favors if you stop swimming before you’ve caught a fish. To that end, what are the biggest mistakes investors make when finding and analyzing properties? How do successful investors “fish” for the right opportunities? They start by avoiding these common mistakes:
It’s a marathon, not a sprint
The investment firm Edward Jones airs a commercial where a man wins an auction on a painting. He paid $50,000 for it and when the auctioneer said “Sold!” the man stood up and announced that he was ready to sell it. Stunned and speechless, the auctioneer glanced around the room as though the buyer were crazy. The commercial continues, explaining that the firm takes a long-term approach to investing.
Buying real estate is very similar. There’s nothing wrong with making a quick profit, but the fastest way to making millions of dollars in this business is tax-deferred asset accumulation of capital. Investing is like running a marathon (think long-term). Marathon runners train differently than those running a sprint. Be cautious of why and how you’re running the race. Those who think long-term last a lot longer and usually make millions more than those who do not.
Smart warriors put on their armor
Buying apartment buildings is exciting. I get energized when I find a property I really like. But we have to be careful to make sure the numbers make sense. Verifying and properly projecting operating expenses are to your investment what armor is to a warrior—you just need to do it right. Too often investors let emotion get the best of them and they begin to justify questionable numbers. Don’t let that happen to you.
Thanksgiving feast
My wife makes a mean turkey. I’m really not a big turkey fan, but when she cooks one up, that’s all she wrote. And although Thanksgiving meals include many other dishes, the main dish is always the turkey.
The same thing is true with apartments. Start by pre-analyzing the property. Does it fit into your investment plan? Don’t worry about the stuffing. Don’t worry about the corn and potatoes. They’re all part of the meal, yes, but put first things first. When you look at apartment buildings there should be three questions you ask yourself first:
- Why is the seller selling?
- Do the preliminary numbers make sense? If not, why not? Is there a genuinely justifiable reason?
- If you had to sell the building tomorrow, would you get your money back?
Of course the other dishes are important, but the first dish is what holds them all together. Start by doing a quick analysis on the property and then move into the other ingredients. You’ll save yourself a lot of time and mental energy.
Overly optimistic
There’s nothing fun about being negative. Most buyers invest in real estate because it’s not only fun, but it also provides for all the other benefits we look forward to enjoying, such as financial security. Because of that, we tend to be optimists. I encourage people to be a negative optimist. Again, there’s nothing fun about being negative, but you don’t want to be overly optimistic either.
Many investors push expected operating expenses down, as discussed above, to turn a marginal opportunity into something it’s not. They do the same thing when they project rental income. Be careful of accepting any “market rent” an agent or seller claims you can attain. Do your own rent study and understand where the property is really positioned in the market.
Indecision
Good opportunities don’t stay good opportunities for long. Somebody else is looking for property just like you. If you find a building that makes sense—something you’d like to own—don’t wait. The Purchase and Sale Agreement (PSA) gives you plenty of provisions to back out if things are not what they seem. Some investors sit on the sidelines for years waiting for that one property that will make them a million dollars. Meanwhile, the two dozen they rejected are making someone else 10 times that. Don’t be afraid to pull the trigger. You have plenty of outs, if you need them.
No analysis
Some gurus teach that, long-term, you can’t lose when you buy real estate. That’s why some investors buy property without analyzing anything. They don’t do an effective due diligence. They pay little attention to the numbers. The best way to get run over by a steel ball is to try pushing one up a steep hill. If your goal is to lose a lot of money, buy real estate without analyzing the numbers or the property. If, on the other hand, you want to make money in this business, take the time and energy needed to properly analyze the opportunity.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at http://www.stevesteadele.com/
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Top Five Reasons to Invest in Apartment Buildings
By Steve Steadele
When most people hear about the millions of dollars investors make buying and selling real estate, the majority of them think about homes and duplexes. That’s because nearly everyone starts in the single family market.
But they don’t have to. The main reason investors start out buying homes is because they’ve heard all the stories or watched an infomercial where some guru is pitching the latest and greatest “no money down” technique. Buyers think they can purchase homes with no cash using a variety of methods including foreclosure, rehab, fix and flip, subject to, lease option, partnerships, wholesaling and more. And they’re right—you can buy homes that way. But you can do the same thing with apartment buildings.
The benefits of investing in multifamily properties are out of this world. I haven’t found a single reason not to invest in apartment buildings. Let’s review five of the top reasons apartments simply make more sense.
Apartments almost always provide a more affordable housing option:
I can’t get into all the economics explaining why apartments provide a more affordable housing option in this article because it would turn into a book. So let’s try to simplify it. The difference between the amount of rental and mortgage payments consumers spend each month is what I call the “gap”. Picture a bar graph where the average rent is $600 per month and the average mortgage is $1,000. The difference is the gap. As the gap increases fewer people can afford to purchase a home. There are only two ways the gap can get bigger. First, the mortgage payment increases or second, rental rates decrease. Most of the time rents do not decline, at least not significantly.
Mortgages, on the other hand, usually increase. If enough homes exist in the market, to meet demand, builders stop building. When demand catches up, they start developing again, because it becomes profitable. That means prices increase, and with them, mortgages. As mortgages increase the gap gets bigger and we experience greater demand for apartment rentals and that pushes rent higher. Rent growth always follows mortgage growth. This is one of the best reasons to buy an apartment building.
Somebody else manages the property:
One of the biggest advantages of buying apartment buildings is leverage. All real estate investors understand the term leverage, but most relate the term to money. There are lots of ways to leverage; money is just one of several. When you buy apartments, you leverage off the work and effort of other people because you can afford it. A lot of investors don’t want to be property managers—I’m one of them. Others don’t trust them and with good reason. But if you take the necessary steps, you’ll enjoy the benefits of apartment building ownership (cash flow, appreciation, tax advantages, or principal reduction or a combination of them) for many, many years to come. The best part? Somebody else does all the work.
The numbers make more sense:
When you buy single family homes and 2–4 unit properties your expenses usually consist of taxes and insurance. If you’re lucky, you might find one other line item such as management or utilities. But that doesn’t mean other expenses don’t exist. We all know there will be turnover, resident issues and the like. When you buy apartment buildings, expenses include taxes, insurance, utilities, maintenance, management, advertising and much more. Not only that, but you get to spread out the cost of maintaining the property across more units. The economies of scale are far superior to homes and 2–4 unit properties. For example, if you have a total of 20 houses, you have 20 different roofs. You also have 20 different utility bills, tax statements, mortgage payments and who knows how much time you’ll spend traveling from property to property. The numbers just make more sense with apartments.
Increase income (and property value) and spend very little doing it:
I have personally bought and sold many apartments where I didn’t spend a penny improving the property, yet I increased the value hundreds of thousands of dollars. While doing it, I also improved cash flow. “Forcing appreciation” on an apartment building can be as simple as increasing income and decreasing operating expense. To increase value with most real estate, you have to spend money improving the look of it. But that’s not necessarily the case with apartments. You might not have to spend anything at all.
Less competition:
Most investors limit their potential by selecting properties that require conventional financing. Then they shop based on the amount of money they have. When you look for a car, one of the first questions the salesperson will ask you is, “What price range?” Then they try to fit a car into that range. It’s true that the number of opportunities increases in relation to the amount of money you have available, but that’s the worst way to shop. There are lots of ways to buy apartments with no money, and because most buyers are looking for homes, you eliminate a majority of the competition when you invest in apartments.
Again, these are not all of the benefits to owning apartments, but it is a good start. I encourage you to check out The Successful Real Estate Investor, which is the first course many investors take to build a foundation for their overall investment plan. Once you do that, you’ll understand how and why investing in apartment buildings can make all your dreams come true.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at http://www.stevesteadele.com/
.
When most people hear about the millions of dollars investors make buying and selling real estate, the majority of them think about homes and duplexes. That’s because nearly everyone starts in the single family market.
But they don’t have to. The main reason investors start out buying homes is because they’ve heard all the stories or watched an infomercial where some guru is pitching the latest and greatest “no money down” technique. Buyers think they can purchase homes with no cash using a variety of methods including foreclosure, rehab, fix and flip, subject to, lease option, partnerships, wholesaling and more. And they’re right—you can buy homes that way. But you can do the same thing with apartment buildings.
The benefits of investing in multifamily properties are out of this world. I haven’t found a single reason not to invest in apartment buildings. Let’s review five of the top reasons apartments simply make more sense.
Apartments almost always provide a more affordable housing option:
I can’t get into all the economics explaining why apartments provide a more affordable housing option in this article because it would turn into a book. So let’s try to simplify it. The difference between the amount of rental and mortgage payments consumers spend each month is what I call the “gap”. Picture a bar graph where the average rent is $600 per month and the average mortgage is $1,000. The difference is the gap. As the gap increases fewer people can afford to purchase a home. There are only two ways the gap can get bigger. First, the mortgage payment increases or second, rental rates decrease. Most of the time rents do not decline, at least not significantly.
Mortgages, on the other hand, usually increase. If enough homes exist in the market, to meet demand, builders stop building. When demand catches up, they start developing again, because it becomes profitable. That means prices increase, and with them, mortgages. As mortgages increase the gap gets bigger and we experience greater demand for apartment rentals and that pushes rent higher. Rent growth always follows mortgage growth. This is one of the best reasons to buy an apartment building.
Somebody else manages the property:
One of the biggest advantages of buying apartment buildings is leverage. All real estate investors understand the term leverage, but most relate the term to money. There are lots of ways to leverage; money is just one of several. When you buy apartments, you leverage off the work and effort of other people because you can afford it. A lot of investors don’t want to be property managers—I’m one of them. Others don’t trust them and with good reason. But if you take the necessary steps, you’ll enjoy the benefits of apartment building ownership (cash flow, appreciation, tax advantages, or principal reduction or a combination of them) for many, many years to come. The best part? Somebody else does all the work.
The numbers make more sense:
When you buy single family homes and 2–4 unit properties your expenses usually consist of taxes and insurance. If you’re lucky, you might find one other line item such as management or utilities. But that doesn’t mean other expenses don’t exist. We all know there will be turnover, resident issues and the like. When you buy apartment buildings, expenses include taxes, insurance, utilities, maintenance, management, advertising and much more. Not only that, but you get to spread out the cost of maintaining the property across more units. The economies of scale are far superior to homes and 2–4 unit properties. For example, if you have a total of 20 houses, you have 20 different roofs. You also have 20 different utility bills, tax statements, mortgage payments and who knows how much time you’ll spend traveling from property to property. The numbers just make more sense with apartments.
Increase income (and property value) and spend very little doing it:
I have personally bought and sold many apartments where I didn’t spend a penny improving the property, yet I increased the value hundreds of thousands of dollars. While doing it, I also improved cash flow. “Forcing appreciation” on an apartment building can be as simple as increasing income and decreasing operating expense. To increase value with most real estate, you have to spend money improving the look of it. But that’s not necessarily the case with apartments. You might not have to spend anything at all.
Less competition:
Most investors limit their potential by selecting properties that require conventional financing. Then they shop based on the amount of money they have. When you look for a car, one of the first questions the salesperson will ask you is, “What price range?” Then they try to fit a car into that range. It’s true that the number of opportunities increases in relation to the amount of money you have available, but that’s the worst way to shop. There are lots of ways to buy apartments with no money, and because most buyers are looking for homes, you eliminate a majority of the competition when you invest in apartments.
Again, these are not all of the benefits to owning apartments, but it is a good start. I encourage you to check out The Successful Real Estate Investor, which is the first course many investors take to build a foundation for their overall investment plan. Once you do that, you’ll understand how and why investing in apartment buildings can make all your dreams come true.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at http://www.stevesteadele.com/
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