Steve Steadele

Apartment Vacancy Rate Hits 22-Year High

2009-07-15T10:40:00.000-07:00

It's no secret that the real estate market is pitiful right now. But that spells opportunity for those who understand how market cycles work. Imagine what will happen after you buy a property that produces more cash flow than most people make in a year--with little or no money and without the management headaches--during a time when vacancies are at 20-year highs....

What will happen to the value of your property when vacancy rates drop? (Which they will!) The value of your property will increase, and fast! It just makes sense. That's why investing in apartment buildings is one of the best investments you can make today. Let us know if we can help.

Below is the article from the Wall Street Journal. Enjoy.

By NICK TIMIRAOS

The vacancy rate for U.S. apartments hit a 22-year high in the second quarter as rising unemployment reduced demand during what is usually the peak leasing season.

Rents fell the fastest in markets that have shed white-collar jobs, such as New York and San Jose, Calif., and in markets where many foreclosed homes and condominiums have been turned into rental property, including Las Vegas and Orange County, Calif.

Vacancy levels nationally rose to 7.5% in the April-to-June period, up from 6.1% a year earlier, according to Reis Inc., a New York real-estate research firm. Of the 79 markets tracked by Reis, 45 showed an increase in vacancies.

Generally more rental units turn over during the spring and summer than in any other time of the year, which means that the declines could have an outsized impact on revenue for apartment owners.

"Everybody expected spring leasing to save apartment landlords. That hasn't happened," said Victor Calanog, director of research at Reis.

The housing downturn initially offered landlords the chance to lure troubled homeowners into the rental market. But the pace of job losses shattered any inroads that apartments might have gained from the housing bust. Apartment vacancies began to rise at the end of 2007 before accelerating further as the economy deteriorated last fall.

Rents, meanwhile, are falling at the fastest pace in at least a decade. Effective rents, which include landlord concessions such as one month free rent, fell 1.1% in the first quarter and 0.9% in the second quarter to an average of $975 a month. The combined decline for the first half of the year was the largest since Reis began tracking the data in 1999.

Effective rents were down 2.9% in San Jose, the sharpest quarterly drop, to $1,430 a month. New York City had the largest 12-month rent decline, at 5.8%, to an average of $2,680.

"It is one of the worst second-quarter performances that we've seen," said Ron Johnsey, president of Axiometrics Inc., an apartment-research firm.

Vacancies tend to rise during periods of high unemployment because household formation slows, as would-be renters double up or move in with family members. Those who do rent are more cost-conscious.

"Do they absolutely need that extra bedroom, the balcony, or the pool view?" said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Meanwhile, shadow inventory of foreclosed properties and condominiums for rent continues to compete with rental apartments in the most oversupplied housing markets. While rental demand grew by 2.1% during the first quarter, apartments didn't benefit, in part because former homeowners chose to live in vacant homes for rent, said Gleb Nechayev, senior economist at CBRE Torto Wheaton Research.

There are signs that the shadow inventory may be leveling off. The number of vacant-housing units for rent declined to less than one million in the second quarter, from more than 1.1 million through most of 2008, according to Ron Witten, who runs a Dallas-based apartment-research firm.

Falling home prices could hit landlords in two ways. They could force landlords to lower rents to keep up, and could spur some renters to purchase homes. Still, the number of renters who move out to purchase homes isn't expected to surpass levels seen during the housing boom earlier this decade.

From 2000 to 2003, around 30% of renters who moved out of apartments were becoming home buyers, while just 15% of move-outs left to buy homes during the first quarter of 2009, AvalonBay Communities Chief Executive Bryce Blair told investors at a real-estate conference last month.

Markets with better employment prospects saw modest rent growth during the second quarter. Effective rents increased in the second quarter by 0.3% in suburban Maryland and in Washington, D.C.

Poorer-than-expected rental growth could push landlords who piled on debt during the years of easy credit into default on their mortgages.

Sometimes You Just Feel Like You're Running Into Walls

2009-06-03T08:55:00.000-07:00

You've got to watch this video! This is exactly how most investors (and agents) feel in today's market!

Let's be honest. It's slow out there right now. Very few apartment buildings are selling today. And it's not because good investments don't exist--in fact good investments are EVERYWHERE! The reason few properties are selling is because there are very few buyers! They don't know what to do or how to do it. They're not sure how to put together a successful transaction. They feel like they're running into walls.

That's good news for you and I. It's bad news for sellers. Those who want to sell (both sellers and lenders--yes, even a few apartment buildings have fallen victim of foreclosure) need to be very flexible in price and terms if they have any hope of selling the property.

Flexibility. It should be one of your new favorite words.

This window of opportunity will not last forever. A few years ago agents were begging property owners to sell. The market was on fire and prices were sky high. Agents did anything and everything to sell property. Today it's the other way around. Credible buyers--those that will perform, those who know how to put together the transaction--are golden.

But just like the window to sell at the peak of the market came to a screeching halt, so will the window to buy.

That's why I have the best offer EVER available right now at http://www.apartmentscanmakeyourich.com. When the market picks up and more people start buying apartment buildings again, demand will increase and so will the price of this program. You should check it out and see what it is we're offering in this incredible package. Get yours while you can!

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Brokerage Industry Hard Hit by Losses

2009-05-07T08:10:00.000-07:00

Expense Cuts of 20% to 30% Have Been the Norm in Face of Drop Off in Transaction Pace, Focus Remains on Revenue-Generating Opportunities

By Mark Heschmeyer

Major U.S. commercial real estate brokerage houses are reporting first quarter net losses across the board, reflecting the ongoing impact of the current recession and dearth of transaction activity. This is believed to be the first time in recent memory that all the major brokerage firms reported a quarterly loss, an occurrence that can’t be recalled even during the last major recession following the dotcom bust in 2001.

Jones Lang LaSalle reported a net loss of $61 million for the first quarter; FirstService (which owns a majority of Colliers International) reported a net loss of $44.7 million in the first quarter; CB Richard Ellis posted a first quarter net loss of $36.7 million; and HFF (Holliday Fenoglio Fowler) posted a first quarter net loss of $6.1 million.

This article courtesy of the CoStar Group. To get the full story, click here.

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Marcus & Millichap Apartment Overview & Forecast

2009-04-21T12:06:00.000-07:00

This is yet another excellent presentation by Marcus & Millichap describing some of the current challenges in the apartment and financial markets. The presentation will take about an hour. If this is too small for you to view, you can also find it at www.stevesteadele.com/ApartmentOverview2

The firm has not scheduled the next presentation yet. For more information, go to www.marcusmillichap.com.

Never Get Caught Off Guard In A Recession Again!

How would you like to start earning the income you deserve so you can do what you want, when you want?

How would you like a clear, easy-to-use system to build your own nest egg? Is there a way to protect your family and safeguard your future?

You can. It starts with a sincere, overwhelming desire to make the kind of money most people only dream about. If that's you, keep reading.

There are a lot of "how-to" products on the market, but few of them explain what to do, why to do it, when you'll receive the benefit, who to talk to and what to say. When you understand that, the how becomes very simple!

Five years from now many investors will look back and say, "I'm sure glad I started investing in apartments in 2009 and 2010!" And others will say, "I sure wish I would've started investing in apartments 5 years ago." Which one will you be?

Most people don't understand apartment investing. If they did, they'd be watching the market like a hawk right now! There's a TON of money to be made, and the window of opportunity is short. You don't need money or stellar credit either. It's times like these where motivated sellers are especially creative!

This is probably one of the best times to invest in apartment buildings we've seen in over 20 years. If you've been sitting on the fence, unsure of where to start and how to begin, visit www.stevesteadele.net/mp.html to learn more about my coaching program. We have at home study programs available as well--but please, don't let this opportunity pass you by.

We also have an internet special available at www.apartmentbuildingriches.com.

Obituary - Common Sense

2009-04-14T12:54:00.000-07:00

A friend of mine emailed this to me the other day and while I don't normally post stuff like this, it is.... well, I'll let you fill in the blank.

Obituary

Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years. No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as:

- Knowing when to come in out of the rain;
- Why the early bird gets the worm;
- Life isn't always fair;
- And maybe it was my fault.

Common Sense lived by simple, sound financial policies (don't spend more than you can earn) and reliable strategies (adults, not children, are in charge).

His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition.

Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children.

It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.

Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims.

Common Sense took a beating when you couldn't defend yourself from a burglar in your own home and the burglar could sue you for assault.

Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.

Common Sense was preceded in death, by his parents, Truth and Trust, by his wife, Discretion, by his daughter, Responsibility, and by his son, Reason.

He is survived by his 4 stepbrothers;

-I Know My Rights
-I Want It Now
-Someone Else Is To Blame
-I'm A Victim

Not many attended his funeral because so few realized he was gone.

Keep Your Eye On Apartment REITs

2009-03-24T10:36:00.000-07:00

Keep Your Eye on Apartment REITs

It’s no secret that the housing market has suffered huge setbacks over the past 24 months. Americans have already lost $13 trillion in net worth and the blood bath doesn’t appear to be over. Real estate markets that went on a building binge during the expansion phase are projected to lose as much as 25 percent in housing value in 2009. It’s the talk of the town and most of us are sick of hearing about it.

But what does it mean for the apartment market? At one point it seemed a corpse could apply for a home loan and get approved in a matter of days. That put enormous pressure on apartment communities as they battled for anyone with a pulse to fill vacant units.

A few years later and well into the housing boom, apartment rents increased dramatically as home prices escalated out of control. Now fast forward to the housing bust. At first rental rates surged further and concessions were nearly nonexistent. Foreclosures soared in 2007 and 2008 and consumers were tossed back into the renter pool. Vacancy fell and cash flow increased.

Today, however, the multifamily sector faces new challenges, like the “shadow” market, which consists of homes and condos that compete with apartments for renters. Apartment communities are again offering free rent and other bonuses to attract potential residents.

Net Operating Income (NOI) is decreasing and fearful investors are panicking. During a webinar on February 24, 2009 Managing Director, Linwood C. Thompson of the National Multi Housing Group of Marcus & Millichap said vacancy rates are, “Going to go up on average about 100 basis points (bps) across the entire portfolio. That’s a significant move.”

Thompson continued: “It’s very difficult to get a 50 bps move across that average in a given 12 months, but with unemployment the way it is we see the vacancy rate going up 1 percent, which is going to be a challenge.”

Indeed it will be; and investors know it. Bad news spreads like wildfire and fearful investors bail in an already volatile market. Many of the largest apartment Real Estate Investment Trusts (REITs) including BRE Properties, Inc. (NYSE:BRE), Equity Residential (NYSE:EQR), Apartment Investment and Management Company (NYSE:AIV), Essex Property Trust, Inc. (NYSE:ESS) and AvalonBay Communities, Inc. (NYSE:AVB) have been pounded in recent months. All of them are at five-year lows.

Many investors and real estate enthusiasts believe commercial properties will face widespread vacancies as a result of rampant overdevelopment like those of the 1980s and 1990s, but the only sector to enter the downturn with too much construction is retail. According to the National Association of Home Builders (NAHB) multifamily starts fell to the lowest number the association has on record with just 119,000 units.

That should bode well for the multifamily housing market. The recent increase in apartment vacancies is the result of rising unemployment and the competing shadow market; not new development. “We’re in the early middle stages of this 20-year expansion of rental demand,” Thompson said, referring to the echo boomers as they mature into their prime rental years. “We believe that once we hit bottom and once we start climbing out of this recession we’re going to see a fairly steep recovery.”

Commercial real estate sales have dropped significantly even though prudent investors know this is the time to buy. Apartment REITs like AVB and BRE have canceled or postponed development projects throughout the country. REITs, and private investors alike, cite the cost and availability of capital coupled with job losses and slumping housing prices as top concerns.

All that said, the long-term outlook for apartment REITs still looks good. Although demand is hampered somewhat by the housing and job market, roughly 4 million people will turn 18 every year for the next 10 years. Combine demand with limited supply and the apartment market will rebound relatively quickly, albeit job growth is the key ingredient.

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Marcus & Millichap Apartment Overview & Outlook

2009-02-25T15:30:00.000-08:00

This is an excellent presentation by Marcus & Millichap describing some of the current challenges the apartment market is facing as well as an overview and forecast of where the market is expected to go in the coming years. The presentation will take about an hour. If this is too small for you to view, you can also find it at www.stevesteadele.com/ApartmentOverview

The firm has scheduled the next presentation April 21, 2009. For more information, go to www.marcusmillichap.com.

We are definitely entering one of the best times to begin investing in apartment buildings. If you've been sitting on the fence, unsure of where to start and how to begin, start by visiting www.stevesteadele.net/mp.html to learn more about my coaching program where I'll help you raise the money and we'll buy large multifamily properties together--I'll even refund your money when we buy our first building!

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The Apartment Building Cycle

2009-02-14T14:06:00.000-08:00

One question I receive quite often is, "Where are we in the apartment building cycle, right now?"

Well, that depends on where you are. Below you'll find a graph provided by the great folks at Integra Realty Resources, Inc. This will give you an idea of where different regions throughout the country are in the apartment building cycle. Enjoy.

Although the multifamily market is a less stable than it was last year due to the numerous economic factors affecting unemployment, apartments still offer investors favorable returns with considerably reduced risk when compared to other assets. Vacancies have increased slightly because residents are doubling up or moving in with parents or friends.

The good news is educated apartment investors can pick up property for substantially less than they could a few years ago. Many uneducated sellers bought at the peak of the market and are now selling for much less than they paid--in some cases by as much as 50%. Cap rates have increased and fewer buyers are writing offers. 2009 and 2010 look to be incredible years to buy apartments.

Don't know what to do or need more information? Check out my how to courses at www.SteveSteadele.com.

If you'd rather a passive investment with no tenant hassles, mortgage, property management or maintenance headaches but want the ability to earn 12%-20% on your money secured by real estate, visit www.SteveSteadelePartners.com.

Do you have a question? Email me at steve@stevesteadele.com.

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How Much Due Diligence Should I Do Before Writing An Offer?

2009-02-09T11:52:00.000-08:00

Hi Steve,

I have gone through your course and have a question. At what point do I need to complete a rent and sale comparable study if I am looking to invest in an apartment building? Your course makes a lot of sense and it breaks everything down but I am confused about how much time to spend working on that information before I write an offer. It seems like I would spend a ton of time doing that with no time to do anything else. Do I need to do it all before writing an offer?--Brian J******, Louisville, KY

Brian,

When I work with coaching students I have them complete a rent and sale comparable analysis using the Apartment Evaluator just to get use to doing it. Yes, you need to understand sale comparables somewhat before writing an offer and, by default, you’ll learn a little bit about the rental market. How do you do that? More than a half dozen agents in any given region will be more than happy to get some information to you in hope that you’ll eventually do business with them. You don’t need to do a full analysis initially. Begin by locating motivated sellers who own properties that are within your price range. When you find a property and qualify it as worthy of your time get it under contract and then get more specific during due diligence. That's when you'll make the most money. For more information, check out How to Turn Due Diligence Into BIG PROFITS!

Thanks for the question.

Do you have a question for Steve? Email him at steve@stevesteadele.com.

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Apartment Investing: Value Indicators

2009-02-05T11:58:00.000-08:00

Question:

Steve,

I have Fast Track to Millions. In there you talk about the five different value indicators. Which one is more common to use when comparing properties? What do sellers usually go by? Do they understand what they mean? --Gary P****, Vancouver, WA

Answer:

Gary,

No, most sellers have no idea what the value indicators are or how to calculate them. Just about anyone can figure out the $/Ft and the $/Unit, but most sellers do not know or understand the meaning of a GRM/GIM or Cap rate. That’s where the challenge comes in. A lot of sellers will price their property based on a “gut feeling” of what the market is doing. Rarely is it ever realistically supported by comparable properties unless an agent managed to earn enough credibility to list it that way. (Or the property is large enough that sellers understand the income and expenses must make enough sense to attract potential investors.) Sometimes you’ll find a property that is worth much more but because the seller is motivated, they’ll sell for less. Those are great situations to be in, and in those cases the five value indicators will usually make some kind of sense even if it’s found in substantial upside. As far as which indicators are more important—it depends. All of them are important to some degree. Properties that are closer to the city core are heavily influenced by the price per foot. Properties in outlying premium markets tend to lean toward cap rates or price per unit. And properties in cash flow markets are heavily influenced by the current cash flow generated by the asset. Those are the basic, generic answers. All of them are important. It really depends on the market and the property. Thanks for the question.

Is it a good time to start apartment investing?

2009-02-04T11:36:00.000-08:00

Question:

Steve,

The financial market is a mess. Lenders are hard to work with and sellers are still asking high prices. Is it really a good time to start apartment investing right now?--Lynn P******, Amarillo, Texas

Answer:

Lynn,

Thanks for the question Lynn. This is a huge topic. I’ll try to keep it short, but I could go on and on about this for hours.

Although apartment buildings have cycles similar to the economy, they don’t necessarily experience the same ups and downs at the same time. If you had asked this question a year ago, my answer would have been, “It’s always a good time to buy apartment buildings, somewhere.” Someday we’ll get back to that answer, but not today. Instead, the answer is more like, “It’s a good time to buy almost everywhere.” Here’s why.

If you know how to determine what phase any given market is in you can make a lot of money. We all know that. It doesn’t matter if you call it buyer’s phase 1 or emerging market or whatever you want to call it—if the market is near the bottom of the cycle (or beginning to go back up) you can make a fortune. But we’re facing something today that is unprecedented. We’ve never seen an apartment investing market like this before.

When the economy tanks (like it has) real estate has historically suffered with it. Years ago developers didn’t have the kind of information they have at their fingertips today. As a result, the number of new units to enter the market at the end of the expansion phase was enormous—meaning we were stuck with massive oversupply. Developers didn’t know it was time to stop building until it was too late. That’s when knowledgeable investors started buying. The rental market suffered until demand eventually caught up with the extra supply. Then they sold.

Today the surplus of information has resulted in shorter, more manageable apartment building cycles. (The single family market is another story. Today it suffers not because of oversupply, but because lender criteria has changed. More on that another day.) Apartment cycles are not nearly as turbulent as they were decades ago (which makes cycles harder to identify). Over the past 3-4 years the amount of new apartment development has been very, very low. That’s the main reason the apartment market is not experiencing the same issues as single family homes, retail, and office buildings. Values have suffered somewhat depending on the asset and MSA (Metropolitan Statistical Area). Condo conversions are no longer pressing prices and tighter lender criteria has made it more difficult to invest. This has caused prices to decline a little bit, but other economic factors are actually helping apartment owners. Many are experiencing more cash flow than they’ve seen in years because everyone was buying a home.

There are very few new units scheduled to come out of the ground over the next 2-3 years. Meanwhile, demand continues to accelerate. Foreclosures are at an all time high and over 4 million people turn 18 every year. Demand is shooting through the roof while supply remains nearly constant. To top it off, it’s a buyers market.

So the short answer is yes—it’s a great time to start investing in apartment buildings. For the most detailed information available, check out the Complete Course

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Do I Need Good Credit To Buy Apartment Buildings?

2009-02-03T14:45:00.000-08:00

I received the following question via email recently and given the current financial environment, I thought I should try to shed some light on this very important topic.

Question:

I've heard a lot of people say I can buy apartments with no money down. If I can do that, how important is my credit? I don't have great credit and I'm not sure how that affects me. Can I buy apartment property with no money if my credit is less than perfect? Thanks Steve--I'm really enjoying the book. -Tom L***, Florida

Answer:

Tom,

This is a good question because the answer has changed somewhat. A few years ago you could buy apartments all over the country with little or no money and horrible credit, but times have changed. Lenders are licking their wounds. Underwriting criteria has tightened up a lot over the past 6 months to a year. A few years ago people with credit scores under 600 were still getting conventional loans. Today it's pretty tough.

The good news is banks are more forgiving with regard to your personal credit report when purchasing commercial property than they are when you buy a single family home. Lenders start by assessing the income and expenses of the property and then look at the borrower. If the property supports the loan (meaning the Debt Service Coverage Ratio using realistic numbers is favorable) and you have great credit your chances of securing financing are better than average.

For more information on how to find quality investments using various creative strategies, check out When, Where and How to Buy.

When, Where and How to Buy

Market Analysis

* 3 Basic Questions a Market Analysis Should Answer
* How Micro and Macro Economics Impact Real Estate
* How Understanding Market Cycles Will Make You Rich
* 4 Phases of the Business Cycle
* How the Real Estate System Works

Defining the Investor

* Investor Motivation
* 2 Fundamental Reasons Investors Buy Any Type of Investment
* 5 Major Constraints to Investing in Real Estate
* How Do I Know How Much to Pay?
* 3 Major Factors to Consider When Buying Investment Property
* 5 Different Types of Real Estate Markets

Simplified Economics

* Simple Steps to Discovering Top Markets to Invest
* Top 6 Variables the Impact the Rental Demand
* Easy Ways to Understand Supply and Demand Variables
* How to Determine Where the Market is in the Apartment Building Cycle

Profit Analysis

* 4 Major Categories of Seller Motivation
* 3 Ways to Maximize Profitability When You’re Buying at the Right Time
* 5 Types of Property to Avoid
* Questions to Ask Yourself to Maximize Performance of Your Investment
* Top Money Making Indicators and Why Other Investors Avoid Them

Finding Quality Investments

* Top Resources to Finding Money Making Opportunities
* How to Find the Best Real Estate Agent

Creative Ways to Buy Apartments

* Can You Buy Large Apartments With Little or No Money Down?
* The Pros and Cons of Leverage
* Seller First or Second Mortgage
* Partnership Opportunities
* Subject To Investing
* Master Lease Option
* Other Great Ways to Minimize Out of Pocket Expense

Private Lending Strategies

2009-01-02T13:20:00.000-08:00

I've just released a brand new Web site for investors who are looking for a place to put their money in today's highly volatile financial market. The website is www.PrivateLendingStrategies.com. It's a simple site that will give you information about becoming a private lender. You can even invest using your IRA or 401(k).

Many Americans are hesitant to put their money in real estate, and understandably so. We will be paying for the financial crisis of 2008 for many, many years to come. Just understand that it doesn't mean real estate is a bad investment. In fact, if you work with real estate investors, private lending can be one of the most lucrative, hassle-free investments you can ever make.

Those of you that know me know that I invest in apartment buildings, so I of course have another Web site that will give you additional information on what we do. This site is www.SteveSteadelePartners.com.

Check out both sites and let us know what you think. If I can help you in any way, please do not hesitate to contact me at steve@stevesteadele.com.

Have a healthy and wealthy New Year!

Steve

My First Apartment Building - Bought 2002

2008-11-13T23:09:00.001-08:00

People often ask me if they can see a picture of the first apartment building I ever bought in 2002. It was this 16 unit building in Auburn, Washington. I bought it for $765,000 and put no money down. I sold it about a year later for $895,000 and bought two more buildings.

Multiple Offers: How to Get Yours to the Top

2008-09-04T10:33:00.000-07:00

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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When Sharks Stop Swimming

2008-09-02T19:49:00.000-07:00

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:

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

2008-09-02T19:42:00.000-07:00

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/

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Assessing Motivation—Four Reasons Sellers Sell

2008-08-30T13:56:00.000-07:00

By Steve Steadele

As a real estate investor focusing almost exclusively on apartment buildings throughout the country, people often ask me what it takes to find motivated sellers. All buyers want to make intelligent investment decisions, and to do so investors must understand seller motivation—thus the question.

One of the most important principles for negotiating the purchase of a lifetime (over and over again) is to learn and understand seller motivation. They generally fall into one of four categories:

They need to solve a problem. (Management headaches, divorce, bankruptcy, death, illness, lawsuit, needs cash, dispute with partner)

Their circumstances are changing. (Retirement, moving, job transfer, increase in taxes)

They have other opportunities. (1031 tax-deferred exchange, business, stock)

They’re price motivated. (If they get their price, they’ll sell. If not, they won’t.)

If you buy an apartment building and hope to make a lot of money, you’ll need to convert current and/or future cash flow into value. Price is undoubtedly a major factor in your decision making process. If you negotiate with sellers who are price motivated, you’re less likely to get what you want and you’ll probably make a poor investment. It’s your job to figure out what’s driving the selling decision and then focus on solving whatever issue your counterpart is facing, but you don’t want to solve it by paying too much for the property. So how do you do it?

Assessing motivation is easy to do when you’re buying from homeowners. Most of them haven’t learned the same skills and strategies and they don’t know why or how to ask certain types of questions. For example, almost all investors ask the seller why they’re selling, and they should. If you ask Joe Homeowner that question, he’ll likely spill his guts and tell you that he’s moving out of town, going through a divorce, or is about to lose the home. He’ll openly give you all the information you need. It can be a bit more challenging when working with investors.

But that doesn’t mean the motivation is different, it just means the answers are not as clear. One of the biggest negotiating mistakes investors make is to assume they know what the other side wants. We’re all different. We all want different things for different reasons. Although a large percentage of sellers sell because of price, there are still plenty who are not price motivated. Even so, most apartment building owners will answer the “Why are you selling?” question with, “We’re doing an exchange.”

An IRS 1031 tax-deferred exchange falls under the “opportunity” category. Maybe they really do want to exchange out of one property into another because they can make more money. However, “We’re doing an exchange,” is usually just their way of telling you: “I’m not motivated so don’t try to steal my property.” They know what you’re doing and why you’re asking the question. This answer is especially popular with real estate agents—because they know negotiations will be difficult if you suspect you can buy the property for less. The point is there’s almost always something else behind the decision. Maybe they’re exchanging and maybe they’re not—it doesn’t necessarily mean that it’s the reason they’re selling the property.

The best way to get to the bottom of it is to ask a lot of well thought out, pre-planned questions. Think of assessing motivation as a fact-finding investigation. Have you ever asked the same question in a different way and received a completely different answer? We all have. It happens all the time. Do your homework and ask several good, pointed questions. Here are a few examples:

What do you like most about the property? What’s the one thing you would change if you could?

Why did you buy this property versus anything else on the market?

When was the last time you sold a property like this?

How did you arrive at the asking price?

How many other properties do you own? Why did you elect to sell this one?

What steps did you take to prepare the property for the market?

When new investors decide to buy apartment buildings, one of the first things I do is help them build a plan based on their objectives. For example, two questions I ask repeatedly are, “Why?” and “When?” Everyone wants to make money in real estate. Is that the goal? No! It’s not. The goal is the reason behind it. Why do you want to make money and when do you want it? What’s driving the decision?

For some it boils down to putting their kids through college. For others it’s all about setting aside a financial nest egg for retirement. Everyone has a reason and that’s what we’re trying to uncover when we ask sellers questions. We’re trying to get to the heart of the matter because they’re unlikely to tell us on their own. If you want to accelerate your net worth and buy properties that will make you richer, faster than you ever thought possible, master the art of assessing motivation.

Everyone has a reason. It’s up to you to find out what it is.

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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Puddle Jumpers: Investors Discover Leap to Apartments Not so Difficult

2008-08-30T13:51:00.000-07:00

By Steve Steadele

“Come look at this, Adam,” the boy’s father said as the six-year-old jumped from one puddle to the next. The boy continued to splash and play, ignoring his father and those around him.

“Adam, come here. You have to see this.” The boy was too excited to listen. Surely these puddles had to be more fun than anything Dad had in mind. Little Adam was determined to splatter water as far as he could and became energized when he did. Eventually, after continuous prodding, the boy’s father picked him up and pointed toward one of the world’s most fantastic natural phenomenon’s:

Niagara Falls.

Adams eyes bulged and his face lit up. With one gasp he yelled, “Wow!”

His father smiled and said: “Now that’s a puddle, isn’t it?”

Sometimes that’s exactly how investors react once they get involved with apartment buildings. For some, it’s just easier to play in other real estate puddles. That’s not to say other types of “puddles” can’t be lucrative, they can be. But for the few who take the time and energy to understand the business, apartments provide everything they’d ever hoped for, and more.

I find that investors hesitate to buy apartment buildings for a couple reasons: First, they believe apartments require a lot of money. For some people that might be defined as the down payment required to buy the property. For others, the total purchase price can be difficult to grasp. Both concerns, at first glance, are valid. But both are easy to overcome.

Apartment buildings usually do cost more than single family homes located in the same area—at least in terms of total purchase price. There’s nothing you can do about that. But for some people higher purchase price spells greater risk. Many investors look at an apartment building selling for $1,000,000 and quickly dismiss the thought because they live in a $200,000 home. The numbers are too big and they struggle to wrap their minds around the figure. And then there’s the loan. Some believe higher debt equates to greater risk. All investors should at least pay attention to debt, but that doesn’t necessarily mean there’s greater risk. Those who understand apartment investing realize that their risk is dramatically reduced, not increased, when they purchase apartment buildings versus other real estate investments.

Then there’s the down payment. This is the biggest reason investors think they need to start with single family homes and “work their way up.” Most investors believe it’s easier to buy houses with little or no money down, but you can do the same thing with apartments—if you know what to do. Numerous strategies exist to give buyers the ability to leverage into large apartment buildings that produce mountains of cash flow with little or no money out of pocket. If that’s true, why are there so few investors chasing these incredible properties?

That question leads us to the second reason investors hesitate to buy apartment buildings: they don’t know what to do or where to start. Most people are hesitant to embark upon something they know little about, and from a certain point of view that makes sense. Just as it would be foolish to dive into a swimming pool before filling it with water, buying any type of real estate before educating yourself is a recipe for disaster.

Flipping houses and buying foreclosures is very popular today. Why? Because they’re easy to understand and anyone with a hint of common sense and a little know how can make a fair amount of money. But is that the way to go?

Here’s the challenge. An investor can buy a house and if everything goes as planned they might earn a quick $20,000-$50,000. However, they might break even or—worse yet—lose their shirt. Most investors start out with the same vision you and I have. They want financial security so they can do whatever they want when they want. But then they combine their long-term vision with short-term expectations. Most Americans want what they want and they want it right now. They don’t want it tomorrow. They don’t want it next week—they want it now.

Short-term solutions rarely carry the same long-term benefits. Most people don’t think five years down the road, let alone 20 years. In 1901 the average American life span was less than 50 years. Today, the average life span is nearly 80 and many people are living well into their 80’s, 90’s and even over 100 years. You can’t lose sight of your long-term objective.

I had a conversation with an investor who told me about a $50,000 “profit” he made on a recent flip. “That’s good, Mark,” I said. “There’s nothing wrong with that. How much do you plan on keeping?”

“What do you mean?” he replied.

“Well, obviously we all have to pay our taxes. And because you sold it in less than a year your profit qualifies as ordinary income.” I grabbed my calculator. “I’ll assume you’re in the 28% tax bracket, which leaves you about $35,000. You worked on the property for what, 40 hours a week for 8 weeks?”

“Something like that,” Mark said with a sigh.

“That’s 320 hours of work at $50 an hour which equates to $16,000. I imagine you’ll need to take that to pay yourself since you don’t have time to work another job. So now you have $19,000 left. Now what?”

“I don’t know,” he replied. “I guess I’ll sit on it and do it again. I’ll eventually get it to the point where I’m doing 15-20 properties per month and I won’t be doing any of the work.”

“So instead of doing the work yourself, you’ll run around town looking for other properties to buy and follow up on contractors—you’re basically a project manager, right?”

“That’s the idea,” Mark said.

“It still sounds like a lot of work to me. You can make a lot of money doing it, but what happens when you stop?”

“Why would I stop?”

“Well,” I continued, “Nobody wants to work forever. The fastest way to wealth is tax-deferred accumulation of capital. You’re giving Uncle Sam 28% of your profit. Isn’t the goal to create a high income so you can do what you want when you want?”

“Yeah.”

“Well, what if you could do that without recreating work over and over again and decrease the risk?” That’s when we started to talk about apartments.

Mark purchased the home for $200,000, put $25,000 into it (not including his time) and sold it for $300,000. When it was all said and done, he had about $35,000 left and he still hadn’t paid himself. And I’m not saying that’s a bad profit, because it’s not. But what if you could make that much, or more, doing nothing?

Another investor, Susan, purchased an apartment building for $600,000 using none of her own money. The property has a positive cash flow of a few hundred dollars per month and she does nothing. She also increased the rent and made minor improvements. Less than a year later, it’s worth $675,000. She hasn’t paid any capital gains tax, still owns the property, and will benefit from the cash flow and appreciation for years to come. She still has her 320 hours to spend finding another property to do the same thing. The growth compounds itself and eventually she can lay on the beach drinking a Mai Tai while the cash flow supports her love for traveling.

In most cases, Mark’s $35,000 is gone. Most people will spend the money on things they want right now. They’ll buy a new car, go on vacation, and build a deck. There are a million different ways people choose to spend their profits. And even if he reinvested the money in another property, he’ll still need to spend his time and effort working on the project—one way or another—again.

The reasons for investing in apartment buildings are plentiful. If your goal is to produce an income so you can do what you want when you want, give apartment investing a serious look. Don’t let money or the fear of the unknown get in your way. It’s a simple business. Much like the natural flow of the water of Niagara Falls, the information and the money is readily available. Anyone can do it. You can too.

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/

Mama Always Said, “Read the Fine Print.”

2008-08-30T13:15:00.000-07:00

By Steve Steadele

“Looks like we found the right property,” a real estate agent said after he and his client viewed a 32-unit apartment building. “You like the property, don’t you?”

The buyer nodded her head in agreement.

The agent reached into his briefcase and pulled out the paperwork. “I’ve got the Purchase and Sale Agreement all done. All I need you to do is initial a few spots and sign the back page.”

The buyer did, and in less than five minutes, the offer was signed.

That’s usually how a Purchase and Sale Agreement (PSA) begins. You write an offer, the seller accepts or counters and eventually, hopefully, you have mutual acceptance. But signing the agreement prematurely is all too common.

At first glance the offer means little because if the seller has even a hint of common sense and negotiating skills, they’ll counter it anyway. But what if they don’t? What if they accept the offer as it’s written? What if there’s something about it that the seller or agent didn’t want you to know? This is one of the most important documents you’ll ever sign, yet most investors have no idea what it says or means.

Remember the good old days when a man’s word was his bond? Remember when you could shake hands and know—that when it was all said and done—everyone would be happy? You probably don’t and I don’t either.

It just doesn’t work like that anymore. The good old days are gone. Sad, but true. Times have changed. People have changed. And so has the law. That’s why mama always said, “Read the fine print.” You must take the time and energy to read and understand the PSA. If not, it could cost you tens, even hundreds of thousands of dollars.

Let’s start with the most basic legal requirements that a PSA must have to be valid. They are:

Mutual acceptance

Written agreement

Names and signatures of the parties

Purchase price

Consideration

Property identification and/or legal description

Of course the agreement is likely to include many other clauses such as due diligence, financing, earnest money deposit, title and the like. What happens if you or the seller fails to perform as outlined in the agreement? Who is entitled to what? Who bears the expense? What if the building catches fire or floods? What personal property is included in the sale? These questions and a whole lot more should be answered in the PSA.

Savvy investors know how to position the negotiation by using other clauses in the agreement. I have five or six additional clauses I like to add to my offer. For example, my violation clause states that if I find and notify the seller of a property defect, which is regulated by a government agency or code, the seller must correct the issue prior to closing. I include utility company requirements as well. Most PSAs do not have a violation clause. In fact, many agents don’t even know what it is. Most of them have never heard of it, especially commercial agents. A violation clause can save you an incredible amount of money, but if you’re the seller and you don’t read the agreement, you won’t even know it’s there.

In summary, you need to know what each paragraphs means. Take the time and effort to read it. Hire an attorney to review it if that makes you more comfortable. Whatever you do, heed mama’s advice and read the fine print.

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

Due Diligence—An Essential Component of Your Management Plan

2008-08-30T12:48:00.000-07:00

By Steve Steadele

“Get in,” I said to my younger brother Kevin (who was just 5 or 6 years old at the time) after we pulled his red wagon to the top of a long, steep road that ended in front of our house. “Use the handle to steer. Jason and I will push you down the hill until we can’t keep up. Just stay in the middle of the road and don’t hit the sidewalk.”

It seemed like a good idea at the time. But I didn’t think about how to stop. I didn’t check the wheels to make sure they were secure. Nobody looked at the handle or the bolts that fastened the axle to the frame. I didn’t think about cars, rocks, or the trouble I’d be in after he crashed either. I didn’t have a plan. Instead, like any other kid, I focused on the initial activity to accomplish our goal: to have fun.

Unfortunately, more often than not, this is true for real estate investors as well. Although we may define it differently, our goal is to still “have fun.” We’re all pursuing financial independence, working to acquire greater wealth for ourselves and our families. As investors, the plan is not as simple as checking the handlebar and wheels on a wagon. There are many moving pieces to consider.

Effective Due Diligence

Jim Rohn said, “We can no more afford to spend major time on minor things than we can to spend minor time on major things.” Many real estate investors enjoy the thrill of hunting down and negotiating their next investment. I’m one of them. At least to me, that’s the most exciting part of investing.

Good negotiations require thorough due diligence. Most investors do very little due diligence. Many simply verify the rent roll, do a physical inspection, make a few adjustments to an operating report and call it good. Then they close on the property and wonder why they struggle with it for the first six months.

Due diligence is so much more than that. Investors who understand it are the envy of those who don’t. If you do an effective due diligence before you buy you’ll make better investment decisions. Makes sense, right? And, if you do an effective due diligence before you sell, you’ll sell at a higher price too. If that’s true, why do so many investors struggle with due diligence today?

There are two main reasons. First, nobody showed them what to look for. Nobody gave them a list of questions. Nobody explained why to ask questions. Due diligence is not all that difficult if you have a plan covering “all” aspects of investing. (No single checklist covers everything.) However, due diligence should cover these nine specific categories:

1. Books and records
2. Financials
3. Physical inspection
4. Marketing
5. Management team
6. Operations and system management
7. Competition
8. Residents
9. Legal issues

The second reason many investors struggle with due diligence is time. It can be difficult to cover these issues when the seller or their agent pushes you to make a decision in seven to fourteen days on smaller properties and 30 days on larger acquisitions. Let’s be honest, that’s not a lot of time. Why do they do that?

It’s simple: time kills transactions. Nobody wants to wait for you to make your decision. That means they’ll press you to make it sooner than you probably should. Sellers and agents know that without a sense of urgency, your depleted desire to own the property will show in the price. They know that our excitement and enthusiasm for an investment is at its highest level early in the game. That emotion can spell disaster for investors, usually to the tune of tens of thousands of dollars or more. Can it be done in seven days? Sometimes, if you have all your ducks in a row and you spend the time necessary to get the answers you need. But more often than not, investors make premature decisions that result in more operational issues than they care to deal with when they finally close and take over the property.

The Management Plan

Like a business plan, the management plan is your roadmap to get you where you want to go. Due diligence is a necessary component of your overall management plan. Remember, you can’t spend minor time on major things. Owning a real estate investment, especially rental property, is no minor thing.

Some investors rely on a management company to build and carry out a management plan. They think that’s what they’re paying the management company to do. That’s just not the case. Although most can and will prepare what they believe to be an ideal budget, I haven’t found a management company anywhere in the country that cares as much about the property and its operations as the owner.

Whether you hire a management company or onsite manager to help you with the day-to-day operations of the investment or you do it yourself, the management plan falls squarely on your shoulders. Isn’t that exciting? One more thing for you to do! Owning property is just like any other business. Set expectations and follow-up. If you manage the property yourself, you’ll find it much easier to carry out the activities outlined in your plan to help you accomplish your dreams and goals. Here are just a few things to consider:

Role, responsibilities and authority of the management company

Personnel policy and staffing structure

Marketing plans and procedures

Leasing, rent collection, and occupancy standards

Lease termination and eviction process

Operating budget and forecast

Income analysis

Physical appearance analysis

Expense analysis

Accounting and reporting procedures/expectations

Management training programs

Management compensation

The management plan could encompass much more depending on how detailed you want to get. But it doesn’t need to be overly difficult; it just needs to clearly define the expectations and activities necessary to get you where you want to go.

The nice thing about money is that it’s indifferent. It doesn’t care who holds it. If you’re not where you want to be; if you don’t have what you want or think you need to live the life you want to live at this very moment, I have really good news. You’re not a tree. That means you’re not stuck where you are. That is good news, isn’t it? You really can have it all.

There’s nothing magical about investing in real estate. There’s no mysterious, closely held secret that will make you millions more than the investor sitting next to you. Successful investors consistently apply basic real estate fundamentals over and over again. They can all be learned. If you have the desire, commitment, and discipline to carry out the techniques investors have used for many years you’ll accomplish your goals faster than you ever thought possible. That’s what we all want. Anyone can do it, and you can too. Most investors are looking for specific strategies to help them maximize returns and the good news is those strategies exist. Taking the time to plan and strategize can save you thousands and make you millions. You don’t want to end up racing down a steep hill in a little red wagon—just ask my little brother.

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/