Finding the Right Properties and a Motivated Seller

The House Detective Approach

Art of being a house detective means finding out about the availabil­ity of a property before anyone else. More specifically, your offer to purchase the property should be the only offer. The most important thing to remember here is that the more potential buyers who know about the deal, the less chance you can snag a bargain. If you can secretly find out about property that’s for sale and get there with the only offer, it puts you in the driver’s seat. Without any competition, your offer will be the only game in town. You must learn how to be a house detective and find good deals before the competition arrives. That’s one of the secrets to buying property substantially below market.
You’ll soon discover, as I have, it’s nearly impossible to buy properties cheap enough or get really good terms when there are lots of eager bid­ders for the same property. Acquiring cash flow properties should be as private as you can make it. You can tell the whole world about the deal— after you own it.
The Secret Path to the Gold Mine
As a house detective, you must possess the ability to spot hidden profit potential. That means you must have special knowledge and the skills to increase the property’s income, or value, that other competing buyers don’t have. These special sleuthing skills can be developed only through experience. Obviously, new investors will need to own and operate several properties in order to get that kind of experience. Generally, novice investors without much real estate experience will not be able to recognize a property’s gold mine potential, even if they get close enough to fall down the shaft. Education and experience will take some time. Completing sev­eral actual deals will provide the necessary experience. I do not know of any shortcuts to develop these skills.
Before You Invest, Do Your Homework—Obtain a Property Profile
Before you invest one penny, do your homework and check things out. The first thing I do is visit the title company where I do most of my business. I request a parcel map, the tax bill, and copies of all the deeds or mortgages recorded on the property. Many title companies provide this service free for repeat customers and real estate agents. Some folks refer to this infor­mation as a property profile. Obtaining the property profile documents is a good way to start a file on property you are interested in, because they will provide you with the following information:
The parcel map gives you the lot size and often shows easements and right-of-ways, as well as location.
The tax bill shows who owns the property and where the current tax bill is being mailed each year. It also shows how much the taxes are now and how high the county assessor has appraised the value of land, improvements (buildings), and personal property (dollar amounts).
With a parcel map and the tax index (owner names), you can find out who owns the properties around the parcel you’re investigating.
Copies of mortgages or trust deeds show the amount of debt against the property at the time of the last sale or transfer of title. They also show who owes the debt (trustor) and who receives payment (bene­ficiary). Any due-on-sale clauses will normally show up on trust deeds or mortgages. Deeds and mortgages will show the chain of title, with recording dates and notarized signatures. • The grant deed shows the documentary transfer tax—a state tax on the sale of real property, generally stamped on the grant deed. The tax is computed on the full selling price or selling price less the liens remaining at the time of sale. So, if you know the tax rate in your state, you can easily determine what the current owner paid for the property, based on the tax amount. For example, if the property is in California, where the rate is currently $1.10 per $1,000, and the doc­umentary tax is $46.75, computed on the full value, then the pur­chase price would be $42,500 ($46.75 divided by $1.10 times $1,000 equals $42,500). Sometimes, knowing what the owner paid can help you develop your own offer to purchase. Remember that sellers dis­like offers for less than what they paid, no matter how motivated they are to sell. Always keep this in mind when negotiating.
Information Hunting Is Valuable and Free

All this information can be found at your local county courthouse or a title company and it’s easy, if you happen to know someone who will help you. Assuming you don’t know who owns the property, first take a look at the key location map. It will direct you to the proper assessor plat map where you’ll find the parcel, or lot, you’re looking for. Once you locate the parcel number, you can go to the name index file and find the owner. Both the courthouse and the title company will assist you with this chore.

My research consists, primarily, of finding out who owns the property and where they live. It’s generally the address where the tax bills are mailed. I want to know how many mortgages or trust deeds are secured by the property and what their original amounts were. Also, the tax bill will show me the “value for tax purposes.” I like to know if my estimate of value is somewhere in line with the county appraiser’s view. I always like to get an idea of how much mortgage debt is still owed because I’m looking for properties with a lot of equity. Also, I’m looking for the opportunity to cre­ate a long-term seller carryback mortgage, should I be successful purchasing the property. Obviously, this sets the stage for buying back the mort­gage at a sizable discount sometime in the future.
The Four Basic Methods of Finding and Buying Fixers
I like to keep things simple. Others may tend to embellish these four fun­damental methods I’ll discuss here, but my experience has proven that these are solid methods that continually work. Naturally, you must make them work for you. Nothing will help if you simply sit back and watch TV while you wait for others to make you rich. First, I’ll tell you what these four methods are. Then, we’ll dissect each one to show what makes it work.
Watch the daily classified ads.
Use a real estate agent.
Work the multiple-listing book.
Initiate written cold calls.
Before we get into these four methods, let me simply make this state­ment. Once you become proficient at doing this stuff, you’ll begin to understand that there is no shortage of fix-up real estate anywhere. The problem is that the right fix-up properties are seldom located where the public can find them and most real estate agents don’t know “good deal” fixer properties from overpriced junk. True bargains rarely reach the mul­tiple-listing books because they get sold by listing agents to a handful of “pet buyers” who can cut a deal before the agent is required to submit his or her listing to the multiple service. They’re called pocket listings and listing agents see no point in splitting commissions when they have a “slam dunk” deal.
1. Watch the Daily Classified Ads
This is the method I have found least profitable for finding and buying fix­ers. Yet, I consider it worthwhile, because it doesn’t take a lot of time and it keeps you tuned into what’s for sale in your buying area. I read the clas­sifieds everyday and have done so for years. I always read “Income Properties for Sale,” “Investment Properties,” and “Commercial Real Estate.” I also keep an eye on “Houses for Sale” because occasionally, momand-pop owners will list their six little duplexes under that classification. Agents almost always list properties under the correct classified heading.
The location where you find the ad might tell you if you’re dealing with a sophisticated seller or a do-it-yourself property owner who has decided to retire. Naturally, mom-and-pop deals can be very productive because, quite often, they will sell for less if they like you. Also, many are trying to sell on their own (for sale by owner) to avoid paying commis­sions. Perhaps more importantly, older, retired sellers are much more like­ly to carry back a mortgage. It will pay you to watch classified ads regular­ly to catch an owner-seller bargain.
Another benefit of calling the interesting classified ads is that it helps you become more knowledgeable about prices, gross multipliers, and what terms and conditions are important to sellers. Many times it turns out the property I call about is not what I’m looking for; however, during the con­versation, the seller mentions other property that’s not advertised in the paper or that he knows someone who wants to sell another property. Telephone calling generates leads. One good lead can make you big bucks.
I purchased my Haywood property (Chapter 2) through a classified ad. The property comprised 11 junky houses on a two-acre lot. With this one fix-up project alone, I earned $150,000 for just 13 months of part-time fix­ing. Classified ads have accounted for about 10% of all my deals—that’s $400,000 worth.
When you read your local newspaper classifieds, you’ll see all of the various reasons for selling over and over again—owner moving, poor health forces sale, ground-floor opportunity, owner retiring, divorce spells my loss but your gain. These are typical classified statements in the real estate “For Sale” sections of any regular newspaper. Obviously, the ads are written to persuade potential buyers that the owners are motivated to sell. Some ads are true; most are not. It’s nearly impossible to tell about true motivation from an ad. Still, it’s a starting point.
2. Use a Real Estate Agent
This method for finding properties and making deals has been, by far, the most productive for me. I acquired at least 60% of my properties with the help of a real estate agent. However, not just any agent will do. I’ve had only two since 1977—Merv and Fred. Merv passed away in 1985 and Fred is still working with me today.
You must work hard to find the right real estate agent. Agents won’t hang around for long if you’re just a “looky-loo”—a person who wants to see everything, but never seems to find anything that meets his or her approval. No agent can afford that nonsense. Fred works for me for one simple reason—it’s profitable for him. He knows I can close deals fast if he does his job. Fred’s job is to know exactly what I will buy. He doesn’t call me about every property for sale in Redding. A good agent will immediate­ly qualify the property to determine if it has potential. Fred knows I don’t normally want deals that require new bank financing. He also knows I want sellers who will carry paper and that I rate small, multiple-unit prop­erties—like four to six houses on a single lot or a bunch of ugly, rundown duplexes—at the top of my buying list. When he hears about these kinds of properties, he acts quickly.
Fred’s job is to qualify the property. Is the seller in any sort of finan­cial trouble? Does he or she live out of town? Is the property managed for him or her? Are the tenants causing the owner problems? Fred tries to determine if there are reasons for the seller to be motivated, such as retirement, going broke, dying, etc. It’s detective work like Columbo does on TV. He obtains a property profile. He asks for copies of notes (mort­gages) on the property. He verifies rents, vacancies, and liens. All this takes time and it costs Fred money. The only way he gets paid for his work is if I buy the property.
Fred doesn’t make a lot of dry runs. He knows what I want and deter­mines quickly if a property has the right stuff. How did Fred get so smart? How did he ever learn this detective business? Well, when Fred and I start­ed, we spent a lot of time discussing what I wanted. Investors must be very clear about which properties they will buy when one comes along. Otherwise, agents will attempt to show them everything.
To start with, I would recommend that you simply walk into five or six realty offices, sit down with an agent who is on the floor, and discuss the kind of properties you would like to acquire. Some agents will jump through hoops to help you. Others will shine you on. Personalities will naturally play a role. You like some people; others, you don’t.
Using this method, it shouldn’t take too long to find one agent who seems more interested than others. He or she will call you more and bring you property profiles to look at. When this special interest develops, you might have found the right agent. If not, keep repeating the process until you do.
3. Work the Multiple-Listing Book
Only licensed real estate agents can have multiple-listing books. That’s the reason I’ve always kept my copy out of sight. It seems like month-old copies somehow find their way to my desk. It’s perfectly OK with me if they’re a month, two months, or even a year old. Here’s why.
First, understand that most income properties in the multiple-listing book would have sold before they ever got listed if they were really bar­gains. Remember what I told you about pocket listings: they never get published. What you normally find in the “Income Property” section in the multiple-listing book are overpriced apartments and “dog properties.”

The multiple-listing service contract provides for selling agents to split commissions with the listing office when a sale takes place. Obviously, the multiple-listing book provides the maximum exposure for the property owner: every licensed agent is a potential seller. The value to me is keeping an eye on properties that stay in the book for a long time, say six months or even a year. Sellers who can’t sell in that length of time often become extremely motivated. Offers they never dreamed they’d accept when they listed the property somehow become much more acceptable to them after a long dry spell.

I’ve had pretty good luck buying properties that nobody seems to want from old multiple-listing books. On several deals, the listing had already expired and I was able to purchase directly from highly motivated sellers. Picture yourself in the seller’s position: if you can’t sell a property in six months with all the exposure of the multiple-listing book, obviously it calls for more drastic measures—usually, lower price and better terms. I’ve done about 10% to 15% of my business as a result of tracking down multiple listings. It’s well worth the effort.
4. Initiate Written Cold Calls
Real estate investors often complain that their wealth-building plans are seriously hampered because too few properties are available in the areas where they invest. You can’t buy real estate and build much wealth if nobody will sell you a property, right? Obviously, it takes both buyers and sellers to complete transactions. So, the big question is “Where do you find real estate sellers when it seems like nothing is for sale?” Cold calling is a technique by which you contact property owners who own the kind of properties you’d like to acquire and try to persuade them to sell.
One of the first questions I’m always asked is “Why in the world would people consider selling their property to me merely because I contacted them and asked?” There are more reasons than you might imagine, but first let me confess to you that I did not invent cold calling. Real estate agents have been doing it for years and with enough success to keep doing it. The problem that many real estate agents have with cold calling is that it’s too much work. It’s much easier when sellers walk through the door and hand them a listing. A big percentage of agents are willing to wait.
How I Make Cold Calling Work. Naturally, there’s a big difference between investors who operate properties for profits and real estate agents who sell them for commissions. Cold calling can be different, too. For example, agents will sit at the telephone for hours calling long lists of own­ers. Obviously, that’s got to be very boring. The way I do cold calling is much different.
To begin with, I write letters to property owners rather than make tele­phone calls. I also do some research before I make any contact with prop­erty owners. This allows me to customize my cold calls (letters) to fit the property and address any special circumstances pertaining to the owner.
Not every rental property is a candidate for my “cold call” letters. To start with, my specialty is the fix-up real estate. I make money by acquir­ing properties I can fix up. My strategy is to quickly increase the value. Average looking properties, without any visible signs of being rundown or neglected, do not fit my profit plan; therefore, I automatically eliminate those properties from my cold calling list.
When I’m driving around, I always keep an eye out for interesting properties I would like to own—assuming I could buy them for a reason­able price and terms. I keep a little notebook in my car to write down the address, number of units, and the condition. I also jot down my own esti­mate of their current market value—and the amount I would be willing to pay. I find it very helpful to draw a little sketch of the lot and then take a measurement from the nearest street intersection to the lot. A sketch will help you locate the property on the county assessor’s map when you visit the courthouse. Assessor maps don’t have street addresses, so the meas­urement will help you find the right location on a scaled map.
Cold Call Letter Strategy Requires a Plan. First, let me tell you what you shouldn’t do—don’t insult or offend the owner because his or her property looks like junk. I sympathize with the owner and attempt to establish my credentials as an experienced property owner, but not as a “hotshot real estate tycoon.” Remember: owners of troubled properties who might be willing to finance a sale will not put much trust in a buyer with no experience. They can easily visualize the property coming back to them in even worse condition.
If the owner hasn’t been around the property much, especially if he or she lives out of the area, I try to paint a picture of a property that is poor­ly managed and in need of immediate attention. I often give the owner an idea of what it might cost to get the property up to snuff. Note that the sample letter in this chapter refers to “a $20,000 lesson I will never forget.” I let the owner know that I’m a local landlord and I buy fixer properties. I generally write something like the following in my letters.
“Each day when I drive by your place, I can’t help noticing how many jacked-up cars the tenants have accumulated.”
“I can’t help noticing the lawns have all died in the past few months.”
“I notice the houses need a lot of work and I’m wondering if you ever thought about selling the property.”
You’ll notice my reason for writing says nothing about buying the property. I try to keep my offer to purchase as an alternate solution to his problems. I even ask him to check me out: “Drive by my houses and see what you think.” This reinforces my credibility with him. It also proves I’m
a real landlord, as I say in my opening sentence. Out-of-town owners gen­erally know about management problems and high expenses. My letter merely reminds them that it’s true and owners are the only ones who can make a difference. I think every owner will agree with that.

I like the owner to start thinking about his or her monthly net income, especially out-of-town owners who receive a monthly check from a property manager for the amount that is left after fees and expenses are paid. When I tell the owner about earning more net spendable income; that generally grabs his or her attention. Again, I never say that my inten­tion is to purchase. I only ask the owner to keep me in mind if he or she should sell. I offer my financial statement and tell the owner how to save a big commission.

When I discover that the property owner lives out of town and his or her property is not being maintained, I will try to emphasize things that indicate how—unless changes are made immediately—the property value will decline and his or her income will suffer. These are very compelling reasons for an owner to take some action. Several times in my career, cold call letters have worked long after I’ve written them. In one case, an owner worked desperately to fix his problems. He hired three managers in a 12-month period. Finally, 16 months after I wrote him a letter, I bought his property for $41,000 less than my initial drive-by estimate of value. If your cold call letters don’t work overnight, just be patient and don’t give up.
How to Write a Cold Call Letter. The sample letter here is an example of how I do cold calling. Read it several times and try to picture yourself as John P. and Mary Jones. How would you feel if you owned the proper­ty on West Street and received this letter from me? Would my letter start you thinking?

John P. and Mary Jones RE: 2020 West Street
1234 Easy Street AP# 07-360-14
Lake Camanche, CA 95640 Shasta County
Dear Mr. and Mrs. Jones:
I am a local property owner and landlord in Redding. I own several
rental houses in the same neighborhood as your property on West
Street. I drive by your property at least once every week on my way to
check out my rentals.

Apparently, you’re having the same kind of problems I have with ten­ants who own junk cars. Last week, I noticed a car motor hanging in the tree in front of your duplexes in the back. I would guess it belongs to that old rusty blue sedan with no wheels, parked between the two pink houses.

I realize it’s difficult to manage properties from 200 miles away. I did it only briefly before moving to Redding, but never again. The manage­ment company I had hired allowed the tenants to take over everything. I had junk cars and dead grass—and you wouldn’t believe what the houses looked like inside. It was a $20,000 lesson I will never forget. That’s why I visit my properties at least once a week now.
The reason I’m writing is because my company does fix-up and repairs for rental property owners. We just rehabbed the three light blue houses on the NW corner of West and 17th Avenue. Drive by the next time you’re in town. I think you’ll be impressed. Keep me in mind if you need work done.
When I spoke with your tenant in the front house, Judy, to find out who owned the property, she said the owners were retired, but she pays rent to the Ace Management Company on Hilltop Drive. I hope they are better than the managers I had, but by the looks of things, they don’t seem much better.
I found out the hard way: owners are the only ones who really keep the property up and watch what the tenants do. I would never again own property in a town where I didn’t live.
By the way, if you should ever think about selling out, keep me in mind. I’d be happy to show you my financial statement and several of my Redding properties, so you can see how I do business. Quite often, you can earn more spendable income from mortgage payments than from rents and, of course, you don’t have to worry about tenants and property managers.
Drop me a line or call if I can be of any service. Call me direct if you should ever decide to sell. You can save a bundle without paying a big commission.
Never say anything about the condition of his property that puts the blame on the owner. Always put the blame on lousy tenants, bad luck, poor property managers, or something other than the owner. The whole idea is to not alienate the owner. Instead you should sympathize with him or her, perhaps explaining that you have the same problems yourself, but you have more time to spend with your tenants. If any owner thinks that spending time with tenants is necessary to make his property get better, he or she may just give it to you. Of course, that’s wishful thinking, but you get the idea, I think.

Your letter should not mention price, cash down payment, or terms. It should state that you are a serious buyer who moves quickly if a sale can be worked out. You should also point out that, by dealing with you direct­ly, he or she can save a large sales commission. If your letter is timed prop­erly (obviously this is mostly luck and intuition), you can develop the sell­ing idea in the mind of a “leaning” owner. “Leaning” means he or she has been thinking about selling, off and on, but has never gotten around to doing anything yet. Be sure to include your telephone number in your let­ter, so he or she can call. If you get a call, you’re all set to grab your sketch of his property and follow along as he explains details over the phone.

Many owners have called and thanked me for my nice letter, then told me they weren’t interested in selling right now. But, you can probably guess who they’ll call first when they are ready to sell. Believe me, they’ll never throw your letter away. One of my best properties was acquired exactly this way. The owner was not interested when he first read my let­ter; however, a month later he was interested and we closed the deal.
Cold call letter writing puts you in a position to buy a property that no one knows about, except you and the seller. Finding a good deal that no one else knows anything about puts you in the driver’s seat. It’s like going to an auction where you’re the only bidder. Cold calls have accounted for about 20% of all my acquisitions.
Finding Sellers Who Truly Need to Sell
Contrary to what many novices think, the most difficult part of buying the right properties has nothing to do with contracts, paperwork, escrow instructions, and presenting offers—it’s finding sellers who really andtruly desire to sell their properties. It’s called discovery. ou’re looking for sellers who have very compelling reasons to sell. Sometimes, fear of losing the property in a foreclosure creates the right pressure. That’s an obvious reason. Many other reasons are hidden, how­ever, or not so visible. Always remember this: a real need situation must exist for the seller, or you will have great difficulty meeting your purchase objectives—that is, buying the property with the kind of flexible terms you need to make the transaction profitable for you. Again, I will repeat myself here because it’s so important.
You must locate sellers who, for whatever reason, have a real need or a very strong desire to sell. Nothing short of this will work—don’t forget this part. Also, there is no point pursuing sellers who don’t seem to have any urgency to sell; you’ll be wasting your valuable time. In the long run, you’ll discover your time is more valuable than money.

Know the Real Reason a Seller Wants to Sell
Initially, it’s quite likely that you won’t know the seller’s real needs because he or she won’t tell you about them. Eventually, as you gain more knowledge from practice and experience, your detective instincts will improve and you will learn how to dig out the information you need more easily. Knowing the real reason a seller wants to sell can be a tremendous advantage when negotiating the kinds of terms that you must have to be successful—that means profitable real estate that pays you back for all your efforts.
For example, “lease with option to own” might really mean the owner doesn’t want to be bothered for at least a year or more. Most out-of-town owners don’t like long distance renting, especially with problem tenants, but will seldom say it that way. Owners who inherit properties often think rental houses are too much of a hassle. Obviously, they weren’t the ones who bought the property. Owners with financial problems or two mort­gage payments will seldom tell you they’re hurting when, in fact, they sometimes are.
You must learn to dig out this kind of information in order to make offers that will generate a reasonable level of interest from potential sell­ers. You can make very profitable offers or proposals once you find the right property and a motivated seller. The big money comes from doing your homework before ever making an offer. Always learn everything you can about the seller. Do it fast, though, so you don’t lose the deal.
Most Common Reasons That Motivate Sellers
Sellers get motivated for many reasons. Here’s a list of the most common reasons, all except one, which we’ll tackle separately in a minute.
Owners live out of town.
Owners have financial problems.
Owners have family problems (divorce, death, life-style change).
Owners are advertising “for sale by owner” (all newspapers).
Owners have lost their jobs.
Owners are elderly, disabled, retired, or in poor health and can’t work on the property any longer.
Owners inherited the property.
Owners are advertising the lease-option or even houses for rent.
Owners have moved (job transfers) and are now making two house payments.
10. Owners have changed investment goals, found a better mousetrap.
“For Sale” Often Means “I Need Help”
I know from experience there are many owners of small rental proper-ties—the kind I recommend—who have their properties for sale, but in reality the “For Sale” sign really means “I Need Help.” These sellers have various problems; many of them need some serious help. Their solution is to sell the property. Owners in this situation can provide big financial opportunities for investors who are willing to help solve their problems— namely, they can give you a great price with seller carryback financing.
“Don’t Wanters”—Most Don’t Know How to Manage
Many real estate instructors refer to sellers who don’t know how to man­age their property as “don’t wanters.” The number-one reason most sell­ers of small income properties are “don’t wanters” is because they can­not manage their own properties. For the most part, they can’t stand the hassle of dealing with their tenants. The reason for this failure is that most of them have never taken the time to educate themselves to pre­pare for this most important task. They are victims of what I described in Chapter 4 as the “Christopher Columbus technique.” They don’t understand what they’re doing and they have little or no idea where they’re going. They are simply drifting without direction. Since they have no plan and very little knowledge, they are unable to fix the things that are wrong. You won’t find yourself in this situation if you do as I suggest and learn how to be a landlord or landlady (manage your prop­erties) right from the first day you start investing.
Violation of Habitability Laws—a Motivator
Many owners become very motivated to sell when needed repairs stack up or when the tenants “gang up” and refuse to continue paying rents until something is done. Quite often city or county housing officials add extra tension when habitability laws are violated. Housing authorities can pro­vide tremendous motivation to owners who neglect their properties. Many of these owners become highly motivated sellers when they find out what building officials require them to do. Out-of-town owners often panic and decide to sell at the first chance they get. You can find these properties by attending abatement committee meetings in your local buying area.
Offer Relief from Pain in Lieu of Cash
The reason you’re looking for ugly, distressed properties is because they’re most likely to be big problems for their owners. The strategy here is to use your time and your efforts to fix these problems in lieu of the normal cash down payment. Fixing seller problems has a cash value. Often the value of fixing big problems will add up to a higher dollar amount than the normal down payment might have been. Your willingness and your ability to fix problems for others can create a very lucrative opportunity for you.
Many investors, including me, have used this wealth-building tech­nique to quickly develop large real estate portfolios. It’s an excellent strat­egy for investors who have very little cash for a down payment, which includes most of us when we’re just starting out.
When I check out a rundown property, I try to find out if the tenants are basically running the place. There’s a good chance that poor management or lack of landlording skill is really the reason the property is for sale. If this is the case, sellers are often willing to give very favorable terms in exchange for immediate “pain relief.”
Problem tenants who are out of control are worth big bucks to investors who know how to establish law and order. Many sellers who find themselves in this predicament are willing to forgo traditional cash down payments in order to rid themselves of the unpleasant situation. People pay handsome rewards to investors who can straighten out the mess.
Key Factors for Making a Bargain Purchase
When you’re looking for a bargain, here are 14 factors to consider:
It’s easy to purchase. Very little cash is required; trades are acceptable.
It’s OK to assume existing financing, if there is any.
Private notes (mortgages) are much better than institutional lenders (banks and mortgage companies).
The seller is willing to carry back financing on good terms (mini­mum of 10 years).
Mortgage payments (total of loans) are 65% or less of total income.
The rents are low and can be increased with property cleanup.
The property is dirty, rundown, or ugly, which means less competi­tion.
The seller is motivated for any of the reasons listed earlier.
There are tenant problems (motorcycles, junk autos, deadbeats).

The property is empty (tall weeds, broken glass, garbage every­where).
There are financial problems (foreclosure, bankruptcy, bank repos­session).
The building is only partially completed (all activity stopped).
You have the skills to fix up physical problems.
You believe that the property will function OK as is, allowing ade­quate time to upgrade and force the value up.
These 14 items are certainly not everything to consider, nor will any of them necessarily guarantee the property is a bargain. They are, howev­er, excellent factors for making a profitable deal.
Beware of Over-Financed Property

In order to acquire properties at bargain prices or at least for prices that will allow you to make a reasonable profit, you must first determine if you can actually purchase the property for a reasonable price. I imagine you are thinking to yourself, “That doesn’t seem so tough. Why not simply ask the seller? Certainly he or she can tell me in a minute.” Here’s a bit of advice: sellers may not know why they have problems, especially if they paid too much themselves.

Many times I’ve found properties for sale that are very desirable, but seriously over-financed. Owners who have over-financed properties are often extremely anxious to sell—many times for low or no cash down payments—because they need to stop their negative cash flow. You must be wary of these kinds of properties. An over-financed property can spell big trouble, no matter how low the down payment. Once you determine how much you can afford to pay for a property and still make money for yourself, you should forget the whole idea if it looks like the price will exceed your estimate. Sellers with too much existing debt have very lim­ited flexibility for negotiating the price downward. Conversely, sellers with lots of equity have room to reduce their asking prices. Those are the sellers you’re looking for.
Look for Owners with Equity
Properties that the seller has owned for a substantial time—six to 10 years or more—will offer far greater opportunities for negotiating the selling price downward. This is because the owner has most likely paid down the existing mortgage debt over the years. Always look for sellers who have a substantial amount of equity in the property, because they can discount that equity.
For example, let’s say the seller is asking $250,000 for her property. You can assume the existing mortgage of $195,000. The balance of the asking price ($55,000) is the seller’s equity. You’ve already filled out your income property analysis form and concluded that $210,000 is the right price to pay. If the seller accepts your offer, she will receive $15,000 for her equity. She may not like the low price, but she still receives some money from the sale.Now consider a similar situation where the seller purchased the prop­erty just a year ago for $235,000, with a down payment of $20,000. Obviously, she still owes almost $215,000 on the mortgage. Your chances of buying this property for $210,000 just flew out the window, because the seller would need to pay you $5,000 to make the sale work. Even if this transaction would help the seller financially, it’s almost too much of an obstacle for him to overcome emotionally. Sellers will seldom pay buyers to take their property. In short, this seller is not in a position to make you a good deal!

Avoid Deals Like HUD, FHA, and VA Foreclosures
Don’t be surprised when I tell you that most HUD, FHA, and VA foreclo­sures or take-back properties are not very good deals for investors—espe-cially investors who have visions of becoming rich anytime soon. You’re probably thinking, “How can that be?”
The answer is really quite simple. You need to understand the public is composed of countless “dummies” willing to bid up the price. Well-advertised properties are seldom sold at prices low enough to be consid­ered substantially below the market. Their normal selling prices are not discounted nearly enough to allow you to make anywhere near a substan­tial profit. You probably won’t even be able to get cash flow if you rent the property. The truth is that sellers don’t need to cut prices very much when the entire public is notified about the sale.
Your only consolation, if you do decide to purchase a government-owned foreclosure, is that you’ll also receive a heaping supply of top-grade plywood as a bonus. Both the FHA and HUD use tons of plywood to board up all the windows when they foreclose properties. However, the selling price rarely ends up less than 10% to 15% under true market value. To me, that’s simply not enough discount for a cash flow investment.
It Pays to Be Snoopy
The very first thing I do, when I hear that property I’m interested in becomes available, is to begin my “detective work.” Sometimes my broker Fred, will perform this task—but it took four years with my coaching before he became “snoopy” (skilled) enough to suit my taste. Brokers and sales agents, typically, don’t do the exhaustive research or “snooping around” I insist must be done.
The biggest difference between most sales agents and me is that they will accept the word of sellers as being mostly true. I accept it as being mostly exaggerated and often untrue. It’s never considered true until it’s proven true to me.
I’m not trying to be overly critical, but you must never forget this important fact of investment life—once the escrow closes and everybody gets paid, it’s you, alone, by yourself, who must live with the deal you signed. If, somehow, you’ve failed to uncover the true property expenses and it turns out they’re considerably higher than you were led to believe, guess what? It’s you, alone, who is now stuck. That’s the reason I learned to become a very snoopy house detective early in my investment career.
Verify Income Plus the Market Rents

If you plan to rent your properties to average tenants at prevailing market rents, you must first know exactly what those rents should be. You can do this by matching the rents in classified ads to comparable properties in the same neighborhood as your rentals (or soon to be yours). This exercise will provide you with some valuable information. First, you’ll learn if the rents for the property you’re negotiating to purchase are currently too high or too low. You hope they’re low, so you can raise them. Perhaps, equally important, you will quickly discover how much income is the right amount for the property. When you know exactly what the true market income should be for a particular property, it becomes a lot easier to fig­ure out how much you can pay for it—and still make a profit.

When the Rents Seem Unreasonably High
Always investigate if you think the tenants are paying way more than appears reasonable. I have found tenants who are paying $500 rent for a $400 house. A little detective work will show you the type of tenants who are willing to do this and why. In one particular case, four occupants were listed on the rental agreement, but I counted 12 coming out one morning when I was inspecting the property. Sometimes you can get an idea about who lives there by checking out the cars after dark. When I feel that nego­tiations to purchase a property are going my way, I spend more time driv­ing by and observing what goes on at the property. The word that best describes how I conduct these observations is “sneaky”—I don’t bother calling ahead for a formal visit. You can’t find out what’s really happening at the property unless you snoop around.
When the Rents Seem Low
Over the years, I’ve had good luck finding properties that were under-rent­ed (under-market rents). Here are two common situations to look for.
The first situation is with older owners of small income properties— perhaps six or seven small houses or apartments—who take care of every­thing, including maintenance, rent collection, and dealing with the ten­ants. Often, these owners will live in one of the houses on the same prop­erty. It’s quite common, in this situation, for an owner to allow the rents to remain low or lag behind the market value, hoping this will keep the tenants from asking for repairs or maintenance. These owners simply don’t want to be bothered. Tenants understand full well when their rents are low, if they’re smart—and they generally are about their own rents. They don’t call the landlord with complaints. They simply let things be. The problem for these owners doesn’t become apparent until they sell. Income property selling prices are based on the rental income the proper­ty generates. Low rents mean a lower price when it’s time to sell.
The second situation is somewhat like the first. It frequently occurs when owners have no mortgage payments on the property; it’s free and clear of loans. Quite often, the original owner will pass away, leaving the rental property to the kids. Because there is no mortgage payment, the rents on the property provide a large net monthly income.
(Typically, the mortgage on income properties will eat up 50% to 70% of all the rent monies. Those properties must be tightly managed or there will be very little or no net income. In fact, these owners must sometimes dig into their wallets each month just to keep their rental operation afloat.)
When the net income is so high, it’s easy for a complacent owner to get careless with property management—vacancies are not nearly so crit ical, raising rents annually is not really necessary, and routine mainte­nance expenses are easy to pay from the rental income. So, these proper­ties must also be sold for lower prices, because they’re generating less net income than they should.
Sophisticated buyers will expect to purchase under-rented properties using the capitalization method to determine the value. The cap rate val­uation method, as it’s called, is based on the net income only: the capital­ization rate for a property is determined by dividing net operating income by purchase price. If the net income is low due to poor landlording, the sale price will be lower as a result. As a buyer, you should look very hard for both low rents and poor management when trying to find the proper­ties that will generate cash flow quickly—after you fix the problems.
What to Do When You Find the Right Property
Let’s look at a hypothetical situation, but one that’s very common today. The property is totally trashed with broken windows and junk inside and out. The county ownership records reveal that tax bills are being sent to out-of-town owners. We learn, after writing to them, that the owners are a middle-aged working couple with two children. The trashed house is a rental property. The last tenants left in the middle of the night without paying rent. A close friend who oversees the property is trying to get fix-up bids for the owners, but hasn’t had much time lately, so the house just sits. Nothing is happening.
The general area is residential. Houses are worth about $60,000 and 20% of them are rentals. The neighborhood is an older, established tract approximately 25 years old. Rents average about $500 per month for a three-bedroom, one-bath house. We learn the mortgage balance is $29,500, with payments of $216.47 per month at 8% interest. We determine that fix-up work will cost $7,500 ($2,500 for materials and $5,000 for labor). Labor generally runs about 70% of the total fix-up costs, the way I do it.
Here’s the proposal we’ll make. We offer $54,000. (For this type of deal, I generally offer 10% under the average market price in the area.) There will be no cash down payment. Instead, I’ll jump right in and provide all labor and materials to restore the house within 30 days. The sellers will allow me $7,500 credit (down payment) for my personal efforts to restore the property. This deal will solve all of their problems in one big swoop.
I make a down payment of fix-up (labor and material) worth $7,500.
I assume or take over the existing mortgage of $29,500 (monthly pay­ment, $216.47).
The owner carries back a private note for the balance of the sale price (10-year term at 8%) (interest-only payments) of $17,000 (monthly pay­ment, $113.33).
I normally agree to pay closing costs—because sellers should not be saddled with out-of-pocket costs. Remember, there is no cash down pay­ment to the owner for escrow expenses. This small item will upset most sell­ers, so I strongly advise you to pay the closing expenses, if possible. It’s an excellent exchange for maximum concessions by the owner. Don’t irritate the owner when you’re asking him or her to carry a long-term note with very favorable terms (below market). It’s not a smart move to try and get everything; you should just be concerned about the most important things.
Small Deals Build Large Bank Accounts
This deal is just a plain and simple “garden variety” transaction. It’s not very hard to do at all. If the seller accepts your offer, you will need $2,500 for materials, plus closing costs. Use your credit card or split the deal with a friend who has the money. You can do the fix-up labor yourself.
I’ll be the first to agree that this “two-bit” transaction will certainly not make you a millionaire; however, what’s important is that you now own a property. You’ve started. Starting is like making a touchdown in football, going on your first date, or getting a jump-start when your car battery is dead. It provides the momentum you need to move forward. Now you’re beyond the thinking stage—you’re in the action mode.
When the dust settles, you’ll have $10,000 equity and rental income of $500 per month. Your mortgage payment will be $329.80. After taxes and insurance you might even have enough left to make payments on your overloaded Visa card. When you’ve completed five or 10 of these deals, you’ll be on your way to an exciting future in real estate. After you have completed 15 or 20, you can start carrying around a briefcase instead of a toilet plunger.
As you gain more experience and learn how to quickly sniff out the high-potential profit makers, this business will get much more exciting. It’s sort of like being a private detective, but it pays much better and you’ll seldom have to dodge bullets.
Equity and Profits Are Greater with Larger Properties
Larger properties have exactly the same problems and the same motivat­ed owners as single houses. However, percentage-wise, the equity and profits are much greater. Your financial statement grows bigger and faster with multiple units. Also, don’t forget groups of older houses and duplex­es in rundown condition can be purchased for much larger discounts because fewer investors want them, so there’s less competition.
The Courage to Look Where Others Don’t: Nontraditional Properties
People constantly ask me how I find these kinds of properties—“diamonds in the rough,” some call them. The complaint I hear most often is “There are no properties in my hometown like you write about.” With very few exceptions, I must disagree. The properties are there. You simply haven’t found them yet—and there are several good reasons why you haven’t.
I’ve found most folks are not looking around nearly enough. Most investors I know do the traditional kind of search for properties—if they wish to be apartment owners, they tend to look at traditional apartment buildings; if they want to invest in single houses, they generally search through the suburbs. Hardly anyone is willing to look at slaughterhouses or an old motor lodge. My suggestion is to broaden your vision a bit. After all, nontraditional properties are a lot more fun and, quite often, a lot more profitable.
Break Ranks with the Typical Buyer
Frequently, you’ll find the biggest rewards are found a little ways off the beaten path. Rich gold mines are seldom in plain view to all who would seek them. Think about investing a little differently. Isn’t it the folks with vision who always seem to be the ones who make the most money? Followers are always lagging behind and never quite sure what they’re looking for. Most often, they show up too late, after competitors have already bid up the prices. My suggestion—don’t follow, lead.
Finding the right properties, with a high potential for profits and cash flow, is the first step for developing a successful investment plan. It’s most important to break away from traditional thinking and stop following the average investor crowd. Serious money is made by those who study the marketplace and develop the ability to spot bargains that others simply fail to see. You don’t need to buy slaughterhouses, but you do need to develop buying skills and open up your vision to different possibilities. Be especial­ly “tuned in” if you run the numbers and a rundown property shows good cash flow.

to be continued . . .

Fixer-Uppers part 6

Tags: Fixer-Uppers, real estate, real estate book
Filed under Real Estate Books |