Real Estate 028: Motivated Seller Questionnaire

A great way to build equity and rental portfolio in a competitive market is to find a motivated seller. A motivated seller is someone who doesn't want to sell, but needs to sell due to their personal circumstances (e.g. death, divorce, inheritance, debt, etc.). Chad Carson wrote on the BiggerPockets blog on the importance of hustle by sharing the following metaphor: “Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion, or it will be killed. Every morning, a lion wakes up. It knows it must outrun the slowest gazelle, or it will starve to death. It doesn’t matter whether you’re a lion or gazelle. When the sun comes up, you’d better be running.“

Similarly to the lion or gazelle that is running, a savvy investor must be on the lookout for great deals through their marketing efforts in identifying motivated sellers. Once you have found a motivated seller through a lead generation software (e.g. bandit signs, flyers, postcards) or referrals from brokers or property managers, having a motivated seller questionnaire or intake script is useful for screening those leads. 

A big mistake made by newbie real estate investors is not being able to filter out the warm/hot leads from the cold leads and end up wasting valuable time with a person that will end up keeping their property.

Below is a list of information you want to document during the initial screening process:

Contact Information

1. Full Name

2. Phone number

3. Address

4. Spouse/Partner Name (if any)

5. Email Address(es)

6. Property Address for Sale

7. How did you find us? (Used to understand marketing efforts)

These are the basic information you need to ensure that you can get in contact with the seller in case they hang up accidentally and to follow up periodically. Next you want to screen them for motivation for selling their property:

Motivation:

1. Is property currently on the market?

2. If yes, how long has it been listed?

3. Why are you selling?

4. Have you listed your home with a real estate agent?

5. What is your plan if your house doesn't sell?

6. Do you have any written offers yet?

7. Who lives in the property right now?

8. Are your mortgage/tax payments current? 

9. Potential problem with co-owners? (Divorce, business, etc)

10. Any known severe property damage?

11. Other need for fast and immediate lump sums of money? How much?

These questions cut to the meat of why a motivated seller may decide to work directly with an investor rather than a conventional method of selling through the MLS with an agent. 

Property Details:

1. Property style: (Single Family, 4plex, ranch style)

2. Square footage

3. Age of property

4. Neighborhood Quality scale

5. CapEx useful life (Roof, Foundation, HVAC, electrical, plumbing)

6. Any other improvements needed?

These questions ask about the physical condition of the property and to a certain extent, the neighborhood. In most cases, the investor should already be knowledgeable about the surrounding areas and rough ARV to be able to quickly determine if the seller is in the ball park of an asking price. Motivated seller screening involves knowing how to ask open-ended and probing questions about the property, to get more accurate and time-saving answers. For example, instead of saying, "How is the roof? Good? Bad? Ugly?", you should ask instead, "When was the roof last replaced?"

Some landlords and property owners will call you assuming they can scam you into overpaying for their property. These people may become motivated sellers later on, but at the moment, they are not worth spending too much time with after the initial screening calls. 

Financial Data:

1. Asking Price

2. Mortgage loan balance and interest rate (Lender information)

3. Any 2nd mortgage on property? (HELOCs, Loans)

4. Mortgage loan terms and conditions

5. Are there any other liens or debts on your properties?

6. How much rent per month? Request rent rolls (if rental property)

7. Any non-rental income from property? (laundry, pets)

8. Any HOA (Homeowner's Association) fees? How much are HOA payments

9. How much is monthly PITI (Principal, Interest, Taxes, Insurance) payment?

10. Utilities costs (Gas, Electric, Water) for the past 6 months (Statements)

In conclusion, using a motivated seller questionnaire can help guide your interview process, and gives you a framework to make the screening as conversational as possible.  This information will help you determine the best way to structure this deal (wholesale, lease option, seller finance, or cash purchase) for a flip or rehab and long term hold. Using the information on this page, investors should be able to work out win-win solutions for your sellers and yourself.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Real Estate 027: All About Home Inspections (Rental Property Edition)

A critical step in the home purchasing process is due diligence. Assuming that you have done your market research, found a deal, and negotiated it under contract, its time to conduct a home inspection to ensure that there are no surprises that significantly change your cash flow numbers. As Ronald Reagan infamously said, "Trust, but verify." Home inspections are a great way for a buyer to hire an objective third party professional to be your eyes and ears, especially if you are unable to physically visit the subject property.

The first step in home inspections is to find the right inspector. For investors, this means finding a team that is investor friendly and understand where you are coming from. There may be "add-ons" to the inspection package that an investor may not need as they are not occupying the property. Further, you may come across a conflict of interest when inspectors also perform repair/rehab services as they may be incentivized to recommend repairs and attempt to perform the work themselves. Hiring an inspector who's sole job is to find issues without being the remediator will allow you to have an objective helper.

Below are a couple ways that I have found my property inspectors when investing in a new market:

• Property Manager

• Real Estate Broker/Agent

• Google (Yelp/Facebook Groups/Bigger Pockets)

• Fellow investors

• Local Real Estate Investment Association (REIA)

Once you have created a short list of inspectors, make sure you have a phone call w/ them to set expectations, check if they are properly licensed and bonded,  request sample inspection reports, and understand costs involved (e.g. Single Family Residence, Duplex, Quads, Radon, Termite, and Sewer Scoping). Although inspectors will have disclaimers stating that they are generalists and not experts when it comes to specific issues such as the foundation, electrical, and plumbing, etc. their experience inspecting homes will allow them to help identify patterns and trends when it comes to issues they have seen in the past. For example, an inspector who has seen a hundred homes in a certain zip code will understand the nuances of that neighborhood and will be able to advise the buyer in a more specific manner. In my experience, I have been able to find an investor friendly inspector who knows I will be a repeat customer, offer special pricing, take additional reference photos (not in the report) as well as walkthrough the inspection report with concerning areas. 

Once the home inspection has been scheduled, be sure to coordinate with your Broker or Property Manger to make sure utilities are turned on so that the inspector can test lighting, appliances, and other CapEx items. Upon successful completion of the inspection, its time to assess remedial costs. Generally, your property manager, handyman, or General Contractor should be able to put together a "high level" bid for you to take to the seller and negotiate a credit at closing, reduction in sales price, or seller repairs. Of the three aforementioned scenarios, I prefer a credit at closing as I would like my own team to perform the work and control the output. Sellers may opt to use cheaper materials or put "lipstick on a pig" that may result in reperformance of the work down the road. Further, I do not have my rehab crew put together a detailed scope of work at this stage, as I do not know if the seller and I will be able to reach an agreement. Reason being, if market conditions do not allow for us to reach a deal, I do not want my team to have spent to much time on this project.

Some of the red flag issues that may cause serious concern relate to:

• Significant termite damage

• Mold

• Radon

• CapEx (Roof, Wiring/Electrical, Plumbing, HVAC, Structural)

• Asbestos

• Lead Paint (Generally found in homes older than 1978, highly toxic and a health hazard)

• Flood Zone

Please note that if you are financing your property, your lender may request many if not all of these above items to be remediated before closing. Further, your lender will typically require an "A" grade insurance plan to cover liability of the property, and your insurance company may deem these issues to be uninsurable. These are real problems that you need to consider before moving forward in the purchasing process. Be sure to differentiate the "must repair" items with the "nice to have/value add" repair list. The seller will generally list the house taking deferred maintenance into consideration (e.g. old carpet, cabinets, touch up paint, fixtures, windows, etc.). 

Refer to my previous blogs on negotiating real estate (e.g. Never Split the Difference book review, and buying real estate through seller financing) for tips and tricks on how to speak with the seller. Bottom line, remember you are not trying to squeeze ever dollar out of the seller, but you are simply trying to hit your pre-defined cash flow numbers and renegotiating the deal based on newly discovered facts. Remember to use your Real Estate Broker as a sounding board when negotiating as an experienced Broker will have a good idea on the After Repair Value (ARV) and local market cap rates that typically drive the selling price. In addition, be strategic when negotiating issues with the buyer and make sure you highlight the high dollar value items and not make a long list of minor repairs. Show the seller you are a reasonable buyer who has identified these issues, but am willing to give up the smaller things (e.g. cosmetic repairs below $100) in order to close the deal. 

In addition to the inspection report, its always good practice to perform an inquiry with the seller or their representative agent to understand their motivation for selling, which may sometimes uncover issues the owner is currently facing or have faced in the past (e.g. high vacancies, vandalism, wet basement, or roof damage due to high winds/hail). Further, you will be able to get a sense of whether or not the seller is trying to hide or conceal issues from you as you begin to ask probing questions.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Real Estate 026: The Real Estate Advantage

When comparing different asset classes for investing long term, the most talked about classes that I have found, were stocks, bonds and real estate. Real estate is often viewed as a middle ground between the high volatility of the stock market and the low returns of the bond market. Stocks definitely have their advantages and disadvantages when put head to head against tangible rental real estate (e.g. Not REITs, private lending, notes, etc).

In my opinion, rental real estate is a far better way for the average person to become wealthy and retire early through the various tax advantages and steady cash flow that rental properties provide the landlord. Lets take a look at some of the pros and cons as listed below an discuss the key features:

Stock Market

Advantages

• Liquidity: Stocks are a liquid asset, meaning that it is very easy for an investor to buy or sell parts of their portfolio, if not all, within a couple days (assuming its publicly trade).

• Less work: Investors who typically invest through their retirement account have the option of choosing from a pool of funds pre-selected by the brokerage. This equates to less work in researching the underlying shares within a fund and looking into individual financial statements, their projected earnings, and other metrics.

• Diversification: By investing in stocks, it is easy to pick and choose individual shares (slices of the pie) or purchase funds (whole pies) that have a mix of equity, large cap, small cap, international, and bonds (toppings and flavors) that provide diversification.

Disadvantages

• Short Term Flux: Stocks are known to have extreme fluctuations in a relatively short period of time, and this can negatively impact an investor who is trying to live off of their investments during retirement. Further, for the average investor with limited resources, it is even more difficult to understand the reasoning behind the fluctuations and the internal/external influences that impact the value of a portfolio.

• Market Value: Investments are typically made at market value or the trading price as the market is efficient, meaning that you cannot negotiate a discounted share or find a "distressed company." Although you can study the company and be a prudent investor in what you believe to be undervalued, there is also a chance it can plummet to zero.

• Less control: An investor has the ability to pick their fund or individual stock, but they do not generally have a say in the day to day operations of the company. Shareholders with a significant position can choose the Board of Directors who oversee operations, but for the average investor, they are merely a passive investor that does not have control of the decision-making process.

Real Estate

Advantages

• Tax Benefits: One of the largest benefits enjoyed by real estate owners is the numerous tax benefits currently in the IRS tax code. Write offs can relate to depreciation, maintenance and repairs, business travel & meals, mortgage interest, and many more. Further, you can defer the gains of the sale of one asset through a 1031 exchange into a new property.

• Inefficient Market: The real estate market is inefficient compared to the stock market, and investors will always be able to find distressed property and motivated sellers (e.g. death, divorce, inheritance, exit strategy, etc.). This gives real estate investors the ability to find discounted properties and create equity through hard work.

• Complete Control: With real estate, you are in complete control of the asset in terms of the purchase price, location, rent-to-value, choosing tenants, and exit strategy. You can choose to sell off your asset, 1031 exchange into a larger rental, or seller finance it to a tenant (lease option).

Disadvantages

• Illiquid Asset: Once you have purchased a rental property, it is much more difficult to sell or transfer than a typical stock. Even for an all cash transaction, a typical escrow may take 7-14 days to close due to inspections, and other contingencies.

• More Up-Front Work: Compared to purchasing stock through a fund, real estate requires you to do some research on the market, the team, and the property. With time, you can use your knowledge and streamline different processes or outsource the most of the work, however, getting to that point will require commitment from the investor.

• Tenant Risk: Rental properties have tenants living in the units, as such, comes with added risk unseen in the stock market. You have to be well versed in the local laws and regulations to ensure that you are not exposing yourself to necessary lawsuits and liability.
  

The simply way I view investing in stock vs real estate is by looking at my competitive advantage. For me, I know that there are hundreds of smart, capable people on Wall Street with deep pockets and resources to out perform the average investor. On the flip side, real estate markets are local, meaning what happens in Los Angeles, doesn't necessarily impact Texas the same way, and vice versa. This allows an investor to choose where they want to compete (e.g. single family vs multifamily, A class vs C class neighborhoods, primary markets vs secondary markets) and avoid stiff competition.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!