tenant screening

It is no secret that right now is a great time to own rental homes for both cash flow AND appreciation.  When I ask rental property owners to explain their asset most will start telling me about the physical property.  I disagree.  Your biggest asset is your tenant.  Because finding a good tenant is so important I want to talk about some of the high risk tenants that I have encountered.  You have to be very careful here as these could be protected classes and I am not saying not to rent to anyone on this list.  I am simply pointing out that these could be a higher than average risk for you as a property owner.  Please do not discriminate against a protected class. 

1)       People that have never lived together – You will normally see this with younger people.  Often times they have recently left home and need roommates to help cover some of their costs.  This is exactly what I did.  The biggest problem here is that people that have never lived together soon learn that they can’t.  You know what I am talking about; one is a slob, one stays up partying too late, one does not cover their portion of the bills, and this list can go on and on.  Trust me if they don’t get along and one moves out you will soon find yourself with a vacancy and possibly one that is returned in less than desirable condition. 

2)      Recent marital change – Again be careful here as this is a protected class.  As we know many marriages end in divorce and often times it is not pretty.  If a divorce is going to happen it may happen sooner than later so a recent marriage can be risky but the biggest issue here is a recent divorce.  One of two things could happen with a divorce and one of the two moves into your house or apartment. 

1. They don’t get along and the ex spouse comes over causing problems after they have had a few drinks.  The next thing you know the neighbor is calling saying the cops are at your house again. 
2. Or even worse, they decide to get back together.  J  I know I’m so harsh.  When they get back together what do you think is going to happen?… that’s right, you have another vacancy. 

3)      Self Employed – I hate to say this since I am self employed but the fact is most small businesses go out of business.  If you are reading this you don’t fall in that category.   J  Have you ever rented to a contractor or handyman?  I have several times with less than desirable luck.  Most small business owners are great at what they do but aren’t so great at running a business.  They don’t understand how to generate business and how to keep the income coming in.  They get busy doing what they do and when it is done they don’t have anything to do.  Make since?  If they do run their own business be sure to ask them questions about how they generate leads and how they keep their cash flow positive.   Also ask for a business card to help verify that they are really not self unemployed. 

4)      Recent job change or recent residents change – This is especially true if there has been more than one in the last 24 months.  This is an indication of instability meaning unstable in your rent also.  Often times they will not disclose many jobs or resident changes on the application which is why calling the last two landlords and asking how long they have lived there is important.  Also, many times recent addresses will show up on the credit report so you can use that to verify missing information. 

Please use this information for what it is worth.  It is not a reason to deny a prospect but is a good way to raise red flags and to be extra careful with the screening process.   Good luck!

Here are the top five ways to save money on your rehabs:

1. Have a solid plan and a budget.  You want to be as clear and detailed as possible.  Your contractors can help you with this during your diligence process, but you want to use your own numbers and not just what the contractor tells you.  You will also want to include a contingency for anything you don’t see before you start, or for items that end up costing more than you thought.  It is important to know what you are going to do and what it should cost before you buy the house.
2. Pay with a debit or credit card that includes a discount or a rebate.  For example, Lowes offers a 5% discount on all purchases using their card.  You also might have a major credit card that gives you cash back or other reward program.
3. Buy in bulk.  If you are doing a lot of projects this is easy, and you are probably already doing this.  If you are just getting going or only doing a couple deals a year, this can be more challenging.  My suggestion is to find some designs that are natural and popular and get a group of investors to go in on buying the material.  For example, maybe there is a specific tile or granite that you like and plan to use in your projects.  If you get a group of investors together all working on a project, you can team up to get the best deals.  A great place to find investors doing deals is networking on and offline.  The Pine Financial Group Happy Hour is a great place to meet local and active investors.    
4. Look for sales and stock up.  I remember my grandma buying cases of toilet paper, paper towels and anything else that did not expire, when it was on sale.  Heck, she would even buy things that did expire if she thought it was a great deal.  This is a solid strategy for business too.  As long as you have a place to store them, buy things you know you will use, like outlet covers, light fixtures, and plumbing fixtures, when they are on sale. 
5. Negotiate with contractors.  When you are just getting going, have several contractors show up at the same time to bid your job.  This will save you time by walking through the project only once and it will create a competitive environment.  This might be uncomfortable for you, but it will be profitable.  Once you start getting bids in, you can call them back and ask them to do better.  Contractors will hate this, but it is a great way for you to save some money and they can always tell you no.  Once you become more experienced and you start learning what certain items cost, you can set the price and call contractors and ask them if they can get it done for that price.  I have a house in Colorado Springs that needed a new electrical box and the box had to be moved.  I know that a price of $1,500 including the permit is profitable for the electrician but is a great deal for me.  I did not know any electricians in the Springs, so I started asking for referrals.  When the referrals starting coming in; I sent them to the house and told them I would not pay more than $1,500.  The third electrician that looked at it wanted the work, and I got what I needed for the price I wanted.   

Straw Buyer

Do this and you can lose everything or maybe in even end up in jail.  There is a very fine line between using or being a straw buyer and partnerships.  I think the best distinction is if all partners actively participate in the deals.  Here is what I mean.  I straw buyer is someone who provides credit to a partnership for a fee.  A typical example is when Ivy Investor wants to build a rental portfolio but cannot qualify for loans.  She pays Carl Credit $10,000 to buy a house and deed it to her.  In this example Carl has no intention of making payments on the loan because Ivy has promised to do that.  

I have been spending a lot of time of subject-to investing where a seller deeds their property to a real estate investor.  That is not illegal.  What makes the scenario above illegal is the intent when taking out the loan.  Carl’s intent was to deed his property to someone else and never make payments. 

This exact scenario has happened to people I know in Denver.  They were paid $10,000 and sometimes more to use their credit to buy properties.  Here is what actually happened so you get a feel for how dangerous this is.  The straw buyer purchased the homes from the investor group at full price.  The buyer then deeded the property right back to the investor group.  The investor group was able to pull all the equity out of the house using this strategy and then stopped making payments on the loan.  The straw buyer was than stuck because their credit was being destroyed but there was nothing they could do since they no longer owned the house.  It put them into bankruptcy and the happy investors got off Scott free.   I like to call this a win/lose case.  There was clearly a winner, the investor group, and there was clearly a loser, the straw buyer.  Many teams these scams end in a lose/lose scenario.  Obviously the straw buyer loses when they go bankrupt but the investor will also lose when they end up in prison.  If you have time I encourage you to Google straw buyer and read about some of the recent cases. 

The correct way to use someone else’s credit is to actually make them a partner.  They bring the credit you bring value in the way of a great deal or experience or hard work.  Combine it is a winning partnership and you divide the profits AND losses.  All partners also must meet and play a part in major decisions.  There are several ways to structure your agreement but what is important is the credit partner stays involved with the deal making them a true partner and not a straw buyer. 

Credit partners are a fantastic way to reach goals.  Partnerships really should help everyone involved and often times they do.  Do not shy away from partnerships but please proceed with caution.

In an attempt to reduce the amount of short sale fraud, Freddie Mac has amended its short sale affidavit policy. The new policy was issued on November 18th, 2011; however, the new changes are not required to be implemented by servicers until January 1st, 2012. Basically, Freddie Mac is requiring everyone involved in the transaction (borrowers, purchasers, real estate brokers, closing agent, transaction facilitators, etc.) to sign, date and notarize that the sale constitutes an “arm’s length” transaction. Additionally, this requirement also requires full disclosure. As is standard practice, the flexibility exists for servicers to modify and integrate their own requirements into the affidavit form, so long as the minimum requirements are met. The short sale affidavit must be a separately identifiable document, distinct from other closing or pre-closing documents, such as the sales contract. This raises some interesting questions: If the listing agent also acts as the buyer’s agent, is that an arm’s length, and what if the agent knows the investor that makes an offer?

There was another point that jumped out at me as I was reviewing the changes. I saw a clause that stated, “If the purchaser intends to re-sell the Mortgaged Premises in 120 days or less without having substantially refurbished or added value to the Mortgaged Premises … the servicer must withdraw agreement to the short payoff of the Mortgage and immediately notify Freddie Mac”. While this is important to purchasers and borrowers alike, this requirement is notably important to investors. In other words, Freddie Mac considers wholesaling short sales or even lipstick jobs, mortgage fraud. This is essentially a deed restriction of 4 months on short sales. Yes you can get around it if you “substantially refurbish” the property, but who determines what substantially means? I have a feeling it’s going to mean more than paint and carpet. Another key word in this statement is the use of the word “intends”, and more importantly, how can we as investors or Freddie Mac, prove what your intent is with the property?

So, if you are actively investing in short sales, or are adding them to your business plan in the New Year, please be aware of the regulations surrounding them. They are ever changing, and the last thing anyone wants is to misunderstand and be held liable.

Everything I referred to can be found here

I want to use a 13 year sample because something really interesting has happened.  On January 11, 1999 the S&P 500 closed at 1,263 and on 11/11/11 the S&P 500 closed at 1,263.  That’s right there has been exactly zero return in almost 13 years.   

During this same period there was a low of 676 and a high of 1,565 so it has been extremely volatile so if you are getting in and out at the right time you could make a fortune.   If we take the common advice from our financial advisors we would have made no money and in fact we would have lost money when you account for inflation.   I also want to point out one other thing.  One lesson we can learn from this statistic is that if the stocks you invest in produced dividends you would at least make money even if the stock price did not move. 

The point here is that it is important to have at least some investments in income producing assets and it is not always wise to dump a bunch of money into the stock market and expect it to grow.  With rental real estate you are producing income and as long as the deal was good when you purchased it and you got favorable financing you will be able to ride out ups and downs and still be ahead.  There are other investment opportunities involving real estate that does not include dealing with tenants.  If you are interested in learning more about how to invest in high income producing assets check out our free Special report “How To Profit From Private Lending.”

A wholesaler is someone that finds great real estate deals and sells them to other investors.  Most of the time these are beat up houses that need rehabbed.  Often times these are sold to experienced investors that want to fix and flip them. 

Bird-dogging is finding a great deal and just turning the lead on to someone you can trust.  It is really that simple.  You get a lead on a deal and you call an experienced investor to take it on.  If the investor is able to make money, they should happily share some of their profit with you.  Bird-dogging takes no money or credit, it carries no risk, and you don’t even need to know what you are doing. 

Bird-dogging is not only for those deals you don’t know how to structure.  One of our clients is fairly knowledgeable when it comes to deal structure, but he found a great deal listed in the MLS that needed an all cash offer.  He does not have the cash to make an all cash offer, so he was unable to get the house under contract.  Instead of just moving on to the next deal, he called us thinking that we might be able to help.  I made the offer the same day and got the deal.  I ended up wholesaling the deal to another client and paid a bird-dog fee of $1,000.  Now $1,000 might not sound that good to you, but he had less than 30 minutes of his time into the deal.  Would you be happy making $2,000 an hour?

I love wholesaling and strongly recommend you use it as a way to produce cash flow.  There are, however, two problems that I see inexperienced wholesaler s make.  They either get a house under contract incorrectly and/or they don’t pay attention to their deadlines.   The deadline problem should explain itself and is easy to avoid.  Be sure you have a buyer for your wholesale deal before your earnest money is at risk.  As a wholesaler, your only risk is your earnest money, so you need to stay within the contract deadlines or you could lose your money.  The contract issue is a bit more complicated, but the most common errors I see are making offers in your personal name or writing assignable contracts and sending them to banks.   Please see the next article in this newsletter for more information on how to write your offers. 

If you don’t know how to put a deal together but you feel like it is a deal, please don’t let it go to waste.  Call us or someone else you know to help you out.  You will most likely have to share your profit or simply collect a referral fee, but it is better than not doing the deal at all.  It is also a great way to start getting real world real estate experience.

These attorneys do not want to take cases unless they feel like they can collect.  It is not really that tough to get judgments but it is quite another to collect on judgments.  If you have a judgment against someone with no assets there is little chance you will ever see a dime.  Because of this, a simple way to not get sued by ambulance chasers is to appear like you have little to no assets. 

You can accomplish this by not owning assets in your personal name.  Especially assets like real estate because these come up in public record searches and it is easy to see what the asset is and how much equity you have. 

Here are some ideas to appear broke:

• Use Trusts, LLCs and corporations
• Use lines of credit or mortgages to encumber property
• Carry assets in a company that does little to no business and is unlikely to get sued
• Split assets among spouses

Obviously insurance should be a large piece of you asset protection plan so talk to your agent about additional liability coverage.  These are known as umbrella policies and are normally dirt cheap.  It is also important to carry above the legal limit for liability coverage on your auto insurance.  It is very possible that a lawsuit is caused while driving so having enough coverage is crucial. 

Of course you will want to talk to a good asset protection attorney to help explain when and why to use different entities and possible even help you set them up correctly.  Setting up an entity incorrectly or not running it correctly extinguishes any asset protection you think you have.  Please pay special attention to this there is some paperwork that is really simple to do that will keep you out of trouble.  There is more to running an LLC than just registering the company with the secretary of state and starting a bank account.  

(This article is for education purposes only and is not meant to replace competent legal advice.  I am in no way supplying legal advice.)

Part of the reason for the new record low rates is more stimuli from the government.  The latest round is being called “Operation Twist”.  I am not real sure why it is called this other than it is a similar tactic that was used in the past with the same name.  The idea is to move federal money from short term debt to long term debt creating lower interest rates on longer term treasuries.  Mortgage rates closely follow the longer term treasuries so this will have a direct impact on our rates.  The Fed wanted the announcement of this new stimulus plan to help boost confidence and stock prices but as we know stock prices fell.  Here are some reasons the stock market has been volatile and on the decline:

ü  Fear of Greece defaulting on their debt

ü  Rising concerns of worldwide credit problems

ü  A sluggish China economy which has been one of the few counties that appeared to be immune to the financial crises

ü  A steep drop in the price of cooper

Again it all comes back to consumer confidence.

There has been several more plans for the REO problem presented including: letting the foreclosed party rent to own the home back from the government, partnering with private property managers to rent the houses out, and selling to owner occupants at discounts.  While we wait for a final plan to get worked out, both Fannie Mae and Freddie Mac will review letters of intent to buy REO packages from investors to keep as rentals.  There will most likely be restrictions on how long the investor must keep the properties as rentals before they can resell them.  These will be large packages for institutional investors so I hate to say it but I don’t see a great opportunity for us here.  I will continue to write updates on this mess as the government gets closer to a resolution. 

The Denver market continues to be strong.  There was a front page article in the Denver Post recently that explained how difficult it is to find quality fixed up housing in good areas.  The article mentioned that Denver has about ½ of the inventory it did in April of 2010 when the tax credit was expiring.  And of the houses on the market, ½ of those are distressed meaning they most likely need work and/or are short sales that buyers don’t have the time to wait for.  I love to hear this shared in the media because it is something those of us in the trenches have known for a while.  Denver is in a strong and recovering market with appreciation in several neighborhoods. 

Top 10 lists are always fun.   Congratulations to Broomfield for being ranked number 1 by Forbes as the top suburb for retirees.  Sounds like more people move to Colorado to retire than I thought.