As a real estate investor, the title insurance company you choose can make a big difference in the quality of your transactions. Be sure you have open lines of communication with your Title Officer so that you are able to get questions answered up front on any concerns you might have on your title report. Here are a few tips to help you familiarize yourself with the title report and some common items to scrutinize.
If you don’t have a relationship with a title company, you are more than welcome to call me and I’ll be happy to help you sort things out!
Review Your Title Report For ‘Schedule A’ Concerns
Policy Type: Ensure the Owner’s policy on Schedule A is the proper form of policy per the Purchase and Sale.
Agreement: Example of policy types are Owner’s Standard, Homeowner’s or Owner’s Extended.
Ownership: Ensure the vesting name matches your seller. If the seller is deceased, yet the title company does not vest in the estate of the deceased, look for a pending probate action as an exception to title. If there is not a probate, contact your title company to find out their requirements.
Legal Description: Ensure the legal description matches the map provided with the title report or with your Purchase and Sale Agreement.
Review Your Title Report For ‘Schedule B’ Concerns
Easements, agreements and restrictions should be reviewed by the Realtor, seller and buyer. Is there something listed your buyer can’t live with? Does the property meet the needs for your buyer for the intended use? Ensure monetary exceptions appear to be correct. Are there valid outstanding Deeds of Trusts, judgments or liens?
Are their questionable judgments or liens that have identity concerns? Does the paragraph contain the words “question of identity”? If so, a Statement of Identity (or Identification Affidavit) will be provided and required to be submitted to the title company. Individuals with common names like Baker and Smith will often have questionable judgments attached to their name.
Is there a recorded survey as a note or exception to title? An encroachment concern may be recorded on the survey. A title company may require a survey be done depending on the type of coverage.
Is there an inspection paragraph to be cleared? A title company may require an inspection based on information found in an Exception.
Exceptions are cause for concern. Exceptions are exclusions of coverage.
Notes are for information only. There is no question on title.
About the author…
Since 1983 Elizabeth Peterson has provided her clients with a level of professionalism and expertise that sets her apart in the title industry. Her years of experience and commitment to client advocacy means Real Estate Agents, Lenders and Investors receive the support necessary to successfully close more transactions for buyers and sellers and refinance loans. If you are looking for a title and escrow partner you can count on, Elizabeth is here to help you provide your clients with the added measure of service so essential in today’s competitive market. Elizabeth is a senior account manager at Chicago Title of Washington. She can be reached by phone at 206-618-6786 or send an email to: Elizabeth.Peterson@ctt.com
“REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!”
Perhaps our greatest achievement this year was making the Inc. 5000 list of America’s Fastest Growing Companies. We ranked #398 overall, and #11 in the real estate category, measured by our growth between 2007 and 2010. Considering how housing prices peaked in 2006 before beginning their steady decline, it’s no surprise that Fairplay by a phenomenal 857 percent during this time.
Fueling our growth was the increase in distressed property transactions, which we helped hundreds of our customers navigate successfully this year. These transactions are popular because they allow investors to purchase real estate at rock-bottom prices. As both a real estate company and a lending firm, Fairplay can purchase properties on our customers’ behalf while arranging bridge loans on a very tight timeline. In some cases, we have put deals together in 24 hours. Bridge loans are an important part of the process, allowing clients to purchase distressed properties at auction, which requires cash on the spot. We also offer traditional mortgages, which come with a much lower interest rate. This transitional service gives our clients a huge advantage, as we can immediately begin the refinance process into a traditional mortgage.
As Fairplay has grown, we’ve also expanded our vision beyond the Northwest. We’re currently conducting feasibility studies in Los Angeles County in California, Clark County in Nevada and Maricopa County in Arizona — all prime markets for distressed real estate that we plan to service in the future. To help achieve our goals, we’ve added a new executive team member: Realty Sales Manager Gary Gray. Gary is the former CEO of Mortgage Reduction Group, LLC, and spent years as a consultant to real estate upper management teams developing processes and refining business metrics. At Fairplay, Gary will perform many of these same tasks, helping us achieve our vision as we grow and expand.
This year, we will continue to host our Thursday new investor workshops, which introduce people to the basics of foreclosure investing. Also, our weekly Investor Café meets over drinks and appetizers to discuss investment strategies, home improvement, financing options, and “featured properties ” selected for their investment potential. In addition to these regular events, we’re holding two special classes. The first, titled “Maximizing Funds from Self-Directed IRAs,” will show you how to easily diversify your retirement accounts beyond the stock market by using funds to invest in real estate, all while avoiding taxes. The second class, “What You Need to Know About Title,” will address your questions about these legal documents that prove ownership of a property and often pose issues for the distressed property investor. I encourage anyone interested in learning more about the amazing potential in distressed real estate to give us a call or attend one of our investor meetings. All are free, as are our membership services, which include access to our exclusive database, online tools and personal coaching. We only charge a fee when you purchase one of our properties or borrow money.
As we wrap up another exciting year, I wish you and your clients tremendous success in real estate, and in life. Here’s to a happy holiday season and a prosperous new year.
About the author…
Bill Widmer is the CEO and founder of Fairplay Financial, Inc., and its operating entities. He has 19 years of experience in finance, management, real estate sales, investment and development. He is also licensed as a loan originator and real estate agent in Oregon and Washington.
“A” properties are the highest end, luxury properties, built in the last 10-15 years and in prime urban locations.
“B” properties are in mixed blue collar/white collar neighborhoods, and built 10-20 years
ago.
“C” properties are in primarily blue collar neighborhoods, and built 20-30
years ago.
“D” properties are in more marginal or war zones, more than 30 years old and typically functionally obsolete. They generally need a good deal of work to rehab or upgrade. As we discussed last month, Capitalization (Cap) Rates are used as a key measure of value in any commercial property. Cap Rates typically increase from A to D properties, with A
properties having the lowest cap rates and D properties the highest. Cap rates are a measure of risk.
Cap Rate = Net Operating Income/Purchase Price
Net Operating Income (NOI) is determined by subtracting all expenses other than financing costs (debt service) from Gross Annual Income, which is all revenue generated by the commercial property. Debt service, or the financing in place on a commercial property, comes into play when calculating Cash-on-Cash Return.
There is much to learn for the commercial investor, but these last two articles in Doing Your First Deal will help the novice investor get started with terminology and understanding value.
This series of articles is a regular feature of the REAPS newsletter, and as REAPS Membership Coordinator, I welcome your feedback. Please let me know what topics you might like to see addressed in future articles for the novice real estate investor. I can be reached via email at: HomeLandInvestment@gmail.com.
About the author…
Wendy Ceccherelli is the volunteer membership coordinator for REAPS. She has been a full-time real estate investor since 2006, and is the designated real estate broker for Home Land Investment Properties, Inc. Prior to her career in real estate, she spent twenty-five years as a government arts funder. More information on real estate topics may be found on her website at www.HomeLandSeattle.com.
“REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resourc”es for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!
The holidays are rapidly approaching and the number one question that I’m asked by home sellers and Stagers during the holidays is: “to decorate or not to decorate?”
There is no question that we all have strong feelings and memories about the holidays, and what sells a home? An emotional connection! Holiday staging done well can help a buyer form that connection faster than you can say gingerbread!
Adding holiday touches to staging just makes sense. Adding subtle touches will invoke memories of Christmas’ past and those yet to come. What stronger connection than an image of the family gathered around a Thanksgiving feast or Yule tide celebration.
Here are my top ten tips for holiday staging:
1. Do not over decorate!! Rather than tons of Christmas stars and angels, subtle decorations such as a glass bowl filled with holiday ornaments used as a centerpiece create a holiday feeling without going overboard. If the home doesn’t sell by Christmas, you simply replace the ornaments with polished rocks, potpourri, shells or small fruit.
2. Do use clear lights around shrubs in the front yard or if there aren’t shrubs add silk weather resistant plants with clear white lights on either side of the front door. Small clear twinkle lights feel festive during the holiday season, but can be used year round.
3. Rather than a fake Christmas tree, add white twinkly lights and ornaments to silk trees inside. This creates an elegant holiday décor that is easily changed once the season is over.
4. Use cinnamon, ginger, spiced apple or other holiday scented candles to fill the home with holiday fragrances. You don’t even need to burn the candles to bring out the aroma of Christmas past!
5. Do not use religious holiday decorations. As you all know decorating is personalizing, staging is de-personalizing. This rule totally applies to holiday decorations. The last thing you want to do is to turn off a prospective buyer because of different religious beliefs.
6. Do add a touch of whimsy to your holiday staging! A tray decorated with a faux glass of milk and Christmas cookies placed on an ottoman or coffee table is bound to bring a smile to your buyers face and evoke nostalgic memories.
7. Do use instrumental holiday music during showings and open houses. Some of my favorites are Windham Hill Holiday Guitar Collection, and all of the Winter Solstice Collection, especially the Silver Anniversary collection. The instrumentals are soothing and appeal to everyone regardless of the holiday they celebrate during the winter months.
8. Bring the outside in. Using fresh evergreen boughs as part of your holiday center piece in the living or dining room adds both a festive and fragrant look!
9. Remember to retake pictures. If the pictures on the MLS, your website or your flyers include holiday decorations, remember to retake and replace them if the home doesn’t sell during the holiday season.
10. The Three C’s of staging: Clean, Color and Clutter free still apply. Keep holiday decorations simple, use colors that compliment the home’s color scheme and keep the home meticulously clean!
Don’t hesitate to put your home on the market during the holiday season. The fact that’s it’s a slower market could work very well in your favor. While there may be few buyers, the ones that are out there are very serious. They want to buy and get in before the end of the year. Plus, while there may be fewer buyers, inventory is also going down, so if your home is priced right and well staged it will easily out shine the competition.
I hope you are looking forward to the holiday season and take time for yourself and your family. Most of the staging tips above apply to your home as well. Keep your holiday decorating simple, even beloved holiday décor can become clutter if you over decorate.
Theme gifts are great, and for you Realtors out there or those of you who have Realtors as friends and clients, consider giving them an “EcoJoe.” This cute little guy is the perfect gift and is available on Amazon.com for only $14.99, or on my website for only $11.99. EcoJoe is an environmentally friendly St. Joseph, who when buried in the yard by the for sale sign, will help to get your home sold!
Do you have specific staging questions? Send me an email or post on my Facebook Fanpage, and I will feature your question with an answer on my weekly radio segment on Chat with Women. I’m on between 8:30 and 8:45 every Wednesday morning on KKNW 1150 AM radio, or you can listen on the wen just go to www.chatwithwomen.com!
Hope you have a happy and safe holiday season!
About the author…
Pam Christensen, APSM is the owner and founder of Staging For Charisma. She is an Accredited Staging Professional Master who specializes in working with investors to help them maximize their return on investment by providing high quality staging that gets results! She is one of only 15 ASPM’s in the state of Washington, in fact, there are under 200 in the Nation! Find Pam at: www.facebook.com/stagingforcharisma.com or visit www.stagingforcharisma.com.
“REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!”
Part 1: Formation
T o start with, what is a “self-directed” IRA? The vast majority of people who have a retirement plan, whether it’s in the form of an IRA, 401(k), 403(b), etc. have their money invested in “traditional” types of investments, e.g. stocks, bonds, mutual funds. However, the general rules governing an IRA allow for any type of investment except for investments into “life insurance contracts” and “collectibles” (e.g. rare coins, antiques, wine, etc.). The most common investments for self-directed IRAs include: real estate, loans, tax liens and privately-held companies. That sounds great in theory, but in order for you to actually invest retirement funds into assets outside of the stock market you will need your retirement plan custodian to allow this type of investment.
In other words, the financial institution that holds your retirement account must be able to facilitate the investment or you are out of luck. The reality is that most large investment institutions (e.g. Charles Schwab, Fidelity, etc.) have traditionally not allowed investments outside of publicly-traded securities. Thus, one of the first steps in the process of forming a self-directed IRA is generally to “roll” or “transfer” some (or all) of the retirement account to a new IRA custodian. But before we get to that issue, a few other steps will need to occur.
Step #1 – Can The Funds Be Moved?
Prior to selecting a new IRA custodian (discussed more in Step #2), the retirement account owner needs to determine whether his or her retirement account is even eligible to be moved out of its current location. For example, many 401(k) plans significantly restrict the movement of money while the retirement account owner is still working for the company that sponsors the plan. In other words, if the 401(k)’s underlying “plan documents” will not allow the account owner to move the money, transferring funds into a self-directed IRA might not be possible. This is an issue that the IRA owner needs to resolve with their current plan administrator. In general, if the retirement account that is owned by the client is structured as an IRA (or a 401(k) from a previous employer), it can be moved (in whole or
in part) to a new custodian without incurring current tax consequences.
Step #2 – The New Custodian
Once the retirement plan holder determines that they are eligible to move some (or all) of their retirement funds, they need to select a self-directed IRA custodian. Although there are an increasing number of IRA custodians that are willing to hold “alternative” IRA assets, there are dramatic differences between these custodians. Some custodians offer very minimal customer service, but have lower fees. Other custodians claim to offer the opposite. Another issue to consider is whether the custodian will allow the IRA to purchase a Limited Liability Company, which is important if the client wishes to have maximum control over the structure (see Step #4).
Step #3 – Rollover Or Transfer?
After setting up a new self-directed IRA, it needs to be funded, which can be done in one of two ways. (1) The client can request a “rollover” – meaning that the old retirement plan administrator sends a check to the client that is made out to the new IRA custodian. The client then must deposit the check into the new IRA within 60 days. If the client fails to deposit the check in time, the entire amount will generally be treated as a taxable distribution. (2) The client requests a “trustee-to-trustee” transfer – in which the funds move from the old custodian to the new custodian without the client coming into physical possession of the funds. When possible, the latter method is preferable.
Step #4 – IRA Or IRA/LLC
Let’s assume for a moment that the client’s goal is to invest into a piece of residential rental real estate. Once the new self-directed IRA is funded, the client needs to decide whether he or she is going to invest the money directly out of the IRA (i.e. the IRA custodian buys the property on behalf of the IRA) or whether the IRA is going to purchase a Limited Liability Company (“LLC”) and invest using the LLC. With the client serving as the “Manager” of the LLC, the latter option allows the purchase of property using a check from the LLC’s checking account, which depending on the custodian’s ability to move quickly, will likely speed up the property purchase. Also, the IRA/LLC model will reduce the future costs due to reduced custodian involvement (i.e. lower fees). For tax purposes, because the LLC is a “flow-through” tax entity, investments made using either method are normally tax-deferred (note: there are major exceptions which I will discuss in future articles). However, the control / flexibility allowed by the IRA/LLC creates problems if the client does not operate the structure is a legal fashion (again, these issues will also be discussed extensively in future articles).
About the author… Warren L. Baker, J.D., LL.M. (Taxation) is a is a tax attorney with Amicus Law Group, PC in downtown Seattle. His areas of practice include estate planning and trusts, business transactions and self-directed IRA tax consulting. Warren has worked with hundreds of clients to help them better understand the tax and legal ramifications of investing using self-directed IRA structures. Warren offers a 10% discount on all services for current REAPS members.
DISCLAIMER: THE FOREGOING IS NOT INTENDED TO BE GIVEN AS LEGAL, FINANCIAL OR TAX ADVICE, BUT INTENDED FOR INSTRUCTIONAL USE ONLY. IF YOU REQUIRE LEGAL, FINANCIAL, OR TAX ADVICE YOU SHOULD SEEK THE ASSISTANCE OF A QUALIFIED PROFESSIONAL.
“REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!”
Telemarketing is the most under-used and under-rated technique for finding discounted real estate notes. You can get the telephone numbers of most note holders by sending your diskette to TeleMatch (800) 523-7346 or (703) 658-8300. For a very nominal cost they will add phone numbers to your list of Note Holders.
The most important goal of telemarketing is not to buy the note, but to get the note seller to send you the appropriate documents. We have found that if a note seller will go to the trouble of finding the documents on the note, we can close the sale about 2/3 of the time. The problem is, what do you say to potential note sellers when you get them on the phone? The chances for rejection are astronomical, and your tolerance for that rejection will determine your success.
This is a game of numbers. And the more phone calls you make the more success you will have. If you have the telephone numbers of one thousand note holders, a good list of note buyers, and the skill and perseverance to telemarket, you are on your way to huge profits. The structure of a successful telemarketing campaign has four phases:
The Opener
First, develop credibility with the note holder. This must be done within the first minute. We like people who are like ourselves. The first thing in telemarketing is to demonstrate that we are like the party with whom we are speaking. The odds are very good that the person will “like us back,” and we’ll be rewarded with a possible note to purchase.
Evidence shows that people can tell with 90% accuracy whether we are smiling and whether we have a positive or negative attitude toward them, simply by listening to our voices!
There are a variety of ways to make the opening very effective.
You can mail people things. (“We have a special report on how to profit on your note. Would you be interested in a free copy?”
You have sent them something already. (“We sent you a special report on how to profit from your note. Do you have any questions?”)
The Market Study Approach. (“We are conducting a market study on note holders. Do you mind if I ask you a few questions?”)
The Urgency Approach. (“We are buying notes this week only for a special price. Is there any reason you would not be interested?”)
The New Idea Approach. (“We have new and interesting way to buy notes that can give you extra cash, AND you can still keep the note. Is there any reason you wouldn’t be interested?”)
An effective opener depends on your credibility, your manner and your approach.
The Description
The second step is to describe what you can do for the note holder. I have found that it pays to mention only two to four benefits. Note holders have short attention spans and tend to be impatient. They will allow you to move to the close based on the importance of a few benefits.
This is where your active listening skills combine with your ability to communicate the advantages of selling their note to you. A good description is concise and directly meets the needs of the note seller based on your evaluation of why he needs the cash. If you can determine the note seller’s needs, you can craft an offer that will meet them.
“Mr. Note Seller, if we could give you $48,000 now, and you would receive the next eighty-four payments as well, is there any reason you wouldn’t be interested in letting us evaluate your note? We can fund the note quickly, give you best price and service the note for you. Is there any reason you wouldn’t be interested in knowing more?”
The Close
This is the most important part of the telemarketing session: getting the note seller to commit to bringing you the documents. This is not the time to have him sign a contract or commit to any money transaction. It is
sufficient to have him agree to locate the original note, closing statement and mortgage or trust deed and to meet with you, mail, or fax them to you.
Three types of closes are very effective over the phone, according to Dr. Gary Goodman in his book You Can Sell Anything By Telephone!
The “Assumptive” Close
ou assume agreement; you put your self in control of the conversation, so it is relatively difficult for the note holder to say “no.” You might say, “What we will do, Mr. Note Holder is set up a meeting, so we can evaluate the note you wish to sell. We can give you your money in three weeks.”
Notice you didn’t ask if he would sell the note. You assumed it. Unless he says, “I do not want to sell,” you can continue to get him to commit to finding the documents and send them to you or meet with you.
The “Check Back” Close
If you find the “assumptive” close too aggressive, you can soften it by checking back with the note seller to assure him that you are proceeding based upon genuine desire. This is not difficult to do. You can say, “So, I’ll drop by your house tomorrow at 4:00pm to pick up the documents. Is that okay?” The word “okay” is a very persuasive word because the note seller is conditioned to respond positively when they hear it, and they can decline if they want to.
The “Choice” Close
This is the most common type of close, and it is very effective. It offers the prospect the choice between one thing or another. When being asked to select an option, it is unlikely that the note seller will walk away from the conversation with nothing.
The “choice” close is useful in setting appointments by telephone. You can say, “My schedule shows that a good time for me to meet with you would be on Tuesday morning between 9:00 and 10:00, or will Wednesday be better for you?”
It becomes difficult for the prospect to decline an appointment at some time because we have phrased the request in the manner of a choice. If we had asked if we could come by at all, this would make it easy for the prospect to decline altogether.
The Confirmation
When the note seller agrees to meet with you, confirm his
wisdom and understanding of what you expect. You should:
1. Repeat that you will meet him on Wednesday at 7:00pm at his house to look over the loan documents
2. Congratulate him on a wise decision
3. Clarify what you will do and what you expect of him
4. Allow him to ask questions
5. See if you can gauge how likely he is to find the papers and follow through on the meeting
End the conversation on a positive note
“Fine, Mr. Note Seller, we’ll meet at 7:00pm on Wednesday at your house. You will have a copy of the note, deed of trust, and closing statement for me to review. Once again, we work with national companies. We can get you your money in less than three weeks and you can still retain the payments for the next two years. Are they any questions you would like to ask me? Great, I want to thank you for your time and your patience. I will let you get back to Monday Night Football, and I will see you on Wednesday.”
Telemarketing
If you have a scripted idea of what you want from each phone call, you will have a much better chance of getting the results you want. If you have some knowledge of how to make people like you and can develop rapport with the seller, you will be closer to doing a deal.
Remember, the point of the telemarketing program is not to buy the note, but to get the documents. If a note seller will go to the trouble of finding the documents on the note, you can close the sale about 66% of the time.
About the author…
Jon Richards was the founder of NoteWorthy Newsletter, the major newsletter for buyers and brokers of cash flows on the secondary market. It has been published monthly since October 1989 and is the largest paid subscription newsletter in the industry. Jon was the publisher of the NoteWorthy Newsletter until his death in 2003. Jon was a licensed real estate broker, long time real estate investor and an expert in finding, appraising, buying and brokering discounted notes and mortgages. He was the professor and tenured instructor of Real Estate at the College of Alameda in California.
“REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!”
With the implosion of our economy, most Americans have been affected in some way. Whether it’s loss of job, income, house, investments or savings, we’ve all suffered.
What does this have to do with IRAs? Everything! IRAs are our safety net for our financial future and retirement. Social security, for anyone younger than 40, is uncertain at best.
Most institutional IRA custodians offer limited options for you to invest your funds and thus you are at the mercy of their investments. Typically, these are geared toward the investor who desires to have little input on his or her financial future and would rather hire someone to make decisions. Doing this leaves your financial future up to the best guesses of your advisor and the random fluctuations of the market.
Do you want to gamble with biased investment opportunities with an institutional custodian or do you want to be involved in protecting your financial future? Self-Directed IRA custodians like Equity Trust Company allow you to take control of your IRA investments. That is, you provide direction regarding your investments and hey follow your instructions as long as it’s within the guidelines set by the IRS. But, with so many investments available, what should you invest in? When considering your investment choices, keep in mind that every investment has two components that are invariably interwoven: degree of risk and rate of return. Usually the higher the rate of return, the more risk involved. As we get older and approach retirement it’s quite normal to look for more safety in our investments instead of the rate of return. It’s very painful to lose a piece of your nest egg and then try and make up for it when you’re older. When you’re younger, you have more time to recover from any losses that may occur due to higher risk investments. In the end, a loss of capital at any age will severely impact your overall accumulation of wealth.
Real estate and real estate byproducts have been one of the best bets for stability over the long run. Set aside the recent foreclosure debacle that was fueled by runaway lending practices. Real estate and byproducts of this industry such as, rental properties, mortgages and options are still one of the safest places to put monies – IF DONE CORRECTLY!
Owning Real Estate in Your IRA
The silver lining in today’s real estate market is that opportunity abounds for cash buyers. Forget about the days of negotiating the terms of sale, as this REO market is purely discounted cash purchases on volume acquisition. The real estate landscape has changed and knowing which markets and structuring safe investments in your IRA is paramount.
The problem with owing real estate is your IRA is the liability that comes from property ownership. You never want to expose your IRA to lawsuits. It is much safer for your IRA to be a lender instead of an owner. What if you could get the benefits of ownership by being a lender? That is, receive the cash flow and the “buy in equity” without going on a title. That is exactly what can be accomplished by using an EQUITY PARTICIPATION NOTE (EP). An equity participation notes keeps you off the title and is secured by a recorded mortgage. Thus, your investment is protected by the recorded mortgage, which puts you in the chain of title. The terms of the note could be that you receive 50% or 99% of all the cash flow and future income from the sale of the property.
Equity Participation Note Example
Recently, an investor bought a 50% interest in one of our properties. We own the property in a land trust and the investor paid us $30,000 for 50% of the net rent and future cash out to the lease/option occupant.
Here are the numbers: $30,000 paid by Investor The net monthly income, after expenses, is $650 per month. The investor receives $325 monthly, which is cash on cash rate of return of 13%. That’s a safe rate of return and the kicker is when the occupant closes out the option at $90,000 the rate of return will exceed 52% if closed in one year.
There are many variations on the theme of Equity Participation Notes and they are an IDEAL investment for self-directed IRAs. You can allow the investor to receive the first six months or 12 months of cash flow and their return is ever higher. In addition, the percentage of the EP notes could be higher. The key is well-selected properties bought under value that are managed properly from the onset.
Turn Your IRA into a Bank to Ensure a Secure Investment for Absolute Returns – That is, be a pure lender.
Let’s assume a house is worth $85,000 in today’s market, based on a lease option purchase price. There is a tremendous lack of credit in today’s institutional lending environment, which opens up the door for private investors to fill the void. How would you like to lend $35,000 for a first mortgage position on this house at 8% amortized in full over seven years? That would be a payment each month of $545.52. An 8% yield in your IRA is like a 16% yield outside your IRA when you factor in state and federal income taxes. From a safety standpoint, this investment is very sound and your loan to value is approximately 42%. And what if the borrower didn’t pay? You’d have terrific equity in a house and could rent it forever. These are the kind of opportunities that are opening up for investors in every part of the country.
Self-Directed IRAs Provide a Tax-Free Vehicle for Higher-than-Average Returns These types of investments are not available at traditional IRA custodians. They limit you to their own financial products like mutual funds and CDs that just don’t provide the kind of return that alternative investments can. You must have returns that beat inflation. CD’s don’t do that and there is an inherent risk in the stock market.
Only a truly self-directed IRA can offer you the control you need to make the right investment choices to ensure you own financial future. When you combine a strong and secure investment with the tax-free environment offered by a self-directed IRA, you truly have an unbeatable combination. For more information on owning real estate in your IRA through Equity Participation Notes and achieving above average safe yields, sign up at AllInvestorNetwork.com (you’ll also get a free property analyzer). You will be notified of our upcoming webinars and receive our newsletter. Call anytime 813-435-1551 ext. 1000 for more information.
About the author…
Jim Case is a real estate investor with over 30 years of experience and cofounder of The All Investor Network. The All Investor Network (AIN) is a free online community for Professional Real Estate Investors and those just starting out. It has been designed to help you promote and grow
your business. Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.
REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!
Early on in my real estate career I was a novice investor. I was learning the ropes of the business as I went along. In my early days of real estate investing I would pay contractors and subcontractors in full, and in advance, to do some of the rehab work on my properties. The contractors I paid in full, and in advance, would often do inferior work and/or would not complete the work I assigned to them. I would have to fire the original contractor or subcontractors I hired, and hire, and pay a second time, a new contractor or subcontractors to do the work over again properly.
I lost tens of thousands of dollars because the original contractors I hired to do work did the work incorrectly or the work was not completed at all. On several occasions I was forced to fire the original contractor or subcontractors I hired to do a job and hire a new contractor or subcontractors to correct or complete a job the original contractor or subcontractors failed to complete or do properly. This cost me time and money that I could not afford to lose.
I was paying contractors and subcontractors who poorly completed the work I assigned to them, only to have the city building inspector come out and inspect the work and not approve the work that was done. Few novice real estate investors know anything about window headers, framing, rough end plumbing installation, roof work, etc. Because most novice real estate investors don’t know about these types of things, they must do everything possible to safeguard themselves from financial losses due to contractors and subcontractors poor or incomplete work. It is also important to make sure that the work completed by a contractor or subcontractor is completed to the standards of the city‘s building code.
How To Avoid This Costly Mistake
The best way to avoid this mistake is to first of all make sure you pay your contractors and subcontractors by work progression only. Only pay your contractor enough money to start the work assigned to him or her. Never pay the total amount of the work assigned to a contractor or subcontractors in full, up front. You will surely regret it if you do.
Pay your contractor and subcontractors by work progression and pay the balance owed only after the job has been successfully completed AND after a city building inspector has come out, inspected the work and approved the work completed. Pay your contractor or subcontractors the remaining balance owed in full after you receive approval from the city building inspector. This way you will ensure the work is complete and you will only pay once to have the work completed correctly.
The Rehab Construction Money Secret
Who doesn’t put a cushion on the rehab construction cost? I have certainly been guilty of it. I would prefer to have more money in the escrow account for repairs than to run out of money and have it come out my pocket to finish the job. In addition, there is another little trick that you can use to guarantee the job gets completed and puts tens of thousands of dollars in your pocket immediately after you get your final inspection from the private lender and a Certificate of Occupancy from the city inspectors.
For simple math, let’s say that you take out a loan with a private lender to buy a $50,000 home with $10,000 in “real” repairs and an After Repaired Value of $125,000. The lender will loan you 70% of the After Repaired Value = $87,500 less $8,750 closing cost (estimated at 10%) for a total of $78,750. The “real” repairs to rehab the home are only $10,000. However, you put a little cushion in the estimated repair sheet you submitted to the private lender to reflect a repair cost of $28,750. Three weeks later you rehab the home and spend only $10,000. You receive a Certificate of Occupancy from the building department, the lender inspects the home, and it passes the inspection. What about the remaining $18,750 that is in the escrow account? Guess what? The lender has to cut the check to you.
In addition, if you are handy with a hammer and nails and are willing to earn some “sweat-equity,” the Rehab Construction Money Secret works great because you can lower your expenses on your rehab construction cost and put more of the remaining rehab escrow funds in your pocket after you are completed with the project.
About the author…
Kenny Rushing is a remarkable tale of a life turned around. A resident of Tampa, Florida who is an evolving account of transformation that is simply extraordinary.
Kenny is best known for the moving story of his humble and troubled beginnings, and his phenomenal success as a real estate investor – in spite of the seemingly insurmountable odds he faced. He is a phenomenally successful real estate mogul, civic leader and devoted philanthropist. His company, Rehabbers Superstore, Inc., now grosses millions of dollars per year through real estate transactions and investments. Kenny Rushing is quickly becoming known for the life transforming impact his uncommon wisdom is having on the lives of those who have benefited from his knowledge, wisdom, training and coaching. His goal over the next five years is to teach 1 million people how to achieve financial independence and flip their life through real estate investing. Kenny Rushing is a living testament that: If KEN Can Do It – So KEN You!
“REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at info@reapsweb.com and be our guest for free!”
The Problem
Most mobile home parks were built in the 1970′s or earlier, at a time when mobile home park residents dreamed of having their own private jukebox and pink flamingos in the yard. They were the very essence of tacky. And the park names matched the customer. Some were clever take-offs on the mobile home concept, like “Roll-A-Home”. Many were rustic sounding like “Wagon Wheel”. But rarely were they created with any marketing strategy involved. Some are so bad that you have to wonder if the owner was trying to make fun of his tenants or the whole concept of trailer living. Some parks don’t even have a name, just a 4‘ x 8‘ sheet of plywood with a phone number or “Mobile Park” crudely painted on it. Just like the grave of the unknown soldier, they are nameless plots of dirt where tenants live and die and don’t even know how to identify themselves.
The Early Creators
Many of Moms and Pops that still own parks in America don’t know diddle about naming a property. They might be good with a carbine in WWII, or great with laying their own sewer line (until it flows backwards the first time around), or building parking pads with asphalt out of the back of their pick-up truck. But when it came to marketing, they were at the bottom of the class. Just look at the marketing materials from these folks even today. A professional quality flyer is a Xeroxed sheet written by hand with a marks-a-lot (both capitals and lower case letters interchanged). These folks ruled over cheap pieces of farmland with new infrastructure and some trailers, and were not serious real estate investors. They never dreamed their parks would be worth anything some day. The bottom line is that while they may have attractive mobile home parks, they have no idea how to name a property properly. Is it appropriate to have a lousy name on an expensive park?
The Cure
Naming a mobile home park is very easy. Virtually any name you choose will be better than the current one – you are probably 1,000% more marketing savvy than the person you bought the park from. You certainly have more at stake than they did. But there is a strategy to derive the ultimate name if you put a little work into it. Here’s the process: What is the number one sales point for someone moving to or living in the park? Reduce this sales point to one or two essential words. Add the name “Estates?” at the start or end of these words.
For example, if your park has huge pine trees on it that everybody loves, then the appropriate name would be “Pine Tree Estates”. Or if it’s the frontage on Lake Forest, then it should be “The Estates of Lake Forest”, or “Lake Forest Estates”. It’s that simple.
Why a classy name? Because people in mobile home parks don’t want to be reminded of the fact with a lousy name that they have to use among the rest of the world who does not live in a trailer park. What kid at school wants to tell his friends, “I live in Roll-A-Home”? Nobody. Everybody wants to feel important and equal. Give them that opportunity!
Enacting the New Name
Once you have settled on a name, it’s equally easy to put it into practice. First, notify the city of what you are doing, and make sure it is legal to change before you begin. I have never seen a city that had a problem with changing the name. Then, it’s time for a new sign for the park. This time around, get a decent quality one from a professional company, at a cost of about $2,000. Then send a letter to all the tenants about the name change. And you’ll have to change the marketing materials at all of the dealers. The final change is your yellow page ad – so keep watching for that renewal notice. That’s all there it to it. That’s not too hard now, is it?
The Benefits
A new, classy name will have multiple benefits to your property:
- The name alone delivers your sales message to potential customers (remember to put the key sales point in the name).
- The residents will have more pride of ownership when they can take pride in the name of where they live.
- A new name erases the park’s past ills.
- A new name is a turn-on to lenders who look at financing it (remember that the name will be throughout your loan application documents).
- A classy name will help you get a higher sales price when you go to sell the park someday.
Conclusion
The benefits of changing the name of your mobile home park are priceless. The cost is nominal. There is no excuse not to do it. So start immediately. You will be very happy you did. And so will your tenants!
About the authors…
Dave Reynolds and Frank Rolfe have combined forces to bring the real estate market a better perspective on the multiple successes you can have with Mobile Home Parks. Together they have a combined experience of 20+ years and over $100,000,000 worth of deals under their belt.
Dave Reynolds is a successful real estate investor that has specialized in the purchasing of
Mobile Home and RV Parks for the past 12 years. He has the keen ability to quickly assess deals, cut through hype, measure upside vs. downside risk, and make sound decisions. He has owned and operated over 55 Mobile Home & RV parks over the past 12 years in 16 different states. He currently owns over $10,000,000 in mobile home park real estate.
Dave Reynolds received a B.S. in Accounting from Mesa State College in Colorado in 1992 and attended graduate school majoring in Accounting and Taxation at Colorado State University in 1993-1994.
Frank Rolfe was born in Missouri, the “Show Me” state, and has been starting up businesses since high school. He has had two big successes: a billboard business that he sold to a public company in 1996, and a mobile home park business that he sold to various buyers beginning in 2004. He always has several start-ups in the hopper – currently an old time photography business, a web-based educational products business, an art school, and a return to the billboard business. Frank Rolfe holds a B.A. in Economics from Stanford University.
