HOW TO MAKE SERIOUS MONEY
by Jay@KeyMenu.com 949-497-3600
c/o TRUSTEE 668 N. PCH #400 Laguna Beach, CA 92651
Real Rules for Real Estate
1. Buy Local
- It is imperative that you buy locally. This ensures that you are
familiar with the environment, traffic, proposed changes affecting the
neighborhood, sales patterns, area quirks, politics, problems, number of
children in the area, ethnic diversity, conflicts, lawsuits, schools,
shopping, freeway access, churches, parks, upward (or downward) trends.
2. Buy the Cheapest House in the Neighborhood
- It is best to buy the lowest priced property (at an additional
discount) in any neighborhood. Almost all potential buyers want to live in
affluent neighborhoods when their budget dictates otherwise.
- I would not buy a 900K home for a 50% discount in a 300K area. I
would be very happy to buy a 300K home for 350K in a 900K neighborhood.
3. Establish True Value
- Most real estate agents are satisfied with three comparables.
Appraisals usually include three comparables to support their estimates of
fair value. The most common comps are those that emphasize similarity of the
house structure and style, rather than location. Also, comps must be
"recent" (not too far back in years of sales activity) and must
actually have been successfully sold.
- Many appraisers will use comps from different neighborhoods, far
from the subject property, in order to be as "similar" as possible
to the property in question.
- Factors such as (a) different square footage, (b) pool, (c)
garage, (d) solar, (e) two-story vs one-story are reasons for using (more)
similar comps from outside the local neighborhood. FYI...The appraiser may
not know about potential sales (or expired listings) if they were "FSBO"
(For Sale By Owner).
- I require twenty comps, rather than accepting faith in three. If
twenty comps are not available, then I want to go back year-by-year in the
same neighborhood, adjusting for differences in sq. footage, pools, garages,
outrageous listings that expire, FSBOs, and yearly appreciation. Twenty
comps gives me accuracy and confidence that supercedes what typical
"Real Estate Agents" and appraisers have to say about any specific
- My twenty comps also give me purchasing support for my purchase
offers and ultimately for my sale (resale) of that property. I might even
use my data to convince an appraiser of the value when I resell it --
thereby making the appraiser try harder to validate my stated price. If I
give the appraiser a copy of my resale contract, he also has more reason to
agree with my value.
4. Get a "Hungry" Purchasing Agent
- Get a "hungry" real estate agent to locate your comps;
one that is aggressive and will work hard for you. Find someone with an
optimistic personality and sales ability and good language skills.
Experience and years of service are not always key... hungry
is the answer.
- To be successful at getting the right agent, you need to
interview ten or more agents to find a truly motivated (and able) person who
is persistent enough to get complete contracts. It is also important that you
declare your intentions regarding (a) twenty comps and (b) the cheapest
house, so that they understand your minimum requirements. You need to tell
them that you are prepared to make an offer (or more) per day until you
secure an acceptance. They need to agree that they can have many offers
rejected, yet "stay the course" until successful.
- One saying that I firmly believe is, "You may have to
process ninety-nine 'NO!' responses before you get one 'YES!'" If in
fact, someone agrees to your first offer, you may not have gotten that
attractive a deal.
- Be sure to tell the agent that:
|A. Fixer-uppers are okay
B. Layout is okay
C. Any bad finance terms are okay
|D. Anything regarding color is okay
E. Built-ins/lack thereof are okay
F. Flexible close and escrow whenever
- The key is to get the property cheap. Then get further
reductions for repairs, financing, problems, late move-outs, holding time,
history, or rumors.
- Your offer of flexible close of escrow and occupancy can
simplify negotiations for further discounts, payoff holdbacks, and rent
5. Live In the Property
- These rules may apply to other types of property; however, in
this instance, they are specifically discussed for residential properties.
The key of this discussion is to understand that it is best to actually live
in the first property you acquire.
- If this is your first real estate transaction, you are expected
to have serious doubts about your potential for success. The fear that is
associated with such a large purchase is natural. This fear will gradually
be reduced with each successive purchase, but do not make a second purchase
until you sell the first one and
long after "Buyers Remorse" is a memory.
- Living in your first investment property eliminates much worry regarding
damage to a vacant house, property management, holding time costs, and
allows you to increase value by continuous repairs and improvements. A lived
in appearance and aroma can have positive effects with a buyer.
6. Holding Costs
- Look at the average holding periods of other properties sold (twenty
comps) and be sure to reduce your price offers according to the following
- Value of Property
- Hold Time
- Improvements and Repairs
- Sales Costs
- Offer Price
(6 months @ 2000)
- In the above example, hold time of six months at 1% of purchase price per
month is typical. Your area comps may be different, but 1% of value is a
good standard rate per month. Now, if you are living in the property, you
might argue that you do not have holding costs, but that's a bad argument.
If it was vacant, you would have to clean, carpet, arrange movers, get
utilities, expect vandalism, and undergo other unexpected expenses. After
that experience, you will never ignore holding cost estimates again.
Besides, you are doing this as a "business" and the rules are your
Business and Operations Management philosophy. It is simply a business plan:
ignore it and you will risk failure.
- FYI: You may be able to reduce costs in all of the various estimated
- For example: hold time may be small, repairs may be less expensive than
expected, and maybe you can "trade" for improvements from friends
- If you buy title insurance with a "resale provision," some
companies only charge 10% of the second (your resale) title insurance fee.
If you use the same escrow company, 50% of the resale escrow fee would be
reasonable. You must get title and escrow discounts in writing prior to your
purchase completion. If you are lucky enough to resell the property
yourself, you have "earned" the (savings of) sales commissions.
Another way to look at it is to realize you could have been earning income
selling another house, or a car, or working, selling motor homes, with the
same time and effort, and been "paid" a commission to do so. Do
not think for one minute that selling your own house "saves a
commission." That implies that you are willing to work for free.
- I don't recommend that you sell your own properties without a real estate
agent. It is almost always easier to get a higher price and a faster sale,
selling things that belong to someone else. People easily believe sales
pitches from agents that provide a selection of properties, that can say
negative, as well as positive things about various properties, thereby
taking pressure off of only having one property to sell.
- Agents are also in excellent negotiating posture to relate offers and
counter offers, enticing alternative methods and compromises. Buyers and
sellers without agents come to a finish quickly and have very little areas
- There is one exception to the need for a real estate agent, and that is if
you are living in the property and do not care how long it takes to sell.
7. Repair and Improvements
- The best fixer-upper is the one you sell before you fix it up. I've seen
many investors that refuse to show or sell their investment simply because
they haven't done the work yet. They are determined to do the actual work,
foregoing the same profits until a later date. If you do end up doing
repairs and improvements, be sure to only work on areas that will improve
value (sales price) at a 2 to 1 Return on Investment or more, such as:
- Return on Investment: 10 to 1 return
- Entrance Door, Doorbell
- Porch, Porch Light
- Entry Flowers, Steps
- Mailbox, Doormats, Entry Decor
- Return on Investment: 6
to 1 return
- Windows, Rear Entry
- Entry Walkway, Front of House
- Gate, Driveway, Garage Door
- Interior and Exterior Paint
- Return on Investment: 3
to 1 return
- Front Lawn, Front Fence Repairs
- Entry Tile
- Replace Worn Carpet, Kitchen Upgrades
- Improve Floor Tile
- Return on Investment: 1
to 1 return
- Rear Yard, Move Interior Walls
- Convert Garage to Living Area, Convert Patio
- Change Colors or Styles of Tile, Carpets, Kitchen Cabinets, and
RETURN THAN YOUR COSTS
- Swimming Pool, Jacuzzi, Fountains, Closets, Barbecues
- Rear Landscaping, Fencing, Change Colors, Lawn Furniture
- Heaters, Air-Conditioning, Rear Fences, Intercoms, Screens
- Only repair or improve in neutral colors or earth tones. Many buyers
already have colored furniture and accessories and may not like the colors
you've chosen. Mixing colors of any kind with earth tones and shades of
white are usually acceptable to the majority of buyers. They can resolve to
make do and later to modify over time.
- Generally, emotions and first impressions will allow or restrict sales.
Most purchase decisions are made by the time prospects are just inside the
front door. Very few buyers change their minds from a negative first
impression (that sometimes occurs in the first sixty seconds).
8. Get a Good Selling Agent
- Usually good purchasing agents (Rule #4) are not automatically good
- The purchasing agent should be proficient at easily acquiring twenty
comps, documenting potential properties and FSBOs, new properties on the
market, potential foreclosures, potential listings, difficult sellers,
unusual properties, desperate sellers, and crime properties. They are
specifically "in a rut," doing many of the above things.
- Selling agents usually have a better knowledge of chain of title, escrow
procedures, traditional financing requirements, appraisal procedures, zoning
and governmental requirements, property taxes, earthquake and flood zone
issues, truth-in-lending disclosures, open houses, and toured properties.
- It is highly recommended that you find an agent that has many of the above
qualities, abilities, knowledge, and has motivation, and salesmanship.
- By way of these rules (#1 to #10), you can be reasonably assured that you
will have success. While it may be difficult to find a "willing and
able" agent, it is well worth the effort to interview many agents
before committing to a single agent to perform this plan. Do not use more
than one agent at a time for either buying or selling. They will trip over
the same properties and will stop working with you.
- Many (certainly the majority) of agents are content to accept whatever
"easy" business that comes their way. Usually, this means friends
and neighbors and friends of neighbors. Almost all agents become either a
"Listing Agent" or a "Buyers Agent," thereby getting
into a pattern that narrows performance and opportunities. Most all agents
are trained in traditional bank financing, and many cannot understand or
participate in seller financing or creative financing. Many agents have such
strong opinions, that they eliminate discussion of discounts, repairs,
twenty comps, or flexible financing. Some even dismiss the idea flexible
appointments and showings! Find someone else to earn all the commissions on
your purchases and resales.
- You must find an agent to pursue your goals, your way, using these rules.
When you find the right agent, they will ask you for a copy of these rules,
guaranteed! Hide this last statement and start interviewing agents and find
out for yourself. Almost all agents will be profoundly enthused or dismayed
by the rules. Very few will be non-committal.
9. Buy and Resell Mathematically
- The basic idea is to avoid emotional decisions; leave emotional decisions
to others, keeping potential profits for yourself. This does not mean
treating anyone unfairly. In fact, my motto is to treat others as you would
have them treat you. Always imagine how you would feel in their position.
Instead of limited options, present multiple options, making them (and you)
even happier. I am happier when they are happier, and I am sure unhappiness
is universal, as well.
- They may not be very happy if I simply offer a discounted price for their
property, so purchase prices are negotiable. Following is an example:
Property value as determined by comps minus repairs: $200,000
|Owner Will Carry
|Close of Escrow
- Note how much flexibility is available. In fact, too much! Keep in mind
that your agent usually presents the offer to the owner and the owner's
agent. It is best to offer number one initially and to suggest verbally that
they counter offer with something like offers 2, 3, 4, or 5.
- The best time to make a profit on a real estate transaction is when you
buy it. This is much better than waiting until the resale occurs. If you
acquire the property at a significant discount, you make a profit going in,
and can still make money going out. At the very least, you are getting
somewhat of a guarantee that there will be an ultimate profit.
- MYTH #1: Buy, hold until value increases, then sell.
While it may be true, you end up holding a property for a period of time.
AVOID HOLDING TIME! If you bought it for 85% of the true value, SELL IT NOW,
hopefully for 110% of the true value.
- MYTH #2: Buy a fixer-upper; fix it; then sell it. You
have allocated a budget for repairs and improvements and a period of time
(hold costs) to finish your project. But, why wait? SELL IT NOW, and be
happy to reduce the price by (almost?) the budget allocated. Get the same
(or more) profit now...
- MYTH #3: Save money by repairing or selling yourself.
Just because you have some skills to repair or make improvements yourself,
or can get materials for free, or are a "Born Salesman," does not
change the value price of your offer, or price (wages) you are willing to
work for. Would you rather be working "for free" on your repairs
or get paid $85.00 per hour working on a real job?
- MYTH #4: Buy and then wait for gradual appreciation.
Prices do not necessarily gradually change. They can instantly go down, such
as when industry has a layoff, or a plant closes, an earthquake occurs, or a
military base closes or is deployed for war. They can also go up instantly.
Such is the case when the only three house in the neighborhood that were
priced at: (a) $200,000 (b) $210,000 and (c) are not priced at (a) $210,000
(b) $220,000 and (c) $221,000. It is very possible that the sellers of (b)
and (c) will increase their listing price when you make them aware of your
listing price. At the very least, they may become much more firm on their
price, now realizing that they are compare to you!
NOTE: The property (a) is the property you bought, then changed the price from being the cheapest to being the most expensive.
- MYTH #5: You cannot sell for higher than true
value. Terms, flexibility, and emotions determine price. If all of the
competition requires 60 day closes of escrow, and you will close quickly,
you can usually sell at a 2% higher price. If all of them require new
financing (and qualifying) and you don't, you can usually sell for 3% more.
If you offer browns, whites, and neutral colors, and they have red or yellow
or other bright colors, you can usually sell for an additional 2%.
- MYTH #6: The washer, dryer, and fridge affect the price.
Always ask to include items like the washer, dryer, refrigerator, lawn
mower, pool equipment, and patio furniture when buying. You can always give
up that request during a counteroffer. Many times, they have no further need
of those items and are burdened by their disposal, anyway. NEVER (initially)
offer those items on the resale listing. Quite often, buyers already plan to
buy those items or already have them. Find out, then offer to sell them with
the deal or include the items, instead of lowering your price.
10. Be Flexible
- Flexibility includes close of escrow date, occupancy dates, interest
rates, down payment amounts and payment dates, length of owner-carried
balloon financing, structured principal payments, contingencies, the ability
to refund deposits, and even the size of deposits. Be prepared to show
credit reports, resume, asset lists, and/or references. Basically, be
prepared to prove that you can complete the transaction and that you are a
completely safe buyer that virtually eliminates any seller risk.
- Before you make any offers, have assurances that you have ready cash and
are prepared to close escrow immediately. Be absolutely sure that you can
keep future payments current for at least 12 months in advance. Be sure that
you can get the repairs and improvements done within you budget. Have a few
thousand dollars available for unexpected events or emergencies. Have more
than one resource available for each repair. Do not expect to rent the
property! Remember one thing..."Renters are scum!" Repeat that to
yourself as often as necessary. Remember, you should be living in your first
property. However, never rent your properties, unless you are prepared to
hire a full time property manager and you have at least 16 units or
commercial investments. Less units are simply an aggravation and more
trouble than they are worth.