HVCC- Bad Appraisals Are Hurting Real Estate

Did you know that appraisers are supposed to provide a service that accurately estimates the value of a piece of real property? Usually they are reasonable accurate, but the new HVCC system is creating a mess.

The Home Valuation Code of Conduct (HVCC) is creating a mess for all involved- lenders, appraisers, and most of all, home buyers. Why? Because it restricts the free flow of information by disallowing an appraiser any contact with anyone involved with originating the loan.

Here is a "bottom line" story: We have a client we just had an appraisal done. The appraiser was selected randomly, according to the new guidelines. An appraisal done less than a year ago put the property at $110,000. We agreed with the appraisal, as did two separate Realtors that Clear Day Capital works with in the Ogden area.

The appraisal came back at $68,000!!! Why? Because he compared an occupied house with renters paying $950.00/mo for the last 8 month to uninhabitable, bank-owned properties!! He made prejudicial statements about what he felt the values should be in Ogden and indicated that a $17,000 rehab done a year ago was simply "deferred maintenance" and did not add value to the property!!! It appeared that he was looking for the LOWEST POSSIBLE VALUE! Not accurate value, lowest possible.

Was he afraid to "speak his mind?" We don't know, but it has been reviewed by an experienced loan officer, a Realtor who is an Ogden expert, and by Clear Day Capital. We ALL agreed: BAD appraisal.

Now that the lender has the appraisal (which cost $450 and took 3 weeks to complete), it is impossible for that lender to go out and get a new one! Our borrower needs to start from scratch with a different lender and hope that the new one is reasonably accurate. The minimum cost:

- 2 appraisals at $450 each = $900
- 1 month loan extension = $2,000
Total = $2,900

That doesn't include opportunity cost, time spent, and aggravation!

Here is a link to a website about what is happening today with HVCC: http://bit.ly/jZaIO

The HVCC system has got to go, for the good of homeowners, investors, and the residential real estate industry.

Utah Real Estate- Don't Wait!

My biggest complaint about the real estate market in Utah is that the general public is listening to the news instead of doing research for themselves. This is leading to waiting for...what?

Interest rates to do down? They did and they are going back up.

Prices to drop? They did (a little) and they are now flat.

Waiting for a short-sale/foreclosure/bank owned property? They are much fewer and far between than you would think.

Take a look at this posting to get even more insight.

Utah Dave- Why People are losing today!

10 Questions to Ask Before Investing with a Hard Money Lender

There are at least ten questions that you should consider before investing with a hard money lender. Any investment should be made carefully. Passive real estate investments can become a non-passive investment, depending on how you invest. We'll answer five questions this month and five advanced questions next month.

1. “Are you going to broker or borrow my money?”
When your money is brokered on a loan, you invest in a single property. The loan broker is paid a percentage of the deal by the borrower, and then you have the responsibility for the loan and a direct relationship with the borrow.

In most cases if the loan goes bad, you will have to pressure the borrower, go through the foreclosure process with an attorney, and liquidate the property. Even if the loan broker is willing and able to help, your money is tied up in that single property and you have the ultimate responsibility for collecting. You will not earn any interest while you are recovering your capital.

When you loan your money to a reputable company, they will pool it with other investors. If a single loan goes bad, they will recover the pooled capital while you continue to receive interest for your investment. Since they have a portfolio, your money is spread throughout the portfolio and good loans will continue to be made. In this case you will continue to receive interest regardless of the performance of an individual loan.

2. “What types of properties to you lend on?”
Why is this important? It will help you understand the level of risk, the relative liquidity of the investment, the size of the market, and how much real equity is in a property and how that equity is determined. Types include: Single family homes, raw ground, commercial properties, multi-family residential, etc.

There is not enough space to explain all of the implications in investing in each type of property, but here are follow-up questions:
A. Is there “fundamental” demand for this type of real estate i.e. a mansion vs. a 3 BR / 2 BA house in a blue collar neighborhood?
B. What income will the property produce if it needs to be rented? Raw land may not produce any, other properties will depend on location, demand, proper management, etc.

3. “How well do you know the market(s) that you lend in?”
If a hard money lender is an expert in a specific area they will understand property values better, have contacts in the area to help them evaluate an opportunity, know the “rules of the road” (local laws covering everything from foreclosure to building ordinances), and know the trends in the local market.

Do you want to lend money in Chicago when you live in California? What about Knob Lick, Kentucky? Distance creates time and expense for any type of recovery process.

4. “Do you have the proper licensing for the types of loans that you do?”
Commercial loans have no licensing requirements in many states. Residential loans that place a lien against a residential real estate (single family home, condo, townhome up to a four-plex) are considered mortgages. Mortgage lenders in most states require a mortgage broker’s license for their company and a personal license for the employees who originate mortgages. Federal licensing goes into effect in late 2009.

Many hard money lenders casually state, “It’s just a hard money loan, it’s not a mortgage so I don’t need a license.” Wrong. Why does this matter to you, if you invest with an unlicensed hard money lender? Simple answer: Your money is connected to an individual or company that is wide open to lawsuit from the borrowers, and to investigation and prosecution by the state Division of Real Estate. How will a company that shows a disregard for the law ,regard you and your investment?

5. “What position do you lend in?"
The first position lien holder gets paid first, then the second, third, etc. If everything goes well, it doesn’t matter and everyone gets paid. If there is a problem with the loan and the first position lien holder takes it to foreclosure, the first position lien holder gets paid their capital, legal fees, interest, penalties and everything that is owed them before other lien holders receive any money.

Unless there is a tremendous amount of equity, this often means that only the first position lien holder gets paid. So, do you want your money lent in second position?

Coming Soon: 5 Advanced Questions

"The Ten Commandments for Business Failure" by Donald R Keogh

Take a look at this posting to review a very good book: http://tiny.cc/pdn94

Keep Your Tenants, Keep Your Profits!

Finding great people to live in your house or apartments is critical for on-time payments, someone who takes care of your asset instead of destroying it, and having peace of mind as a landlord. So how do you keep these people, year after year after year? We know of one property manager whose average tenant stays 4.5 years!

Wow! How Much Can You Save?

Can you imagine the cost savings? If your average tenant stays 1.5 years, let’s look at the turnover cost over 4.5 years on a unit that rents for $1,000 per month.

Lost Rent 1 Month @ $1,000 Rent-ready costs (not covered by deposit) 250 Advertising, signage, etc. 50 Total Cost every 1.5 years $1,500 x 3 Total Cost Over 4.5 years $4,500

If you can get your turnover rate from 1.5 years to 4.5 years, you save $3,000 or $1,000 every year! If your cash flow is $200 per month, you just saved almost half of your cash! So, how do you keep these great tenants that you found and put into your properties? Let’s look at a few simple ideas.

Basic Tenant Retention Strategies

Treat Your Tenants Like Clients. They are your customers and should be treated as such. Your goal should be that your tenant feels good about your property and their relationship with you as a landlord. Good customer service includes:

Polite communications. Even for late fees, 3 day pay or vacates, etc. Most tenants will pay what they owe, so communicate politely and professionally.

Accurate billing and statements. A confused tenant will not feel good about paying anything. Would you?

Rewards for Good Behaviors- Provide a discount for on-time payments instead of a late fee for late payments, give a rent rebate for referrals to other properties you own, and provide positive feedback on good property inspections. Why dwell on the 2-3 things that may need to be improved when there are 50 things that are well maintained and in great condition?

Reduced Rent Increases- The next time contract renewals come around, bring the tenant’s on-time payment record with you. Talk to them about the “regular” rent increase rate and then reduce it based on their on-time record. Even consider NOT raising rents. Remember, it costs about 1.5x monthly rent if someone moves out! Is a 5% rent increase always worth the risk of a good tenant moving out?

Advanced Tenant Retention Strategies

Thank you gifts. Say “thank you” with a gift at the holidays or a birthday (you have their birthday from your application, right?) for your best tenants. Let them know that you appreciate them and they are one of your best tenants.

Tenant Rewards. Sign up for a tenant rewards service like blackledger.com to reward your tenants. The cost to you is minimal and your tenants win big.

“That’s it! I’ve had it! Let’s sell this place!”

It takes time, people skills, market knowledge and patience to be a good landlord. Sometimes it makes sense to own real estate, but you don’t want the hassle of being a landlord.

If that sounds like you, don’t call your real estate agent. Contact Clear Day Property Management instead. With a 94% occupancy rate for single family homes and an average turnover rate of 2.5 years (and climbing), they can take all of the hassle out of managing your property. Call them at 801.725.9044 and ask them how they can take the weight of property management off of your shoulders and put it onto theirs.

Are YOU an Investor or a Speculator?

Are you a real estate investor or a real estate speculator? What's the difference?!!?!How about a clear cut strategy, a set of goals, and a business plan on how to reach those goals?

When is a Strategy not a Strategy?

All too often when asked the question, “What’s your strategy with this property?” an investor will start talking about:

Repairs Paint FlooringUpdating

Landscaping HVACBathrooms Kitchens

These are short term tactics, not a strategy! These are the things that you need to do toget ready to execute your strategy! Here are some popular strategies:

• Fix-up and sell
• Long term financing and rent
• Lease option
• Long term financing with credit partner
• Pull out equity, create a cash reserve to cover negative cash flow, and then sell after one year to pay long-term capital gains tax
• Fix-up, move in for two years or more, and sell within five years to qualify for primary residence tax exemptions

Who Cares About "Tactics" vs. "Strategies?"

You should! All too often real estate "investors" are really "speculators," without a real game plan. A basic plan should be in writing and include some basics:

• Financial goals- long term, short term, annual, etc.
• Primary Investment Strategy
• See the list above for a start
• Backup plan if the primary strategy for a property is unsuccessful
• Ideal Property Profile
• Price range, including target discount below market
• Location, location, location
• Condition (new, touch-up, fix-up, major rehab, etc.)
• Key team members
• Title officer, appraiser, and inspector
• Real estate agent(s) & other property sources
• Long-term loan broker & short term loan sources
• Accountant, lawyer, and book keeper
• Contractors of all types

The Acid Test

How do you know that you have a business and are not just speculating? Well, can you sayyour business plan in 30 seconds or less if someone asks? For example,

"I invest in multi-family, residential housing in Webercounty for both cash flowand long-term capital gains.

I buy them in good condition for 90% or less of market value and then do everything I can to keep them occupiedand expenses down.

My goal is to have one new property every six monthsand I only sell properties if my business needs a cash infusion."

There is a BIG difference between Investors and Speculators. The biggest is that speculators loose money when the market changes, investors thrive!

OPM To the Next Level- Other People's Money is Just the Start!

Everyone knows about OPM- Other People's Money. If you are a professional real estate investor, you need to know about the other OPM- Other People's Minds!

Whether you are a brand new investor or a seasoned veteran about to retire, akey to success is knowing other people who can help you find, structure, finance, close, hold, and exit properties over and over again. Where can you go to find advice?  Of course, there are the usual suspects:

• Real Estate Brokers
• Loan Officers (Traditional)
• Loan Officers (Short-term)
• Contractors of all types
• Title Officers
• Property Managers
• Real Estate Lawyers
• Financial Consultants

These are all good sources, especially if you are their client!  The challenge is that their experience may be limited in scope to their area of expertise. Ideally, all of these people that you work with will be real estate investors themselves.

 

Give a Little, Get a Lot

Local real estate investment clubs are a great source of free or inexpensive advice.  Where else can you go to find dozens, maybe even hundreds, of other real estate investors who have understand the complete picture?!! Real estate investors are generally generous individuals and are willing to share with anyone who asks for help. 

 

What do they expect in return? Reciprocation.  Expect to give back through advice in your area of expertise, a lead on a good property that doesn’t fit your business model, or maybe just paying for lunch when you meet!

Here is the contact for a club thatt Clear Day Capital attends and supports:

Shawn Watkins  (801) 678-1901   investorsworkshops@comcast.net

Of course, real estate clubs can be found all over the country.  Find a state-by-state listing of clubs at http://www.reiclub.com/real-estate-clubs.php

OPM²

So what is OPM²?  Using other people money and minds!  The two together are a powerful combination.   Make sure that you are connecting with experienced real estate investors.  Your business will grow, and so will theirs!   

 

Reminders About Other People's Minds 

 

• Send an e-mail to Clear Day Capital.  We are all experienced investors and we would love to help you work out a deal or introduce you to someone who knows how to make things happen!
• Stay in touch!  We suggest e-mail and we use iContact.  It’s fast, it’s easy, it’s inexpensive.  Want a free trial?  Click here: Free 30-day iContact Trial

FHA & IRS Cooperate to Allow Tax Credit Bridge Loans

Up to now consumers have had to wait to receive their (up to) $8,000 tax credit.  They were not able to use it at closing to buy down the loan and lower monthly payments.  Up until last Friday, they were also not allowed to use a bridge loan to buy down the loan.  (They are not allowed to apply the tax credit to their 3.5% down payment.)

What happened Friday?  New guidelines from the FHA on how to Use First-Time Homebuyer Tax Cuts at closing.

Interested?  Go to http://tiny.cc/1NVoM  and read letter directly from the FHA website.

Bottom line:  First time home buyers who work with FHA approved lenders can get a bridge loan so they can apply their tax credit to reducing the loan. 

Expectation: First time home buyers will be able to pay more for properties.

Thanks to Shawn Watkins at Investors Workshops for the heads up.

http://investorsworkshops.blogspot.com/

http://www.investorsworkshops.com/

Passive Income- The Investor's Dream Part 2

Maximize Revenue, Not Just Rent

Last month’s newsletter was all about how to get the highest possible monthly rent But there is more to maximizing income from rental units than the monthly rent. This month we’ll look at late fees and “no deposit” leases for additional revenue and how to minimize vacancies to keep the checks coming in every month.

Late Fees
Late fees can be a very important increase to your revenue every month. Here are some ways to make sure late fees are charged and collected:
-Spell-out late fees in your lease, including when:
-Rent Past Due “Rent received after 5pm on the 1st day of the month is past due.”
-Late Fees Charged- “Late fees will be charged if rent is not received by 5 p.m. on the 3rd day of the month.”
-Clearly identify late fees. For example: “Tenants will be charged a $50 late fee for rents received after…”

- Collect late fees first, then the rent
- When a tenant pays, credit late fees first
- If late fee is not paid, then the balance of the rent is still due. Since rent is still due, you can take legal action to start the eviction process

Communicate
-If a partial rent payment is made, rent is still due and late fees will be charged
-Once the rent is past due, send an invoice for the late fees
-The good news about late fees: They can be an important source of income. Some landlords feel that their best tenants are the ones that pay late every month, but always pay with their late fees. The late fees can add up to another month’s rent each year.

“No Deposit” Leases
“No Deposit” leases can generate incremental income. How? Offer two choices: lower rent with a deposit or higher rent. The higher rent should give you enough incremental income so that in about six months you have more income than the amount you would have received for the deposit.

A lot of well qualified tenants can pay the extra rent each month but have a really hard time coming up with a deposit and will go for the more profitable option. Here are some examples:

-$675 monthly rent with a $340 deposit or $735 rent and no deposit
-$1,200 monthly rent with a $600 deposit or $1,295 rent and no deposit
-$325 bi-weekly rent with a $325 deposit or $360 bi-weekly rent and no deposit

In each example you would collect twice as much extra rent as you would have as a deposit within 1 year. And guess what? You don’t have to give back the monthly rent when the tenant moves out. There will be no debates on how much of the deposit should be refunded and if repairs are needed you have a lot more money to make them with.

Some of you will say, “What, NO DEPOSIT? What if the tenant trashes the place?!!?” Think about this:

- Tenants who trash a property usually do a lot more damage than a half month’s rent. How far does $400 - $600 go to re-carpet and re-paint even a small unit?
- Even good tenants often say “Here’s my notice. Use my deposit for the last month’s rent.” Of course they have a legal obligation to pay the last month’s rent, but what is the cost of dragging them to court to collect?

Minimizing Vacancies
Of all the topics on how to maximize revenue, this may be the most important. Why? Because if you try to get an extra $50 rent on a unit, but it creates an additional one (1) month vacancy, you just wiped out a year’s extra income on a $600/month rental. Do the math:
     Extra $50 Rent x 12 months = $600 per year      
                      1 Month Less Rent = $600

How do you keep your units full and then re-fill them quickly when someone moves out? Volumes have been written about how to minimize vacancies, here are a few key ideas:

Keep Your Tenants: Turnover will kill you.
Pre-rent the Unit: Start advertising immediately when you receive notice. Not ready to show? Get a list of people to call when it is ready.
Develop a Waiting List: Always advertise your units. When you don't have a unit, keep track of who they are and what they want. Call them when you have what you want.
Pay For Referrals: As soon as you know of an upcoming vacancy send out an e-mail blast to let friends, family, and especially current tenants to let them know about your unit. Offer them cash to find your next tenant!
Fast Rent Ready: Goal: New tenant move in the day after your old tenant leaves. The current tenant leaves the property rent-ready. That won’t always happen so you need an action plan for clean-up and fix-up. Even major fix ups, such as junk removal, new paint, and new carpet can be done in a week if planned properly.

Give Your Real Estate Investing a Boost in 2009

Want to give your real estate investing a boost in 2009?  Thinking that the best way to make it happen is learning a new investment technique or getting better pricing out of Home Depot?  Well, that may help but here is another idea: Find like-minded people who share common goals that you can help, and in turn are likely to help you!  In other words, Network!

Take an inventory of who you know and who else you still need to meet!

• Property Sources- so you can find more properties in less time
  
  • Realtors who specialize in working with investors
  • Banks that have REO
  • Investors who wholesale properties
  • Internet web sites that list investment RE

• Financing Sources: so you have the right financing when you need it
  
  • Friends and relatives with capital to lend- long term or short term
  • A long-term mortgage broker that specializes in working with real estate investors
  • A bridge-loan broker to provide funds fast for quick turn-around opportunities
  • Commercial loan specialists for your larger projects- one for short term loans and one for long term loans 

• Property Improvement and Analysis Help: So you can turn a property as quickly as possible
  
  • Roofers, framers, drywall, electricians, plumbers, etc.
  • Landscapers, sprinkler specialists, and concrete people
  • Appraisers and selling agents

How do you meet people?  This is step one on the way to building a network.  Here are some suggested sources for building a network:

• Send an e-mail to Clear Day Capital.  Tell us who you are trying to meet and we’d be glad to introduce you
• Join the Utah Apartment Association and attend their meetings and ask other members about their network  (click the above link to learn more)
• Real Estate Investment Clubs.  The are many around and you can meet people at all of them. 

How do you stay in touch?  This can be the hard part!  Why? Because you’ll build a list of hundreds of people!  How do you keep in touch with them?  Here are some suggestions:

• E-mail:  We use  iContact.  It’s fast, it’s easy, it’s inexpensive.  Want a free trial?  Click here: Free 30-day iContact Trial
• Invest in your education.  Click hear and buy a copy of Jeffery Gitomer’s Little Black Book of Connections for lots of great ideas of how to make and keep networks.

Networking… help and be helped.  The key to successful networking is to first ask what you can do for the other person.  Sometimes the answer is obvious.  For example, you can buy a house from a real estate agent who specializes in working with investors.  In other cases, it may have nothing to do with real estate!  For example, you give an investor an lead on a reliable auto mechanic and that is your connection.

Sometimes there is no good connection… that’s OK! Move on to the next person that needs help and can help you!

Can Clear Day Capital help you make a connection? E-mail us at info@cleardaycap.com and let us know who you want to meet.  We’ll do everything that we can to create the opportunity for you!

P.S.  Want to learn a lot about real estate?  Contact Shawn Watkins at investorsworkshops@comcast.net to join him at his round-table discussion real estate club!