Bernard Zick's

Advice for the Impatient Investor

For real estate investors who don't have time or money to waste!

September 2003

In this issue:

Getting Started: Do "First Things First" - You are not a Social Worker (back to top)

One new student wrote, in great detail, about two houses she was interested in buying that are near a college. The first owner wants to sell and is very motivated. She is an elderly lady moving to an old folk's home, leaving all her furniture. The payments are high due to an equity loan on top of a first mortgage.

The second house was described in detail but regarding the owner, she only said: "The house is free & clear; he will be moving out of state in two months or so. He is not willing to lower his price at this moment...selling for $159,800...no appraisal so far. He arrived at the price by doing some comparisons with his neighbors. The house condition is good, and upkeep is great. The houses in this community have good upkeep..."

She wanted to know how to start on the deals. I told her the following:

The first step is to find the real value of the house. If you did what I told you -- select one neighborhood and look at enough houses to know prices cold before you begin -- you will know if this is a good deal immediately and could have written a contract on the first visit.

This is a cardinal error for most new investors. If you find a really good deal, you want to jump on it. How can you do that if you do not know the values in the community? This is up there in the "first things to do" list!

Both deals sounded like a "subject to" purchase to me. At some point you do need to know tons of information about the properties, but, not in the beginning. You have to have the details about existing loans. That is very, very important. The first line of attack is to leave current loans in place. If you don't know what they are you don't know if it makes sense to do that.

Also more important than brick and mortar is an in depth understanding of the owners situation. You need to solve their problem as a part of buying the property. That is what makes deals close.

So if you remember nothing else, remember this:

1. Find out what the real value is or will be when fixed up and the asking price to see if it is a great deal without work or does it need to be negotiated into a great deal (Remember, motivated sellers get less stubborn as time passes.)

2. Find out about all the existing loans and liens. They can be your friend or enemy. Which one is it for this property?

3. You are not there to be a social worker but you DO need to find out what their problem is. If you can, you creatively solve their problem in such a way that you're making a profit, and it works for both of you. You are not in the business of buying real estate. You are in the business of solving problems while making a profit.

Advanced Strategies: How Much Should an Apartment Building Cost? (back to top)

A student sent me a question about apartments...

Q. We still remember the excitement and fun of your seminar in Las Vegas. We continue to pursue our real estate investment business here in western Washington. We got a call from a broker the other day about a property that seems like it would be good for us, but wanted your opinion about the matter.

This is a six building, 70-unit apartment complex located in our area. The broker whom we have been communicating with says that this is not on the MLS yet. He has been asking around as requested by one of the owners. We contacted him recently on another property and that is why he called us. This complex is in a corporation jointly owned by a retired doctor and his wife, the builder and his wife, and the doctor's daughter and son-in-law. The doctor is in his seventies and asked the broker to put out some feelers because lately he has been thinking of the fact that he will not be doing this as a business much longer. An offer was made recently for 2.8 million and was turned down by the one of the members because he felt it was worth more. They want 3.2 million for these six buildings housing 70 units.

They were built starting in 1986. Some deferred maintenance does exist with regard to the six composition roof tops with an expected life of 20 years each. They look to be in good shape now but will have to start being replaced in about three years at about $8500 a pop! Other than that, the buildings look to be very well kept and the management boasts of 100% occupancy and no advertising budget! There are 8 Sec 8 units and most of the residents in these 6 buildings are long term renters. The broker feels that the rents are a bit low, thus 100% occupancy, and could be raised about $ 40 per month (up from $550 for the 58 2 bedrooms and $450 for the 12 1 bedrooms) with out many repercussions. Buildings 1 & 2 were built in 1989. Building number 3 was built in 1990. Buildings 4, 5, & 6 were built in 1991. The broker refers to the depreciation and interest expenses as "funny money" and that is how he came up with the increased NOI (net operating income) of $238,514. He has advised us to put in the offer our request for 3 years tax returns or verifiable and auditable expense records. He doesn't see a problem with us getting those, but is unwilling to ask for them without our offer. He further feels that had they countered the previous $2.8 million offer with a $3 Million counter offer that it would have been accepted and we would not be talking about this property now.

The numbers that we have so far are:

Rent roll $417,486.00
Other income $606.87

Expenses:
Accounting Fees $1,782.50
Amortization Expense $1,272.07
Bank Service Charges $26.00
Credit Reports $662.00
Depreciation Expense $76,414.00
Dues and Subscriptions $130.00
Insurance $8,692.00
Interest Expense $38,488.27
Legal Fees $547.80
Maintenance $24,002.35
NSF Fees $45.00
Office Supplies $458.29
Payroll Expenses $30,509.48
Building Repairs $1,845.04
Returned Securities Deposits $1,829.17
Taxes $38,954.04
Utilities (phone, cable, electric, fire monitoring, garbage, sewer/water) $68,318.92
Total Expenses $259,702.79

NOI $122,390.08

How should we proceed on this? What should the offer look like? Should we hand the broker three contracts, all different in some respect like I have heard mentioned on occasion? Since there are five people (one of the six died recently) involved in the decision making process, I would like to give them choices.

Cheyanne has expressed some concern about the cap rate being too low and the multiplier being too high but if the buildings can take care of themselves, then this might be a good investment for us. The broker would like us to get back to him right away. We have not really thought of how we will fund this investment. What suggestions do you have in that regard?

Thanks again for all of your help with our continued knowledge gathering in this business. We look forward to our next contact with you.

Sam and Cheyanne

A. My first reaction was this is a really long email! However, you told me what I needed to know and I ran some numbers for you.

Real expenses are $174,596, because Interest expense and depreciation are not subtracted out before you find the NOI. With an income of $418,092.87 this gives you an expense ratio of about 41.7%, which is about right. So, the numbers look real. If there is no deferred maintenance, expenses should be 40 to 45 per cent on most apartments. Adding NOI ($122,390.08) plus Depreciation Expense ($76,414.00) plus $8,692.00 gives an adjusted Net Operating Income or NOI of $207,496.

At a sales price of $3,000,000 you would have a yield of 6.9%, which is low. At $3,100,000 the yield is 6.59%. I would be much happier with a yield of 8 per cent which would be $2,600,000. But then, I like good deals and this is a reasonable deal only. To my mind, if he had received an offer for $3,000,000, he should have taken it. You would have to get a loan at around 6% to make this deal look good and that is difficult if not impossible. Add to this that some of the roofs need replacement, and it is even less attractive. Share these numbers with the broker and see what he says. Sad news is, even though the rental market is soft, and rents are down, there are quite a few investors chasing the few projects that are on the market. So, apartments are hot and they may find someone who will buy the complex at over $3,000,000! Do you have $300,000 to $450,000 it will take as a down payment? How is your credit score? If this does not work out, remember, there are more buyers for $700,000 deals than for $3,000,000 deals and the buyers and sellers of $3,000,000 deals can eat you for lunch. Also remember that $15,000 profit a deal on ten house deals will get you there just as well as an apartment deal.

BZ

Financing: Should you get pre-qualified before making an offer? (back to top)

Q. I have couple questions for you. What do I say to my real estate agent when she asks me to bring a pre-qualified letter? She said she needs the letter before I can make any offers. I am in the East Bay area of CA. Basically, my income won't get me qualified for anything. I am also in the process of interviewing other real estate agents to work with me. I fear they are all going to ask me for the letter. What do you suggest I say to them about my pre-approval letter before showing me the houses?

Another question is that I did go to look at two fixer-ups in my area. One got eight offers and the other one got nine offers. The houses actually got bided up more than the owner asked for. In my area, houses usually start from $300,000 to $400,000 or more. These seem like no small figures for me to start with. I just don't know at this point which direction to go. Should I look at condos and multi family homes rather than residential property? These figures are very frightening to me right now.

Murphy

A. No use telling a fib... if you can not get a letter pre-qualifying you for a loan, you will need to find another broker. You will need one that will work with you based on your desire rather than credit. A second approach would be to team up with someone that has more credit and maybe more money than time. If you do want to see how much you can qualify for, go to www.zickhomeloans.com. There is a place to do that.

Some West Coast investors starting out, rent their home or sell it on lease option, then move into the bargain they purchase just because it is so much easier to get a loan on a home you plan to live in. Some have even moved often, getting new owner occupied loans each time.

As to the prices, yes they are high and they will be. Some students go out of town to cheaper places. Some just flip properties. Some partner.

Stop looking for property and start looking for people with problems that selling the property could solve. And once a property is listed in a hot market, odds are it is not for you. When a property gets listed the real estate agent promises the sellers the moon. That usually keeps them expecting the moon for quite some time. You need someone with a problem AND someone that has not been pumped full of high price expectations by a broker.

Don't get me wrong. For most of my students, up to 20 per cent of their deals come from MLS, but the other 80% do not.

BZ

Facts to Ponder: Save Time Dealing with Virus-Infected Emails (back to top)

The current round of email W32/Sobig.f virus attacks seems to be the largest by volume ever. As if junk mail was not enough, now we have these gems. It took awhile to realize that these emails were not coming from the people in the "from" line. The virus used email address books to send out its junk.

I use Norton AntiVirus and experts tell me it is better than McAfee or any other. The moment I start seeing it eat up email attachments I do a live update. (This is a must, and the service is so cheap on a yearly basis.) But recently, as if to add insult to injury, I still had to delete the emails with the disinfected messages (and you SHOULD delete them). I've taken in up to 80 in a day!

My brother Kirk sent me the solution to cleaning up the emails that have had the viruses removed. (Deleting those dead dogs can be very time consuming). If you use Outlook Express, go to "Message" and then "Create Rule from Message". Then, one at a time, tell set up a series of rules that say, when a subject line has any of the following phrases, that email should be "move to delete file." This way, as Norton sets them up for me to delete, once I delete them, they really go away, not to be dealt with again. Here is the list to put in the rule.

Your details
Thank you!
Re: Thank you!
Re: Details
Re: Re: My details
Re: Approved
Re: Your application
Re: Wicked screensaver
Re: That movie

Hope this saves you some time! We had Ken Dwight, a virus expert, check all of our computers before this hit so we are in good shape. Nonetheless, we are still getting 60 out of 150 messages deleted by Norton. So the "move this email to the deleted file" is saving us lots of time. Hope this helps you save time with your emails.

Q & A with BZ: Get Your Questions Answered for Free! (back to top)

You may have to wait, but yes, everyone gets one question answered for free...

We offer several levels of help. Our Platinum Members get a special email address and virtually unlimited help. If you are a Gold, Silver or Bronze level student, just put one of those in the subject line and your questions will be answered in less than 24 hours in most all cases. Gold members have consulting and can ask questions as often as they want and these questions are not deducted from your consulting time, nor do they activate your consulting time period. As a courtesy, we answer all our students "one shot" questions. (Gold and Platinum students have no limit.)

We also love questions from subscribers and if you keep them brief and to the point, most will be answered within a few days. We will tell you if you have pushed the "consulting" button and need to sign up and pay to get the help you need. But most simple, individual questions are easily answered. Just type "subscriber question" in the subject line. DON'T put "remember me?" or "you will want to read this" in the subject line or you will be deleted with all the ads for getting drugs on line or enlarging certain body parts!

Questions can be sent directly to me at bernard@zick.com. If we use the question in an article, we will hide your identity as we have in these various articles in this newsletter that have come from past U.S. Presidents and famous movie stars.

Articles of Interest: Mortgage Rates Head Higher (back to top)

Mortgage rates approached 6.5 percent recently, firms holding low interest rate mortgage paper started selling those mortgages. And the selling by mortgage investors shifted from panic to hysteria. Economic data confirmed a modest acceleration in the economy, but the driver in the rate explosion is institutions trying to get out of a couple of trillion dollars' worth of sub-5.75 percent mortgage-backed securities - investments now likely to be under water for 20 years or so. Some institutions may be near financial disaster.

There is only one question facing borrowers, Realtors and mortgage bankers: How high will rates go before they stabilize? (Anyone asking how soon rates will go all the way back down should instead focus on an alternate career!)

It seems as though rates have risen a lot, but they really haven't, when compared to other cyclical reversals, and considering the true bottom of this cycle. Where was the real bottom? From a simple numbers point of view, that would have been in May when thirty-year, fixed-rate, low-fee loans traded at 5.25 percent. But that drop was caused by the market makers miss-understanding what Greenspan had said. Once Greenspan explained that he had just been thinking out loud, rates went back to the Christmas-to-April 5.75 percent, the true bottom of the cycle.

Thus far in what looks like a new, sustained up-cycle, rates have risen barely .75 percent - peanuts! It seems like a big rise to a market conditioned by three years and three percentage points of rate decline, but it is not.

When inflation begins to rise toward 2 percent, the Fed will begin to toss in .25 percent hikes, but the mortgage market has already priced in the first of that, and the fact may be years away. The Fed's problem today is still too little inflation.

My guess: I think mortgage rates will stay where they are for awhile, until we can measure the strength and inflation potential of this "recovery". To check current rates, you can go to www.zickhomeloans.com.

Articles of Interest: Get Them Out of the House! (back to top)

I get this all the time... "I have a super deal. The person is behind on payments and they will give me their equity if I will bring the loan current, but they really want to stay in the property. Tell me how to do that."

Well old pockets are full of money. I will give the warning one more time.

My rule is to never let them stay in the property. Never. Why? There are many reasons. Before you decide to go ahead, and before I tell you the exception to the rules, read the reasons.

1. You take a very real risk that the former home owner will later claim that he or she did not understand. They thought the money was a loan or worse yet, a gift. When they take it to court, the judge will call them "stupid" (without using those words). In the same breath he will then tell them they won their case because the Judge will not take the chance that they really believed they would get to keep their home! (No Judge wants to kick a home owner out due to something an investor did!)

2. Many states have homestead laws that say no matter what the homeowner does, they still have lots of rights. Be careful. Many states have laws concerning buying from people in foreclosure. If you leave them in the property, you double the chances of confusing what you were doing and running afoul of one of those laws. In both cases, you are better off if you get them out of the property.

3. If you stop to think about it, you are leaving someone in the property that has proven that they don't pay for their housing. Dumb move.

4. How are you going to let them stay? Are you going to have them sign a lease? Kicking the person out (evicting someone) that used to own the place gets complicated. That is when they file a suit saying they did not understand!

5. Are you going to let them cancel your purchase by buying you out? That will most likely violate usury laws. It is easy for an owner to say that you hid the fact you were making a loan by a lot of paper work. The courts will agree with the former homeowner. They will say it was a loan and usury has been violated. (Usury law sets limits for interest charged and penalties for charging too much. Top of the line is Federal statutes called the "Rico Act" that will send you to prison for being in the rackets!).

So what do you do? Get them out of the house, that is what. No money, no nothing, until they are out of the house. Oh, I give them $10 and I have a document I have them sign that protects me, but only $10. Tell you what... if you are so interested in this that you are still reading, go to www.zick.com/Sample-OptionAgreement.pdf for a copy of that agreement. Remember, just get them out of the house first... even if you rent them another of your rental houses, to prove that they really do have a sale and not a loan or a gift or whatever.

Upcoming Events: (back to top)

CORRECTION: In our last issue of Advice for the Impatient Investor we said we are having the one-day "Getting Started and Wealth Building with Options" event two times in Florida in the upcoming months. The first one will be near Ft. Lauderdale on Saturday, September 13th and the second one will be Sunday, October 5th, in Orlando. (I had the date wrong, as if it was going to be on Monday, October 6th.) This has been corrected now on our web site, www.zick.com.

Since we may not publish another newsletter before the September 13th date, contact us now if you would like us to provide you with registration information. Just send email to reitbootcamp@kingwoodcable.net with "September 13th" in the subject line and your phone number in the email. We will do the rest!

The Fine Print... (back to top)