Re-Habbing Secrets Revealed!

Knowing When To Hold ‘em

and When To Fold ‘em

...Sometimes the best ‘Tool’ is a Bulldozer!

I get a dozen calls a week from “investors” who want to buy “fixer-uppers” so they can do the repairs and then re-sell them for a profit. While the idea is a great one; the reason I put those two words in quotation marks is because if you don’t know what you are doing, you are likely not an investor and if you don’t know what to buy you’re liable to buy a property that ought to be “bull-dozed” rather than “re-habbed”.

Unfortunately this is a topic that is too broad to provide all the answers I know in one article, but I can share some ideas, a couple warnings and a formula that will at least, help you steer clear of trouble or at best, direct you toward profitable projects that will fit your strategy for personal success.

Speaking of strategy; that’s a great place to start. What is your investment strategy? Are you looking for single family homes under $35,000 that you can invest $10-15,000 of repairs and re-sell for $60-65,000 and net a $10-15,000 profit? Or do you want to work in a more affluent market? Or are you interested in buying multi-family property, improving it and then holding it as rental property? Or is commercial property really the thing you have in mind? Do you see yourself developing a run-down strip center into a vibrant piece of revenue generating real estate? One of the quickest ways to lose my interest in helping or partnering with you is to say “yes” to all the above. My first tip: “Pick a horse and ride it!”. Figure out what interests you and then put blinders on. Focus on that and that only. Stay focused! Become the best you can at this specialty! Remember, Specialists get rich while General Practitioners just make a living.

If I just hurt your feelings; that may be good. At least a good segue. Emotional behavior is for amateurs. This is my first warning to you. Do not get emotionally involved in a project. In fact you should always have a figure in mind for what it would be worth to you to walk away today. And, as much as you may like to see a project to the end, you need to be willing to do exactly that! What’s your ‘walk-away-today’ price? If you find yourself unable to part with a deal at any stage of the deal; you are in trouble! Seek help. Get an experienced professional to consult with or partner with you. It’s worth saying again. Do not get emotionally involved in a project.

Formula for success. Now that you know you need to be focused and approach your deals with an “It’s not personal, it’s only business” attitude; the key is to have a simple formula that will allow you to do an initial evaluation of a property. You can adjust this formula to fit your strategy. For now, I am going to ‘adjust’ it to specifically target the type of re-hab project I am most often asked about: the “single family homes under $35,000 that you can invest $10-15,000 of repairs and re-sell for $60-65,000 and net a $10-15,000 profit” strategy that I mentioned earlier.

Begin with the end in mind. For this you will either need to know the market yourself, have access to the courthouse records or to a real estate agent that knows what they are doing and is willing to help. Know (a) what the property will logically sell for in a short time on the market (preferably 30 days or less. This will be a longer period if you are working with higher priced homes, multi-family or commercial property). From this subtract (b) your marketing costs. (I would use 5 to 10%). Now you have (c) the amount you believe you can net from the sale of the property once it is repaired. From this, subtract (d) what you estimate the repairs will run. (If you don’t have an eye for this, you will want to either partner with someone who does, hire an inspector or work with an agent who knows what they are doing.) Also subtract (e) the amount you want to make on the project. The answer, (f) is the maximum amount you should pay for the property as it sits. So, the formula looks like this:

(a - b) = c - (d + e) = f

Providing that you have accurate market information, realistic repair estimates and have approached this; a project that fits your target strategy, with a non-emotional business-like attitude; you now have a solid idea of what to offer. Due to the nature of real estate, I would suggest offering slightly less than you are willing to pay. This will allow the seller to present a counter offer or two and feel like they have done their best.

Don’t be scared! Two fears that keep want-to-be investors from becoming investors are: 1) “What will the seller think if I offer such a low price?” and 2) “How do I know that I can do those repairs for what I estimated in my formula?” First, this is America and in America real estate is truly a free market product. It is worth what someone is willing to pay. No more. No less. Second, if you know what you are doing or are working with an agent who does, you will protect yourself in your contract with contingencies, such as “Contingent upon acceptable property inspection by buyer and/or buyer’s representatives”. (For more on this, see the “Real Estate Articles” section at Middle Man Magazine’s web site: www.Commercial.4T.com)

The key is to stick to your formula, your strategy and your business. If another “investor” is willing to pay more than your formula says a property is worth; let them! There are plenty of deals. Plenty!

Do not get caught up in a bidding war with emotional buyers. The winner will be a loser.

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Randy Lee is the author of the best selling text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.

How To Avoid Taxation and Maximize Profitability
by Randy Lee

I am surprised at how few real estate agents and investors know about the rules that allow for avoiding taxation involved in repeat real estate transactions.

Certainly most investors take advantage of any legal deduction available from expenses and depreciation. However, there is a way to roll from one property to another without incurring taxes. Many wise investors are not taking advantage of the 1031 exchange rule.

What is a 1031 exchange?

A 1031 exchange allows you to sell investment property and defer capital gains and depreciation recapture taxes, assuming reinvestment of 100% of equity into "like kind" property of equal or greater value. Any property held for investment purposes or for productive use in a trade or business generally qualifies as "like kind" property for 1031 exchange purposes.

A 1031 exchange is also referred to as a tax free exchange, tax deferred exchange, tax exchange, or Starker exchange.

1031 exchange rules generally require an investor to identify up to three investment properties within 45 days of the close of escrow of the relinquished property and to successfully complete the acquisition of the replacement investment property, or properties, within 180 days of close.

The Section 1031 exchange is really a sale and a subsequent reinvestment. The deferred exchange is the most popular form of exchange. It involves four parties:

1. You as the owner (seller) of the property being relinquished.
2. The buyer for your property.
3. The seller of the property you want to acquire.
4. A qualified intermediary.

The qualified intermediary is an individual or entity with whom you have not had a business relationship of any sort within the last two years. Therefore, your accountant, lawyer, or real estate sales professional will not qualify as an intermediary.

The intermediary makes the exchange work. Think of exchange money as "radioactive." You may not touch it. Your buddies (like your accountant or lawyer) may not touch it. If you or your buddies touch it, you destroy the exchange and trigger taxes.

The qualified intermediary handles the money and holds the sales proceeds from your property in interest bearing accounts. Then, the intermediary distributes the money as needed to purchase the replacement property.

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Randy Lee is the author of the best selling text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.

The following excerpt is from the book:

"Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing"

by Randy Lee

Available on line @ www.Purpose.4T.com

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Who To Contact at the Bank and...
What To Say when you do.

To this point you've obtained the seller's authorization to contact the bank and negotiate on their behalf. You've also done some initial analysis of the property and the likelihood of it proving to be a good Short Sale opportunity. Now it is time to call the bank.


If your prospective seller hasn't been able to provide you with the address and telephone number of the financial institution that holds a lien against their home; use the Internet to track down the lender. Chances are they will have a web site. Take a few minutes to learn a little about the bank. Obtain as many telephone numbers as possible and then prepare to call.


Before you call be certain to have all of your research ready for reference. Also make sure you have the authorization form (form 1 from Chapter 6) completed and signed by all the parties who appear on the bank's records.


You should have both a telephone and a facsimile (fax) machine. It is important that you are able to fax and talk on the phone at the same time. (A scanner and cable Internet connection would also work.) Have a summary prepared of your findings regarding the house (as in last Chapter) so you're prepared to converse... authoritatively with your contact at the bank.


Call the lender and ask to speak to the "Loss Mitigation" Department. Don't be discouraged if the person answering the phone isn't familiar with this department. I've asked several bank officers, that I know personally, if their bank has this department and they honestly didn't know. It is not exactly a department the bank is trying to publicize! The person who answers the phone may also not have heard of this department; so be prepared to politely and kindly prompt her. Tell her that it could be called the "Short Payoff" or "Work-Out" department. If that doesn't ring a bell; go ahead and tell her that you want to talk with someone about a "Pre-foreclosure". If that doesn't work, describe in more detail what you are trying to accomplish. If you do this in a cooperative, appreciative manor the bank employee who answers the phone will likely find a way to direct you correctly. Be sure to keep a pen and paper handy and write down all the information you receive; including each person's name you speak to along the way.


With persistence, you will be forwarded to the correct department. Once you are speaking to the correct person, be prepared to tell your story twice.


The first time you will do a brief walk through. The only purpose of this story telling is to obtain the opportunity to fax the authorization form to the bank. However, you want to both speak on the phone and fax Form 1 simultaneously. Your script should sound something like this:

"Hello (Insert Banker's Name), my name is (Insert your name) and I am working with some of your clients.

(Insert your seller's first and last names) have a mortgage against their house with your bank. They are in a serious financial predicament and are unable to make their payments. At this point they are (Insert number of days delinquent) days behind and can't see a way out. Their attorney has advised them to file bankruptcy. However (Insert your seller's first names) are honorable folks and they know if they can sell their house; they could avoid filing.

I am interested in purchasing the house. Unfortunately the amount they owe on the house is significantly more than what anyone would be willing to give in the houses current state of disrepair.

(Insert your seller's first and last names) have given me an authorization form allowing me to speak to you in more depth on this matter. May I fax this over now?"


Obtain the banker's fax number and tell them you are going to send it right now. Ask them to put you on hold, while they retrieve the fax from their machine. If at all possible do not let them get off the line. Move forward with this on your schedule; not theirs!


When the banker comes back on the line and says they have received the authorization form; reiterate the story briefly adding a little more color to the picture you are painting. Something like this:

"The situation for (Insert your seller's first and last names) is that (Tell a little of the seller's hardship story here. IE: lost job, poor health, death in family, divorce, etc.), so it isn't likely they are going to turn this around. To complicate the situation, (Insert your seller's first names) haven't been able to keep up with maintenance and now the house has (Insert some of the bad things the sellers told you about the house here. IE: poor plumbing, leaking roof, out of date electrical, mold, etc.), so the house is going to be difficult to sell."

Next explain that you are interested in buying the house, but naturally you couldn't possibly pay the amount that (Insert your seller's first and last names) owe on the house. Ask "would the bank be willing to consider a Short Sale?"


This isn't the first time someone has called this banker for this reason. Most banks have a required package that they need to have on hand in order to make a decision on a Short Sale offer. Ask the banker what forms and information are needed.

Carefully record all the information the banker requests and read it back to her. Ask if the fax number you sent the authorization to is the best one to send this information to? Also ask for her email and tell her you will be sending some photos of the property. Ask if she has a direct contact line and if there is a "best time of day to call". Thank her for taking the time and promise you will be back in touch shortly. Keep in mind that you are trying to forge a relationship with this banker. Be professional, courteous and keep your promises.

In the next chapter we will discuss securing the necessary documentation and information from the home owner to reinforce our negotiating position. For now, let us assume we have obtained all of the information required by the bank and are ready to begin those negotiations. For our purposes, we will assume that we've forwarded the documentation requested by the bank and are telephoning our bank contact to follow up our fax and email.


Remember the banker will have to follow procedure and will only have limited decision making capability. In fact, it is likely that as you get started in short selling, the individual bankers who really need to speak to are guarded by the 'gatekeepers' that answer the phone at the department. Be patient and persistent and you will gradually make stronger contacts.


Your follow up phone call should highlight the reasons why it is in the bank's best interest to accept your offer. Typically this offer will be 40 to 50% of the retail value of the house, so you need be armed with a variety of tools.

Included in this package of 'tools' will be all the information you've gathered about the current owners inability to pay, along with:

• An itemized list of repair cost estimates at retail prices. This is not the time to show how inexpensively you can do rehab. work! Get estimates from big retailers (like Sears) that a bank would be likely to use. If there are no repairs needed, estimate the cost of remodeling the bathrooms or updating the decor. With imagination, it is fairly easy to create an extensive list. (Use a separate sheet for Mold and/or Pet Remediation)


• Comparable sales prices of similar distressed properties sold recently in this same area. The key here is to compare with only distressed properties. Reiterate to the banker that the reason you have used foreclosure sales to compare likely selling price is because that is a more realistic pricing guide than owner occupied, well maintained properties.


• Hardship Letter from current owner (See Chapter 5). If possible also include a letter from an attorney advising the owner to file bankruptcy to avoid foreclosure.


• Net sheet projecting the banks closing costs (a title company can assist you with these numbers) and their net amount at closing at the price you are offering.

Typically you will need to make at least three or four calls to the bank before you get a decision. Most likely your first offer will not be accepted. The bank may choose to counter offer, but more likely they will just ignore you or ask you to make a higher offer because their superiors simply won't entertain your previous offer.

We won't be getting into the dynamics of negotiating or individual property pricing analysis here (See Chapter 12 for other sources of information), but following are some keys to successfully steering your way through this process:

1. Don't make emotional decisions! Your offer should be based on sound, logical strategies (see Chapter 8). Though your initial offer will usually be lower than your 'top dollar', your subsequent offers should never exceed that threshold.


2. Be willing to walk away! There are lots of deals!


3. Establish relationships with the banker(s). Listen to them and learn what are their motives and interests. Structure your offer to include benefits to them (i.e. improved default rate).


4. Create Empathy and Emotion on the banker's side of negotiation by always referring to the home owner(s) by name and looking for reasons the deal will benefit the banker.


5. Be Prepared & Professional. Make the banker's job easy. Make her feel comfortable working with you. Follow the banks procedure for submitting information and offers.

Use a strong cover letter with your follow-up offer(s). Explain why you are will to increase the offer, but why you can't go higher. Give the banker ammunition to 'sell' your offer to her superiors.

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Randy Lee is the author of the best selling educational text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is also an active investor and a licensed real estate agent in the states of AL, TN & GA. In TN & GA he is an Affiliate Broker with ERA Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.

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