Master Real Estate Course

Lesson #12 Highest and Best Use

Objective:

• To be capable of determining the most profitable use for a property.

1. Buy six properties. 2. Love your tenants. You buy a property and you pay off the mortgage. Then you enjoy the income. Then your children enjoy the income. Then your grandchildren enjoy the income. Your great-grandchildren will enjoy the income. When does this end? Now, you know why real estate investing is so great because it never ends. In a hundred years, your offspring will be saying, "Thank you great-great-great-great grandpa or grandma!" Start your family dynasty. This is beyond the comprehension of average people. You can do this. You deserve this.

Background:

One of America's greatest real estate geniuses, a visionary, was William Zeckendorf. He made tens of millions of dollars during the forties, fifties and sixties, when millions really were millions. He lived and worked in New York City, where he was a notoriously flamboyant character. His trademark was to be driven in the biggest limousine and to smoke the biggest cigars of anyone in the city. For a few decades, he succeeded.

Though our goals may be more modest, Zeckendorf has a lot to teach us. He was a real estate genius. Zeckendorf was a visionary and an opportunist. Here was his genius:

Zeckendorf looked at real estate not as it was, but as it SHOULD be.

This is a very important sentence. Again, Zeckendorf would look at real estate not as it was, but as it should be. When your research brings you to a point of confidence so that you start seeing higher and better uses for property than the current use, you will have developed a very profitable skill.

Zeckendorf would see a ten-story apartment building and think that there should be a new thirty-story apartment building in its place. He would see a thirty-story apartment building and think that there should be a thirty-five-story office building. He rebuilt New York City. He rebuilt Washington, D.C. He rebuilt Montreal. He was a big thinker.

He saw himself as a modern day Rip Van Winkle. He would think, "Ok, if I went to sleep for the next ten years and woke up, what would I see?" Then he knew that every change he saw was a profitable real estate opportunity. The technical real estate term for being Rip van Winkle is highest and best use. Is the current use of the property the highest and best use of the property? If something else would be better, will the governing bodies allow the change?

You need your Mastermind Alliance. You need contacts in politics and government. You need the right attorneys and architects. But, most of all, you need the vision and the ambition to pick up the phone and to start to make things happen.

You can achieve your investment ambitions without the complications of being a wheeler-dealer. You can buy your six properties at the asking prices. You can quietly manage your investments. You can retire rich in twenty years. There is nothing wrong with this approach. This is a good, safe way to proceed and you will prosper. It works. However, if you possess a visionary inclination like a Trump or Zeckendorf, then have fun crafting creative deals that change the landscape.  Working on deals and developing new projects can be interesting and fun. Even if you only have the time to initiate the deals, you can find partners to see the projects developed. Just being the idea person can be very profitable.

Think of yourself as a Zeckendorf in your investment area. You be the modern day Rip van Winkle. You be Donald Trump. Think about the possible development opportunities around you.

   Should the Dairy Queen be knocked down to make way for a McDonalds?
   Would Burger King move near the McDonalds?
   Should the old service station be turned into a small shopping center?
   Can the old factory be converted into a nursing home?
   Is the Kmart ready to go out of business?
   Can we build forty houses on that farmland?
   Would Holiday Inn be interested in the old Shady Pines Motel?
   Does the Dunkin Donuts want to expand?
  Is your local Starbucks busy enough to warrant a second or third store in your small specific investment area?

Do you have a contact with enough money to compete with Starbucks?

   Does the bank need a drive through?
   Would the old movie theater make a nice weekend flea market?

Again, never forget that your edge is your research knowledge. What is a two-family house worth on the South Side? What is a four-family house with eight garages worth on the North Side? What is a five-bedroom mansion on Main Street worth? You must be an expert at valuation and this takes time and work. Then, you can proceed. And, markets evolve, so you must keep your research up to date.   Every great enterprise begins with one person's idea.

You are a warrior. You are alert and aware. You are reading and thinking and listening. Almost every business transaction involves real estate. Smart real estate investors anticipate change and put themselves in the middle. What franchises are missing from your area? What businesses have passed their prime? In the opening and the closing of businesses, there are potential real estate profits.

   What information can you learn from the articles and ads in your local newspaper?
   What are people talking about?
   What is the condition of local buildings telling you?
   Where is the path of development in your area?
   Are there any vacant buildings? What's being done with them?
   What is the state of the local economy? People moving in or out?
   Where is infrastructure (highways, roads, bridges) being added?
   Get in the middle of the action.

How To Determine Highest And Best Use

   "I just converted one of my buildings to condos and made a fortune!"

   "My warehouse space is being snapped up for artists' lofts at twice the rent!"

   "I'm going to sell, and lease back the land under my apartment building."

There are always enough new ideas around to make the real estate investment business exciting - and to make a change of use tempting and potentially profitable. When is a change in the use or operation of a property warranted? What can be done to bring the property closer to the ideal of value: highest and best use.

We define the concept of highest and best use as that use of the property that will yield the greatest economic return over a given period of time. Determination of highest and best use requires a continuing reevaluation of your needs, the property's potential, and other outside influences. You must ask the following questions before making any major changes:

   What are my financial objectives regarding this property?

   What are my realistic options for the property?

   What outside influences may affect the use of the property?

Let's examine these questions and list specific actions that may help us to reach the proper conclusion.

What are my financial objectives regarding this property? You should consider only those changes that fit your financial plans. For instance, a small addition to net income may not justify a change requiring greater risk or a longer time commitment. Highest and best use is an opinion of value. The advice of friends and experts may differ. But it's your investment; therefore, yours is the only opinion that matters. From your personal financial viewpoint, you say either, I'm satisfied with the property as is, or I want the property to do more for me.

   Here's how to determine which changes are in your best interest:

   Conduct an annual review of your investment goals and objectives.
   Conduct an annual review of your net worth and cash flow.
   Arrange for your Super Agent or your Mastermind Alliance or your mentors to review your entire investment portfolio each year.
   Arrange for a tax consultant to review your entire investment portfolio each year.

   What are my realistic options for this property? You should keep abreast of new ideas and trends in the business. Here are some of the options you might consider:

   Converting to condominiums.
   Converting to cooperatives.
   Leasing the land under your buildings to low-risk investors.
   Developing a time-share program.
   Installing energy-saving devices, or separating utilities.
   Rehabilitating or upgrading to improve gross income.
   Refinancing to gain tax-free capital for further investment.
   Improving your maintenance scheduling to reduce expenses and add to net income.

You can evaluate these options on a specific property by researching new ideas and strategies in newsletters, trade publications, books and on the Internet; and by discussing the specific options with your Mastermind Alliance.

This mission should be called The Grandmaster Real Estate Course. It is all the opportunities that are going to separate you from any competition. You see a two-family and everyone else sees a two-family house. But, you envision expanding or developing that two-family house into a four-family or six-family house. Now, you could be talking real, real, real money.

As we talk about highest and best use, you must consider that the present use of the property may be the best use. Even if there is a better use, you can still decide that making a change is not in your personal interest.

Let's say you buy a two-family house on a large lot for $200,000. You get approvals to knock it down and you have a modular sixplex erected on the site. You spend lots of money on amenities and landscaping and you condo the sixplex. Let's work the deal through in our minds.

   You buy a two-family for $200k.
   You put $100k into plans, approvals, demolition and site work.
   It costs $400k to build the sixplex.
   You sell the units for $200k each.
   You pay the real estate agent and how many Ks [thousands] are left for you?

 
 This is not a Disney fantasy. This is a story that plays out day after day, but for whom? You've got to believe. You've got to know the market. You've got to be a person of action who sees what others don't see. This is simply you putting all of your research work into play. How do rich people get rich? Well, this is one way.

Large Lot

Every city and town has zoning rules. Usually these rules specify how much land is required per building unit. Let's say in your town, it's 4,000 square feet per unit. You look at a two-family house on a 13,000 square foot lot. You automatically think expansion. You can add a third unit.

   How much more is a three-family house worth than a two-family?
   What would your conversion costs be?
   What would your profit be?

Of course, zoning laws can be appealed to the Board of Appeals. Is there an affordable housing shortage in your investment area? Maybe the Board of Appeals would approve a four-unit or a six-unit building on the site. Maybe, they would approve eight units or ten units if you agreed to make two or three units affordable.

   Do you know any board members?
   Can you hire a local attorney who specializes in zoning matters?

If the property is a small two-family house, does the land area and location justify your knocking the building down and putting up a new pre-fab duplex? Could you then convert the two duplex units into two condos?

If you read it a hundred times in this course, it isn't enough. Most average people are doing nothing! Keep thinking. Keep researching. Keep looking for creative ways to make money. Be a person of action and succeed.

What if the zoning is for 4,000 square feet and you have 10,000 square feet? You have an extra 2,000 square feet. The Board of Appeals turns you down for more units. Can you put garages up for added income? Can you sell the extra 2,000 square feet to an abutter? You may not want to do any of these things, but you want to consider all your options.

Large Houses

In many areas, older homeowners who are empty nesters are stuck living in large houses. Zoning permitted, these houses often-present excellent conversion opportunities. Can you buy a large house and convert it into apartments or condominiums? Again, it is the zoning and the Board of Appeals and the sentiment of the community.

Remember when you convert units and build and rehab, you are adding to the housing stock and to the tax rolls of your local government. You are providing a valuable community service. And, if you are borrowing rehab funds and hiring local contractors, you are supporting your community. Every city and town needs people like you willing to make improvement investments in the future.

Many large houses are on large lots. Maybe the lot is worth more than the house. Maybe you'd make a lot of money by knocking down the large house and building two or three houses in its place. What would the town officials say? Pose the question. Learn. Then, when and if an opportunity presents itself, you'll be ready to act.

Again, think about an investor like Donald Trump. Trump is not, Trump is never putting on old jeans and painting or sweeping up apartment hallways. Trump is the artist of the deal. Trump makes deals. The money is in the deal. Trump hires people to do the dirty work.  You can hire people to do the dirty work. There are a lot more people who can do dirty work then there are people who can do deals.

Zoning

Every time you see a property that is wrong for the zoning, you are seeing either an opportunity or a potential problem.

A single-family house in a commercial district may be an opportunity to convert for retail or office use. Maybe the house can be used for commercial and residential purposes. This type of property can be very desirable for work-at-home people.

A single-family house in an industrial district may have significantly less appeal and value. Unless, of course, you can knock the house down and use the land as an approved toxic waste disposal site, then it would be worth a lot. I am kidding, but it's true.

Convert to Condos

In your researching of values, you will learn condo values. You must compare these condo values to comparable apartments. For example, the average two-bedroom, one bath condo might be $150,000 and a two-family house with two comparable units sells for $200,000. The profit would come from buying the two-family house and converting the two apartments into two condominium units.

Every multi-family you buy, you think, "Does this property have condo conversion potential? Are the parts worth more than the whole?"

Condo Conversion

Before you decide whether to convert or to retain a building for rental purposes, you should consider these points:

• Suitability of the property for conversion.
• Your financial position and objectives.
• Prevailing and future economic conditions.

   Let's focus on each of these considerations.

Suitability of the property for conversion

A property that's a prime conversion candidate will run a fairly straight line down the yes column of the following checklist. Some investors would argue that yes answers to these questions could also support a decision not to convert. That's because the best properties for conversion are usually also the best properties for rental. Those investors would question the rationale of tampering with a successful existing venture. They might invoke the logic of the Peter Principle, which translates to: Just because you're successful in one area of real estate investing - buying and managing apartment buildings - doesn't necessarily mean you're going to be successful in another area - converting and selling condominiums.

Quick Quiz For Suitability

1. Will 30 percent or more of the present tenants purchase?

2. Is the property located in a low-vacancy area?

3. Is the property located in an area that lends itself to individual ownership?

4. Is there high migration into the area?

5. Are the existing units of adequate size and equipped with sufficient amenities to warrant individual ownership?

6. Is the property located within a reasonable distance of the probable market?

7. Can the units be absorbed into the market in a reasonable time?

8. Can the units be priced competitively?

9. Will the unit prices be competitive with the going prices of single-family houses in the area?

10. Will the condominium offer a better value to the purchaser than a rental unit would?

11. Is there a limited supply of new houses and condos on the market?

12. Are resales in the area selling at top prices and moving quickly?

13. Will at least 50 percent of the leases expire within six months?

14. Is the property convenient to transportation?

15. Do local and state laws support conversion?

16. Is the property located near employment and shopping areas?

17. Is there community support for conversion?

18. Is the cost of construction of new homes and condominiums in the area high?

19. Is interim financing available?

20. Are end loans for buyers available at competitive rates?

How to plan and execute a condominium conversion

The mechanics of converting apartment units to condominiums have become quite standardized, but still require the professional assistance of an experienced investment team to address such facets of the conversion as:

Comparing current local market conditions for condominium sales, condominium rentals and apartment rentals.

Determining the total legal, engineering, financing, reconstruction, marketing and potential profits of the conversion.

Assessing the suitability of your building's floor plan for conversion.

Setting the time factor of the conversion and possible loss of rental income during the interval.

Retaining and coordinating qualified support personnel needed for the conversion: attorney, accountant, architect, engineer, contractor, etc.

Locating optimum financing for the project: rehab and bridge loans for you and end-loans for your unit buyers.

Ensuring that the conversion conforms to all applicable state and/or local laws, rules or regulations concerning condominium conversion.

Designing and implementing a marketing package for the property to appeal to existing tenants, new buyers/occupants and most particularly to investors.

Expanding the Condominium Concept

You purchase an apartment building for conversion to condominiums. It's a nice, simple, clean-cut transaction. You sell the individual units. But, are there other options? You could sell the units, sell enclosed garage space, sell outside parking spaces, sell mini-warehouse bins in the basement, sell workshop space in the basement or sell cabanas by the pool. You could sell the land under the building, using a ground sale-leaseback. By expanding the condominium concept, you could turn one condominium project into six plus condominium projects. Whether the end result of all this dicing is justifiable is what real estate research, analysis, and projection are all about. But, wouldn't you agree that it's this kind of creative "what if" thinking that has always formed the basis for real estate fortune?

Expand some more. Think about retail store condos, office space condos, professional space condos, airport hangar condos, motel room condos, hotel room condos, mini-warehouse condos, stadium box condos, safety deposit box condos, campground condos, trailer park condos....

Handyman's special

Handyman's specials are properties that seem like good buying opportunities because they need work. They may be, but tread with care. If the work needed is more than cosmetic, these properties are best left to skilled contractors. You cannot hang sheetrock after one class at Home Depot. You cannot build a deck after watching Flip This House on cable TV. You cannot replace a bathroom after reading a Time Life book. And, hiring tradespeople to work for you can get very expensive very quickly. Before you undertake a handyman's project, rent the movie Money Pit. Will it cost twice as much and take twice as long? Probably.

This does not mean that you can't clean, paint and paper to your heart's content. Yes, you should mow and rake the lawn and trim the hedges. The more that you can do without hammer and nails, the better. The more that you can do with just your negotiating skills, the better.

Most handyman specials are for suckers. Others are only for masochists. You can make all the money you need as a skilled negotiator. You want to negotiate good deals on good properties. Unless, you fancy yourself some type of woodworking hobbyist, you never have get involved in the major rehab of buildings.  If you end up with a handyman's special, your best course of action may be to sell it to someone else and wish him good luck.

Real estate investing is a thinking person's art. If you advertise a property as a handyman's special, you will probably have a long line of bargain hunters at your door looking for a good deal and bidding the property way beyond the range of profitability. For each deal, you have to know your numbers. It costs the same amount to update a kitchen in a wealthy area as in a poor area, yet the return in the wealthy area may be significantly higher. If you are converting apartments to condos or adding additional units and you estimate the potential profit to be one hundred thousand dollars, this is a good construction project. If you are buying a house to resell at a profit and you don't personally like the kitchen, who cares? Every investment doesn't have to be your dream home. You aren't going to live in the house with the bad kitchen. Let the owner who will live in the house design the new kitchen. Resell the house with the potential for improvement.

Don't buy a Handyman Special. If you choose otherwise, at least don't buy in a area where there are a lot of Handyman Specials. And, if you hope to make any money, a Handyman Special should be priced at least 20% below the area market average.

What Renters Want - A Guide for Renovators

Investors in rental apartment properties have one thing in common - they are always seeking ways to add the most rental value to each unit at the lowest possible cost. Smart investors can make $1000 worth of improvements pay off in one year; others can spend the same amount and wait five years for it to pay off. And the losers can spend money and actually decrease the appeal of the unit...and the rental value.

Before you consider any renovation expense, take a look at what renters are looking for.   What's number one? Location.

In between the top and the bottom, however, lie the factors that you can control with intelligent renovation and fix-up strategies.

   On the list of priorities you'll find the following, in ranking order:

1.   Location.

2.   Curb appeal: landscaping, entranceways, and the general impression the building creates from the outside.

3.   The condition of the building on closer inspection. Window trim painted, walkways not cracked. Trim and edging of grass and gardens maintained.

4.   Attractive entrance and hallways or foyer, if there is one.

5.   Condition of the apartment itself.

6.   Layout of the apartment unit.

7.   Rent - including utilities.

8.   Appliances supplied. Hook-ups for washer/dryer.

Long-Term Renovations That Add Property Value

In looking at any residential property, consider the basics first. They are the most expensive, but may be most crucial to long-term profits. They include plumbing, roofing, heating and ventilation, wiring, exterior facing, even parking space or garage excavation.

These are costs that you won't recover in a hurry, but in the long run, will save you headaches and maintenance and repair costs, and, in the end, add to the appreciation and profitability of the building.

Other costly items: adding a second bathroom, redesigning kitchen layouts, new cabinets, sinks, etc. These costly improvements must be compared to other less costly ones that may increase rents as much or even more. For example, adding a balcony can increase rents 10%, a fireplace, another 10%, a built-in desk and sofa bed in a small apartment (a studio) can increase rents by 5%.

How Much Renovation Should You Do?

• Plant exterior landscaping. This is relatively cheap, but as seen in the priority list, it is a top priority for renters.
• Add. Closets, without disturbing the basic layout. It's inexpensive but appealing.
• Refinish wood floors instead of carpeting; it's cheaper by far and is in line with current trends in decorating.
• Install doorknobs, hardware and drawer pulls. Buy quality fixtures; they add elegance and appeal at a low per-unit cost, particularly if the walls are white to set them off. These fixtures give an elegant look to bare wood floors and white walls.
• Think lighting fixtures. Install chandeliers, track lighting, under-the-cabinet kitchen lighting or bathroom mirror lighting. Brighten apartment units, which may have inadequate or limited natural light.

A final word of advice: Do some "comparison shopping". Take the time to look at other rental units in the area. Compare rental values, space and amenities. Note obvious renovations and fix-up details. You can't be sued for copying the most appealing ones, or for stealing ideas.

Poor management

Poor management can mean bad tenants or poor collection policies. It is a situation that needs more attention than the present ownership can give. You buy the property and begin professional management. You profit.

With bad tenants, there are two scenarios. They become good tenants or you evict them. Understand that it is extremely unlikely that a bad tenant will become a good tenant. Unfortunately, in many states, the eviction process can take up to six months. If the rent is $900 per month, you will probably lose that $5,400, plus legal fees. A bad tenant who is being evicted usually doesn't pay rent. You may obtain a court judgment against the bad tenant, but good luck collecting.

A better approach is to buy them out. Yes, this is correct. You should reward their bad behavior with money. You are not a social psychologist or a social worker. There are lots of people who you do not want as tenants. You can talk to them. This is a waste of time. You can take them to court. This takes time and money. You can give them money to leave. Explain to the tenants very calmly and rationally that they are going and that you have allocated several thousand dollars for their eviction. Let them know that they can have this money or your lawyer can have this money. They will take the money. Of course, you can tell them that you have nothing against them personally. You just want the unit back so that you can upgrade. Everyone saves face. They get the money. You reclaim the unit. They become someone else's problem.

Offer them a thousand dollars if they will move within two weeks. If a thousand doesn't work, offer two or three thousand. Even if you had to give them the whole five thousand, the non-aggravation would probably be worth the cost. If you are buying a property and suspect these kinds of problems, you should factor these buyout costs into your offer. Or even better, you can request that the property be delivered to you free of tenants. Then, the seller has to deal with bad tenants before the closing.

Unfortunately, some owners will give a bad tenant a good recommendation just to get rid of them. You need an independent evaluation tool, and that is the credit report. Make sure that you receive a current credit report for all prospective tenants. The credit report shows the tenant's prior history. This is easy. A good credit report equals a good tenant and a bad credit report spells trouble. You are not a social service agency. You do not have to take a chance on a tenant with a poor credit report. Wait for a good tenant with a good credit rating.

Regardless of the rules, regulations, and provisions agreed to and signed, some individuals will act with independent indifference. Letters requesting compliance are left unopened; verbal requests fall on deaf ears. The root cause of the problem can be determined at a later date or never. Once you've identified a problem situation, act promptly and prudently.

This is important so let's go over this again. Legal eviction can be time-consuming and expensive. However, the tenant may voluntarily relocate if you locate comparable space at a comparable price, or if you offer to pay moving expenses or a moving allowance. The offering of such cash rewards to tenants who voluntarily agree to relocate (whether to make the space available to a higher paying tenant or for new construction or conversion) has been a standard practice in commercial and industrial real estate for many years. While rewarding a problem tenant with a cash settlement to relocate is not a first option, it may be a cost-effective one. Remember, once you're rid of the problem, you can concentrate on more profitable concerns.

The best course of action with bad tenants is not to compromise, counsel or appease them but to get rid of them. Take them to court. Pay them off. Get rid of them. You want tenants who: 1. Pay the rent. 2. Don't bother other tenants. 3. Respect the property. If these rules are violated, save yourself a lot of aggravation and get rid of them. You are not a social agency. Pay them. They will find accommodation elsewhere.

Remember from the Military Action Principles^™ that you can't change people. You can't make them neat or quiet or non-smokers or good parents.

Foreclosures

Like Handyman's Specials, foreclosures bring out the lazy bargain hunters in packs. "Gee, I'm going to get a $200,000 house for $150,000". Gee, I don't think so. Before a property actually makes it to a foreclosure auction, the following has probably happened:

The owner has tried and failed several refinancing attempts with this bank and others.

The owner has tried and failed to sell the property to the general public.

Many of the owner's friends, family and co-workers know about his financial troubles and have decided not to buy the house.

Many people at the bank know about the foreclosure and have decided not to approach the owner and buy the house.

All of the attorneys and their staff and family at the law office handling the foreclosure know about the owner's financial troubles and decide not to approach the owner.

In most cases, when you are buying a property at foreclosure, you cannot preview the property prior to the auction and even if you can, you don't have an opportunity to do a full property inspection. Read this sentence again.

Even with all of the cautions above, you still might get lucky and get a good deal on a foreclosed property and buy it for 10% - 20% below market value, but you can do that anyway by making offers. And you can make those offers with a lot less risk.

Loyalty is a warrior trait. You will give and expect loyalty from your Mastermind Alliance. This can extend to your tenants. Let loyalty have its privileges. Everyone doesn't have to be treated equally. Feel free to do something extra for tenants who have been with you for years.

Charles Wang's Seven Secrets to Success

Billionaire Founder of Computer Associates

1. Benchmark to determine the world standard. Somebody has to be the best; why not you?

2. Map your progress. Break down you goal into manageable objectives.

3. Define a clear vision that creates a sense of urgency.

4. Start with the hardest part. The hardest part is usually the most important.

5. Set goals high and then double them. Give your employees the support they need to flourish.

6. Let go and watch. Give employees a job and let them do it.

7. Wave laurels; don't rest on them. Don't relax; keep going.

Library

The Helmsleys: The Rise and Fall of Harry and Leona Helmsley, Richard Hammer

What Every Real Estate Investor Needs to Know about Cash Flow... And 36 Other Key Financial Measures, Frank Gallinelli

Rich Dad's Real Estate Advantages: Tax and Legal Secrets of Successful Real Estate Investors, Sharon L. Lechter

Property Management 101

Most tenants pay their rent without excuse or delay. However, poor payers are looking for signs of weakness in your collection policies. For any number of reasons or habits, some people don't have enough money to pay their monthly bills.

If rent is not paid by the third, send a note. If not paid by the fifth, send an email and voicemail. If not paid by the tenth, send a thirty-day "Notice to Quit." And, then you must follow through or, like a bad parent, your threats mean nothing.

Many local firefighters and teachers are trustworthy and capable part-time handymen and contractors.

Operational Limitations:

This mission presents possibilities. However, do not feel that you have to become a wheeler-dealer-rehabber-developer to become successful. Once you are licensed, you can broker these possibilities to others and profit. Donald Trump does this. For your investment program, you can decide to invest in only the best properties in the best locations. If you work, this will all work.

You are conducting a research program that will make you an expert, probably THE expert, on value in your small specific investment area. Knowledge will be your edge in finding and negotiating good deals.  If you are active in the marketplace, you will find plenty of quality deals. You don't need to get involved in overly risky ventures. Generally, Handyman Specials and Foreclosures are for get-rich-quick bargain hunters. Avoid them.

Jargon:

Assessment - The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.

Assumable mortgage – A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

Cap- A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease. See lifetime payment cap, lifetime rate cap, periodic payment cap, and periodic rate cap.

Insurance Binder - A document that states that insurance is temporarily in effect. Because the coverage will expire by a specified date, a permanent policy must be obtained before the expiration date.

Loan - A sum of borrowed money (principal) that is generally repaid with interest.

Multi-dwelling Units - Properties that provide separate housing units for more than one family, although they secure only a single mortgage.

Public Auction - A meeting in an announced public location to sell property to repay a mortgage that is in default.

Pre Fab – Pre-fabricated housing, also called manufactured housing. Units that are built in a factory and trucked to a construction site to be erected onto a foundation. The opposite of stick built

Radon - A radioactive gas found in some homes that in sufficient concentrations can cause health problems.

Recording - The noting in the registrar's office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Sale-Leaseback - technique in which a seller deeds property to a buyer for a consideration, and the buyer simultaneously leases the property back to the seller.

Stick built – Tradition building, stick by stick, board by board, on a construction site. The opposite of pre-fab or manufactured housing.

Tenancy In Common - A type of joint tenancy in a property without right of survivorship. Contrast with tenancy by the entirety and with joint tenancy.

Title Search - A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Question and Answers

What is the difference between signing an offer and signing a purchase and sale agreement?

An offer is your initial written bid to a seller. An offer is the framework for a deal. It is usually a short, one-page, simple document. It will contain contingencies for financing and property inspections. It will also include dates for signing a purchase and sale agreement, completing inspections, securing financing and a proposed closing date. You will usually include a check for five hundred or a thousand dollars with your offer. The seller may accept, reject your offer or make a counter-offer.

A purchase and sale agreement (P&S) is a more involved formal legal contract often drafted and negotiated between your attorney and the seller's attorney. When you sign the P&S, you are committing yourself to buy and the seller to sell if both parties meet the conditions of the contract. You will need a signed P&S to obtain a mortgage.

Because of the large sums of money involved in real estate transactions in our litigious society, you must have competent legal representation. It makes sense to have an attorney who specializes in real estate as an integral member of your Mastermind Alliance and to have him or her review all legal documents. The cost of a few hundred dollars to an attorney is worth the peace of mind.

I was a Navy carpenter and now I want to use my skills to buy properties for rehab and resale. Many of the properties that I look at are in pretty sad shape and have code violations. Is it worth the risk of buying properties with housing code and other violations?

Any housing code or health code violations must be addressed immediately. Be careful, because once you own the property, you are responsible to the tenants and subject to all the town ordinances. Violations of building and sanitary codes can result in substantial fines and even criminal penalties. In the eyes of the town officials and the building tenants, you want to be seen as the hero and not the next villain.

I would make my offers subject to correcting all housing code violations immediately and my ability to secure enough time from local officials to make the repairs. Most building and health inspectors are reasonable if they know that the repairs will be made in a timely fashion.  You don't want surprised. Again, insist on talking with the inspectors before you are committed to buy so that you know exactly your obligation to correct violations.

Also, you do not want to do your evaluation alone. I would strongly suggest that you utilize the services of a professional property inspection firm.

This sounds like a great public relations story to me. With your military background and your service to the community, rehabbing substandard housing, your new career will be considered commendable.

I am physically disabled veteran. How can I get involved in real estate investing?

You can enjoy a career as a successful real estate investor because real estate is primarily a research and a people business. Think about Donald Trump. He makes deals. The Donald is not climbing ladders. He makes deals. You can make deals.

Here are the categories of people who with the right style and attitude can succeed at real estate investing: man/woman, young/old, gay/straight, black/white, native born/ immigrant, high school/college graduate, Catholic/Protestant/Buddhist/Muslim,/Jew, rich/poor, wheelchair bound or jump rope all-star.

You start from wherever you are and move forward.

What kinds of people wouldn't you recommend as real estate investors?

Don't bother if you are lazy, weak and or have a negative attitude. Don't bother if you have a whining, complaining personality. Don't bother if you are a coach potato waiting for others to do your bidding.

If you are a thinking person of action, welcome. If you are a slacker, buy lottery tickets.

Isn't it arrogant to think that in a few months I'll know more about real estate than most real estate agents?

Most agents work an area much larger than your specific investment area. Common sense tells us that the larger the area to be studied, the more challenging the learning process becomes.

If you commit to a coordinated and sustained research program, you are going to know much more about your specific investment area than most real estate agents. Now, consider that most buyers and sellers will invest hundreds of thousands of dollars based on the flimsy advice of these agents.

Yes, be afraid; be very afraid. This will not be you. When the time comes, you will negotiate from a base of strength, based upon your research and not wishful thinking or an agent telling you whatever you want to hear in order to make a sale.

There are a couple of new companies in my town that offer cut-rate real estate services at discount prices. Is this something worth looking at?

In most cases, discount brokers offer less than full services. They may put your home into the Multiple Listing Service [MLS] and provide signs and sample ads. Some will host open houses and some will handle paperwork. You do the rest. You set a price and you advertise and you negotiate.

Each company will offer different levels of service at different prices. The question is when you are dealing with the largest financial transaction of your life, do you want different? Is this the best time to nickel and dime? Should you be concerned with securing the 95% of your equity or the 5% commission?

If the market is super hot, you can probably put a paper "For Sale" sign in your window and attract buyer interest. If the market is cool, you may need all the professional help you can hire.

With many discount firms, you will pay them a set fee whether the house sells or not while a super agent is only paid when a transaction is completed and you have your money.

Action Plan:

With practice, thinking highest and best use will become second nature. Start training to think about possibilities. Where would get a great spot for a McDonalds? Where would be a good location for a new CVS? Where would you open a new Starbucks? Be a visionary. See the future. What can you do to bring the future into the present?

Go back and look at current offerings. Do any have condo conversion potential? Do any have extra land which can be subdivided? Check the zoning against the current use.

Over the last ten years, think about any new construction and conversions in your small specific investment. What was replaced and who did the replacing and who made the money?

Support:

• From the National Association of Realtors: http://www.realtor.com
• For investors in land: http://www.rliland.com
• For investors in resort and vacation properties: http://www.realtor.org/resorts/index.html
• For women in real estate: http://www.wcr.org
• More on real estate blogging: http://www.TheRealEstateBloggers.com
• And, if you can't get enough on real estate blogs: http://realestatetomato.typepad.com
• How to interpret the real estate economy: http://matrix.millersamuel.com

Inspirational Insights:

Rental income is important but it is the long term tax advantages and appreciation that make real estate the best investment.

Jim Gillespie, President, Caldwell Banker RE

Ideas must work through the brains and the arms of good and brave men, or they are no better than dreams.

Ralph Waldo Emerson, b. 1803, American writer

Wisdom begins in wonder.

Socrates, b. 470 B.C., Greek philosopher

Our plans miscarry because they have no aim. When a man does not know what harbor his is making for, no wind is the right wind.

Seneca, b. 54 B.C., Roman writer

War is simple, direct and ruthless.

General George Patton, b. 1885, World War II leader

Buy the neighborhood, not the house.

Rob Zache, President of Central Place Real Estate

I want to stay as close to the edge as I can without going over. Out on he edge you see all kinds of things you can't see from the center.

Kurt Vonnegut, b. 1922, American author

We don't know a millionth of one percent about anything.

Thomas Edison, b. 1847, inventor

Success on any major scale requires you to accept responsibility... in the final analysis, the one quality that all successful people have... is the ability to take on responsibility.

Michael Korda, b. 1933, Publisher

The quality, not the longevity, of one's life is what is important.

Martin Luther King, Jr, b. 1929, civil rights leader

What you get by achieving your goals is not as important as what you become by achieving your goals.

Zig Ziglar, b. 1926, motivational speaker

Glass, china, and reputation are easily cracked, and never mended well.

Benjamin Franklin, b. 1706, American founding father

Life is to be lived. If you have to support yourself, you had bloody well better find some way that is going to be interesting.

Katharine Hepburn, b. 1907, American actress

The reason why worry kills more people than work is that more people worry than work.

Robert Frost, b. 1874, American poet

Something in human nature causes us to start slacking off at our moment of greatest accomplishment. As you become successful, you will need a great deal of self-discipline not to lose your sense of balance, humility, and commitment.

Ross Perot, b. 1930, billionaire businessman

He is rich or poor according to what he is, not according to what he has.

Henry Ward Beecher, b. 1813, American clergyman

Sometimes our best is simply not enough.... We have to do what is required.

Winston Churchill, b. 1874, British prime minister

When you choose to be pleasant and positive in the way you treat others, you have also chosen, in most cases, how you are going to be treated by them.

Zig Ziglar, b. 1926, Motivational speaker

When a decision has to be made, make it. There is no totally right time for anything.

General George Patton, b. 1885, World War II leader

It's not hard to make decisions when you know what your values are.

Roy Disney, b. 1930, Disney executive

The invariable mark of wisdom is to see the miraculous in the common.

Ralph Waldo Emerson, b. 1803, American poet

The only way to train a soldier is to show him how to do his job and then make him do it over and over.

General George Patton, b. 1885 World War II leader

You never really hear the truth from your subordinates until after 10 in the evening.

Jurgen Schrempp, b. 1944. Former CEO of DaimlerChrysler

Affirmation without discipline is the beginning of delusion.

Jim Rohn, Motivational speaker