Master Real Estate Course

Lesson #8 Evaluate The Property

Objective:

• Learn to identify variables that affect value

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:

If you have completed the last seven missions, you are now ready to evaluate properties.

NOTE: If you haven't completed the previous missions, you are wasting your time progressing further.

The Long March

Infantry soldiers love the long march because everyone else hates the long march. This is what infantry soldiers do. You walk with a heavy pack for twenty miles. You bivouac in the woods. You eat concentrated dehydrated bad food boiled over an open fire. You wash in the cold stream. You wear your cleanest dirty shirt. You are an infantry soldier.

Now, you are infantry. You are doing lots of things that most people will never do. They won't do the research. They don't visit all the new listings. They don't track listing prices and sales prices. They wander around aimlessly alone. They do not have a clearly defined plan.

You need a plan. If you don't have a plan, any road will take you there. You are an infantry soldier. You have a point A and a point B. You know "A" which is where you are and you know "B" which is where you are going. It will take some grunt work to get from A to B. You do the grunt work. This is the infantry warrior. You are going to own six properties free and clear of debt within twenty years. This is your "B." This is where you are going. If you have to forge rivers and climb mountains and slog through mud, without whining and complaining, you do what you have to do. Your mission is to get to "B."

When you're confident and ready to buy, the evaluation process will be twofold: physical evaluation of the property and evaluation of the property on paper.

The physical evaluation of the property will serve two purposes. First, it will help you determine the condition of the property you are buying so that you can plan and budget for immediate repairs and long-term improvements. Secondly, the physical evaluation gives you a basis for negotiating the best possible price.

Unless you are extremely confident about your inspection and contracting abilities, you should hire a specialized property inspection service to evaluate the physical condition of the property. If possible, you want to work with inspectors whose full time job is inspecting and who know all the trouble spots and the telltale signs of potential trouble. You are investing tens and hundreds of thousands. This is no time to try and save a few dollars. Expect to spend two to five hundred dollars, depending on the size of the property and the scope of the inspection.

Even if you feel confident physically evaluating a property, it makes sense to bring another set of trained eyes with you. The other person may find a flaw or a benefit that you miss. Remember, you are always thinking highest and best use. What can you do to this property to raise the income and/or enhance its value?

Property inspection firms will be listed in the Yellow Pages and you may see some ads in the real estate section of the newspaper. Be careful of firms that advertise a free or very low fee. They're probably looking for contracting work and won't be as objective. Your best bet is your Super Agent who will have a list of firms that he or she has used and can recommend. Your Mastermind Alliance will also have suggestions. Your property inspector could well become a member of your Mastermind Alliance. If you are evaluating lots of properties, you will probably be offered a special rate.

Remember, you've got to dig the well before you need the water. You are networking. You are always networking and adding new contacts to your team. Donald Trump is not getting his thousand dollar alligator shoes dirty in grungy basements. He is the general. He is sitting in his limo, using his cell phone to give the orders. Remember, in 1984, The Donald owned a USFL professional football team called The New Jersey Generals! The Donald has made billions. You only want to make a modest few million.

After reading the property inspection report, if there are any real or potential trouble spots such as an old heating system, inadequate wiring or poor insulation, use your Mastermind Alliance to call in a specialist. If they know you, most contractors will give you free advice and repair or replacement estimates. If they don't know you, just getting contractors to the property can be a chore. Guess what, the best contractors tend to stay busy.
Make yourself four lists. The first list is for immediate repair expenses you will incur after the passing of papers. The second list covers work to be done within six months such as painting, wallpapering or landscaping. The third list contains replacement cost estimates for the first two years of ownership such as a new roof or new wiring. The fourth list covers the major improvements you plan to make in the future such as remodeling kitchens or baths, replacing the roof, adding to the parking area, etc. At this stage, don't get carried away or overanxious about estimating these repair and remodeling costs. Yes, when you actually have the work done you will want to get and compare a number of different estimates. For now, an overview of costs is sufficient.

Paying a mortgage is a forced saving account. Every month you pay your principal and interest and reduce your mortgage obligation. Every April, you reduce your tax obligation with your interest deduction. Over time, properties appreciate in value adding to your equity wealth. Do this. Repeat X 6.

The second method for evaluating a property is to compare income and expenses on paper. Your Super Agent will be able to help you here. First, work out all the figures on paper. Your Super Agent will be able to help you here. First, work out all the figures in the least advantageous way to you. Figure on the highest prevailing financing rates and be very conservative in listing the expense numbers. If you're buying an income property, be sure to add a realistic vacancy allowance. Be sure to include the immediate repair figures from your first list. The bottom line is to find the maximum amount of expense or the least amount of cash flow this property will generate.

Next, re-evaluate the property on paper to your maximum advantage. Use the lowest feasible price as your sales price. Figure on the best financing available. Your expense figures should still remain conservative. If you're buying an income property and will immediately raise any rents, use these new rents for your income figure. The bottom line is to find the least amount this property could cost you each month or the most amount of potential cash flow.

The bottom line is to determine if the property is right for your acquisition given all the other possible purchase options. If the property needs work, are you prepared and skills to do the work? Do you have the necessary funds? If you will be living in the property, do you have specific personal requirements for bedrooms and baths and schools and commuting distance? Is this property your dream home or simply a stepping stone to your dream home?

Responsibility is a Master of Success trait. You have a talent that average people do not. You are courageous. You are willing to put yourself in harm's way so that others may live and enjoy freedom. You assume a mantle of responsibility. Now, in the real estate business, you can see all that you can achieve. Average people buy one property. You can buy six. You have a responsibility to yourself and to your family to do all that you can do.

Story:

Arnold Is NOT A Plumber

Arnold is a certified public accountant, a C.P.A. Except for not being able to control his cocaine habit, he's a smart guy. Being great with numbers, Arnold knew that real estate was a great investment. When he was laid off from his job for chronic absenteeism, Arnold figured that he was smart enough to capitalize on the real estate boom. So, rather than get another job, Arnold used most of his severance pay to buy a fixer-upper, a handyman's special. Arnold's crew consisted of his very unfit wife. She lasted a week. However, Arnold was not alone. Arnold had the Time Life series of home improvement books he had bought one late night on a drug-induced binge.

Arnold was actually pretty good at the first part of his project, the demolition. He completely tore out the kitchen and two bathrooms. Since Arnold didn't have a construction dumpster or a truck, the debris went into the basement, garage and backyard. Unfortunately for Arnold, his kitchens and baths did not look like the kitchens and baths in his remodeling books. Give Arnold an "A" for gumption and effort. Give Arnold an "F" for performance.

Arnold called in professional help, carpenters and plumbers but no estimates came even close to the money left in Arnold's account. Arnold went to the house every day and worked on useless tasks like stripping wallpaper, which only further added to the mess. Of course as the problems mounted and funds evaporated, Arnold's drug intake escalated.

Three months into the project, Arnold's wife had thrown him out. He was living in the dust-covered dining room of the house. When he was banned from the Burger King for loitering, he split his eating and personal hygiene time between a local Wendy's and Taco Bell.

Arnold called Frank, a local rental agent, to give him the keys to the house. Arnold had given up all hope and was leaving town. Arnold was down to his last two thousand dollars. He gave a thousand to his wife and packed his car. He told Frank that with no heat, the pipes had frozen in the house and he couldn't live there any longer. The neighbors keep calling the police reporting break-ins. The cops were on his back and he was three months late paying the mortgage. He didn't open any mail but presumed that foreclosure had begun.

Since all of my investments were concentrated in a small specific investment area, everyone in the real estate business knew me as an action-oriented investor. Frank called me. I heard and story and said that I'd take a few days to think about it. Frank said, "No, Arnold is here in the office now. Come to my office now."

Arnold sat in a chair hugging himself and kind of rocking back and forth. He looked like what he was about to become, homeless. Frank said that Arnold had a hundred thousand dollar mortgage and he didn't want any money that he just wanted out. This didn't seem very realistic. I took the keys and went to the house. I was back in twenty minutes. I was an expert on value in my specific investment area. The house, rehabbed, was worth between $160,000 and $180,000.

I do not like Handyman Specials. I am not handy. But, there seemed to be enough profit potential to make a deal work. Never be greedy and be sure that everybody gets something. If I just paid off Arnold's mortgage, Arnold would get nothing. Frank, who called me, would get nothing. Yes, Arnold might go along with this deal now and then tomorrow regret this decision and try to renege. Better to be fair and get the deal done fast.

I wrote an Offer To Purchase for $110,000 with Arnold agreeing to pay Frank a commission of two thousand dollars. This was a Saturday morning. I gave Arnold a check for one thousand dollars. I told Arnold that we'd sign a Purchase and Sale Agreement on Monday and that I'd give him another two thousand dollars. I told him that every week for the next five weeks until the closing, I'd give him another thousand. This would keep Arnold in town and invested in the deal.

On the Offer and the P&S, I listed my name as the buyer but also included "Or my nominee." I had a plan. My plan was to make money without actually owning this property. I would try to sell the deal, the paper, the right to buy the property, to one of the many contractors that I knew in my specific investment area.

After leaving Frank and Arnold, my first call was to Kevin, a young architect. Previously, at a Rotary meeting, I had heard Kevin mention that he was saving to buy a home. We met for lunch. I brought him to the house. He loved the location. He loved that the house was demolished and ready for his creative genius. I kept quiet and let Kevin sell himself. I told Kevin the price was $135,000. This was a great deal for the neighborhood but Kevin said that he might have a few thousand for closing costs but that he didn't have a downpayment. I said I'd lend him the downpayment.

Two days later, Monday afternoon, Kevin and I met with my bank loan officer who also happened to be the head of the bank loan committee. The banker liked Kevin and assuming that the property appraised well, Kevin would need only ten thousand as a downpayment. At the same time, the bank agreed to give Kevin a fifteen thousand dollar construction loan. I also asked the loan officer to call Arnold's bank to tell them that a deal to pay them off was in the works.

For the next three Saturdays, Arnold went to Frank's office to get his grand. The next week we closed on the house. At the passing of papers, I assigned the Purchase and Sale to Kevin. Kevin bought the house from Arnold.

At the closing, Arnold was cleaned, shaved and dressed in a suit. He almost looked like a CPA again. He left happy with a few thousand in his pocket. True or not, he said he was mulling several job offers. Kevin was excited about his new project. For a ten thousand dollar investment, I had a thirty-five thousand dollar second mortgage on the house. The term was six years. The interest rate of 12% was fair for the day. Over the term of the loan, Kevin repaid me seventy thousand dollars. Years later, Kevin got divorced but his wife and children still live in the house. Today, the house that Arnold destroyed is worth about $450,000.

From my perspective, the money was in the deal. How could I solve this problem and make a deal work? When you are a knowledge investor, you can find solutions to problems and in those solutions, you can find profit.

Dealing only in a small specific investment area, I was an expert on value. Being an active investor, I had the network, my Mastermind Alliance of contacts who could maximize the value of this property. Masters of Success win because Masters of Success are in the game.

Real estate agents will tell you that they have clients who look and look and look and wait for Spring and then for Fall. This is sometimes called "paralysis by analysis." Look at properties. When you find a property you like, figure out what it's worth and make an offer that works for you. Make lots of offers. Offers cost nothing. Accepted offers mean profit. Profit is why you are in business. Take action.

Brian Tracy's Rules for Success

Motivational Speaker and Self-Help Author

1. Choose your job or career with great care.

2. Become excellent at what you do.

3. Work for the right company and the right boss.

4. Seek a strategic niche.

5. Develop good work habits.

6. Keep learning.

7. Cultivate good relationships with others.

Library

The Consumer Advocate's Guide to Home Inspection: Avoiding the Nightmare of Purchasing a Money Pit , Barry Stone

Landlording: A Handy Manual for Scrupulous Landlords and Landladies Who Do It Themselves (Landlording), Leigh Robinson

The Real Estate Investor's Tax Guide , Vernon Hoven

Property Management 101

Realize that when good tenants first move into a unit, they are frequently very picky. Don't be alarmed when the first month brings a long punch list of requests. These tenants are bringing your building up to their standards. These are the tenants who are truly treating your investments as their homes.

Run a tight ship. If one tenant is abusing the noise or guest or parking or trash policy, deal with that situation immediately, thus avoiding long-term problems and resentment from your tenants who are following the rules.

Before any new tenant receives the keys to a unit, you must be sure that the initial monies: first month's rent, last month or security deposit are paid with good funds. This means a bank or certified check or cash. Only accept a personal check if that check has had time to clear. Occupancy is ninety percent of the law.

Operational Limitations:

Life and real estate investing is about who you know. You want to know people who can evaluate property and people who can solve problems. Your job is to negotiate the deal based on the information, which you collect. Some will, some wont, so what, next. If negotiations succeed, you buy the property and begin to work toward highest and best use. If negotiations fail, you walk to the next deal and negotiate with another seller. This is your job working the cell phone. You can hire plenty of people with flashlights and tape measures. You can't hire people to find and negotiate great deals for you. You have to find and negotiate the great deals for yourself.

If it were easy, average people would do it. Average people are easily frustrated and annoyed when things don't go their way. They get resentful and take rejection personally. The easy path to never facing rejection is to never do anything. You are not average. You are a Master of Success.

Jargon:

Acceleration clause - a provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed.

Building Code - Local regulations that control design, construction, and materials used in construction. Building codes are based on safety and health standards.

Buyer's agent - Represents the exclusive interest of the buyer.

Closing Costs - Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey.

Default - Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Equity - A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.

Foreclosure - The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Origination Fee - A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Prepayment - Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.

Quitclaim Deed - A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.

Realtor^® - A real estate broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors.

Right Of Survivorship - In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.

Question and Answers

If it's possible to make a lot more money as a part-time real estate investor, why not do this job full time?

That sounds like a rhetorical question. Yes, this is a great small business that doesn't have to be that small. Yes, you can be the next Donald Trump of your area and beyond. Why not you? Why not this? Do it.

Should I consider an interest-only loan?

In an appreciating market, interest only loans are a safe way to get into the game. Of course, our end game is to own six properties free and clear or debt. So, at some point, you want to start reducing mortgage principal.

Do you agree that location, location, locations are the three most important words in real estate?

It depends on your objectives. If you are securing the property as one of your six properties, you want the best properties in the best locations. However, if you are buying to raise investment capital, then you want the best deal. Which is the better deal: the beautiful house in the great location that is marketed for five hundred thousand and is worth five hundred thousand or the ghetto three-family that is being marketed for eighty thousand and is worth a hundred and thirty thousand? The money is in the deal.

If I get my real estate license, will this spoil my relationship with my Super Agent?

Don't flatter yourself. Your decision to join the thousands of others with real estate licenses will not intimidate any super agents. Real estate brokerage is a very tough business and only a few excel.

Even with your license, your relationship with your super agent should remain unchanged. You still want your super agent to present you with moneymaking opportunities. See the big picture. You are in business to make money. Look at the strength and potential of the deal and not the few hundred or thousand that you may lose by not being a participating agent. Let the super agent makes his commission while you make your money as the buyer/investor.

I am still trying to get it straight in my head that the Master Real Estate system will work but I guess that investing in real estate is better than most other investments. Do most people feel this way?

Almost seventy percent of Americans are homeowners, so most people are real estate investors. All our system is saying is that if you buy and profit from one house, why not six properties? You are a Master of Success. They buy one house. Can't you buy six and become a multi-millionaire?

You do not have to make low offers. You can wait until properties are listed at prices that you feel are fair and pay full price.

When you invest in real estate, you are in control. When you invest in stocks, some CEO somewhere is in control. If you do the research and compare real estate to other investments, you will invest in real estate.

What do the Action Principles^® have to do with real estate investing?

The Action Principles^® are built on a philosophy of self-improvement and service to others.

You wake up in the morning thinking about how you can be a better mother, father, sister, brother, employer, employee, citizen and servant of God. Where have I been? Where am I now? Where do I want to go? You live your life as a thinking person of action. With this commitment to self-improvement, you will prosper.

But prosperity isn't enough. If you want the truly important things in life: trust, loyalty, respect, friendship, love – the only way that you will ever get these things is by giving them to others first.

What does all this have to do with real estate? Actually, everything. Real estate is a people business: buyers, sellers, tenants, agents, bankers, appraisers and contractors. By following the Military Action Principles^™ you will be a person that others will want to do business with and then these people will become your ambassadors, recommending you to others. It is win/win/win.

From what I've learned about selling real estate, the people who seem to get top dollar for their properties are the people who can get bidding wars started. How can I start a bidding war?

You can list your house on Ebay. Seriously, very few people do well trying to auction off their properties to the highest bidder. Yes, in very hot markets, two or more people may simultaneously vie for the same house but this is unusual. To create such a frenzied sales environment is not a recommended business practice.

If you price your house low, you may receive multiple offers. If you price your house high, you may register no activity. The obvious answer is to consult with a super agent and price your house fairly at current market value. Your asking price is not set in stone. If the market heats up, you can raise your price. If the market cools, you may need to adjust your price lower. You stay in control. Your objective is to sell and you can only sell to one buyer with or without a war.

I have been using our system to make a lot of offers. I have been close on two deals but I haven't won any negotiations yet. I am still very confident that I will buy a property very soon. However, I can tell that my agent, even though she is a buyer's agent, is really getting fed up with me. What should I tell her?

Your agent should be so lucky as to have clients who are making offers. This is why she is in business. If you haven't already, you should briefly explain to her your overall objective to buy multiple properties. You want to work with a super agent capable of envisioning the big picture.

Yes, there are agents who feel personally offended and embarrassed to present offers that they don't like. But, this is not about them. Real estate agents are legally bound to present to the seller any and all offers.

Believe me; if you are active in the marketplace, making contacts and making lots of offers, you are a valuable client and many other agents will welcome your business.

Action Plan:

Have you established a working relationship with any local inspectors or contractors? If not, you are missing a key component to our system. The best contacts will come from two-way referrals. A person who can vouch for a contractors work and who can vouch for you as a responsible businessperson who pays his bills. Down the line, since you will be giving the inspector lots of business, you should be able to negotiate a lower fee for this service.

Are you making plans to look at every property that comes on the market in your small specific investment area? Every property, every deal that is made or not made will teach you something. If you haven't started already, begin tracking sales information. Who is buying? Who is selling? Who is lending? This is not what average people are doing. This must be good.

You must stay motivated. Are you watching my weekly update seminars? One year of weekly seminar instruction is included with most tuition programs.

Support:

• To find home inspectors: www.nibi.com, www.homeinspections-usa.com, www.ashi.org
• For real estate news, statistics and directory: realestate.yahoo.com
• Magazine for real estate developers: www.naiop.org/developmentmag
• Magazine for builders: www.bdcnetwork.com
• Magazine for real estate professionals: therealestatepro.com
• From the Department of Housing and Urban Development [HUD] www.hud.gov

Inspirational Insights:

Generosity and a smile go a long way in a service industry.

Andrew Heiberger, President, Buttonwood RE

Success is the maximum utilization of the ability that you have.

Zig Ziglar

I have developer's disease. I love to sit at a drafting table and draw plans for hotels, wrestling with problems of traffic and the flow of people. That's what turns me on.

Steve Wynn, b. 1942, billionaire casino developer

Ability is what you're capable of doing. Motivation determines what you do. Attitude determines how well you do it.

Lou Holtz, b. 1937, College football coach

Our ultimate freedom is the right and power to decide how anybody or anything outside ourselves will affect us.

Stephen Covey, b. 1932, self-help author

In a world where there is so much to be done, I felt strongly impressed that there must be something for me to do.

Dorothea Dix, b. 1802, Social activist

In real estate, as in so many areas of business, it's quality that matters.

Leo F. Wells III, President of Wells Real Estate Funds

The superior man acts before he speaks, and afterwards speaks according to his action.

Confucius, b. 551 B.C. Chinese philosopher

I think there is something, more important than believing: Action! The world is full of dreamers, there aren't enough who will move ahead and begin to take concrete steps to actualize their vision.

W. Clement Stone, b. 1902, self-help author

You will never win if you never begin.

Robert Schuller, minister and self-help author

As you begin changing your thinking, start immediately to change your behavior. Begin to act the part of the person you would like to become. Take action on your behavior. Too many people want to feel, then take action. This never works.

John Maxwell, b. 1944, Christian leadership writer

Work hard, do what you say you're going to do, and remember that the people you interface with in the industry tend to come back around.

Robert Sulentic, CEO, Trammel Crow Development

Deliberation is the work of many men. Action, of one alone.

Charles De Gaulle, b. 1890, President of France

It is always your next move.

Napoleon Hill, b. 1883, self-help author

People travel to wonder at the height of mountains, at the huge waves of the sea, at the long courses of rivers, at the vast compass of the ocean, at the circular motion of the stars; and they pass by themselves without wondering.

St. Augustine, b. 354, religious philosopher

Why not go out on a limb? Isn't that where the fruit is?

Frank Scully, American Sci-Fi writer

Begin somewhere; you cannot build a reputation on what you intend to do.

Liz Smith

The more senior the officer, the more time ha has to go to the front.

General George Patton

You must play boldly to win.

Arnold Palmer, b. 1929, golf legend

Determine never to be idle. No person will have occasion to complain of the want of time who never loses any. It is wonderful how much may be done if we are always doing.

Thomas Jefferson

In great attempts it is glorious even to fail.

Vince Lombardi, b. 1913, NFL coach