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Chat Transcript – June 1, 2009

Posted on June 2, 2009

Mike_Summey Hi Dave
dave_spiler@yahoo.com Evening, Mike. How are you?
Mike_Summey Hi jp
Mike_Summey All is well here. I just finished making another offer.
Mike_Summey Sent it via email about 3 min ago.
Mike_Summey Hi Roger
dave_spiler@yahoo.com Good luck with it. It’s all about making the offers!
Roger Dawson Hi Mike, Dave and JP!
Mike_Summey Hi Joshua
dave_spiler@yahoo.com Hi, Roger. Nice to meet you.
Joshua Hi Mike
Roger Dawson Hi Joshua
jp HI Mike, I sure wish you would have a public seminar soon
Mike_Summey jp, I’m too busy buying properties reght now!
Mike_Summey Hi hsafdari & lew
hsafdari hello Mike
Roger Dawson I spoke on Saturday to a group of commercial real estate investors in DC. Their economy is booming. The Federal government is hiring like crazy and they see no signs of a slow down.
Joshua I guess I’ll jump right into a question if no one minds. Mike, Roger, just found out I have a tenant that left us high and dry. Mgmt hadn’t collected for May and just filed eviction with court last week. They have vacated and proprty needs a lot of work now. I bought it 1 1/2 yrs ago and now this will be seriously negative investment due to these major repairs. Any advice?
Mike_Summey Investors are having a heyday right now, but speculators are taking a beating.
hsafdari I have a question about a property I am looking at: monthly rent is $1675, the asking price is $189,900
Roger Dawson Hasfdari: what kind of a neighborhood is it in?
Mike_Summey Joshua, if you are in this business long enough, you are going to have tenants like that. That’s why we recommend factoring in a maintenance “reserve” rather than just worrying about repairs as they occur. If you build a reserve account, you will have money to cover damages done by bad tenants. I treat them as a normal part of the cost of doing business and factor that into the purchase price when I buy.
hsafdari I am trying to put deal toghether for 20% down, part of it with 3.25% home equity line of credit…but still cannot make it cash flow unless I buy it for $150000
hsafdari the neighborhood is ok
hsafdari it’s a duplex
Roger Dawson Are the total rents $1675 or is that per unit?
Roger Dawson Hi Penny!
hsafdari the toal rent is 1675
Penny Hi Roger!
hsafdari total rent is $1675
Mike_Summey Hsafdari, you are correct. Without even running the numbers, I can tell you that a deal like that won’t cash flow. $1675/mo rent is only about an 11% return on the purchase price and that’s before deducting, vacancy, management fees, maintenance reserve, taxes, insurance, etc.
Mike_Summey Hi Penny
Joshua Yeah, I’m with you Mike and I went back and referenced what you said in the book about bad tenants…I built the 10% reserve, the problem is I’ve only had for about 18 months so it’s not enough. I’ll need another two years to recover.
Penny and Mike
lew Joshua how active are you in propety? and how did it get to this point
hsafdari any ideas how to make it work?
Penny I’m a few min. late.. I’ll read and catch up.
Joshua Lew, can you elaborate on your question? I have a mgmt company that handles my properties.
Roger Dawson Hsafdari: as you said, you need to get them to sell it to you for $150,000 or less.
Roger Dawson Mike:
Mike_Summey Joshua, if you only have one problem and you get a bad tenant, your whole portfolio is distressed, but if you have 10 properties and you get a bad one, only 10% is distressed. The more you have the more you spread the risk and the quicker your reserves will build up.
hsafdari ok thanks
Roger Dawson Mike: do you think it’s worth while for Joshua to get a judgment against the tenants? For back rent and the damages done? I was frequently surprised at how, sometimes, these judgments get paid off years later.
Mike_Summey hsafdari, you could also offer them $189,900 payable at $1055 per month for 180 months.
hsafdari thanks mike…but I think it’s owned by a bank
Joshua Mike, good point. I’m starting to get concerned because have another property that tenant didn’t renew beyond 1 yr and left damages beyond what their 1 month deposit covered. Damages were several hundred dollars beyond deposit and now it’s pulling teeth to try and get mgmt company to send it to collections.
dave_spiler@yahoo.com Mike and Roger – I’ve just started to explore the idea of investing in real estate. I’m wondering if you have a point of view about the value of having a broker’s license.
Mike_Summey Roger, I always get judgements for late rents and damages. As you mentioned, I’ve collected some of them many years later and they accrue interest until they are paid. Tenants with judgements against them find it almost impossible to buy a home later unless they clear the judgement.
Mike_Summey Dave, personally I think having a license is more of a hinderance than a help. It subjects you to many disclosures you don’t have to make if you are not licensed.
Roger Dawson Dave: their are plusses (better access to good buys) and minusses (some sellers won’t deal with brokers, you must fully disclose your position, etc)
Mike_Summey Hi Ken
Ken Hey Mike, Doesn’t look to busy tonight, everyone must be outside enjoying the weather
Penny Ken, I;m outside, with my laptop, enjoying the chat. But u r right, slim crew tonight.
Mike_Summey hsafdari, whether a property is bank owned or not, you should make offers that will work for you and not worry about the asking prices. I make tons of offers and figure I’m doing well if I can get 1 out of 10 accepted. the good part is that when one is accepted I know it will make money for me.
dave_spiler@yahoo.com Thanks. One other question. Have you seen investors successfully use their IRAs as a source of investment income for properties?
lew Joshua nothing like first hand information. Is it possibleto manage these properties yourself. Is this a norm for management companies/
hsafdari Mike: I never thought of it that way….I guess I have to make offers and see what happens
Mike_Summey Dave, yes some people have used self-directed IRAs to invest in real estate, but a big downside is that your IRA can’t borrow money so you have to pay cash and that makes you lose the advantage of leverage.
Joshua ok, court date is in 2 weeks so I think mgmt co will faciliatate the judgement process? I think they’re going to hit me with representation fees
Roger Dawson Mike, do you know if you can buy real estate with your IRA? I don’t know.
dave_spiler@yahoo.com And, I assume it complicates matters if I combine IRA and non-IRA assets in a property purchase?
dave_spiler@yahoo.com I know on the IRA that you need to have a custodian and be wary of prohibited transactions. I’m investigating that as a secondary source of investment income.
Mike_Summey hsafdari, that’s one of the reasons I recommend the Offer Generator so strongly. It will allow you to calculate offers very quickly. I use it almost every day and I’ve made as many as 20 offers in one day.
Mike_Summey Hi janfam
janfam22@aol.com Hello Mike
hsafdari To buy property with IRA account, one has to transfer its funds with a companies that allow investments in real estate
dave_spiler@yahoo.com Thanks hsafdari
Mike_Summey dave, we’ve had an expert in self directed IRAs in past chats. My knowledge is very limited, so if I were you I’d consult a pro. I’ve never used and IRA to buy real estate.
hsafdari The problem is one has to have enough money to buy it outright…or getting a non recurse loan
dave_spiler@yahoo.com Will do. Thanks, Mike.
hsafdari only a couple banks in the country offer non rec. loan….very hard to get
Mike_Summey hsafdari, I’m not sure any bank will make a non-recourse loan for an investment property today.
Roger Dawson Mike, what vacancy factor are you using in your offers these days?
hsafdari When I researched it…a bank in Kansas city did…but with 70% down and 20% of the loan as reserve
janfam22@aol.com I was curious, what might be the average current interest rate around the country for investement properties?
Mike_Summey The problems with financing are one of the biggest reasons that there are so many deals on the market now. When there are few buyers and lots of sellers, prices go down and sellers become very flexible. When there are lots of buyers and few sellers, prices go up and sellers become less flexible. I think its called the law of supply and demand!
Mike_Summey Hi Hawkeye & John
hawkeye775 Hi Everyone
john j Hi All
Mike_Summey Roger, vacany factors vary market by market and will change with the times. When rates were low and almost anyone who could fog a mirrow could get a loan, vacancies were at an all-time high. Today, I’m finding the rental market getting stronger and stronger.
Joshua Mike, Roger, I have brought this up in the past, so apologies for resurfacing, but thorn in my side. mgmt co charges 1 mo leasing fee here. I have called 20-30 companies here in Houston and no one seems to be willing to waive or reduce that for mgmt of 9 properties. Tempted to draw hard line with mgmt co on this most recent vacancy since i believe they screened a bad tenant and they should waive new fee. i know they won’t budge. maybe i need to not be so difficult…thoughts, creative ideas? i can be a high maintenance owner
Mike_Summey janfam, rates for investors will usually run 1-5% higher than home mortgage rates unless your credit is impeccible and you have adequate reserves.
Mike_Summey Hi sparky
sparky37 Hi Mike & Roger
janfam22@aol.com Thanks
sparky37 Mike 1st Monday is so tough, I miss the every week chat, maybe after the summer we can have them back
Roger Dawson Hi Sparky. Good to have you back.
Mike_Summey Joshua, I know there are generally accepted practices that vary market by market, but a 1 mo. leasing fee coupled with a 10% management fee equates to in excess of 18% on a 12 month lease.
Mike_Summey Hi Bob
Bob Hi
hsafdari speaking of managment companies…anyone know of a reputable one in Minneapolis?
Mike_Summey Sparky, the reason we shifted to a once monthly chat was because of declining participation as the market cooled. I think we had a lot of people who joined the chat thinking they could learn how to get-rich-quick. Unfortunately, that’s not what real estate investing is all about.
janfam22@aol.com Roger & Mike, in current environment what percentage of asking price can be considered a good initial (first) offer from a buyer? (e.g. 35% to 45% ???)
john j I’m new to real estate investing and would really like to make some offers but my personal resources are low. What have been your experiences with hard money lenders? I am in southern california.
Mike_Summey hsafdari, sorry, but I don’t know anyone there.
Roger Dawson A suggestion to find a management company. Real estate agents are hurting right now. Call the biggest real estate offices in town and ask if they have someone specializing in management. A Coldwell Banker agent in San Diego who is a good friend of mine does that and now manages 82 properties and selling is now her sideline.
Mike_Summey janfam, percentage of asking price has nothing whatsoever to do with getting a good deal. The only thing that determines what you should offer is the Net Operating Income a property can produce. Just this month, based on calculated NOI, I’ve offered less than 50% of asking price on one property and full asking price on another.
hsafdari Mike. no problem but I have had a hard time finding one that would take duplexes or homes below $185k
sparky37 sorry Mike I got kicked out before I could read your whole answer, but from what I read I agree a lot of people came and went quickly here, it is not get rich quick
Mike_Summey John, if your resources are low, your best bet may be to seek seller financing. Hard money lenders usually want out after a few months and expect very high returns on their money.
janfam22@aol.com Mike, how well your 50% offer was received?
hsafdari mike&roger: any word of advice on short sales? I have heard there is a bigger risk on a clear title?
Mike_Summey hsafdari, your screen name is very difficult to type, can I just refer to you as HS for the rest of the chat?
Joshua Mike, Roger, have you ever negotiated a deal with your mgmt cos where you somehow reward them if the lease renews (since no renewal fees) but not if tenant doesn’t renew to decrease overall mgmt fee ? Roger, any creative negotiating ideas?
hsafdari yes please use HS…I did not think of the difficulty when I signed in
Roger Dawson hsafdari: in todays market short sales are not worth pursuing. It might take months for the bank to accept your offer, even if they ever accepted it. Title is not the issue for you. Better to concentrate on REOs (bank owned foreclosures)
sparky37 Mike, I have a good one for you, I have a lien on a property in Michigan against the owner and they just sold the property and my lien was transferred to the new owner! I asked what good is my lien? I am awaiting an answer from the att’y general
Mike_Summey HS, one risk you have with short sales is the possibility of leins against the property that may not be discovered. I always buy title insurance on every purchase.
lew Mike regarding that 18%. Are you saying that one should negotiate the management fee or the leasing fee
Roger Dawson Beware of hard money lenders who give you a short term loan but promise to renew it. They might renew it but may charge you a lot of points to do it.
HS Hi everyone again
Mike_Summey HS, I agree with Roger on short sales. Once the property has been through foreclsoure, leins get wiped out and the bank has more incentive to sell when they own the property. They will negotiate much harder to get as much as possible on a short sale.
Mike_Summey lew, I was using your example of a 1 mo leasing fee and an assumed 10% management fee.
Mike_Summey HS, thanks for the name change! Most of us just use our names or a shortened version of it for ease of typing.
HS Mike/Roger: what is the best way to write an offer to a bank…like the template in the weekendmillonier CD?
HS Mike: no problem. that was a tactical flaw on my part…loging with screen name
Mike_Summey HS, if you use the Offer Generator to compute your offers, it will also allow you to print an offer letter.
HS offer generator is the prodcut mentioned on your website?
Joshua Mike, do you just send the offer letter from the OG to your agent and they type up the contract and you sign and then they submit?
Mike_Summey The offer letter produced by the Offer Generator is a Letter of Intent that can be transferred to contract form after it is agreed to by both parties.
Mike_Summey Hi Gilbert
Gilbert Hi,
Joshua REO’s (in texas at least) won’t accept an LOI, they will only look at a signed contract for submission
Mike_Summey HS, the Offer Generator is a computer program we sell in our online store. It only costs $69.95 and will save you more than that in time on your first offer. I could never make the number of offers I do without using it.
Gilbert Is the offer generator for residential or also applicable for commercial properties?
HS Is it downloadable?
Roger Dawson Contracts to buy are about 14 pages long these days, depending on your state. The letter of intent that the Offer Generator prints out for you is much easier to deal with, which means you’ll be making many more offers.
Mike_Summey Joshua, that’s what they say in my area as well, but I’ve purchased two properties using them in the past 3 months.
Joshua That’s good to know Mike, your agent must be better at convincing the listing agent than mine is. I’ll try again.
Mike_Summey Gilbert, the OG works for either. It is a program that computes NOI and then allows you to use the computed NOI to structure dozens of different ways to buy any given property that will all cash flow. You can check it out on this website. Just click on the “Tour the Offer Generator” link on the home page.
Mike_Summey HS, the OG is only available on CD.
HS Mike: sounds like something I need. I will purcahse it through your website
sparky37 Nite Mike & Roger see you next month
janfam22@aol.com Mike, I noticed in “Offer Generator” the program calculates the management fee based on the Net Monthly rent (after accounting for the vacancy rate). Should n’t it be based on the GROSS MONTHLY RENT? Because R.E. Mgmt Cos will base their fees based on GROSS MONTHLY RENT. It will also be on CONSERVATIVE side for investors. Could you please share your ideas on this? Thanx..
Mike_Summey Joshua, all a Letter of Intent does is give you a quick way of determining if you and the seller are in the same ballpark. Once you agree to the general terms of an offer, it can quickly be transferred to contract form like any other offer. The LOI keeps you from having to fill out dozens of pages without knowing whether or not you are even close.
Mike_Summey Hi eppiceye
Mike_Summey Hi llewis
llewis01 hello
HS when is the next chat?
Joshua Mike, have you ever taken one of your mgmt companies to court over something that was big?
Mike_Summey janfam, I know of no property management companies that calculate management fees based on Gross Rents. They only get paid for what they collect, otherwise they would have on incentive to keep the properties leased.
Mike_Summey HS, next chat will be the first Monday in July.
eppiceye I read your weekend millionaire book and enjoyed very much, but the real estate world seems iffy
Mike_Summey Joshua, I’ve only had to do that once and it was due to gross neglect that was in direct violation of the contract we signed.
HS this was my first one…I really thank you and Roger for answering our questions
Mike_Summey eppiceye, iffy in what way?
Mike_Summey HS, you are welcome. I hope you will join us each month. That’s why we host the chats, to help our readers.
Joshua Thanks again for all your help Mike and Roger!
Roger Dawson Thanks Eppiceye: our method is different. We advocate buy and hold. It doesn’t matter if the property goes down in value as long as it cash flows. I’ve been a California broker since 1978 and I’ve never seen a better time for real estate investors.
HS will try to join next month…hopefully will have bought an investment property by then..
Mike_Summey I want to challenge all of you to come to next month’s chat with a story about a purchase you made in June.
Gilbert The OG hve just few contingencies with it. Do we have to include all other contingencies with the LOI or just leave it as your sample?
Roger Dawson Good night everyone. See you next month. Good investing~!
eppiceye I don’t enjoy the renting to iffy people. But I will keep an open mind and do more homework. Thanks
Mike_Summey Gilbert, once you get to the LOI that is produced by the OG, you can modify it any way you want. There is a section where you can list contingencies that will be automatically inserted into the letter, but even after that you can still modify anything you want. It is very flexible.
Gilbert Thanks Mike
Mike_Summey eppiceye, I don’t like renting to iffy people either, but sometimes that happens. You just have to factor that into the cost of doing business. Plumbers don’t like employees wrecking thier vehicles or losing tools either, but it happens. YOu have to plan for the worst and hope for the best.
Mike_Summey Goodnight everyone. I’ll see you here next month.
Joshua Goodnight everyone, thx mike

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