LOREN KEIM - Real Estate's Next Level

 

 

 

 

THE NEXT LEVEL TRAINING

DEVELOPED AND PERSONALLY LED BY LOREN KEIM

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INTERNATIONAL LEADER IN TRAINING AND CONSULTING FOR THE COMMERCIAL REAL ESTATE INDUSTRY

Tools and Videos

Handling Newspaper and Magazine Calls

Prospective clients researching properties for sale in the newspaper or in magazines seldom know the exact address or location of the property being advertised.  As Realtors, we do this in order to generate a call.  Many of the callers will not be interested in the location of the property being advertised.

As with sign calls, these callers are probably not just considering one advertisement in the periodical.  The likelihood is that they have circled several in the same newspaper or magazine.  You can again ask them if they’d have interest in you pulling information on any other properties they may have circled.

 

Caller: “Where is the advertised property located?”

Agent:  “I’m just pulling up the details on that on my computer.  I’ll have it in a second.  What area are you considering?”

Caller:  “I’d like to be close to the shore points.  I’m particularly interested in property south of the turnpike.”

Agent:  “The shore points?  That’s my favorite area.  How much were you looking to spend?”

Caller:  “Probably no more than a million, unless it’s a truly spectacular property.”

Agent:  “That’s fine.  I have that property in front of me now.  It’s actually located in Tapani, pretty far inland.  I’m guessing that area wouldn’t work for you?”

Caller:  “No, I’m sorry.  That’s not where I’m looking to buy.”

Agent:  “You said you pulled this advertisement from the Morning News?”

Caller:  “Yes.”

Agent:  “While you were looking through the ads, did any others stand out that might interest you?  They don’t have to be listed by my firm.”

Client:   “About 5 or 6.”

Agent:  “That’s great.  I can actually look them up for you now in our database.  I can pull up all the information and let you know those prices as well.  It’s a bit easier than you calling through different agencies for information.”

Caller:  “Really?”

Agent:  “Definitely.  Actually, we have a great software program at our company as well that helps us to find the perfect property.  Each morning, the program searches all the new properties that came on the market in the last 24 hours by every agency in the system.  It then emails you a copy of each of the new listings as they come on the market.  This way, you know about properties before the big commercial sign even hits the lawn.  The best listings sell quickly, often before a sign goes up.”

Caller:  “That sounds great.”

Agent:  “Well, let me pull up information on the other properties you drove by, and then we’ll talk about your needs and try to get you into our Automatic Property Search program.”

 


 

 *  All Scripts and Information are Copyright 2007 Loren Keim and Keim Enterprises, Inc.

Handling Sign Calls

Commercial property signs are one of the best sources of buyer and tenant leads.  When possible, I’ve used “Available” signs to attract both buyers and tenants.  Some property owners request the sign to read “For Lease” or “For Lease Only” so the tenants aren’t concerned about a property sale.  However, generic commercial signs with your company’s logo and the words “available” can attract a broader base of callers.  Keep in mind that all property advertising is to attract potential buyers and tenants.  These buyers or tenants may not want this particular property, but as you become skilled at switching buyers and tenants between properties, you’re more likely to sell and lease your listings.

Buyers or tenants calling on a particular property are often surprised by the asking price.  They obviously already know and like the location of the property, so the likely objections are either the asking price or the size of the space.  In either case, your goal is to find out what price range the caller is comfortable with, or what size the caller requires.

 

Caller: “What is the asking price for the property on 5th and Broad?”

Agent:  “Let me pull up the details on that property on my computer.  I’ll have it in a second.  Are you looking to purchase or lease a property?”

Caller:  “I’d like to buy.”

Agent:  “Is that the general location you’d like?”

Caller:  “I’d like to stay close to I-78.  I need access to the highway.”

Agent:  “I have that property on my screen now.  They’re currently asking $600,000.  How much were you looking to spend?”

Caller:  “Wow.  That’s high.  I’m not looking for anything over $350,000.”

Agent:  “No problem.  What type of building and what size are you looking to purchase?”

Caller:  “Well, I need at least 2500 square feet.”

Agent:  “And you’d like something free standing, like the property on Broad?”

Client:   “That’s not necessary.  I just need some visibility.”

Agent:  “Okay.  I remember a similar property that was for sale in the area.  I don’t think it had a sign on it, because the owner didn’t want anyone to know he’s selling.  Can I look that one up for you and call you back with the information?”

Caller:  “That would be fine.”

Agent:  “Great.  What’s your phone number?”

 

An alternate approach to sign calls is to try to determine if the caller has written down several properties.  Buyers or tenants looking for properties tend to drive through areas, and may write down the agency names and numbers on several properties for lease or sale.   Rather than allow the prospect to call several other agents, who may pick them up as a potential client, you can research the same information for them.

 

Agent:  “While you were driving around, did you see any other properties that interested you?  They don’t have to be listed by my firm.”

Client:   “I noticed a few.”

Agent:  “That’s great.  I can actually look them up for you now in our database.  I can pull up all the information and let you know those prices as well.  It’s a bit easier than you calling through different agencies for information.”

Caller:  “I didn’t realize you could do that.”

Agent:  “Definitely.  Actually, we have a great software program at our company as well that helps us to find the perfect property.  Each morning, the program searches all the new properties that came on the market in the last 24 hours by every agency in the system.  It then emails you a copy of each of the new listings as they come on the market.  This way, you know about properties before the big commercial sign even hits the lawn.  The best listings sell quickly, often before a sign goes up.”

Caller:  “That sounds great.”

Agent:  “Well, let me pull up information on the other properties you drove by, and then we’ll talk about your needs and try to get you into our Automatic Property Search program.”

 

Incidentally, most agents have access to automatic search programs.  Different MLS systems offer the service.  Loopnet and other websites offer similar services.  What differentiates you from the competition is that you’re using it as a tool to convince buyers and tenants to work with you.


*  All Scripts and Information are Copyright 2007 Loren Keim and Keim Enterprises, Inc.

What IS Prospecting?

Many years ago, I found myself without a date for Valentine’s Day. It was February 11th and I was in my mid-20’s. 

I had recently broken up with a long-time girlfriend and wasn’t sure what I wanted in a relationship. So I went to the local florist and ordered a dozen roses. I then asked the florist to send one rose to each of twelve different young women I had selected. The florist said “You’re kidding, right?” I wasn’t. That’s called prospecting. Select a target audience and let them know you have something to offer them.

In the Real Estate Industry, as in most sales professions, prospecting is a dirty word. Far too many Realtors enter the field of Real Estate believing they can wait for the phone to ring and earn an above average income if they only select a brokerage with great advertising. Most new agents, as they venture into this endeavor, expect that the company will generate leads for them. While it is true that most good real estate organizations generate some buyers and sellers from the advertising done by the company, you will not make a great living at any company waiting for the phone to ring. That is the kiss of death in the real estate industry.

Prospecting, however, is not simply picking up the phone and calling possible buyers and sellers. To be effective, prospecting must be a consistent planned process.   Your goal is to create a steady flow of business into your pipeline that will result in an above average income.

Your business will build like a wave over the long term of your career if you deliver exceptional service. Starting small, it can grow to tsunami proportions as more and more of your past clients, business associates, friends and relatives refer you business. It’s a process to create those referrals, and you have to survive long enough in the industry, making a living, until you have a database of people who like and trust you that will continually feed and expand your business and client base. 

There are two fundamental truths about prospecting.

The first truth is that you must prospect consistently to be successful. Set aside time each and every week to perform the task. If you don’t block out time, other stuff will get in the way. “Well, Loren, I couldn’t prospect today because I really needed to go shopping for groceries, and I had an out-of-town client, and I had this awful hangnail.” My experience with training hundreds of Realtors over the years has taught me that prospecting is the hardest part of any real estate career. The number one reason that Realtors fail in this industry is that they fail to schedule the time to find prospects. This is particularly important early in a Realtor’s career. In the long run, Realtors who deliver exceptional service receive many referrals from their clients, which limits the amount of prospecting successful Realtors need to do. However, when building a real estate business for yourself, you need to look at the various options available to seek out qualified property sellers and buyers.

The second truth is that prospecting is a process, not an event.  Some real estate trainers teach Realtors to randomly pick up the phone and call people until they get an appointment. A much smarter approach is to carefully select a target market that you feel is not being serviced, or where you may find a competitive advantage, and lay out a game plan to target that audience. The game plan will include a method, or several methods, of contacting the target audience, a reason for your contact or something of value for the group you’re prospecting, and a systematic way to follow up with that group.

The Prospecting System: 

There are four steps to a successful prospecting system. 

1. Select Your Target Market - Determine who you want to be the recipient of your message, advertising, or direct prospecting.

2. Select Your Method of Contact - There are literally hundreds of methods of contacting prospective buyers and sellers in your marketplace. Methods may include phone calls, door knocking, emailing, mailing, and some special deliveries. Some of them are quite fun, like delivering flags or pumpkins.

3. Give Your Prospect Something of Value - The primary goal of prospecting is to identify a potential client. You want to entice a client to raise their hand and acknowledge that they may be in the market to buy or sell some time in the near future.

4. Follow Up Consistently - Once you’ve identified prospective future clients, you’ll need to begin building a relationship with them.

Again, prospecting is a process, not an event.  You can hope for business, pray for business or go get business.  It's your choice!

 

Real Estate Prospecting: The Ultimate Resource Guide

This book is the ultimate game plan for prospecting. It carefully outlines methods to select likely groups of prospects, how to contact those target groups, what to offer them, and how best to follow up. 

As a Realtor needing listings and sales, you can Hope for Them, Wait for Them, or Go Get Them. This innovative book lays out a game plan to identify people who want or need to move, to find a way to meet with them, and then to consistently follow up. As the author states, "Prospecting is a process, not an event". Filled with scripts, dialogues, sample letters, sample postcards and complete prospecting attack plans, this book is certain to help any real estate career blossom.

Cleaning Up Your Credit

Cleaning Up Your Credit!

Far too often, the first time an investor finds he or she has a credit issue is when that investor first applies for a mortgage. Credit issues can take several different forms. The investor may be young or new to the country, and have not established credit yet. Perhaps the investor is part of an “old school” and has always purchased cash without establishing a credit history. Or, more commonly, an investor who has missed a few payments over the past few years, seriously impacting their credit worthiness in the eyes of a lender. To improve your credit score, you should follow a 3 step process. First clean your existing credit. Next establish new credit, and last you should maintain clean credit forever!

Also keep in mind that your late payments are just one part of the overall picture of your credit. Having a significant number of open accounts can look to a lender (and the credit reporting agencies) that you could borrow significantly at any point in time from the available or open accounts. If you have too many credit cards, lines of credit or open accounts, you could be denied credit on the basis of having a high “debt-to-income” ratio. 

Cleaning Your Credit

Cleaning your current credit report is the first step in maximizing your credit score. Bob Wilfinger of Homestead Funding explains the first rule of credit cleaning, “No matter what you hear or see on late night television, not all bad credit can be removed!” You can dispute each late payment and any derogatory information individually with the credit reporting agencies, like Equifax, Trans Union and TRW. Some creditors will remove negative information, rather than argue the information. Some creditors will fail to respond. Several books and dozens of articles are available to those with the fortitude to fight creditors on their own.

An alternative is to hire a credit restoration or credit repair service. These companies take advantage of the Fair Credit Reporting Act to argue your case with creditors and eliminate many of the negative entries. “Negative entries can stay with you and affect your credit for 10 years.” according to Loren Keim of Century 21 Keim Realtors. “It’s important to eliminate as many as possible.”

Establishing New Credit

Even with some cleaning techniques completed, your score may not be high enough to borrow a significant mortgage on an investment property. Do not go out and start applying for credit cards. This can actually damage your credit again. If you apply for a card, apply for ONLY one card. Multiple inquiries appear to a lender to be in a financial jam, needing to borrow money. Slowly establish credit by applying for an easy credit line or credit card, a secured credit card, “piggy backing” on a relative or using an installment loan.

Even with fair or poor credit, a borrower can often obtain a credit card. Some department stores, gas stations, or other retailers offer consumers credit cards with fair or no credit history. The interest rates on these cards are often very high. You can apply for a card like this to establish a history of credit payment. Make sure to always pay the car on time.

A Secured Credit Card, unlike a typical credit card, is really a savings account that has a line of credit against it. By placing $250 or $500 into a savings account, you will be allowed to “charge” up to that $250 or $500 on that card. To obtain a secured credit card, check with your local bank or a bank you do business with. If you can’t find a local bank, several national banks are now offering this service as well.

“Piggybacking” on a relative is the idea of borrowing their credit to improve yours. Parents will often add a card in their child’s name as an authorized user of the card. When the parent, relative or friend adds you to their card, you will receive a card in your mail. File this card away without using it. Don’t ever risk a family member or a friendship by abusing their credit!

Another method of adding good credit to your report is by creating an installment loan. If you purchase a car or appliance on this type of loan, make sure that the creditor reports the loan, and then pay it on time. 

Maintaining Credit

After taking the time and significant effort to repair your damaged credit and to start building new credit, you don’t want to make any mistakes. Some of the suggestions to keep your credit good are simple, like “Don’t miss a payment”. Other suggestions include keeping your open accounts open and use them periodically. Still other suggestions include not paying the minimum balance on outstanding loans, and don’t apply for more than one loan or credit card at a time.

Keeping your open accounts open is showing that you have access to some credit. Make sure you have activity in the open accounts. Even a balance of $50 or $100 will show that you are making payments on an account and will help to improve your credit score over time. Again, do not apply for more than one loan or credit card at a time. Multiple inquiries can make you appear to need money to a lender, and inquiries can actually drop your credit score.

Pay more than the minimum required on open accounts. Many accounts are set up that if you pay the minimum, you’ll be paying off the debt for 20 or 30 years, and interest will accrue on the outstanding balance every month. A wise person will pay down as much high interest debt as possible as quickly as possible.

Many people think that being debt-free is a positive trait valued by lenders. Nothing could be further from the truth. A borrower with no credit history is in worse shape than one with bad credit. A creditor wants to see a history of how you handle debts. You should know that correcting; building or re-building a credit report is not a quick- fix situation. It could take up to a year to complete but it can be done and it is well worth the time and the money. Just follow the basic outline presented here.

Building good credit is like building a good reputation. They may not be easy to create. They take time and effort. Be careful in your use or application of credit, and make sure you pay all your bills on time. Good credit is one of your most precious assets and should be respected!

Farming for Business

The most commonly discussed long-term method of prospecting is farming. A farm can be a geographic area, such as a particular neighborhood or area around a particular school, or it can be a property type, such as historic homes, farms, vacant lots, or town homes. The downside to farming is that you will need to contact the same group over and over until they begin to recognize you. It may take a year to eighteen months to actually see any results from your work. The upside to farming is that once you become known as the specialist in that area or property type, it becomes very difficult for another Realtor to unseat you.
 
In order for farming to work, whether you’re targeting a geographic area or targeting a type of property, you must be consistent in your message and you must be in front of the group regularly. 
 
The most effective farming, like everything else, is face to face. If face to face is impractical, you can try mixing methods. Try interspersing phone calls to the farm and mailing to the farm. Simply mailing to the group will take far longer to build any sort of relationship. Remember what we discussed earlier in this book about those individuals who open their mail over an open garbage can. You may never impact many of the people in your farm area simply by mailing.
 
One of the country’s top sales trainers and an incredible motivational speaker, Tom Hopkins, was a master of farming. He would visit the same geographic area on a monthly basis, meeting each owner in person. His consistent effort to be in front of his farm area led him to be one of the top real estate professionals in the country.
 
One of the stories about Tom Hopkins that is most often repeated in real estate circles is how Tom hired neighborhood kids one year to help him deliver pumpkins to everyone in his farm area. He was so well remembered for the pumpkins that he put a picture of a pumpkin on his business card.

Short Sales when you have multiple mortgages

By Loren Keim

            Many home owners are facing the difficulty of dealing with more than one mortgage on their home.  In order to transfer the property to a new owner, all liens and mortgages against the property have to be satisfied or released.  Whether you are the Realtor assisting the home owner, or you are the home owner, you'll need to negotiate with all parties to complete the short sale.

            Negotiating with two or three lenders, rather than one, seems like a daunting task.  After all, it took you two and a half hours just to get the first one on the phone.  There is a bright side, however.  Second and third lien holders, whether they are equity loans, second mortgages or any other liens, typically receive little or nothing if the home is foreclosed by the primary lender.  This simple fact may make the lenders more receptive to reduced payoffs (and in some cases, significantly reduced payoffs).

            When a foreclosure sale or Sheriff's sale occurs, the property is sold to the highest bidder.  Many homes that go to foreclosure do so because the home owner owes more than the home can be sold for in the current market.  The holder of the first mortgage or principal mortgage will typically bid on the home as high as the balance on the first mortgage or as high as the amount the mortgage holder believes they can sell the property for, whichever is lower.  Lenders bid in this manner in order to recoup the maximum they can from the property.

            In many cases, the bid from the first mortgage company or primary lien holder is the highest or winning bid.  A Sheriff's Deed or Trustee's Deed is filed to deed the property back to the winning bidder, and the loans are all extinguished from the title.  This leads to home equity loans and second mortgages receiving little or nothing from the foreclosure sale.

Example:  Property is foreclosed by lender.  There is a first mortgage of $180,000 and a second mortgage of $35,000.  The lender believes the property may be resold for $200,000.  The lender will bid up to $180,000 to insure their loan is repaid through the sale.  If others bid above $180,000, the balance is paid to the junior lien holders and then to the owner in that order.  If the primary lender is the high bid, the junior lien holders get nothing.

             Property Value:       $200,000
          1st Mortgage:             $180,000
          2nd Mortgage:            $  35,000
           ________________________

            Total Owed:              $215,000

Primary lender may bid to $180,000.  If the primary lender buys the property back at $180,000, the junior lien holders (second mortgage, home equity loans) get nothing from the sale. 

            The existence of second and third lien holders may make the negotiation with the first lien holder more difficult because the first mortgage company may believe that they can recoup their entire mortgage in the foreclosure process.  All the losses of the short sale may have to be carried by the second mortgage company or any other junior lien holders.

            As with any negotiation, the home owner must be prepared to understand that the first mortgage company may reject the offer of a short sale if they believe they can do better through the process of foreclosure.  If you, dear reader, are a Realtor advising clients, you must make the client aware of this possibility.

Junior Liens 

 

             There are three possible options to deal with junior liens.  Again, we're defining junior liens as second mortgages, third mortgages, home equity loans, money you owe your second cousin Rudolph, or any other lien behind the primary mortgage on the property. 

            The first method of dealing with junior liens only applies if the lien is a piggyback loan.  A piggyback loan is a second mortgage written by the same lender as the first mortgage or primary mortgage.  With piggyback loans, a Realtor or home owner may be able to negotiate with one single mortgage workout person.  In some cases, the lender may still have different people work on either loan.

            The piggyback loan allows the lender to spread the shortage of payoff over both loans.  This allocation of the payoff may allow the lender some benefits on their books.

            The second method is to simply negotiate a short payoff, as described under the previous section of the short sale process.  The second lien holder will likely have all the same required documentation as the first.  This mortgage company will want to see exactly how much they'll be receiving from the sale based on a preliminary HUD settlement sheet from a title company, attorney or escrow agent.

            Remember when dealing with the second mortgage holder that they are likely to lose the entire loan if the owner defaults and goes to foreclosure.  That may allow you as either the Realtor or owner to negotiate a payoff that is a fraction of what is owed on the loan. The recourse the second mortgage holder has, however, is the possibility of filing a deficiency judgment should the property go to foreclosure, depending on location and applicable laws.

            In order to settle a property with a first and second mortgage, the lender needs to understand their bottom line at the end of the transaction.  Assuming the sales price is within an acceptable range of the market value, the first mortgage and closing costs to settle must be paid at settlement.  The second mortgage holder must be willing to accept what is left as payment for the lien in order for the borrower to close the loan under this scenario.

Example:  A home is valued at $200,000 and receives an offer of $200,000.  In order to settle the property, closing costs are $13,000 including Realtor fees, transfer taxes, notary and filing fees.  An outstanding first mortgage of $170,000 exists and the second mortgage is $50,000.

 

            Sales Price:                $200,000

            Closing Costs:           ($  13,000)

            First Mortgage:         ($170,000)

            __________________________

            Balance:                     $   17,000

 

In this scenario, the second place mortgage company must be willing to accept $17,000 in lieu of the $50,000 balance on their loan.  As with any short sale, an owner should get something in writing from the lender stating that they are accepting this payoff as payment in full for the loan, and that the lender will not pursue civil action for any balance at a later time.

             If the lender is unwilling to release the lien at an amount equal to what is left after the first mortgage is paid, as shown in the example above, the alternative is for the home owner to accept a personal note for the difference.  At this point, the home owner can elect to file bankruptcy or allow the property to foreclose, but should give serious consideration to their situation.

 

For more information on the step by step process, check out "Short Sales: Step by Step" at Amazon.com.    

Loren Keim is the author of several books including "Short Sales: Step by Step" and "How to Sell Your Home in Any Market"

Risks and Rewards of Short Sales

By Loren Keim

Selling your home through a short sale is not for everyone.  There are pros and cons, or benefits and challenges to the process.  Before you do anything, you should consider all the possible options available, which are outlined in the last section, and perhaps consult an accountant, Realtor and even an attorney.

The Pro's of a Short Sale 

            What are the benefits or positive aspects of agreeing to sell a home with a short sale?  Why even consider a short sale?  Isn't it far easier to stop the harassing phone calls from the lender by simply walking away from the home, or giving the home back to the lender in a deed in lieu?

            In many states, when a lender forecloses on a property or takes back the property through a deed in lieu, they still retain the right to go after the home owner for the difference between the amount that the lender sold the home for and the amount that was owed on the home. This is known as a deficiency judgment.  What this means is that the lender may continue to hound you forever until the debt is repaid or you file bankruptcy.

            To clarify, there are laws and regulations in different parts of the country that limit or disallow this practice.  There are also laws being considered that may reduce or impact this practice.  Since this book is being written in a snapshot in time, and the mortgage crisis is fluidly changing, you must consult a professional.  You should always determine your rights and obligations prior to making a decision, and legal counsel is the best method to understand these.

            Another strong benefit is the possibility of preserving some credit for the borrower.  Although we don't have access to the formulas used by credit agencies to determine an individual's credit score, we can guestimate the potential outcome based on our work with customers in short sale situations.  Unfortunately, the credit reporting agencies appear to do a better job hiding their formulas than the government hides their nuclear secrets.

            Our analysis suggests that while a foreclosure may cost the borrower 200 to 300 points of credit score, a short sale may only cost 80 points to 120 points.  Again, you can't take these numbers to be gospel, but it does appear that a short sale impacts your credit significantly less than a foreclosure or bankruptcy, meaning that you can rebuild your credit more quickly.

            One further benefit of the short sale process is that the lender typically pays the bills for the borrower's closing costs to sell the property.  In essence, these costs are deducted from the net that the lender receives at settlement, but they are not paid by the borrower.

The Cons of a Short Sale 

            Several aspects of a short sale concern home sellers, and many that concern potential buyers of homes sold subject to a short sale.   For example, the home owner may go through a lot of work and pain to locate a buyer, negotiate a sale, and fill out all the required documentation of the lender just to be turned down by the lender.  Although we've found this situation to be rare because the lender is more likely to respond with a counter proposal, it is still a risk. 

            The reward of avoiding a bankruptcy or foreclosure on the owner's credit is often worth the risk of a denial. 

The risk for buyers in this scenario is that they could potentially waste sixty or ninety days waiting for an approval on the purchase of a home only to be shot down by the lender.  In many cases, however, the risk is worth the wait.  The potential value the buyer may receive in purchasing the home at a discount may be worth the risk of being denied.

            Another common complaint by home owners considering short sales is that the owner may not receive proceeds from the sale of the home.  "We need money in order to move!"  Unfortunately, the home owner made a commitment to purchase the home, take out the mortgage and made a guarantee to pay that loan back.  In a short sale, we are asking the lender to take less than they are owed.  In some cases, we are asking the lender to take far less than they are owed.  They gave the home owner a loan in the first place, and they are taking a significant loss.  They are certainly not going to give money back to the borrower.  They'll simply foreclose and resell the home at a later time.

Worse than the home owner receiving no proceeds from the sale is when the bank or lender only agrees to accept the short sale if the borrower agrees to take a personal loan for part of the loss.  Although this means the borrower may have to make an additional payment on a home they no longer own, it also significantly reduces their liability on the property and again, can save the borrower's credit from the damage and stigma of a bankruptcy or foreclosure. 

Additionally, the borrower doesn't have to accept the lender's proposal either.  The borrower can decide, after receiving this proposal, to file bankruptcy or walk away and allow a foreclosure.  Typically, if the lender is requiring a personal note or loan for part of the balance, it is because the borrower has sufficient income to justify the expense and, in our experience, the loan is typically for only part of the shortfall.  The lender is trying to share the pain.

One final note: lenders will typically not allow a home to be sold short to a relative or close friend of the current owner.  Most lenders are now requiring "arm's length" clauses requiring the owner to disclose any relationship with the buyer.

For more information on the step by step process, check out "Short Sales: Step by Step" at Amazon.com.    

Loren Keim is the author of several books including "Short Sales: Step by Step" and "How to Sell Your Home in Any Market"

The Truths and Myths about Property Flipping

Let’s start with the bad news. The bad news is that most new investors have a misconception about buying property for the purpose of flipping and think it's far easier than it really is. More bad news is that most investors believe foreclosed properties are their best investment for real estate flipping, and this generally isn’t true. “Cheap Foreclosures” are often a misconception. However, there is a light at the end of the tunnel. If you work hard and seek out the best properties, you can not only succeed, but you can create phenomenal wealth.

What are the Misconceptions?

Misconception #1 - Banks will sell foreclosed properties REALLY cheap

Many buyers mistakenly believe that foreclosed properties are bargains and that lenders will sell a foreclosed property at half or less than half the value of the property in order to quickly get the property off their books. Unfortunately, this simply isn't true. Banks and Lenders are very astute investors, and while they do not want to hold onto non-performing properties, they likewise wish to get full market value for every property in their portfolio.

Everyone has heard the story of a relative or friend who purchased a foreclosed property at 10 cents on the dollar and fixed it up. Unfortunately, most of these stories are exaggerated and the really good deals are few and far between.

When a lender forecloses on a property, the lender will have at least one local appraiser evaluate the property to determine that property’s "Fair Market Value". Some lenders may sell the property at 5-15% below the "Fair Market Value" in order to dispose of the property quickly. Other lenders will hold out for the appraised value and will not accept any "low" offers.

So what is the benefit of buying these properties if you can't buy them cheaply? There are several. Again, some lenders will sell properties at 5-15% below market, which gives you immediate equity. If these properties need repairs, renovations, or reconditioning, the Fair Market Value of the property will take into consideration the cost to complete these repairs as well as a reasonable value for the buyer to have done the repairs. In other words, if the home needs painting, the appraiser may value that painting at $2000, and may reduce the Fair Market Value of the property by $3000 or $3500 because the buyer will have to go through the effort of hiring someone to make this repair. In order for you to make profit on the property, you would have to be willing to do much of the work yourself. If you were willing to paint the house, the paint and supplies might cost $350, but you'll already be ahead by $2650 to $3150 in value when you're completed. 

Misconception #2 - You can double your money by fixing up a house and re-selling it

While it's true, we've had clients double their initial investment in a property when they sell it, it's rare that an investor will make a killing on one property. The object is to make a good return and keep re-investing so you can build a nest egg. If you make an average of $6000 per house after all expenses, and you'd like to make $60,000 per year from your real estate investing, you must turn over 10 homes each year.

The investor may obtain the property at a much lower purchase price, if the repairs or renovations to the property are significant. As we explained, if the property needs paint, the appraiser will reduce the Fair Market Value accordingly. If the property needs carpeting, kitchen cabinets or flooring, electrical upgrades or other renovations, the appraiser will likewise reduce the value. If you, as an investor, can handle the renovations and repair the property yourself, and there are enough repairs, you can often make $5000, $10,000 or $15,000 on each property. 

Additionally, homes that show “like new” will often sell for far more quickly and for more money than homes that are simply in average condition. Making a home sparkle may dramatically increase the return an investor will make on a property.

In order to make a smart buy, have your real estate professional help you determine what the Fair Market Value of the property will be "fixed up" and determine what it will cost you to repair the property and resell it. Then attempt to have your real estate professional negotiate to purchase the property lower than Fair Market Value to give you the best return possible.

Misconception #3 - HUD Properties are one of the best investments for real estate investors

While it's true that HUD foreclosures can be great investments, it's also true that they are difficult for investors to buy at the right price. The Department of Housing places these properties up for sale in a "bidding" situation where they accept bids until a certain date and then take the highest net bid to them.

Any HUD authorized real estate professional can show you these properties and write your bid. Most HUD foreclosures are initially open only to live-in owners. A non-live-in investor may not bid during these initial bid periods. If you attempt to "fool" the system by pretending to be a live-in investor, the consequences can be very severe in civil charges and fines. Many of the best properties sell during this initial offering.

Once the initial offering is over; if no offer is acceptable to HUD, the bids may be opened to investors. On HUD’s “bid” site, www.hooksvanholm.com, these properties are listed as "available to all buyers". Please keep in mind that these properties, like all foreclosures, are appraised by licensed appraisers in order to determine the property's Fair Market Value. HUD has greater latitude in their selling prices and therefore can sometimes have better buys than conventional banks.

The Best Sales - The best prices for investors are often not obtained on foreclosures, but rather from Auctions and Estate Sales where the property has not been formally appraised. Other great properties are foreclosed properties that have been on the market for a significant period of time and have been reduced in price. Many investors view foreclosed real estate when they first come on the market for sale. If the property doesn't sell initially, lenders will often lower the property prices in 30 or 60 day increments until the properties sell. Often these properties that have been on the market for a while may not be revisited by large investors.

One last note, When you're buying to FLIP the property: Make sure you calculate the amount of time it will take to dispose of the property once it's fixed up. Your carrying costs must be included in the costs to purchase the property. Too often investors forget the cost to maintain any credit line payments, taxes, insurance or utilities for the time period of holding the property.

Good luck in your investment search. More property flipping information and techniques can be found on our website at www.REInvestmentDigest.com .

12 Deadly Mistakes Made by Investors

Ownership of property is the hallmark of free society. Investment in Real Estate can provide an investor with many great benefits such as positive cash flow, tax benefits and sometimes quick capital when a property is fixed up and resold for a profit. However, real estate, like any good investment, has risks. If you purchase real estate as an investment without first considering the numbers, location, market trends, repairs and maintenance, you could place yourself in dire jeopardy! 

Many investors buy real estate without first double checking the income figures, comparable property values or even studying the property they are purchasing. Too many investors rely on their feelings rather than hard facts.

Deadly Mistake #1 - Failing to verify Seller's Income Figures - Many sellers or their real estate agents will show you figures that depict a best case scenario. You need to know exactly what kind of return the building is doing right now. 

Check out the rental history, payment history, taxes, expenses, repair bills and repairs necessary for continued income. You need to know the vacancy rate and why the rate is what it is. If you believe you can dramatically increase the income of the property, find out why the rental income hasn't been up to par. And make sure you have the right real estate agent who knows income property and rates of return. Your real estate agent should be able to spot obvious problems with condition or possible repairs.

Rule #1 in making money in real estate is always to “buy right”. Buy based on the current income or return with an eye toward the potential. Always resell on the maximum potential of the property.

Deadly Mistake #2 - Failing to perform a thorough inspection - Check every inch of the building! Then go back and check it again. You are always wise to hire a professional building inspector. These are people who are trained to look over a building for possible flaws or future problems. Far too many investors buy properties without an inspection. Make this a condition of any offer. Ask the tenants about pest problems or re-occurring problems. Tenants may make a problem sound worse than it truly is, but are a good source of finding potential problems.

Also, when choosing an inspector, ask for references from other investors or from a good real estate team. A top notch inspector can make the difference in finding any potential structural or system problems in the future! 

Deadly Mistake #3 - Double check and inspect all documents - New investors may find the list of documents overwhelming. You need to check every single lease on the property. Many investors are blind sided by strange or special clauses a prior landlord placed in a lease.

Go over the purchase contract, all inspection reports, insurance reports, health licenses if any, laundry leases, loan documentation for the purchase, by-laws, title policies, building permits if necessary, zoning laws, and more. Don't attempt to do this alone. The right professional Realtor or attorney can help explain the documentation and verify information.

Deadly Mistake #4 - Double check the zoning approvals - Too often, new investors buy a 3 or 4 unit building, only to be notified by the City later that the property was never a conforming use and the previous owner did not obtain the necessary permits and zoning variances to convert the property to a 3 or 4 unit. In some cases, new investors have had to convert multi-unit buildings back into single family properties at considerable expense to themselves. Make sure to check with the tax assessor’s office and zoning authority that the building is a legal and conforming use.

Deadly Mistake #5 - Failing to determine what type of real estate investment is best for you - Do you need a quick return on your investment? Must you make your capital liquid again within a year? Or are you in this for the long haul, creating for yourself an income for the next several years or decades? Whatever your needs, sit down and discuss them first with your real estate professional or financial advisor to determine which direction to take: Property Fix Up and Flip, Property Investment for Return, Property Conversion or Development.

“By aligning yourself with a successful and knowledgeable real estate team, you can significantly cut your risks in investment” according to Theresa Keim of Century 21 Keim Realtors Allentown office.

Deadly Mistake #6 - Failing to understand the difference between cash flow and capital appreciation Are you looking for cash flow or capital appreciation? Do you understand the tax benefits? Are you looking to get a great cash flow in a building that may not appreciate, although you'll most likely be paying down the principal on the mortgage loan. Or are you looking for something that may not make as much each month, but will appreciate and become a retirement nest egg?

Often urban areas generate the highest cash flow, giving you a great return on investment. Although many urban areas have risen significantly in value over the past few years, many urban areas historically have not had much appreciation. Conversely, some “hot” suburban markets may provide you with the highest growth in property value, but are often bought just above break even, with very little return.

Have your real estate consultant review the different options with you and evaluate your needs so you can make a firm determination.

Deadly Mistake #7 - Don't forget you are buying a business - Whether you're buying a 3 unit apartment building, a 50 unit complex or a parcel of land to develop, you are purchasing a business, not just an investment. Many of the greatest investors in history have made wealth in the real estate market, but along with that potential for wealth is the possibility for hard choices. You may need to decide at some point in the future of re-investing in the property, the amount of time and energy you devote to the property and more.

Deadly Mistake #8 - Failing to have enough insurance – When you purchase investment property, you also purchase the liability of investment property. Adequate insurance coverage is a must! Be sure to consult a professional insurance agent to determine the coverage that you need.

Deadly Mistake #9 - Make sure all Personal Property is included in the Agreement of Sale - Investors often provide appliances and sometimes furniture for their tenants. Make sure a complete list of appliances and personal property is included as part of the Agreement of Sale. The last thing you want is to find items missing when you settle on the property!

Deadly Mistake #10 - Don't attempt to overcharge for rents - An investor's biggest expenses are vacancies and turn overs. Your goal is to keep tenants in your units as long as possible. With the same tenant in a unit for several years, you have less expense in vacancy, advertising expense and utilities. If you charge fair rents, you're more likely to rent more quickly and you're more likely to keep those tenants for longer periods of time.

Deadly Mistake #11 - Not thoroughly checking a prospective tenant - It's far easier to take a little extra time and select the best possible tenant up front than to spend much more time attempting to get a bad tenant back out! Check a prospective tenant's credit, their previous landlord history, financial references and even their employment. Keep in mind that people who jump from job to job often jump from apartment to apartment.

Deadly Mistake #12 - Spending Cash Flow - The most successful investors have properties that are debt free. Keep an account for emergency repairs. Then take the remainder and re-invest that cash flow into the property payment. Speed up the amortization schedule. This decreases your debt load and increases your equity which builds your net worth.

Editor’s Note: Loren Keim has been a successful Real Estate Broker with Century 21 Keim Realtors for 22 years, and has assisted hundreds of people to invest in Real Estate. Loren can be reached at his office at 610-395-0393 x206. 

Understanding Commercial Property Classifications

It would be impossible to itemize every single type of real estate investment vehicle.  There are literally hundreds of real estate investments.  Some are passive, like REITs (Real Estate Investment Trusts) and TICs (Tenants in Common) projects, and some are very hands-on, like buying an existing business or developing a mixed use parcel of land.

However, when searching for the right real estate investment vehicle, you should have a broad understanding of the different classifications of the various major real estate investments.  Many experts and organizations have tried to categorize commercial and investment real estate into between five and twelve different broad categories.  This breakdown is from the book "The Fundamentals of Commercial Real Estate" by Loren Keim.  He divided commercial and investment real estate into ten broad categories.

  1. Office Buildings / Office Space - including general Office Buildings, Medical Office Buildings, R&D Office Buildings, Institutional or Governmental Buildings, Executive Office Suite and Office Condos.
  2. Retail Buildings / Retail Space - Free Standing, Pad Site (McDonalds), Big Box Retail (Home Depot), Small Box Retail (Gift Shop), Special Use (Automotive Garage, Greenhouse, etc),  Retail Condo, or Residential Conversion.
  3. Shopping Centers - Malls or Open Air Shopping Centers
  4. Industrial / Flexible Space - Flexible or Flex Space (often found in office parks), Distribution or Warehouse (Bulk Properties), Manufacturing Facilities, Research and Development, Self Storage / Mini Warehouse, Truck Terminal, Cold Storage / Refrigerated Space
  5. Hospitality Property - Hotel / Motel (Economy / Limited Service, Full Service, Extended Stay Hotels, Resort / Convention Center, Bed and Breakfast / Country Inn), Casino, Luxury Spa, Timeshare Complex / Shared Ownership, Golf Course, Marina, Camp Ground / Recreational Cabins, Amusement Park / Water Park / Indoor Water Park, Special purpose (ski lodge, private beach, etc),  Mixed Use / Combined Use Property
  6. Multifamily Property - Apartment buildings.
  7. Farm and Ranch Property
  8. Business Opportunity - Business sales that may or may not include the physical real estate.
  9. Vacant Developable Land - Commercial or Residential.
  10. Senior Housing / Long Term Care Facilities - Independent Living, Assisted Living, CCRC / Life Care, Dementia Care, Nursing Care / Nursing Homes

Buying of Selling a Business Opportunity

Buying or Selling a Business Opportunity

As large industrial companies have downsized over the years, many former employees and managers have opened small businesses, purchased franchises, and started a life independent of the rat-race of corporate America. Small businesses include restaurants like a Subway and Quiznos, laundromats, flower shops, tanning salons, fitness centers, mini markets, auto repair, or anything in between.

"We have customers", explains Tim Mahon of Century 21 Keim Realtors in Bethlehem "who were former Engineers or corporate managers who are buying Curves, Subways, or any number of small business opportunities in order to work for themselves."

Buying or selling a business is often more complicated than simply buying or selling an investment property.  Purchasing any type of real estate is generally not a completely passive method of investing, however, purchasing a 3 unit apartment building to rent to tenants is generally far more passive than purchasing a business that an investor may have to personally operate.  While it is true that some businesses are sold complete with management and very little need for direct supervision by the investor, most require the investor to step in and make the business their career.

Some business opportunities include the real estate they occupy, and others simply include the equipment, name of the business, employees and "good will" of their past performance.  Businesses are priced based on their Net Profits.  Although many business owners would like the price to be based on their cost of equipment and inventory, banks and real estate professionals understand that the buyer will not pay a price that will give the buyer no return or a negative return on their investment.

"Small businesses can often be difficult to finance as well.  A buyer should always consult a mortgage banker that deals with the sale of small businesses," explains Bob Wilfinger from Mecco Commercial Funding in Allentown.

Business opportunities are generally categorized by a business category:

  • Retail Business - like a Dunkin Donuts, a Jiffy Lube, a Laundry, or a Subway Restaurant.
  • Professional Business- such as a Dental Office or an Insurance Office.  Because of licensure requirements, these are generally only purchased by buyers in those professions.
  • Distribution Business / Wholesale Business - A distributor is the middleman between the manufacturer and the retailer.  A distributor may buy truckloads of vegetables from farms and re-sell them to grocery stores, or purchase beverages directly from the maker and distribute them to restaurants.
  • Manufacturing Business - The creation or production of anything to be sold.

Important Questions to ask any Business Owner

  • Before a buyer leaps into the purchase of a business, they should have a clear picture of how the business operates.  For example, in the salon industry, customers tend to stay with a particular stylist.  If the owner has great income on her books, but has recently lost her 3 top stylists to other salons, the business could be in trouble.  Analyze the customer base and whether the market for the business is growing, declining or remaining stable.
  • Who is the business selling to?  Directly to consumers or to distributors and wholesalers?
  • What is the businesses approximate number of customers?
  • Do any of the customers account for more than 10% of the annual income of the business?
  • Does the business only sell locally, or is it regional or national?
  • What is the trend of the market for this type of business (increasing, stable or declining)?
  • How does the business promote or market their products or services?
  • Why is the owner considering selling their business or company?

Considering a business's SWOT

SWOT is an acronym for the Strengths, Weaknesses, Opportunities and Threats of any business.   When a buyer is making a decision to change their life by taking over and running someone else's company or business, they want a very clear picture of what to expect.

  • Strengths - Clear definition of the business strengths.  This includes the location of the business, the employees or sales force, the product line and the efficiency of the operation.
  • Weaknesses - Clear definition of what challenges exist in the same areas as the business strengths.
  • Opportunities - In what way would the current owner change or improve the company?  Why isn't this being done currently?  Are there any markets that can be expanded?  Can a new market be captured?
  • Threats - Is a competitor considering opening nearby?  Is a key employee retiring?  Is there a decline in demand for your product or service?

"When buying a business, a buyer or investor should carefully consult a Realtor or Business Broker who understands the nuances of buying and selling businesses," Marc Lucarelli from Century 21 Keim's Commercial Group in Bethlehem explains.

Understanding Commercial Loan Terminology

Important Terms

  •  Mortgage - The Mortgage is the legal document that is filed at the local courthouse or recorders office that secures the property as collateral for the purchase of a property. This document secures the repayment of funds, because the lender may foreclose, or take back the property, if the loan is not repaid to the lender according to the terms of the mortgage.
  • Promissory Note - The legal promise a borrower makes to the lender that they will repay the funds. This note accompanies the mortgage.
  • Loan to Value Ratio - The ratio of the amount borrowed against a property to the appraised value of the property being secured by a mortgage. For example, a loan of $200,000 on an office building appraised at $250,000 would have a loan to value ratio of $200,000 / $250,000 or 80%. Loan to Value Ratio's are commonly referred to as LTV's.
  • Points - Points refer to both prepaid interest on the borrowed funds, called discount points, and to origination fees paid to the lender as a fee for securing the mortgage, called origination points. A borrower can "buy down" an interest rate by prepaying some interest to the lender. A point is generally one percent of the mortgage amount. If a purchaser borrows $200,000, one point would be $2000.
  • Down Payment - A buyer or investor will generally have to put some of their own money into the purchase of a property. Although there are times on particular properties with particular investors that a loan for 100% of the purchase price can be obtained, most purchases require a down payment. The down payment can be 10% of the purchase price, 20%, 30% or greater depending on the type of property, the strength of the borrower and the perceived risk to the lender. For example, taverns typically require a more substantial down payment than 4 unit apartment buildings because taverns have a much greater chance of failing and falling into foreclosure.
  • Closing Costs - There are costs to purchase a property in addition to the down payment. These costs may be lender fees, such as points, or prepaid fees, such as prepaid property taxes, or pro-rated reimbursements. Closing costs will be discussed in more detail in the next section.
  • Mortgage Payment - Mortgage loans are paid back to the lender over time. The Mortgage and Promissory Note outline the repayment terms. Mortgage payments are typically monthly, but some loans may be paid quarterly, bi-annually or annually.
  • Principal and Interest - Each mortgage payment is made up partly of principal and partly of interest. The principal component is repayment of the loan balance. The interest payment is interest to the lender for the use of the principal.
  • Amortization - Loans are typically repaid in equal monthly, quarterly or yearly installments. Each payment is made up partially of principal and partially of interest. Although the monthly payment does not change, in a fixed rate mortgage, the portion that is paid on principal increases over the life of the loan, and the portion that is paid in interest decreases.
  • Balloon Payment - Many commercial loans are amortized over a long period of time, such as 15 or 20 years, but have a specific date when the balance of the loan is due and payable. For example, a loan may be amortized for 20 years, but require a balloon payment in 5 years for whatever balance is left on the loan at that point.

Loren Keim is the author of "The Fundamentals of Listing and Selling Commercial Real Estate"