Rich Dad Education Blog

By Dick Pexton

I recently drove with three associates to a convention in Las Vegas. I had mapped out the 376 miles from Provo, Utah to our hotel in Henderson, Nevada, and had no trouble arriving there. The problem occurred when we tried to get from our hotel to the convention center.

The concierge gave us directions and said it was about 10 minutes away. We missed a turn or two and spent the next 20 minutes trying to find our way. We passed several convenience stores where we could have asked for directions, but our bull-headed driver would not stop to ask. Finally, he drove back to our hotel and started over using the original directions. This time, we arrived at our destination.

We might relate this experience to real estate investing and call this a critical path plan. There is such a plan in real estate investing, and if we follow it, our chances for success will increase.

Visualize the real estate plan by drawing a line across a piece of paper and dividing it into eight sections, or by drawing a staircase with eight steps going from bottom left to top right. These are the steps I follow in my transactions:

1. Find the money.
2. Find a property that fits your money.
3. Apply whatever formula you use to determine your offer price.
4. Make the offer. A written offer is better than a verbal offer.
5. Inspect the property, confirm your fix-up costs, and renegotiate the contract if necessary.
6. Close the purchase.
7. Fix the property as soon as possible.
8. Sell it or hold it, depending on your exit strategy.

I allow a three-to-four month maximum period for this cycle. We could take most of these steps by ourselves, but if we bring others with specific skills or services into our circle, the process moves along faster. Now, let's examine each step along this critical path plan and who could help us achieve it.

1. Find the money – Realtor, mortgage broker, hard-money lender, private lender, or partner
2. Find the property – Realtor, bird-dogs, I-buy guys
3. Apply the purchase formula – Realtor, contractor, handy-man, or inspector
4. Make offer – Realtor, or on your own if the property is for sale by owner
5. Inspect the property – Realtor, inspector, handy-man, and/or contractor
6. Close the purchase – Realtor, title company or closing agent, and/or attorney
7. Fix the property – You, handy-man, and/or contractor
8. Sell it or hold it – Realtor, property manager, or I-buy guys

Looking at the above list, who shows up the most in that critical path plan? The Realtor is in seven out of the eight steps. Why start by interviewing attorneys, accountants, or any other member of the Power Team until you have a Realtor? A good Realtor, especially one who works with investors or who is an investor, can probably refer you to the people you will need.

I am an enthusiastic supporter of quickly developing the resources that will help you as a real estate investor. My friend Robert Johnson said, "Success in any field of human endeavor is determined more by our ability to organize and direct human activity than any other single thing or combination of things." I believe that. So let's start organizing and managing our Power Team. Yes, I said, "managing." Maybe you don't have to manage your hobby but you do have to manage your business.

When coaching a new real estate investment student, I emphasize the importance of a Power Team and the need to put these resources in place within the first week. The first assignment would be to attend a meeting of your local Real Estate Investor Club or Association (REIA). Most REIAs meet monthly to provide investors with opportunities to network with other investors and potential Power Team members.

The first person you should put on your team is yourself. This is your business. In your company, you can delegate everything but ownership and leadership. You are ultimately responsible for its success or failure and are responsible for creating the company's vision, setting the company's standards, and making the tough decisions.

Let's divide the members of your team into two groups:

1. A resource group would consist of a Realtor, a mortgage broker, a hard-money lender, and a rehabilitation crew (contractor, handyman, and a housecleaning service).
2. A protection group would consist of an accountant, a real estate attorney, an inspector, an insurance agent, and a title company or closing officer.

In future articles, we will discuss these team members in detail, beginning with the important step of selecting a Realtor, or group of Realtors, if your market area is large.

This is a difficult time for many investors. Prices are down, but money is tight and loan qualification is difficult. More fortunes have been made in transitional economies than at any other time in our history. A wise person may consider ways to create multiple streams of income in addition to real estate investing but doing nothing is not a viable option for success.

Posted 12:48 PM | Permalink | Comments (0) | TrackBacks (0)

What is the difference between a market, limit, and stop order?

It’s important to remember that an order can either be a buy or sell order. Thus, there are both buy and sell market, limit, and stop orders. Furthermore, some brokers have separate orders for shorting: sell short and buy to cover. Just remember, if you enter a trade with a buy order, then it will be exited with a sell order. If you enter a trade with a sell (or sell-short) order, then it will be exited with a buy (or buy-to-cover) order. Generally after selecting whether you want to buy or sell a stock, you then select what type of order you want to enter. The market, limit, and stop orders are the three most common types of orders most brokers offer. Let’s review the definition of each one:

Market order: A market order is an order to buy or sell at the best available current price. Market orders will always get filled, but not necessarily at the exact price you want. Those that use market orders simply want in (or out) of the market NOW, and don’t mind if they get filled at a price worse than expected. I would recommend not using market orders on low volume stocks or after hours as the stock may gap up or down significantly the next day prior to your order getting filled.

Limit Order: A limit order is an order to buy or sell at a specific price or better. Generally if you want to buy a stock at the current price or at a lower price you would use a limit order. For example if stock XYZ was trading at $50 and I wanted to buy it if it dropped to $49, I could place a buy limit order at $49. This would ensure that I don’t buy the stock unless it is at $49 or less. On the other hand, if I wanted to sell stock XYZ if it traded up to $55, I could enter a sell limit order at $55. This would ensure that I don’t sell the stock unless it is at $55 or higher.

Stop Order: An easy way to think of a stop order is as a trigger order. Stop orders allow you the ability to specify a price at which you want your buy or sell order to be triggered, or to become an active order. There are actually two types of stop orders: market and limit. Let’s first highlight a buy-stop market order. If stock ABC were trading at $60 and I wanted to buy it if it traded at or above $62, I could enter a buy-stop market order at $62. Then, when the stock price reaches $62, my stop order becomes a market order.

The stop-limit order combines the benefits of a stop order with that of a limit order. Instead of turning into a market order when the stop price is reached, the stop-limit order becomes a limit order. Using our previous example, let’s assume we enter a buy-stop limit order instead of the buy market order. Our stop will be $62, and our limit will be $63. Given this order, if stock ABC reaches $62, the stop-limit order becomes a limit order (rather than a market order) to buy the stock at $63 or better.

In addition to the three orders mentioned, there are quite a few additional orders offered by different brokerage firms, including one triggers other, one triggers two, and contingent orders to name a few. After you have mastered the basic market, limit, and stop orders, try to familiarize yourself with the more advanced orders.

Posted 12:14 PM | Permalink | Comments (0) | TrackBacks (0)

I primarily trade options and have recently heard some of my trading buddies talk about hedging. What is hedging and how can it help my trading?

Investopedia defines a hedge as follows: “Making an investment to reduce the risk of adverse price movements in an asset.” We could also say that hedging is a technique primarily used to minimize one’s exposure to specific risks. Suppose stock XYZ was trading at $50 and we are long 100 shares. If the stock were to fall in price, we could lose up to $5,000. If we wanted to reduce or minimize this risk, we could enter a separate trade, such as a put option, that increases in value as stock XYZ falls. If the stock drops, although we would be losing on the long stock portion of our trade, we would make money on the put option. In other words, the profit of the put is helping to offset the loss of the stock.

Options are commonly utilized as hedging instruments for long- or short-stock positions. Long-stock positions can be hedged by either buying puts (protective or married put) or shorting calls (covered call). Conversely, short-stock positions can be hedged by either buying calls or shorting puts. If you want to take your understanding of hedging to the next level, I recommend learning more about the Greek Delta. Delta tells you how sensitive your position is to a $1 move in the underlying and can be used to gauge how much of a hedge you need for your existing position.

Within the equities market, most traders who use hedging in their trading tend to focus on hedging adverse moves in the stock price (called Delta hedging). However, within the options market there are other risks involved, such as time decay (Theta risk) and volatility (Vega risk). It is possible to minimize your exposure to time decay and adverse moves in implied volatility. Once you develop a fundamental understanding of Theta and Vega, you can begin to venture into spread trades that mitigate the risks of these two Greeks.

Posted 02:30 PM | Permalink | Comments (0) | TrackBacks (0)

I’ve seen a lot of traders using different time frames with their charts. Some use weekly charts, others use daily charts, and some use intraday charts (five-minute charts, 30-minute charts, etc.). What is the purpose of using different time frames and which one is best for me?

Let’s first tackle the question of why traders use different time frames. When we look at the aggregate of stock market participants, we see investors, position traders, swing traders, day traders, and scalpers. Each one of these traders bases their decisions off of different time frames, primarily because the duration of their trades will be different. For example, investors, having a long-term horizon, may focus primarily on weekly or monthly charts. On the other hand, day traders may focus on hourly and minute charts. Larger time frames simply display the price of smaller time frames in a more compressed manner. For example, one candle on a monthly chart represents four weekly candles; one candle on a weekly chart represents five daily candles.

Although most traders typically use one time frame, a few use multiple time frames to provide additional insights into the development of price patterns which enables them to gauge the sentiment of different groups of traders simultaneously. The best price patterns are confirmed in multiple time frames. Each style of trading should implement three different time frames: main, longer-term, and shorter-term. For swing trading, the main time frame would be a daily chart, the longer-term time frame would be weekly, and the shorter-term time frame would be an hourly or minute chart.

Here are a few tips for properly using multiple time frames:

1. Don’t trade against the trend in the longer-term chart. If the weekly chart is in a downtrend and close to resistance, buying a bullish retracement on the daily chart would have lower odds of being successful.

2. The smaller-term chart could be used to:
a. Improve the entry threshold. If the main time frame shows a bullish retracement setup, drop down to the hourly chart to find a proper bullish pattern confirming the start of the bounce suggested by the daily chart.
b. Manage the swing trade. The hourly chart will show weakness or strength quicker than the daily chart, providing quicker signals for exiting the trade.

The second part of your question asked which time frame is best for you. The answer: it depends on what style of trading you focus on. As mentioned above, if you primarily swing trade, then the daily chart is probably your main time frame, the weekly serving as the larger time frame and the hourly as the smaller time frame. If you are day trading, then perhaps the five-minute chart should serve as your main time frame, with the 30-minute chart being the larger time frame, and the two-minute chart acting as the smaller time frame. It really comes down to personal preference.

Posted 11:58 AM | Permalink | Comments (0) | TrackBacks (0)

By Del Denney

One of my favorite mission statements comes from the Notre Dame locker room. As the players rush onto the field, they have a tradition of touching a sign. It’s not just any sign. It’s a personal slogan. It’s an agenda that reads, “Play like a champion today.” I find that so intriguing. While the saying as a whole is quite profound, I want to put emphasis on the word today.

In my investing life, my personal life, and my spiritual life, today is what counts. I cannot count on the good fortune of the past, nor can I hang onto the bad things that happened to me. By the same token, I cannot and will not waste time in anticipation or apprehension of what in the future may affect me. Just as your mother told you when you were younger, “Don’t wish your life away.” With the current economic turmoil we face, it is all too easy to simply wait to take action until some future date that we have set. However, we need to stay away from the sidelines and get into the game, today.

To illustrate this concept, I would like to share a story. When I first learned to golf, I was so excited to get out on the green every time I played. Each time, I got dressed up in my nice golf shirt and slacks, retrieved my clubs from the garage, and felt absolutely pumped for a day out with the guys. Upon arriving at the first hole, I would get up to tee off, smack the ball, and watch it dart off right into the woods. Upon finding my ball, I would take another mighty whack, typically sending the ball into a sand trap. It was about this time that my buddies would chuckle and tell me that I spent more time in the sand than David Hasselhoff of the TV series Baywatch.

By then, I would be frustrated. Not only had I had two bad hits in a row, but I was then faced with the monumental task of getting the ball out of the sand trap. Did I mention sand traps are my nemesis? I would hit it again, and much to my dismay, the ball would invariably fly over the green and nestle itself in another sand trap. My whole day was often filled with frustration and, quite frankly, I often began to wish that I wasn’t playing golf anymore. My whole attitude changed for the worse in a matter of 20 minutes. Isn’t life a lot like this?

The moral of the story is this: Do not let your bad shots affect your current shot; do not let your future swings affect your current swing.

Focus on right now! Just as a golfer must focus on his or her current swing, we all need to focus on the current day. Erase from your mind what has happened in the past. Cross the bridge of your “next shot” when you get there. Success is about staying in the moment. In other words, think about the shot you are taking right now. Look around you. What are your opportunities? What are the dangers? How can you improve your current position?

Here are some suggestions to make today more productive:
1. Your past
Learn from the past, but don’t dwell on it. Today, you can move farther than any accomplishments of yesterday. Upon winning a third world championship in bull riding, Tuff Hedman soon began training for his next rodeo. He spent little time celebrating his victory; instead, he began preparing himself for the next season. Someone took notice of this, and questioned him about his routine. He simply said, “The bull won’t care what I did last week.” The same rings true for our lives. Life doesn’t care about our past victories, or even our past failures. Each day we have an opportunity to move forward, no matter where we are in life.

2. Your future
Set your priorities straight today. As the classic quote says, “A goal not written down is merely a wish.” It’s important to dream, but you must have your goals in place in order to achieve those dreams. What do you want to achieve? How will you get there? Set a large goal, then break it into smaller goals in order to accomplish the bigger picture. When you wake up in the morning, make a list of everything you want to achieve for that day.

3. The present
Start your day with an uplifting book. It will help set the tone for the rest of the day. Many people report experiencing great results when they set aside a part of their morning for religious or spiritual devotion or meditation. If you lack time in the morning, audio books are great for your morning commute to work.

Something that I have found helpful is keeping a personal journal. Every night, take the time to write in your journal what happened that day. You may be surprised at all you have accomplished. If you’re trading in the stock market, write down your trades. Write down why you are in the trade and what it was that triggered you into the trade. If you are investing in real estate, write down how many offers you have made. Write down the description of the experiences you had with the people with whom you networked. The next day, push yourself to be better than the day before. If you are actively involved with keeping a good journal, you may find yourself thinking during the day about what you are going to put in your journal for that night. I’ve even found myself going the extra mile just so I could have a good journal entry. Your journal will also be a valuable legacy to leave behind to your loved ones. It may help inspire them one day to live to their fullest potential.

In conclusion, the greatest gift that we have is the opportunities that avail themselves to us everyday. Make the most of the day no matter how mundane or busy it might be. In your work ethic, remember the adage, “Do today what others won’t so you can live tomorrow like others can’t.” This is a new day; what are you going to do with it?

Posted 03:20 PM | Permalink | Comments (0) | TrackBacks (0)

As residential rental property owners, we are experiencing one of the most challenging economic conditions of our time. These are the times that test a landlord’s spirit, resolve, and commitment.

Almost daily, there is news of more job cuts − five-thousand jobs lost here, fifty-thousand jobs lost there. These headlines may seem distant until you receive a call from a tenant saying they are sorry, they lost their job, cannot pay rent, and will be breaking the lease and moving out at the end of the month. It is at that moment the headlines hit you right between the eyes.

We have to realize and accept that for the most part, we are not in a normal market. Supply is far exceeding demand, which has created a renters’ market that requires thought and creativity in order to survive. As a landlord, what options do we have available to us? How do we stay afloat and avoid prolonged vacancy?

Picture this: it’s the middle of the month and you get that “I’m sorry” call. The tenant tells you he lost his job, has had his hours cut back, lost a contract, or gives any number of reasons for why he will not be able to pay rent on time.

Your pulse begins to race, your blood pressure starts to raise, beads of sweat form on your forehead—you are becoming stressed. Like many residential rental property owners, you too are probably operating on a thin budget and have a mortgage or two to pay.

Your first thought is to begin the eviction process and get the “bums” out. Take a step back, catch your breath, create some distant between you and the situation so you can think clearly, objectively, and in a less reactionary manner. The typical eviction process may not be the best option in this situation.

Let’s look at the costs that will likely be incurred with the typical eviction process:

• Legal expenses – attorney’s fees, court costs, or both
• Lost rents
• Clean-up and fix-up (transitional) expenses

The bottom line is that expenses will be incurred − some known, but most unknown. Is this really the best course of action?

You have to think outside the box and consider other possible solutions. You may even be able to keep the newly unemployed tenant, and save yourself a lot of money, trouble, and goodwill with your tenants?

Tenant Skill Sets
What line of work does the tenant come from? What skill sets do they possess? Consider trading rent for work.

The following is a list of professions that may be useful:
• Bookkeeper
• Handyman
• Landscaper
• Laborer
• Painter

You already know the value of a worker who possesses such skills. If they do happen to possess these skills, can you put them to work on one of your properties or in your business? Remember to be creative − you could even broker the tenant out to another property or business owner in need of such skills.

Lease Modification
Leases, like other contracts or agreements, are not necessarily set in stone, and you can modify or renegotiate the contract or agreement at anytime if all parties concerned are in agreement to do so.

For example, let’s say your tenant entered into a lease agreement several months ago. They are paying you $1,300 per month to live in the home and have been problem-free to this point. The tenant informs you they have lost their job and can no longer afford to pay the rent.

Perhaps an appropriate response would look like this:

• Be empathic - The last thing anyone wants to feel when their chips are down is that another person of authority is giving them more bad news and causing more humiliation and embarrassment.
• Establish intentions - What does the tenant intend to do from this point forward? Is he capable of making future rent payments or not? Will he be moving out by the end of the month? Does he intend to attempt to apply his security/damage deposit to the next month’s rent?
• Evaluate information – After gathering all the pertinent information from your tenant, you are in a better position to make a decision.

Let’s look at a few possible solution scenarios:
(For the consistency of these examples, I am using two months’ numbers for comparisons.)

• Prior to the tenant’s laying off:
Legal fees and court costs $ 0.00
Mortgages paid (2) $2,600.00
Transitional expenses and repairs $ 0.00

Total estimated expenses $2,600.00
Rental income received $2,600.00

Net negative cash flow $ 0.00

• Potential cost of eviction:
Legal fees and court costs $2,000.00
Mortgages paid while vacant (2) $2,600.00
Transitional expenses and repairs $1,000.00

Total estimated cost of eviction $5,600.00
Rental income received $ 0.00

Net negative cash flow ($5,600.00)

• Potential cost of voluntary move-out:
Legal fees and court costs $ 0.00
Mortgages paid while vacant (2) $2,600.00
Transitional expenses and repairs $1,000.00

Total estimated cost of move-out $3,600.00
Rental income received $ 0.00

Net negative cash flow ($3,600.00)

Because of the potential costs of eviction and voluntary move-out, you would rather not evict or have your tenant move out unless there is no other option.

What if your tenant wants to stay, but cannot afford the current monthly rent of $1,300? What if he can only afford to pay a monthly rent of $1,000 until he is gainfully re-employed? Let’s assume he will be unemployed for two months, after which the rent rate returns to the agreed upon amount of $1,300.

Here is how this scenario would look:
Legal fees and court costs $ 0.00
Mortgages paid (2) $2,600.00
Transitional expenses and repairs $ 0.00
------------
Total estimated expenses $2,600.00
Rental income received $2,000.00
------------
Net negative cash flow ($ 600.00)

As you can see, the modification option is clearly the preferred scenario if at all possible.

I have tried to show you a couple of creative options you may have available to you; try to think of others. As you see, once you take the emotions out of a potentially bad situation and put some numbers to it, the situation may not be as bad as you first thought.

The scenarios I presented illustrate the need to keep your emotions out of unpleasant situations, to think creatively, and to stay focused on what will be better for you financially, while (if possible) looking out for the people with whom you have been doing business. Oftentimes, the two coincide.

Posted 03:03 PM | Permalink | Comments (0) | TrackBacks (0)

Years ago, one of the challenges facing new real estate investors was the lack of information detailing various techniques that could be used to buy properties in creative ways. In today’s real estate world, a real estate investor has access to almost unlimited information; however, this information may be inaccurate or incomplete. Misinformation can block what would otherwise be a great deal or could make a bad deal look good.

One creative method by which real estate may be purchased is called “subject-to” financing. Many people would like to know whether one can really buy a property subject-to the existing mortgage or if it is illegal to do so? If you were to ask 10 different investors or real estate agents this question, you would probably get 10 different answers. Let’s investigate some of the details of subject-to financing so you can decide if this financing technique can be used in your real estate investing business.

What is subject-to financing?

Simply put, buying a property subject-to the existing mortgage means that the title to the property is transferred to the new buyer, but the loan remains in the original borrower’s name. The buyer takes over making the payments on the loan, but does not formally assume the loan. In order to discover the truth about this method of financing, it is necessary to expose and explore the numerous misconceptions surrounding it.

Misconception #1 – Buying a property subject-to the existing mortgage is illegal.

It is not illegal, but you should check with the laws in your state. There are states that have discussed passing legislation to regulate subject-to purchases because of unscrupulous buyers. For this reason, you should consult your attorney to determine your state’s status.

The reason there has been some question as to the legality of buying a property subject-to stems from the fact that most bank mortgages have what is known as a due-on-sale clause. This clause basically says that a lender has the right to call the entire loan due if the property is sold without the loan being paid off in full. The key to understanding the due-on-sale clause is the term “has the right” to call the loan due. The lender has a choice, not an obligation. There is no due-on-sale jail.

The practicality of the matter is as follows: why would a lender disturb a performing loan and chance turning it into a non-performing loan? As long as the payments are being made, the lender is unlikely to call the loan due. Why would the lender want to do so? Banks are in the money business, not the real estate business, and in today’s market, banks already have more foreclosures than they can handle. You can also do a little research on your own. Ask local lenders if they have ever enforced a due-on-sale clause on a performing loan.

Misconception #2 – No rational person would ever sell their home subject-to.

Who are we dealing with in our transactions? Motivated sellers! Motivated sellers have problems − financial problems, personal problems, house problems. They need a way out. If we can provide a solution to their situation, buying the property subject-to will not be a problem. In fact, if the seller is behind on payments and the investor brings the loan current and makes timely payments, the original borrower’s credit will improve. Remember, the loan is in the original borrower’s name and they get the credit for on-time mortgage payments! Use this fact as an added bonus for the seller when discussing the subject-to option.

Misconception #3 – Buying subject-to requires a lot of paperwork and is complicated.

Not so. It is really simple. In fact, a lot of real estate purchase contracts have subject-to as one of the financing options, right along with new financing, seller provided financing, cash, and loan assumptions. If the purchase contract you are using doesn’t have that option, you can write it in the “other” section. For example, you could write:

Total purchase price to be $180,000, payable as follows: subject-to existing mortgage with Brownsville Bank with a balance of $160,000, and monthly PITI payments of $1,024.67; remainder of seller’s equity to be paid in cash at closing.

It’s wise to have the seller sign a disclosure statement indicating they realize that there is a due-on-sale clause that could be enforced by the bank. Consult your attorney to prepare this disclosure. Full disclosure to all parties is essential. Also have the seller prepare a letter to the bank telling them that all future correspondence should be sent to the new buyer. The letter states that payments will now be coming from XYZ Company. This is not uncommon, as many homeowners move to a new home and keep their original home as a rental property and have a management company make payments on the loan from the rent each month.

Now let’s look at some of the advantages an investor gets by buying properties subject-to.

• You don’t have to have good credit (or any credit) to do the deal. A new investor (or any investor) may not have the best of credit for many reasons. But bad credit shouldn’t keep a person from the opportunity of being a real estate investor. You are not applying for a loan, so your credit doesn’t matter.
• It’s fast! One of the most important things to a motivated seller is the speed with which you can close the deal and solve their problem. Once the seller has agreed to the subject-to deal, you still need a few days to do a complete home inspection and title search, but you can usually close within a very short time period. You won’t be waiting week after week for a loan approval.
• It’s cheap. There are no loan costs, no high points or interest from a hard-money lender, and there is no need to split the profits with a private lender or financial partner. Your only costs are normal closing costs.
• You may not need a down payment. If the seller just wants out and has little or no equity in the home, you wouldn’t need much cash to complete the transaction. If you were getting a new loan to buy the property, the bank (in today’s lending environment) would likely force you to put 20 percent (or maybe even 30 percent) down as an investor. The bank wants you to have your money in the game these days.
• You don’t have to have a job! Many lenders consider a full-time real estate investor as an unemployed individual, not a self-employed individual. The days of “stated income” and “no doc” loans are gone. Again, when buying subject-to, you don’t need a new loan.
• You can do unlimited deals without the fear of being cut off by the lenders because you own too many homes and loans.
• You can use the cash you have to do a lot more deals. In many cases, you can not only buy the property subject-to the existing mortgage, but you can also get the seller to agree to seller financing on any equity they might have in the property. Getting long-term seller financing is great, but you might also just have the seller carry the note for a few months until you get the property fixed and sold. This way, the original seller gets paid their equity when the home sells, and you conserve your cash for the rehab or for buying more properties.
• You can still borrow money on the home at some point if you need to. You own the property; you (or your company) have the deed. As long as the value of the property provides equity beyond the first mortgage, you could get a second mortgage if you needed to.

There are also advantages for the seller when they sell their property subject-to:

• They have a sure sale and don’t have to wait weeks and weeks to see if the buyer qualifies for a new loan.
• Because no new financing is required, the closing can take place very quickly and the sellers can get on with their lives.
• If the loan was in default or was about to go into default, the seller can potentially be saved from foreclosure and from the severe credit damage done by a foreclosure.
• When the investor buys a property subject-to the existing loan, if the loan was in default, the investor brings the loan current and takes over making the monthly payments. The seller’s credit only shows late payments, but no foreclosure. The seller’s credit will improve once the buyer brings the loan back in good standing and continues to make monthly payments. This is a big benefit for the seller, especially if they are considering buying another home in their future.
• Even though the loan and the loan payment will still show on the seller’s credit report, the seller can show the income from the property sale to offset the loan payment; the same as a seller could show rental income to offset a loan payment. Thus, the seller could still qualify for a new loan to purchase another home in the future.
• If a seller has some true equity in their home that they would lose in a foreclosure, they could set up an equity-sharing agreement with the investor and get cash out of their property when the property is rehabbed and sold by the investor. Again, without the investor, the seller would probably lose any equity they might have in their property.

Buying properties subject-to is a great way to buy properties with no credit and no down payment. Now it is up to you to decide whether or not buying subject-to is a technique you would like to use. Be sure to check the laws in your state to see if any restrictions exist on buying property subject-to.

And remember, if you buy a property subject-to, treat that loan as if it was one you had originated and had in your own name. Make sure all payments are made on time. You don’t want to put the original seller at risk or ruin their credit by missing payments. Plan your exit strategy in advance, and make sure you have money set aside to make the mortgage payments during the rehab period, as well as during the selling or lease-up period. If you default on a subject-to deal, your credibility and reputation will be jeopardized, and credibility and a good reputation are critical to your long-term success.

Now go out and make lots of offers!

Posted 11:35 AM | Permalink | Comments (0) | TrackBacks (0)

Aaaaaaaah! What am I doing? How am I going to do it? How did I get here? Where am I going? Why am I doing this again? Whose idea was this, anyway? Am I making the right offer? Is it too high? Is it too low? Is now ok, or should I wait? What am I going to do with this property? What if I can’t find a wholesale buyer? What if I find skeletons in the closet? What if they reject my offer? Worse yet, what if they accept it? AAAAAAAAAAAH! Help! Is anyone there?

Don’t worry, you are in good company. Keep asking questions, apply the techniques you have learned, make the offer, and follow through with the techniques you have learned through your education, If things do not go as planned (e.g., you can’t find a wholesale buyer or the seller’s tax returns do not jibe with what he said in the listing), then use your escape clause and get out.

How do I get past all of my fears and make my first offer? First thing to know: it does get easier. These are common fears and concerns, and with each offer and deal you make, it will get easier.

One word can describe the best way to overcome your fears: preparation. Run the numbers as you were taught. If you are unsure about anything, call the real estate hotline, or if you have a Mentor, get him/her scheduled to come out. Once you have scheduled your Mentor, you will have direct access to their help and support.

Let’s examine the process for a wholesale or a rehab property, as the numbers gathered are the same for either strategy. Work through the MAO (maximum allowable offer) and then analyze your deal as a rental property, if that is your strategy.

First, as a wholesale or a rehab, you must determine within a fairly close margin the ARV (after-repair value). This number need not be as hard to find as it seems. I do not have enough room to teach you in this article how to do a full appraisal, but I can get you off on the right foot. The first step in determining the ARV is to pull comps. What has sold recently nearby that is similar to the home you are looking at? To pull up recently sold properties, you can either call your Realtor and ask them to send you a list of sold homes (this list will not include FSBO homes though). Your county’s website may also offer a list of recently sold homes near your subject. www.Zillow.com is another option to obtain a list; however, this may be a bit out of date. If you have the new software offered by the Wealth Intelligence Academy, you can pull up recently sold homes yourself. Ideally you should find comps which meet the following criteria:

• Houses sold in the past six months
• Houses within a quarter of a mile
• Houses of comparable size – within 10 percent of the square footage of the subject home
• Houses with the same number of bedrooms and bathrooms

Seldom are we so lucky to match all of these, so you need to find out (from your Realtor or a local appraiser) how much value to add or subtract for each item that is different. For example, if the prospective home has three bedrooms and the comparable home has four bedrooms, you would subtract some cost from the sold price of the comparable home for the value of that extra bedroom.

Now that you have pulled up a list of homes, you need to drive by those homes to verify that they match your subject home and finish analyzing the property. If the profit potential that you are looking for is there or if you think the price is low enough to attract a wholesale buyer, then make the offer!

If you want the property for a rental property, then you need to analyze the income minus the expenses and minus the debt service. We recommend that you have at least a $100 per unit, per month positive cash flow. If the numbers are in the profit range that you are looking for and/or have the ROI (return on investment) that you want, then make the offer!

Always have your attorney review your contract to make sure it is appropriate for your strategy. Trust your calculations, not your emotions, and make the offer! After the offer is made, you have a due-diligence period or your inspection period to verify all of your work and the seller’s representations. Again, please review with your attorney as to the amount of time you have and qualifications for backing out, if necessary, to make sure you know your escape clause.

If a property seems to be a great deal, trust your instincts and make the offer! You can always use your escape clause if you find something you did not count on or a mistake that you or the seller made. So make the offer and then verify the numbers again.

You can’t get rich in slow motion! If you are too slow…someone else will get it first.

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