In a previous post I had mentioned I belonged to USAA. For anyone who doesn't know, USAA is an insurance company founded by Air Force personnel back in the days when military members found it almost impossible to get insurance.

As it turns out, I had saved an article from their USAA MAGAZINE, Spring 2007, issue. It was about mortgages. Keep in mind the date of this particular issue.

By the way, USAA has a reputation of being one of the best carriers in the country with a very stable business model. The advice in their magazine usually follows suit.

Here is one sentence from that article that stands out like a sore thumb:

"Many borrowers may not fully understand the changing payment schedules, especially the sharp monthly payment increases common in these mortgages,"� says Allen Fishbein of the Consumer Federation of America.

What followed that quote are these words:

And if you put very little down and real estate prices decline, you could face a loan balance that exceeds the present value of your home. That's downright scary.

You don't have to be a rocket physicist to know the mortgage type being referenced. And, you don't even have to be a nuclear pharmacist to see this bit of advice was too late.

I want to believe they just missed the ball by publishing this article when they did. Maybe they didn't want to believe the problem would grow to the magnitude it has grown. Maybe their mortgage lending division was making very few ARM loans. After all, they are a conservative bunch down there in San Antonio.

I wonder how many other supposedly conservative lenders were of this mindset during the Spring of 2007. It is hard to believe many existed as the problem certainly had its ugly head above water level.

I am not singling out USAA for criticism or accusing them of aggravating the problem. I am merely using their published words as a highlight as to the possible thinking that may have existed that late into the burgeoning crisis.

Wouldn't it be a kick in the pants if some of that thinking is having a residual effect? It would go something like this, "As long as we warn the consumer about the possible dangers, it is OK to keep making loans they can neither qualify for nor afford."�

After all, there is a school of thought that says you can borrow your way to riches and it is being promoted even in today's world. I guess pay back never visits some people's door step.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

The Sky is Falling . . . We’re Watching and We’re Not Going to Do Anything About It

I'm in sunny Florida for the next two weeks on business/pleasure (of course there is always business in there for the tax deductions from our favorite Uncle.)

As I was getting my rental car at the airport, the guy at the counter asked me if I wanted the ultimate coverage insurance or the collision only. What this guy did was use the "yes or yes technique"� or the "yes or yes"� close. It is one of the best sales techniques around and if you are not utilizing it you are probably losing thousands of dollars worth of deals every year.

When the rental car employee asked me which one I wanted, I had to think for a split second and realized that I didn't want either of them. This is such a powerful technique because when people are given two choices they automatically think they have to choose one of them. Another example is an owner of a pool hall near my house who uses this technique brilliantly. Every time that I walk into the pool hall he asks me if I would like a beer or would I like an appetizer (I bet 90% of the people choose one or the other and that very few people say neither"¦"¦"¦.except me. I'm just there for the pool and to take other people's money. See, I believe in the use of OPM in everything I do, not just in real estate.)

After I have evaluated a property and I know that there is a deal to be had, I ask the seller "Mr. Seller would you like to set up a visit for Tuesday at 7 or Wednesday at 6, which works best for you?"�

One of the most important ways that I use the "yes or yes"� technique is by presenting multiple offers to a seller. Never, ever, present just one offer to a seller. If you present only one offer to a seller, then it is very easy to say no and you will not close many deals this way. I always present a minimum of two offers and many times three offers. My two offers are going to be a cash offer and a subject-to/lease option (terms) type offer. Even if I know there is no way the seller will do a subject-to, I still present the offer (this is extremely important to remember.) Even if your seller said there is no way you can take over his payments, still give him two offers so that he can choose your cash offer.
So when I am meeting with a seller, I say "Mr. Seller would you like our cash offer of x amount of dollars, or would you like us to take over your payments and you will receive x amount of dollars at closing? Which works best for you?"�

There are many more ways to use this technique, such as when setting a closing date: "Mr. Seller, do you want to close on September 22 or September 25"�? Or when you are purchasing a real estate course: "Do you want to pay in full, or would you like the easy payment plan of only $19.95 a month for 120 months"�?

Well, I am back to the 500 degree Florida heat, sweating to death. So the next time you are meeting with a seller, are you going to present two or three offers?

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

How To Close More Deals Instantly . . . The Power Of “Yes”

To just about no one’s surprise, the U.S. Congress failed to act on a foreclosure prevention measure before closing down for the long July 4th weekend. And, some think the Congress won’t do all that much once the weekend is over, either.

A New York Times estimate is some 55,000 more homes will be in foreclosure by next Monday! Amazing.

Mind you, the bill being considered by the Senate is far from a cure-all: It is voluntary, for one thing, and it would ask lenders to issue new mortgages at a reduced rate of 85 percent of the current price of the home.

By many accounts, then, even passage of this measure would be a drop in the bucket. But a drop is better than a drought anytime.

Could it get much worse? What are you kidding!

Yeah, it could get worse. In fact, it already has.

Evidence:

Since January 1st, stocks have lost $2.1 TRILLION. I don’t even know how many zeros that is?
Last month, the market suffered its biggest June loss since the Depression.

U.S. auto sales are now officially at a 15 year low and dropping.

Even Starbucks is buckling–announcing it will layoff up to 12,000 employees and close down 600 stores.

And, as amazing it may now seem, these are but a few of the latest ramifications of the the subprime mortgage crisis that ignited this global fire.

While there are more vacant homes on the market, credit is so damn tight that fewer and fewer people can afford them, even at such “bargin” prices. In fact, the interest rate on a 30 year fixed mortgage is actually up, making it that much more difficult for a buyer to — well, buy!

In the months ahead, economists fear that credit card debt will strangle more and more people who will then miss payments to the bank or not pay at all.

For some, the answer to this entire problem is a simple one: Fix the housing mess and everything else will fall into place.

But I am not convinced it will be as easy as that.

After all, while we like to talk about this crisis as having been sparked by the mortgage debacle, the truth is far more complex than that. Bank and lender greed, lax government oversight, suspect credit evaluations, dubious exotic investment vehicles–all these and more interacted to bring us to where we are today. No single fix, then, of any single component of this puzzle will solve it.

But you have to start somewhere, so it might as well be with the foreclosure mess. And that is why Congress must come back after the 4th with the pedal to the metal or else witness the further destruction of the global economy as we know—knew?—it.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

July 4th Foreclosures: Congress Celebrates, Homeowners Vacate

Greetings from the metropolis of Cedar Crest, New Mexico!

I just got back from a fun filled week with my youth group in Durango, CO. I (and three other adult sponsors) took twenty one high schoolers to a C.I.Y. conference hosted at the Fort Lewis College campus. We joined over a thousand other kids for a fun filled week of God, music, learning and shenanigans. It was a blast. I love young adults….their energy…their boldness….their idealism….and yes…their practical jokes.

The events included river rafting, ultimate frisbee, basketball and games that encouraged projectile vomit. Entertainment at it’s best! My guess is that BiggerPockets.com will not allow me to show the vomit pictures…but below is a river rafting picture with me and some of the gang. I am the old guy…but not the real old guy (the guide at the back of the raft)

Anyway….

Overcoming the Moron Label

When I write….I try to have a deeper meaning with my topics and I try to go beyond the “how to…..” articles. Not because those articles are not important, they are. But because I feel that being an entrepreneur is more of an art than a “how to.” Like being an artist….being an entrepreneur usually looks/sounds silly to others until you are successful….then everyone calls you a genius and wants to know your secret. But…until you are labeled a genius….you are labeled a moron. If you never become a success….chances are the “moron” label will stick.

When I first started investing in real estate….like many of you, it started with a book. Then I went to a boot camp. Three or four day of intense instruction, a certificate and a hug at the end….and off I went…into the harsh reality of real estate investing.

When I came back from the boot camp, I told friends and family with bursting excitement of my new career as a real estate investor. As you can imagine….it was received as if I had told them “I was abducted by aliens….an oh…by the way…I am now an Amway distributer.” If that was not enough….having to explain to them that I did not need any money to buy real estate because I learned how to buy with no money down….gave me the label of MORON.

Now….years later….I no longer wear the label “moron” (ex-girlfriends and in-laws excluded)….well…at least I think. After accumulating residential real estate and then commercial real estate….the “moron” label dropped and now I was being asked “Rob…what is your secret.” Well….here is the secret(s)….

1) Don’t buy the book The Secret….it’s crap and you know it (let the hate mail begin). Blasting the book, The Secret, gave me tons of traffic on my blog…so I like to throw it in there every now and then.

2) Go deaf! Yes….hopefully you are still reading after my #1 secret. But the ability to not listen to your critics (friends and family especially) is by far the most important. For some reason, I did not give the words of my critics any value. I was so convinced that I was doing the right thing that…I became “verbally bullet proof.” Which is a blessing. My mind was on a mission….and nothing could distract me. I am not sure how I was able to do that….but the “burning why” (I did not want to get a job) was there and I ignored everyone….except my mentors.

3) Wear Blinders. Most entrepreneurs have A.D.D. (Attention Deficit Disorder). I am not sure if that is a fact…but I heard it somewhere (credibility at it’s best). So….I am going to assume that most entrepreneurs have a hard time staying focused. Whew….I sure did. When I started investing, I was approached by so many different opportunities that I tried to do it all. From real estate software to international investing to multi-level marketing. All good opportunities…but they were not in my business plan….so I said no to temptation and continued on. What a great decision. Staying focused and being blind to other opportunities kept me in the game.

I think business plans are a requirement not just for goals and objectives…but to help screen out opportunities that may take you away from what you are trying to accomplish.

So…..here is to all the geniuses out there….wear your label well!

Until Next time…..rob

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Secrets To Overcoming The “Moron” Label

As I stress time and time again to new apartment building investors, before making an offer on any apartment building real estate property be sure that the investment will be a profitable one. Banks and commercial mortgage lenders will only lend money on an apartment building that has a Debt Service Coverage Ratio of at 1.2. Once the investor has done his or her work and found a profitable apartment building to purchase then the next step is to structure a offer.

The Offer Letter

The offer that the investor makes on an apartment building should be in the form of a typed letter detailing the terms and conditions under which the investor is offering to purchase the property. After the buyer has figured out the value of the property then he or should deduct around five percent off of that figure and make that the offer price. The investor should also make the offer contingent upon receiving financing, under specified terms, within 30 to 45 days for an amount of at least 75% of the purchase price. The buyer should also include an expiration date of one week on the offer during which time the seller can review the offer.

How to Make the Offer Stronger

1. Get a letter of interest from a commercial mortgage broker that simply states they are willing to lend 75% of the properties value. This letter of interest should not be confused with a commitment letter. The bank is under no obligation to lend the money if they decide to turn down the deal.
2. Put together a professional sales agreement in simple language that is fair to the buyer and seller. This will ensure that your letter is taken seriously.
3. Include any information that will make your offer appear stronger. If you have a lot of real estate investment experience, include your curriculum vitae. If you are going to pay your down payment with cash on hand then send a copy of your bank statement showing the cash.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Buy an Apartment Building — How to Structure Your Offer

One piece of advice that is frequently offered to those wishing to invest in real estate is to join a local real estate investment club.  Okay, now what?  While taking that first step to actually attend a club meeting is great, it is only the beginning. To make it a worthwhile endeavor requires some effort on your part.

First off, be sure that you are joining a real club, not a thinly disguised sales pitch.  Companies and individuals looking to sell products and services to real estate investors may start a club in order to attract prospects.  The clubs may be started by real estate agents, mortgage brokers, seminar peddlers, and others looking to sell you their wares.  That doesn’t mean that you can’t find these clubs valuable, just be aware of what their agenda is and go in with your eyes wide open.

The Meetings

Typical club meetings may have one or more sponsors.  In order to help cover the cost of a meeting, the clubs will allow someone to pitch a product or service in exchange for a sponsorship fee.  These sponsorship pitches are not much different than television commercials.  If you have a need for the product or service, great.  Just be aware that it is a paid spot and it does not necessarily mean that the club is endorsing the product.

There will usually be several speakers at the meetings as well.  A good club will provide a segment that is purely educational.  The topics will be related to real estate or running a real estate business.  You should be able to learn a lot from these segments and will, hopefully, be worth more than whatever the membership fee may be.

Other speakers may be a combination of education and sales pitch.  You will often hear from gurus pitching seminars and boot camps.  You should learn something from these speakers but their primary purpose is to get you to attend their training programs or buy their books and tapes.  Other speakers may be pitching an investment opportunity.  They may be traveling the country and presenting at real estate clubs in order to attract buyers.  Be aware that the club frequently gets a referral fee from those pitching seminars, boot camps and investment opportunities.   I am generally skeptical of the opportunities being pitched, if it is as good as they say why do they need to travel the country selling it?

Where The Action Is

The real value to a club is what takes place before and after the meeting - networking.  In a recent article (The Power of Networking) I explored the benefits of building relationships.  This is the main advantage of joining a club, the ability to get to know other investors and learn from them.  This is where you can make connections that can change the course of your business.

I see many club newcomers who arrive just as the meeting starts and leave the minute it ends, they don’t realize what they are missing.  You should arrive early and stay late.  Be sure to have business cards and introduce yourself to as many people as possible.  If you meet someone that you find interesting, arrange to get together with them outside of the meeting.  You may be surprised to find how many people would be willing to do this.  I usually arrange to meet with someone for an early dinner before the meeting and have developed several powerful relationships as a result.

Lastly, get involved.  It takes a lot to run a club, an offer to help at the meetings will usually be greatly appreciated.  Perhaps you can help with sign in or act as a greeter when people arrive.  What you gain is visibility, the more people who know who you are the better.  Be sure to seek out the successful investors and make an effort to get to know them, most will be happy to share their knowledge and offer their insights.  If you make an effort you will receive an enormous benefit.  It gives “going clubbing” a whole new meaning!

You can close more business in two months by becoming interested in other people than you can in two years by trying to get people interested in you.
Dale Carnegie

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Getting the Most From Your Real Estate Club

You may have heard recently that this is a great time to purchase investment property. One reason for this is because you can now "cash flow"� them again. That sounds like a pretty good idea, but what does that really translate into? What really makes this a better time to buy and hold investment property rather than 18 months ago?

I would like to give you a brief overview on the two major concepts of making money on investment property, and why it is a perfect time to acquire and hold an investment property.

Fix & Flip

I am sure many of you have heard of the term "fix & flip"�. This is a good money making technique when the real estate market is steady and the volatility is predictable. The concept is to buy a property that is undervalued compared to the other homes in the area and fix it up. The typical targeted repairs are items like new floors, carpet, paint, window treatments, landscaping, kitchen & bathrooms cabinets, etc.. Ideally, these repairs take only 1"“3 months, and then you list the property for sale at a much higher price. The goal is to make enough to cover your repair costs, the temporary mortgage payments, and walk away with $20K "“ $60K profit on that property. The key to success is to have the right property and to turn the property as quickly as possible.

Obviously, this doesn't always work as planned, and sometimes you lose money on the deal. Factors that contribute to losing money on a Fix & Flip property are the repair costs being too high, the repairs taking way too long, or the property not selling quickly. Sadly, some Fix & Flippers got stuck with property over a year ago when the market turned, and either took a loss selling it below cost or turned it into a rental property. This is not the ideal strategy to own rental property, because most of these people are still taking a monthly loss renting these properties today. I feel that I am an authority on this topic, because I own one of these types of properties myself.

Cash Flow

This is the concept used to identify property that will make good rentals. The word "cash flow"� refers to the amount of cash a rental home generates and uses on a monthly basis. Cash flow can be used as an indication of a rental home's financial strength. When it comes to renting out your investment property you would prefer it to have a positive cash flow, whereas you are making a profit on a monthly basis. Due to the high price of housing in some Metro areas it is more difficult to find homes with a positive cash flow, but it is not impossible. Here are some of the factors we look at to determine a property's cash flow.

You should first calculate the monthly cost of the property (sometimes called the nut). You need to consider all costs associated with the property including the Mortgage Payment (Principal, Interest, Taxes & Insurance), Property Management Fees, HOA Dues, Pool Service, Home Warranty, Etc. This monthly cost will not only be covered by your renters, but will also have to be covered by you during times when the property is not rented. Also, take into account if you need immediate repairs to the home to make it ready for renters.

Next, you have to calculate how much you can rent the home for. I highly suggest using a seasoned property manager to help you in this analysis. Not only can this person help you identify the right rental rate, but can also help identify the current occupancy of rentals within the area. That should give you an idea of how long it will take to rent your property.

When you subtract the monthly cost (nut) from your potential rent you will get that property's monthly cash flow number. Most people will gravitate towards properties with a positive cash flow "“ but some people will also consider properties that simply "break even"� with the intent of selling them in a few years at an appreciated value.

Why is this a Good Time to Buy??

One of the biggest factors in finding property with good cash flow will be in the price of the home. Being that the mortgage payment on the property will constitute the largest portion of your cost, you want to find rentable property at a low purchase price. This sounds like common sense (Duh!), but a cheap list price doesn't always mean it's a good deal.

Today's housing market has a record number of short sales, foreclosures, pre-foreclosures, distressed, and bank owned property! Some home prices in some areas are down over 30% from where they were 18 months ago. This could easily mark the low price point for home sales for the next few years. When you see the following scenario you might think that those properties are not really available. To that I can honestly say,"¦ have you really looked? Because, you only need to find one property that works!

Example:

Here is a single family home (3bd/2ba) in Tempe, AZ near the light rail. It is bank owned and they are asking $150K (appraises at $205K) and they will pay all of your closing costs with a full price offer. The property is basically move in ready and needs a little paint. You pay 20% down ($30,000) & finance 80% ($120,000) on a 30 year fixed (6.75%).

The principal & interest payment is $778/mo + $50/mo home owners ins. + $92/mo property taxes = total PITI = $920/month. You also decide to have a property manager (a good idea) for $65/month, and you find no other monthly costs. Your net cost is $985/mo.

Your realtor does their research, and informs you that rent on a 3 bedroom within 2.5 miles of ASU should rent for $1,130/mo. And if you get it listed before August 20^th, you should be able to rent in within 2 weeks.

$1,130 rent "“ ($985) cost = $145/ month in positive cash flow. This seems to be a pretty good scenario worth exploring. Here are the positives:

• You have the potential to make $145/month cash flow.
• You have a 30 year fixed loan, so every month your principal balance goes down.
• You have an great source of Tax deductions at the end of the year
• You have just acquired a property with $55,000 of equity in it.

The above example is simply one basic scenario out of thousands that exist. Investors can find the same scenario in most college towns. There are going to be plenty of properties that have a negative cash flow after thorough analysis. But, the key to finding the right cash flow property begins in the act of building a team and looking for them.

Conclusion

Investment property is not everybody's cup of tea. However, if you have thought about it in the past, today's housing market provides great opportunities to buy properties that "cash flow"�. If you are waiting for the housing market to reduce inventory and "tighten up"� to buy an investment property "“ you are missing the boat.

There are many other concepts and techniques that I did not touch on today that I will be happy to share with you if you have interest

• Buy investment property as a primary residence (2% - 5% down)
• Buy investment property as a second home (5%-10% down)
• Buy a multiplex (2 "“ 4 units)
• 8 creative ways to find your 20% down payment
• Purchase an investment property that needs rehab for 10% down
• Buy a new home and use your current home as a rental

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Real Estate: Flip or Rent?