by Thomas Lucier

The most common mistake that many beginning real estate investors make is that they pay too much for property. Fact is overpaying for property is often cited as the number one reason why so many newcomers fail to make it as profitable real estate investors. That’s because most beginning real estate investors are woefully undercapitalized, and they don’t have the deep pockets that are needed to subsidize their overpriced real estate investments.

For many neophyte investors, paying too much for their first investment property usually proves to be a very costly and fatal mistake, and marks the beginning of the end of their foray into real estate. That’s why it’s imperative that you learn how to accurately estimate the current market value of potential investment properties! As far as I’m concerned, it’s the single most important aspect of the entire real estate investment business!

A Fast $15,000 Profit for Knowing the Value of a Condemned House

I once bought a real estate option on a filthy, neglected, run-down, but structurally sound house in a neighborhood-in-transition in Winter Park, Florida, a suburb of Orlando, that had been condemned for building, safety, health and fire code violations. This place looked like something right out of downtown Baghdad, Iraq! It had what code enforcement inspectors commonly refer to as accumulations of every type of debris, garbage and junk known to mankind! The property’s owner lived in Westerville, Ohio, and wanted the steady stream of threatening letters from the Winter Park Code Enforcement Board to stop.

I had done my homework, and knew the property was worth at least $110,000 after it was cleaned up. I ended up paying $500 for a one-year option to purchase the house for $75,000. It cost me $2000 to have all of the accumulations removed from the property, and the house, driveway and walkways pressure washed. Three weeks later, I sold my real estate option agreement for a $15,000 profit! This never would have happened if I had been clueless about how to estimate property values. Since I had an accurate estimate as to how much the property was worth in its current condition, I was able to negotiate a below market purchase price that was based on the property’s filthy, neglected, run-down non-marketable condition, and not on how much it might have been worth after it had been cleaned up.

No Kelly Blue Book for Real Estate Investors to Look Up Property Values

Sadly, there’s no Kelly Blue Book equivalent for real estate investors to lookup used property prices in, so you’re going to have to learn for yourself how to estimate the current market value of potential investment properties. However, thanks to computers and the Internet, in most real estate markets it’s not that difficult to get a rough estimate of a property’s current market value. This is especially true for real estate investors located in counties where all property ownership, sale and tax assessment records are available online.

The Definition of Market Value

The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice, defines market value as: “The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the sale price isn’t affected by undue stimulus.”

The Difference Between Assessed Value and Appraised Value

The difference between a property’s tax-assessed value and its appraised value is as follows:

1. Tax Assessed Value: Tax-assessed value is the value established by the local taxing authority for a parcel of land and the improvements placed upon the land for property tax purposes. For example, in Florida, owner-occupied single-family houses are generally assessed at around seventy percent of their fair market value by county property appraisers.

2. Appraised Value: Appraised value is the value estimate given to a property by a licensed property appraiser using accepted appraisal methods for the type of property being appraised. For example, the accepted appraisal method to accurately estimate the fair market value for an owner-occupied single-family house is the comparison sales method where a property’s value is based on the recent sale of comparable properties within the same area.

The Three Common Methods Used to Estimate Property Values

The three most common methods used by property appraisers to estimate property values are the:

1. Comparison Sales Method: The comparison sales method bases a property’s value on the recent sale prices of properties that are within the same area and comparable in size, quality, amenities and features.

2. Income Method: The income method is used to estimate the value of an income producing property based on the net income the property produces.

3. Replacement Cost Method: The replacement cost method is based on what it would cost to replace the improvements on property using similar construction materials and construction methods.

The Comparison Sales Method of Estimating a Property’s Value

The comparison sales method of estimating a property’s value is based on the recent sale prices of properties within the same area that are comparable in size, amenities and features. In order to be accurate, sale price adjustments must be made for comparable properties that have been sold at unrealistically low prices or on overly favorable financial terms not readily available to the buying public.

The Income Method of Estimating a Property’s Value

The income method is used to estimate the value of an income producing property based on the net income the property produces. Under the income method value is calculated using a:

1. Capitalization Rate. The capitalization rate, or cap rate, is calculated by dividing a property’s annual net operating income by its purchase price.

2. Gross Rent Multiplier. The gross rent multiplier, or GRM, is calculated by dividing the purchase price by the property’s monthly gross operating income.

Watch Out for Owners Using Fuzzy Math

A word to the wise: when you read a property’s income and expense statement, you should always go under the assumption that the owner is probably practicing fuzzy math by fudging on the numbers, and telling little white lies to back them up. Also, use a monthly income and expense analysis worksheet like the sample copy below, to cross-check everything that’s listed on a property’s income and expense statement in order to reconcile the statement with receipts and tax returns against what’s shown on:

1. Schedule E (Supplemental Income and Loss) of the owner’s latest federal income tax return.

2. The property’s latest annual tax assessment income and expense statement on file at the county property appraiser or assessor’s office.

3. All of the rental agreements for the past year.

4. Water, sewage, solid waste, gas and electric bills for the past year.

5. Repair and capital improvement bills for the past year.

The Replacement Cost Method of Estimating a Property’s Value

The replacement cost method of estimating a property’s value is based on the cost of replacing the improvements on the property minus the cost of the land to estimate a property’s value. Replacement costs are calculated on a per square foot basis by dividing the total number of square feet in the building by the per square foot construction cost. For example, a two thousand square foot convenience store that cost $375,000 to build would have a replacement cost of $187.50 per square foot, $375,000 divided by 2000.

How to Get Free Building Replacement Cost Estimates

You can usually get a free building replacement cost estimate by calling a local independent insurance broker who represents insurers that specialize in providing property and casualty insurance coverage for residential and commercial buildings. When you call a broker, tell them that you want a replacement cost quote. Property replacement costs are calculated by using a replacement cost formula that’s based on the property’s geographical location and its:

1. Street address.
2. Age.
3. Type of construction.
4. Number of stories.
5. Type of roof.
6. Current use.
7. Heating and cooling system.
8. Square footage.

Use the Eight-Step Approach to Estimate a Property’s Current Market Value

Use the following eight-step approach and the current value worksheet on the following page to get a rough estimate of a potential investment property’s current market value:

Step # 1: Log onto your county’s property appraiser or assessor’s Web site to obtain the tax assessed value of the property under consideration.

Step # 2: Search your county’s property tax rolls for recent sales of three to five properties that are comparable in size, amenities and features, and located within two miles of the property under consideration.

Step # 3: Carefully analyze any comparable properties that you find, and make sale price adjustments for differences in amenities, special features and the property’s physical condition.

Step # 4: Verify the income and expenses that are listed on the income and expense statement of the property under consideration.

Step # 5: Analyze the property’s income and expenses for the past twelve months to estimate its net operating income potential.

Step # 6: Calculate the property’s capitalization rate by dividing its potential operating income by the estimated value that you derived from analyzing recent sales of comparable properties in step number three.

Step #7: Estimate the property’s value by multiplying its net operating income by the capitalization rate you came up with for the property.

Step # 8: Calculate the cost of replacing the improvements on the property using the same building materials and method of construction.

by Darius Barazandeh

I always say that when choosing a business entity, you must evaluate the tax advantages and disadvantages BUT ALSO the level of liability protection.

LET’S EXAMINE A COMMON SITUATION: Many attorneys recommend the corporation to their clients. For the most part, corporations will provide good protection from ‘traditional liabilities’. In other words, if the business is sued for its business activities, then I consider this a ‘traditional liability’ situation. In most instances (a properly set up and maintained corporation) will protect the owners from personal liability.

Most attorneys (myself included), who stay up-to-date with court precedents and how creditors (and collection attorneys) actually work, will tell you that a multi-member LLC will usually provide enhanced benefits. Here are a few reasons:

Less Formality = Less Mistakes

The corporation requires annual meetings and has a number of rules which create a ‘forced’ management structure. For example, every corporation is made up of a ‘tri-parte’ management structure (tri-parte means 3 levels). This means that all corporations will have to ‘force’ or channel operations through this structure of directors, officers, and shareholders. The trouble with small to mid-sized businesses is that the same person or perhaps a handful of people must occupy all of these positions. This can create confusion and more opportunity for error. The limited liability company (LLC) is simpler to operate because state law does force this ‘tri-parte’ structure upon LLC owners and employees.

LLC’s (unlike corporations) are not required to have annual meetings. Although we think LLC meetings are a good idea, you probably won’t lose your protection if you forget to have a meeting. These simplicities mean less technicalities and less confusion. It also means that there will be less mistakes available for an attorney to use against you when trying to ‘pierce’ the entity in order to hold its owners personally liable.

Charging Order Protection

Alright, let’s move forward to another VERY IMPORTANT issue. I am going to say that this is perhaps the KEY REASON why an LLC is favored in most situations. The LLC will protect you from business liabilities but it can also protect your business from personal liabilities. DID YOU CATCH THAT? We said the LLC will protect you personally from business liabilities, BUT IT CAN ALSO protect your business from personal liabilities. Ok, enough word manipulation…let’s look at a concrete example:

EXAMPLE: Let’s say that you are driving and taking your family to the park on a Sunday afternoon. Negligently, you tap someone who is crossing the street and they are slightly injured. The injured person finds a sharp and hungry personal injury attorney who ‘milks’ the case for every penny. They sue you for $1,000,000 and win. Your insurance pays out the $500,000, but there is still $500,000 owed. What happens next? The answer will depend on whether you have a corporation or LLC.

Did you know that once a judgment is obtained against you, the attorney may pass the case on to a collections specialist (an aggressive attorney who handles collections)? These attorney’s are very knowledgeable and may only focus on collections – in other words, they know the ropes. This attorney would go to the judge and request a Write of Execution. With this writ they many visit your residence or office (with the local sheriff) and begin seizing personal assets. The problem is the corporate stock shares are personal property. As a result, generally they can seize 100% of corporate stock shares.

Now you may say…’Wait a minute, my business was not involved in the accident”. “I was taking my family to the park on a Sunday”. Understand, the creditor is not trying to enter your corporation through the front door, but through the back door! Have you ever heard the _expression, “He who has the gold makes the rules?”. I don’t always agree with this, but in this situation, let’s say, “He who has the stock shares makes the rules”. In other words, if the creditor seizes your stock shares they can vote to dissolve or end the corporation. As a result, any assets in the corporation must be ‘distributed’ to you personally.

Now you may ask, “Why would anyone want to break up my corporation?”. THE REASON: Once the corporation is dissolved the assets of the corporation will be distributed to you, the owner. GUESS WHAT? Now the collection attorney will have more money to satisfy the rest of the judgment (the $500,000 still owed). Remember we discussed the importance of protecting your business from personal liabilities? The corporation won’t do that very well because of this reason: Stock shares are personal property. They can be seized if you have a personal judgment against you.

The same thing can happen if you are doing business in a corporation made up of 2 or more parties. In such an instance, a creditor who obtains enough shares could vote to dissolve the company or they could become a substituted owner. You see, you can’t control the actions of all your co-owners all the time. For this reason, there is undue risk when corporations are used (especially if there is more than one owner!).

Learn To Avoid These Traps Before They Happen!

I am a licensed attorney and attend training conferences each year to keep up with my required hours of continuing legal education. I can tell you that while I love to learn about all the updates and nuisances of setting up companies…I know that the real benefit comes from understanding how collection attorneys work. The goal is to learn what tricks they use to tear companies apart. Believe me, most will foam at the mouth when they learn the business owner is using a corporation. They are not so pleased to learn the business owner is an LLC or other ‘partnership-style’ entity.

So at this point you may be wondering how the LLC is different. This is a complex issue, but generally we can say that the laws of all states (except Pennsylvania and Nebraska) have included special rules for LLCs which allows them to be protected in this type of situation. In other words, if we had the same facts in which you hit someone on the way to the park on a Sunday and $500,000 of the judgment was not covered by your insurance, the creditor would generally not be able to gain control of your LLC. The creditor also could not vote to end the LLC, could not force a ‘distribution’, and could not break up the LLC. The creditor would be limited to a court order called a ‘charging order’.

So what is a charging order? The charging order is a specific court order that first must be granted by the judge. It is a court order which says that if any money is passed on to the owner who was involved in the accident, this money must first go to the creditor until the debt is paid off. The only problem is that the creditor does not have the right to force the LLC to make this payment. This means that the creditor could wait a very long time for such payment to be made. If your LLC is run by parties who are ‘friendly’ to your situation, they may choose to stop all distributions made to you. State law limits a creditor’s collection efforts to this charging order. Second, once the creditor obtains the charging order they may have to pay taxes on money that the LLC made, but which was not distributed to you (we call this ‘phantom income’).

What does all this mean? Generally it puts you in a much better position if such an event occurs, since it may force the creditor to try to settle the judgment debt or just drop the collection efforts. At the very least it can help keep your business intact. If you were using a corporation the end result would likely be the end of the company. If an LLC was used, managed correctly, and its owners properly reserved this charging order limitation then the result will be quite different.

A Few More Points To Consider

Here are a few other things to consider: An LLC will need to have more than one member in order to ensure this type of protection. Let’s also say that in community property states it may be useful to have someone other than your spouse (family member or close friend) own a small percentage interest in the LLC. The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Second, you must make sure that the LLC is run and managed in the correct manner. None of these protections will hold up in court unless you truly become a MASTER of good business practices and learn how to keep up with LLC formalities.

by Darius Barazandeh

POINT # 1: Many investors believe that they can create a limited liability company (LLC) or file a corporate charter with the state and always have liability protection. This is simply not true. The truth is that each of these business entities (the LLC, the corporation and even the limited partnership) require certain key steps after the structure is created. I always like to compare business entities to a fancy Italian sports car or a new baby…they will demand proper care and feeding! They are fun on the first day, but you had better know how to maintain them. You can’t neglect the baby or take the fancy Italian sports car for a spin without any oil in the engine. If you do then a disaster is coming! Many new business owners believe that because they hired an attorney or service to create their new business entity, the work is done. The truth is that what you do after the entity is created is most important. There are countless nuisances, details, traps which must be understood in order to maintain liablity protection.

POINT # 2: If you plan on going into business with another investor or what you might call a partner, consider this: What happens if there is a disagreement? Do you have to sue, do you use mediation, do you have procedures in place to require efforts to settle things out of court? What happens if one of the parties in the business wants to sell their ownership interest? Who will buy it? What will they sell it for?

Here Is A Typical Scenario

Assume that you go into business with your best friend Tom. Things are going great but Tom decides that he needs to spend more time with his elderly parents. He wants to sell you his part of the business but you tell him, “Just wait a bit, Tom”. “Things will get less stressful soon”. He agrees but shakes his head in doubt. The next day you learn that he has sold shares in the business to his uncle. You now have a new co-owner. You never would have started the business if you were going to have to work with Tom’s uncle. These types of situations can be avoided by utilizing proper ‘buy back’ agreements between co-owners and limiting transfer rights. Sadly, most business owners never learn about these precautions until it is too late.

POINT # 3: For real estate investors there are always risks when the owner of a property decides to make repairs on the property or hire someone to make repairs for them. It does not matter if you have a business structure or not: A business owner is always personally liable for negligence. So if you are negligent when you make a repair or negligently ‘hire’ someone to make a repair, you can be sued personally. Don’t ever forget these words: “Business owners can be sued personally for negligent acts”. It’s really important that you spend just as much time learning about the limitations of business entities, rather than just hearing about all the benefits!

Tax and Asset Protection Choices – Possible Contradictions?

POINT # 4: When trying to choose a business entity: Be Warned! There are a number of opinions out there depending on who you ask. I’ll try to make this really simple so remember the following: You are fighting two battles. The business and tax structure you choose is your weapon/protector. What are these two battles?: 1) a tax battle and 2) a liability or asset protection battle. In other words, when you choose a business structure type (corporation, LLC, limited partnership) the choice for the real estate investor will depend on the tax issues which are associated with the business, and how well the business structure protects personal assets from the activities of the business. Certain structures can protect the assets of the business from personal liabilities (please see my article, ‘Corporations and Limited Liability Companies (LLC’s): Charging Orders and the Differences in Protection’.

Most real estate investors will go to their attorney in order to find out which business structure makes the most sense from a legal standpoint. Usually the main question is, “Mr. Lawyer or Ms. Lawyer which business structure will protect my personal assets if my business is sued?”. Later that week, the same investor also travel across town to an accountant’s office and ask, “Mr. Accountant or Ms. Accountant, which business structure will save me the most in taxes?”.

Notice A Few Things:

There could be different answers. Most attorneys will have a dynamite understanding of the legal issues (in this instance personal liability protection issues), however they may not be as informed on the complex tax issues associated with real estate or other industries. So their answer may be help you from a liability standpoint, but hurt you from a tax standpoint. The same is true regarding the accountant. They may have great choice for you when it comes to taxes, but a bad choice when it comes to personal liability protection. Usually, the biggest trap comes in the form of a good liability protection choice, but a horrible tax choice. This is especially true in real estate. If you ever receive conflicting advice be sure to understand exactly why it is conflicting. For example, are there really contradictions or perhaps is the professional giving you legal advice, but not considering the tax issues. The same is true regarding tax advice. I like to say that you need to educate yourself on all the options available and some of the most common issues and structures that investors like yourself use – day in and day out.

POINT # 5: All professionals are not created equally. In order choose a capable attorney or accountant you need to be able to evaluate them. How do you do this? An excellent way is to ask them questions which relate specifically to your business/industry. While some investors have a pretty good understanding of the tax and liability issues…many do not. Because of this many business owners choose an inadequate attorney or accountant for their business. After all how can you evaluate the accountant or the attorney for you if you don’t understand all your options? How can you really ask pertinent questions? How can you evaluate their skill level? How can you really be sure what they are telling you is up-to-date?

You really need to have some knowledge before you walk into the plush law or accounting office. It will not only help you make the right choices, but it can also Save You MOney! If the attorney does not have to create an entire set of forms for you…then you will save several hundred dollars or more. If you have run your entity properly and understood accounting rules and IRS requirements, then there is less work for the accountant to do. With the right information you can choose the best professional and usually save a good deal in professional fees. You make your life and their job easier! Get educated first!

by Preston Ely
Let's cut to the chase.

The goal is a few hundred leads per month. You want billboards, commercials, and mass mailers going out in the tens of thousands.

There is only one small problem…

You currently have $327 a month available for marketing.

What do you do?

You have champagne taste and a malt liquor budget.

Simply put, you must start where you are and work your way up. And where you are is broke, by the way. Let that both embarrass you and motivate you at the same time. Don't like it? Oh yes, you do. If you really didn't like it, you'd change it. It's comfortable to you, and you're scared of anything else. You don't want the responsibility.

Isn't that true?

How does that make you feel?

You need to become a networking machine. You need to start networking so consistently and constantly that you literally hand out 95 business cards to imaginary people in your dreams at night.

Doesn't sound fun, does it? Well how much fun is being broke? Which one is less funner to you?

The answer to that question will determine whether or not you get off your lazy arse and DO something about your life.

You gotta get in the mix, man. Mix it up. Stir it up. Put it in the oven and bake it till a cash cake appears out of nowhere.

Then eat it.

Eating the cash cake is so fun, let me tell you. Oh how glorious when cash cakes just come to you every day. What a life.

But you gotta pay your dues.

No dues? No cake. No cake for you!

Your entire community needs to know that you buy houses and close fast. That you're the "go to" guy or gal when someone needs their house sold quickly.

How do you plan on accomplishing this?

If you have lots of money then this is easy. If you don't, then it takes work and high levels of creativity.

Are you willing to work? How willing are you to put in some 15 hour days to really get this thing off the ground? Are you all talk by any chance? Or are you one of those rare souls who actually make something happen in this world? Who are you really?

Get out there and make some friends. Hand your card out to every single person who comes within a 3 foot radius of you. The exact card to use and the unbelievably easy conversation you need to have with these people are in my digital book that you should already have by now.

I was just having lunch with a friend of mine who has been in the real estate investing game for years already. He still hands his business card out to people in an effort to get new leads. As a matter of fact he just recently did a deal that he made over $20,000 on, and he got it from handing his business card out to a stranger at my office - Starbucks!

It is more comfortable to do nothing. It feels better to stay home and watch tv. But does it feel better really? How do you feel about yourself? About your life? On a scale of 1 to 10, how much do you think your spouse respects you and what you have accomplished in life? How does that feel? Do your kids respect you or pity you? How does that feel?

Are you really safer doing nothing?

Me personally, I would rather die doing something than live doing nothing.

Get out there and mix it up. Shake it. Flip it. Bake a cash cake. Eat it. Smash it in your boss' face. Whatever.

Until you have the funds for the big time marketing…network your way to millions.

by Ben Innes-Ker

How did you get into real estate investing? Did you read a book on it? Was it a seminar? A meeting of some sort with speakers selling courses? Did you get really, really jazzed and pumped up by these simple ("not easy") concepts that were delivered to you in parable form from the stage by a charismatic speaker? Did you find yourself levitating to the back of the room, powerless but to slap down your plastic to buy the kits that were being sold there? Like…

"Yes Mr. Ker, we do take traveler's checks. Yes, cash is okay, too. HEY BARNEY, DO YOU HAVE CHANGE FOR A HUNDRED? There's your kit Mr. Ker. Good Luck!"

I have to admit that's where I began. I attended a "conference" and dropped over a grand in two days. What I ended up with was a very funny course about Paper (i.e. discounted mortgages) and a more sober account of making a million five in eighteen months buying and rehabbing multi-units. I listened to tapes for about four days straight, then went out and bought an HP12C financial calculator.

I loved paper (the units can wait a while). I really got my head around it. I loved discounting on the calculator, I loved calculating yields. And the guy on these tapes was so funny! I spent a fun couple of weeks learning the courses and I knew more than most bankers because the guy on the tapes told me so. I wanted to get started and get a note-closing-sweatshop going just like he described. I knew this stuff inside and out. Two deals a week would be OK with me you know, I'm not greedy. Now where was it in the book that it showed how to find the deals. OK…here we go … Look up names at the courthouse, call Accountants, call Contractors, call Attorneys……hmmm.

To cut a long story short, I looked up five hundred names at the courthouse and sent letters to them, I made about five hundred phone calls to Accountants and Lawyers (setting up my "network"), and finally I found one note holder who was interested in selling. I made an offer, he said "no", and I went home and went to bed for two weeks, too depressed to function. All that work, and this guy just said "no". That was my introduction to the wonderful world of real estate investing. From there, I got into low income apartments and completely flushed myself down the toilet!

Five years later, after buying and giving back about 50 units, nearly penniless, I discovered this thing called creative real estate. Control without ownership, solving people problems, use your brain to buy property - not your cash. I had an acute appreciation for it, given my (expensive, and painful) landlording odyssey, but it seemed even with all this wonderful knowledge, I was still in very much the same position I had been in when I first got started. The same position I stayed in, until I wised up, and the same position most real estate investors struggle with year after year because they don't know any better.

That is: "I know all this stuff inside and out. I know 100 different creative ways to buy a property. But I've got to suffer through things like lackluster advertising results, cold-calling, talking to hundreds of testy uninterested people, and dead ends, before I even get the chance to talk to someone who is half way motivated to sell. This is a crossroads. The proverbial "brick wall" for most of us.

And this brings up an important point. Possibly the most important point to really "get" here. Knowing how to find motivated sellers is far more important than knowing 100 different ways to buy a house. You see, your business (and therefore your life) is going to be frustrating, stressful and unfulfilling unless you find a way to create a non-stop flow of motivated sellers calling you, every day. Now, that's obvious isn't it? Well it can't be that obvious because not many people actually do it. You see, what I'm trying to point out here that there is a mental shift that needs to occur in your mind, a paradigm shift if you will, before you are going to make any serious money as a Real Estate Entrepreneur.

And What is This Paradigm Shift?

Instead of being a real estate entrepreneur, you must become a marketer of your real estate entrepreneurial business. That's what it comes down to. If you are in business, you need to make this shift in your thinking. Because no business is going to prosper, or be successful without a lot of customers.

Making this shift in thinking, in orientation, about who you are, focuses you on the singularly most important and financially rewarding aspect of business: marketing. The money is in marketing the business, not in doing the business. It may take a while before you really absorb this. You may have to think about it for a while before it really sinks in. Read it again. Take a minute. Once you change your thinking to accept that you are a marketer first, and a Real Estate Entrepreneur second, you'll finally be able to start making the kind of money you really want to make.

Accepting your role as a marketer is the thing that will move you out of the rut of occasional mediocre deals and up into a level of sustained success that would not otherwise be possible for you. And this is true of anyone in any other business or industry. The person or company who is most on top of their marketing, makes all the money, and dominates their market.

Look at Domino's

A marketing machine! Very average pizza. But aggressive marketers, and they virtually own their market. Look at Bill Gates (yes, I know, everyone cites BG). If you saw Accidental Empires though, a PBS documentary by Robert Cringley, you'd know that Gates was just one of hundreds of fanatical "techies" who were trying to make this computer thing work somehow. With his astute positioning and relentless marketing he rode Microsoft up over IBM to the $80B company it is today.

Of course, this doesn't mean you just market better and let your buying, negotiating and selling skills go to pot. You've got to be the very best property buyer you can be and run your office well too. After all, your sellers and buyers deserve the very best treatment from you. But more importantly, doing what you do so well that people can't resist telling others about you, is the purest type of marketing in and of itself. Remember, it doesn't matter how good you are if you have no Motivated Sellers to talk to. Buying houses from Motivated Sellers with little or no money out of your pocket is the name of the game, and marketing is the thing that brings in the Motivated Sellers.

OK, so, marketing. Really fabulous! But, what does it mean? So far it's just a word I've said 10 or twenty times, right? Well, there are two types of marketing people typically use.

The traditional approach which, for want of any better way to go, usually involves just going out after randomly selected sellers. They haven't been screened or qualified in any way. We just know they have a house to sell. We run up big phone and classified ad bills to get to talk to them. In communicating with them we usually talk to them about our financing, and how great it is, and if they will just sell to us their "problems" will go away. We do it manually; call by call, door by door. We talk about us, rather than inquire about them. We chase, they run. When we stop, the marketing stops. The cost per deal is very high, both financially and emotionally.

The second approach is the targeted, low-cost, systemized, response-oriented approach that, through a variety of media (such as direct mail, lead generating classified ads, flyers, signs, radio, cable TV) states or implies a benefit for the seller, calls for a response from them, and positions you as "the solution" for the sellers who want that. The sellers step forward and select you. The marketing is automated, and it is an operating system that works whether you are there or not.

I don't want to shock you, but we are not going with the first choice here. Pick up just about any book or course about real estate investing or creative real estate and you'll find the choice #1 approach to finding motivated sellers, if any. What you won't find anywhere in those books or courses is the choice #2 approach, which is direct response marketing. Direct response marketing targets a specific group of most-desired prospects that you have defined as those most likely to respond to your offer (e.g. out-of-state homeowners, or expired listings), then it advertises for or delivers a message to only those people via a media (e.g. personal-looking hand-addressed #10 envelope mailed first class) that will reach them and get their attention. Once in front of the target, direct response delivers the following:

1) benefit-telegraphic headline

2) true marketing message

3) offer, or offers

4) reason to respond immediately

5) precise response instructions and mechanisms

With these five elements in place, you set yourself up to be called only by motivated, partially pre-sold sellers, continually, day after day! So now you can be freed to do the most productive thing possible for you as an investor: make offers to motivated sellers!

Hopefully you can see the picture here. Direct response marketing cuts your advertising expense in half. It sifts, sorts and screens your prospects so that only the most qualified and most motivated respond and get to talk to you. In short, it allows you to make more while working less, with more predictability, consistency and control than anything else you could do to find deals. Is that something you want? Think about it. Is there anyone you know of who is buying and selling a boatload of houses every month?

They are still doing a ton of business. Now, why is that? They don't offer sellers anything more outstanding than you, do they? They certainly don't offer sellers anything more creative than you are capable of offering. They don't have any better phone manner than you. Not at all. The only thing that very successful Real Estate Entrepreneurs do better than anyone else is: Create a reliable, consistent flow of motivated sellers calling in each day! That's it! That's the difference. So did you get the message here? I hope so. If you want to change your experience in real estate investing from one of anxiety, frustration and disappointment to working less and making more, you'll make the change.

by Alan Brymer

I used to run TV ads in order to find houses to buy, and I’ll give the pros and cons of doing it.

1) One plus is that more people are seeing your ad for every dollar spent than just about any other media. This can help to build brand awareness so that if someone falls into trouble a year after they saw your ad, they will hopefully remember your company’s name and look you up.

2) It will also increase your response rate with other ads you’re running. If someone sees your commercial one day, doesn’t respond, and then later gets a letter in the mail from you later on, they will be more likely to respond to your letter because your company has already gotten a foothold in their mind. This is what J. Conrad Levinson teaches in his Guerilla Marketing books.

3) It makes you look pretty darn professional. People who see the commercial know that you’re a serious player and will call you and trust you a heck of a lot more than if they just saw some handmade We Buy Houses sign teetering in the wind on a street corner.

4) You get a good amount of leads. When I ran TV ads, I got about 26 calls per month for the first month or two. The usual number of these leads were motivated sellers–about 1 out of every 8 or so. So, if I could have closed one deal out of every 3 prospects who called me, then I could conceivably have done one deal per month just from TV ads.

I became a licensee of another company that let you use their name and their pre-made TV commercials (I’ll go into this more in Part 2). The total cost of the ads plus their monthly fee was $2600. Would you pay $2600 in ads to find one house to buy every month? I would, though it’s a little high. My goal is to spend less than $2000 per deal on marketing costs.

5) Another plus was that I did not have to spend any time brainstorming, writing ads, or managing any of the pains that come with other kinds of advertising (getting paper and stamps when you’re running low, making sure someone was sending mailers out on time, hanging up signs, etc). I would just send a check every month and be done with it, and that was nice.

So my cost per lead (call) ended up being about $100, at least after the first 2 months. Since one out of 8 leads was a real (motivated) prospect, my cost per prospect was $800. This was terrific. Then, for some reason, the ads didn’t work well a few months in a row. After about 6 months, I felt I had enough data to use to decide if I wanted to continue or not.

After all, you can’t judge an ad campaign solely on its first month’s performance. It might have been a really good month or a really bad one, and the only way to know for sure is to try it for a while and see how it does over time.

The downsides:
After 6 months, I looked at the numbers. It had cost me $15,600 in ads and we had done 3 deals from it. This meant that my cost per deal was over $5000, which was unacceptable. Think of the ways you have found deals before, and what they cost you. Would you have kept doing it?

I would have kept running them if it were for a different industry than real estate. If I could pay $15,600 now and sell $60,000 worth of my courses, I’d do it in a hearbeat. But real estate investing is different, because:

1) Each house requires even more money to make the deal work. So it makes sense to have the lowest cost per deal imaginable, so you can reserve your limited funds for things like repairing houses, paying your assistant or yourself, and actually doing deals.

2) Each deal takes time to do. So you might spend thousands of dollars on ads, and tie the money up for 3, 4, 5, 6, or more months before you get it back again from the sale of the house. If you keep the house as a rental, it may take even longer. Most of us cannot afford to have our limited funds tied up for so long, and the more you spend on ads, the more likely you are to wake up one day with a negative balance in your bank account.

3) Each house contains an element of risk. You may believe that you will make $20,000 or $30,000 from the sale of a house, but you never know for sure until the deal is done. It’s not as sure of a thing as simply handing a customer a product in exchange for payment the same day.

These are all things I would keep in mind when considering television ads to find houses to buy. My experience was mine alone, and yours might be totally different. If after reading this, you’d prefer not to run TV ads, fine. If you’d like to try it, remember to keep these considerations in mind and give it the proper planning and budgeting that any serious ad campaign deserves.

by Bill Bronchick

You can’t expect to reduce your risk of getting sued to zero, but you can take steps to reduce your risk as much as possible. In any situation where your money is at risk, ask yourself, “Is there a better way?”

Know the legal and financial risks of the situations in which you place yourself, your business, your family, and your assets.
Without covering every issue involved, here are a few common mistakes that investors make, novice and experienced alike.

Poor Legal Forms

It’s amazing how short-sighted novice investors can be when it comes to shelling out money for good legal contracts. They often buy contracts at discount office supply stores, from Internet web sites, or borrow them from friends.

However, a real estate deal is only worth the paper it’s written on. Like the old expression, “every tax strategy works until you get audited,” it can also be said that “every contract works until you have a dispute.”

So invest in a good set of legal forms that apply to your practice and ask a local real estate attorney to review them. Also, make certain you fill in the forms correctly—a good real estate attorney will review contracts for just a few hundred dollars.

Too many people rely on real estate brokers to fill out contracts, which is fine for a “standard” deal. However, most brokers aren’t trained in legal matters and often create long contract addendums that are insufficient to protect your interests.

Illegal Discrimination

The Fair Housing Act of 1968, as amended, prohibits discrimination on the basis of race, color, religion, nationality, familial status, age, and gender. Many state and local laws also forbid discrimination on the basis of sexuality or source of income and the Americans with Disabilities Act makes it illegal to discriminate against disabled people.

If you harbor any such prejudices and would allow them to come into play when renting a housing unit, then you’re probably not cut out to be a landlord. However, many sincere real estate investors make honest mistakes that result in discrimination lawsuits. The best way to avoid these lawsuits is to be informed.

The Fair Housing Act may appear to be common sense and most people would never think of discriminating against people of different races or religions or on the basis of gender. However, it’s important to note that the Act extends beyond the screening process and into advertising as well, so watch the wording on your ads.

This is where many landlords and property managers make critical mistakes. Some people scour the classifieds looking for inappropriately worded ads so they can pounce on them and threaten a lawsuit. While someone must have standing to bring suit, these scoundrels often work in coalitions to ensure that all of their bases are covered.

For example, if you own a rental property in a predominantly Jewish community, its proximity to the local synagogue could be a major feature. But if your ad says “within walking distance of the synagogue,” you could be sending the message “gentiles need not apply”—even though this wasn’t your intent.

And keep in mind that you may not discriminate on the basis of whether a couple is married and whether children are to live in the unit. You may also not discriminate on the basis of age. Often, novice landlords aren’t aware of these areas of concern. And while it’s good that citizens are more aware of their rights today, it can create a bad situation for well-meaning landlords who are out of step with the law.

Be aware of your local laws and use good business sense. State law and local ordinances can extend similar protections granted under the Fair Housing Act to other groups. For example, California, Minnesota, and North Dakota prohibit discrimination based on source of income. In other words, landlords can’t discriminate against would-be tenants who rely on public assistance. Putting the political perspective of the landlord aside, such discrimination makes little business sense because people on welfare or social security are virtually assured of a fixed income.

The Americans with Disabilities Act (ADA) prohibits discrimination against the disabled and also requires landlords to make “reasonable accommodations” to disabled tenants. Who decides what’s reasonable? Typically, judges, if it comes to that. But while most landlords are aware of the ADA and would never stoop to discriminate against a person in a wheelchair, many are unaware that the ADA also protects mentally disabled tenants. A mental disability could also include recovering alcoholics and drug addicts. On the downside, these people can relapse; if they do, this can cause serious problems for you and other tenants. Everyone deserves a second chance and many recovering addicts become productive members of society. Those unable to recover typically have other problems and, thus, if you decide to reject their rental applications, it’s vitally important that you document additional reasons for rejecting their applications.

Improper Disclosures

Improper disclosures are a common mistake for investors. It’s critical to be aware of the federal and state requirements for disclosures. For example, federal law requires a lead-based paint disclosure on the sale or rental of properties that were built before 1978. State laws may have additional regulations.

It’s become common practice for real estate brokers to use a property disclosure form as a general-purpose sell disclosure for all aspects of the house. Even if you’re selling your house on your own, be sure to use one of these forms. Whenever in doubt, disclose what you know, especially something the buyer or tenant may not know about, such as dangerous conditions, water damage, electrical issues, or plumbing problems.

Illegal Solicitation of Money

Many novice investors try to solicit money for investing via public advertising or mailings. This is commonly referred to as syndication. You may inadvertently cross over a variety of federal and state securities regulations when trying to raise capital. Chatting with friends over the dinner table about a real estate deal is one thing, but advertising to the public in mass may be considered a public offering. Before soliciting money from strangers, review your marketing, paperwork, and solicitation strategies with a local attorney well versed in this area of law. You may be able to get away with a good set of written disclosures if you solicit money on a limited basis, but it’s better to be safe than sorry.

Independent Contractor Liability

The IRS and your state department of labor are on the lookout for employers who don’t collect and pay withholding taxes, unemployment, and workers’ compensation insurance. If you have employees that are “off the books,” you’re looking for trouble. If you get caught, you’ll have to pay withholding taxes and as much as a 25 percent penalty. Intentionally failing to file W-2 forms will subject you to a $100 fine per form. The fine for failing to complete the Immigration and Naturalization Service (INS) Form I-9 varies from $100 to $1,000 per form. Your corporation or LLC won’t shield you from liability in these cases, either. All officers, directors, and responsible parties are personally liable for the taxes.

If you hire people to do contract work for you on a per-diem basis, they may be considered employees by the IRS. If any workers fail to pay their estimated taxes, you may still be liable for withholding. If these workers are under your control and supervision and work only for you, the IRS may consider them employees, even if you don’t. If this happens, you may be liable for back taxes and penalties.

To protect yourself, you should:

• Hire only contract workers who own their own corporation or get the business card and letterhead of any unincorporated contractors you may use so you can prove these workers aren’t your employees.

• Require proof of insurance (liability, unemployment, and workers’ compensation) in writing.

• Get written contracts or estimates on workers’ letterhead that states they’ll work their own hours and you don’t have direct supervision over the details of the work.

• Have letters of reference from other people for whom the contractors worked to show that the contractors didn’t work solely for you. Keep these in your files.

• File IRS Form 1099 for every worker to whom you pay more than $600 per year.

In addition to possible tax implications, an independent contractor can create liability for you if a court determines the contractor is your employee. For example, if your independent contractor is negligent and injures another person, the injured party can sue you directly. If facts show that you exercised enough control over your contractor, a court may rule that this contractor is your employee for liability purposes. As you may know, an employer is “vicariously liable” for the acts of his or her employees—the employer is liable as a matter of law without proof of fault on the part of the employer. Make certain you follow these guidelines when hiring contractors and pay particular attention to the issue of control.

Finally, under your state’s law be aware which duties are considered inherently dangerous, such as providing adequate security for tenants in a multiunit building. These duties can’t be delegated to an independent contractor without liability on your part, regardless of whether the person you hire is considered an independent contractor or an employee.

by Ben Innes-Ker

You’re a Real Estate Entrepreneur or Investor, and you’re out there in the market place looking for deals. I have a question for you.

Are you doing a bit of advertising and just hoping that a deal will fall in your lap, or are you operating in a way that makes certain it will happen. If you don’t have a process for making sure deals happen, you don’t yet understand the importance of having a marketing plan.

The sad fact is that even after all their training, less than one percent of all real estate entrepreneurs and investors actually have a marketing plan. Even though it’s very simple, don’t underestimate its power.

The Most Important Thing About Marketing is to Have a Marketing Plan!

1) It’s a concrete result you put out for your mind to seize on and strive to achieve.

2) It allows you to clarify exactly what you want to achieve in the coming 30 days.

3) It allows you map out the activities needed to achieve that plan.

4) It allows you to plan in advance to delegate off the lower paying activities, so you don’t end up doing them.

5) It allows you set time deadlines, to hold others accountable so everything gets DONE!

6) It results in you being free to concentrate on your highest payoff activity: Making Offers on Great Deals!

7) You have a business that operates consciously, not by accident.

More people fail in real estate because they simply do not have a plan or goals. You should have a detailed marketing plan of what you want to accomplish and how you are going to accomplish it.

And, don’t be vague, either. Things like, I want to make more money than I can ever spend, and I want to be rich, and I want to make $10,000 a month, are not plans. They are too vague, and they won’t help you get there. Be as specific as you can possibly be.

In planning for monthly revenue, try to put your money goals in cash income, not gross revenue. I know gross revenue is what you’re used to thinking in, but cash is obviously more important. It’s what you take to the bank, and it’s what pays bills.

First, examine your current numbers. More than 80 percent of all real estate entrepreneurs know how many houses they are buying each month, but they don’t know where those houses came from and how many leads they had to process to develop them into the single deal. And, this is a deadly sin.

You Simply Must Know How You Are Currently Doing

You should know:

1) The total leads that call each month (each week is more manageable),

2) Where those leads come from,

3) How many “qualified” seller prospects (i.e. those that you are willing to invest follow-up in if they don’t sell now; they have motivation, you are interested in the house.) you get each
month,

4) The ratio of total to qualified,

5) The number of deals you close,

6) The ratio of closed deals to qualified leads – for each lead source

7) How much you make from each seller,

How much it cost you to acquire a new seller.

With this information you can look at your current resources, look ahead, and then plan out what you want to have happen. The number of deals you want to do, the amount of money you want to make.

For example, let’s say you are bringing in around $10,000 a month and your average deal gives you $5,000. Yes, I know that’s low, but for the sake of example. That’s two deals a month. These are cash proceeds and after expenses you net 50 percent of your gross or $5,000 a month. And let’s say that you want to double your net income next month.

You will have to get twice as many deals to double your business. Goal? Four deals a month, or one a week.

Let’s say you currently get one deal a month from a classified ad, and one deal a month for mailing expired listings. But, you get ten qualified calls a month from his classified ad and 10 qualified prospects calling a month as a result of mailing expired listings. So, you currently close ten percent of your prospects.

First, you can improve on this situation by improving that twenty percent closing ratio. By improving your closing ratio by things like more precise targeting, the present lead-flow would stay the same, you’ll get your same twenty real prospects and achieve your goal of doing four deals next month.

But assuming that’s not something you have control over right now, the other way to double your income in the next month is to double the number of qualified prospects you talk to and make offers to. So instead of getting 20 qualified leads to call, you would need 40.

Your plan to get forty qualified prospects would need 10 to come from expired listing mailings, 16 to come from flyers in target neighborhoods, 4 from business cards handed out everywhere, 6 to come from signs placed in the ground at high traffic count intersections, 10 to com from classified ads that drive people to the website. Total: 46 prospects. Cool! That’s six to spare.

With this number of leads coming in you have what is needed closed four deals and reach your goal of doubling your net income. Actually, it’s more than doubling because your fixed expenses don’t increase with the income.

You should have a monthly plan. Schedule thirty or forty minutes out of one day to make up your monthly plan and see how you did last month. Schedule this time and keep to it. Don’t do any work or take any calls during this time. Keep it strictly for planning. If you do this and you allow yourself to get into the whole spirit of planning, and making things happen on purpose, you will easily double your income in twelve months.

Your Monthly Plan Should Include The Following

1) A goal for total net income.
2) A goal for number of deals signed up
3) A goal for number of appointments made.
4) A goal for number of qualified, interested sellers.
5) A goal for total number of leads.
6) Average net income from each deal.
7) The number of prospects you have to generate to reach your goal.

A detailed plan to generate the number of prospects you need. Your plan doesn’t have to be typed out or put into a computer. It can be handwritten on paper. It doesn’t have to be pretty.

Scratch pad plans are good enough. The important part is that you do a plan every single week and keep on top of things.

This is a simple thing to do, but it is just as easy to not do. Blowing it off is the equivalent of you absolving yourself of responsibility for your business. On the other hand, taking the time to think through your goals each month, both for income, and marketing activity, then committing them to paper will make things start happening by plan and put you in control of your business.

by Bill Bronchick
There are over 80 million lawsuits filed every year in the United States. Landlords and real estate investors are especially susceptible to liability. Are you a target? Are your assets easy to locate? Is your real estate titled in your name?
You wouldn't walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Anyone can go down to the county courthouse or recorder's office and look up the owner of any property. Real estate records are now computerized, so all of your real estate holdings can be located at the touch of a button!
Any mortgages on your property will be recorded as well. Most recorded mortgages will state the amount of the original principal balance and the date the mortgage payments began. All one has to do is figure out the balance of your mortgage and subtract that amount from the market value of your house. Bingo! Now they know how much equity you have and hence whether suing you is worthwhile.

If a tenant or creditor is contemplating suing you, he will make an appointment with a lawyer. Unless he can afford an attorney by the hour ($150 and up), he will likely seek a "contingency-fee" lawyer. A contingency-fee lawyer does not charge by the hour; he charges a percentage of whatever he collects. Most contingency-fee lawyers will not take a case unless there is something upon which to collect. If you have no real estate in your name, then finding out your ownership interest will not be easy for a typical lawyer. It's not that lawyers are lazy. It's simply a matter of allocation of resources; lawyers focus on cases they can win and collect. If they don't find any assets in your name (and there is no other apparent "deep pocket"), they probably won't take the case. As you can see, appearing "broke" is the best lawsuit-repellent money can buy!

There is another problem with owning real estate in your own name. If a judgment is obtained against you and filed in any county in which you own real estate, all real estate in that county will have a lien attached to it. You cannot sell or refinance any property in that county, since no title insurance company will guarantee a clean title. You're stuck until you pay off the lien.

Some people use a corporation or limited liability company to hold title to their real estate. While these entities will protect you, they will not protect your property. If you own all of your properties in one corporation, a judgment against the corporation will create a lien on all property owned by the corporation. Furthermore, the directors and officers of a corporation are public record, so a corporation will not hide your ownership.

The solution for holding title to real estate is a land trust. A land trust is a revocable, living trust used to title ownership of real estate. Title to the property is held in the name of a trustee, who is forbidden to reveal the beneficial owner. The beneficial owner or "beneficiary" can be an individual, corporation or other entity for further protection. Land trusts were first used in Illinois, hence the nickname, "Illinois Land Trust." In nine states (AL, FL, GA, HI, IL, IN, ND and VA), land trusts are specifically recognized by statute. In most other states the validity of land trusts are supported by common law and general trust principles (land trusts are not recognized in TN & LA).

A land trust, if properly setup and implemented, will hide your name from the public records. No one will know who owns the property but you, your attorney and the trustee. If a judgment is entered against you, a lien will not automatically attach to the property, since title is not in your name.

A transfer of realty into a land trust virtually no income tax consequences. A land trust is considered a revocable "grantor" trust under the Internal Revenue Code, so it does not require a separate tax identification number or income tax return. Thus, you continue report the property for income tax purposes as though you still own it. Furthermore, a transfer of property into a land trust will not usually trigger the "due on sale" clause of your mortgage.

A land trust will allow you to assume an FHA or VA loan without recourse. Anyone can assume an old FHA or VA loan without qualifying, but few investors realize that such an assumption is with recourse. If the investor sells the property and the buyer assumes then defaults on the loan, the investor (and anyone else who previously assumed the loan) may be held liable. If a land trust is established to take title to the property and assume the loan, there is no recourse against the beneficiary. Furthermore, the loan will not appear on the beneficiary's credit report as a liability. So What are your waiting for?

Get that Property Out of Your Name!