Buying Apartment Buildings – Purchase Agreement Contingencies and Lease Mistakes

In this article, I want to talk about one of the biggest mistakes apartment and commercial real estate investors make when buying a property. This has to do with the actual purchase agreement and, just as importantly in examining the leases.

One thing I highly recommend when investing in any type of income-producing property, whether that is an apartment building, a strip mall, or office building, is to include clauses in your purchase offer that will protect you.

I do not recommend filling the offer with ridiculous contingencies that make you look like a complete amateur, but to use prudent clauses and language in your purchase offer to protect yourself. These will make sure you are not making a huge mistake in purchasing a building.

You are probably wondering what kinds of contingencies to include?

Of course laws vary from state to state, and I cannot cover everything in this article, but some examples of purchase offer contingencies I recommend are:

Seller to provide the following for buyers examination and approval in the next 30 days:
1) All lease documents
2) All property management agreements and records
3) Current Rent Roll
4) Accounting ledger detail and bank information
5) Property Income and Expense History for the last two years

I could go on and on, but those are some big ones that I recommend investors use.

Even after including these clauses, there is one mistake I have seen investors make in purchasing a property, and that is this:

Just because a property is leased, does not necessarily mean that the tenants are paying rent.

That is correct. What I am saying is that just because there is a written lease in place on apartment 204, that does not necessarily mean they are up-to-date on their rent.

I have seen investors take over large apartment projects, and thinking they had gone through their due dilligence ensuring leases were in place, found out after closing that up to 50 percent of the residents were behind on rent.

Imagine trying to clean that mess up on a 178-unit property.

This is especially true in today’s economy where the job market is very soft and we are in an era where foreclosures are commonplace. Once tenants are say one or two months behind on their rent, how motivated do you think they are to make that up, and pay the rent?

Make sure you look at the details of the property ledger to ensure the residents are actually paying rent and up-to-date on their payments. This is especially true on larger properties, but even for smaller purchases, as well. Get copies of leases and examine them before closing, but also get copies of the deposit registers to make sure they are paying rent.

Including the right contingencies in your purchase offer and examining not only the leases, but also that residents are actually paying rent can literally save you thousands of dollars in costly mistakes when buying.

By the way, if you liked this article, you will probably like my new report and video series, “The 7 Biggest Mistakes Investors Make When Buying an Apartment Property.”

Buying Apartment Buildings – Should You Get a Professional Inspection?

“Persistence is to the character of man as carbon is to steel.” — Napoleon Hill

Buying an apartment property can be an exciting time in terms of building your wealth. It can also be a very busy time with many items to take care of during the purchase process. A question I get a lot during this time is whether or not you should have your property you are looking at purchasing inspected.

My answer…it depends.

Here is what I mean. I have been in the apartment investing business for 18 years. Needless to say, I am familiar with local building codes and requirements, and generally quite comfortable knowing what to look for in a property.

I just got done inspecting, myself, a nice apartment project that is 5 years old. The property was in great shape. Now, will I have this property professionally inspected?

No.

Why? Because based on what I saw I left the project with no lingering thoughts of what may or may not work. If you leave the property with a list of concerns then…

Have it inspected by a pro.

In general, my view is that it really depends on the condition of the property when you see it and how concerned you are about the condition. That is really what it comes down to.

Other times I would recommend a professional inspection are:
1. If it is your first purchase and you are new to the apartment business.
2. Likewise if you are moving up to a much larger apartment property, hiring a pro is a good idea.
3. If you are purchasing outside your area, most definitely hire a professional to go over things.
4. Finally, if you are the type of person that will not sleep at night until you get your property inspected, then get it done.

Hiring a professional inspector really comes down to how comfortable you are with the age and condition of the property, and your own personal experience. If in doubt, get an inspection – it will be money well-spent during the purchase process.

Do you want to learn more about investing in apartment buildings? Click the link below for my FREE 7-Part Investment e-Course, and I’ll also send you my FREE special report and teleseminar access, “How to Buy Apartments and Commercial Real Estate With No Or Low Money Down.”

The Profile of People Who Are Likely to Buy Apartment Complexes

If you find yourself in a situation where you are looking for people to purchase an apartment complex you happen to be selling, then chances are that you will want to find out what the profile of people who are likely to be really in a position to buy apartment complexes is like, so that you can target your advertising and marketing efforts properly.

The need to know, beforehand, what the profile of people who are likely to be buying apartment complexes is accentuated by the fact that it is extremely hard to find guys who have fixed a sign on their door to the effect that ‘we buy apartment complexes.’ You may find guys with signs to the effect that ‘we buy houses’ or ‘we buy plots’…and so on, but it is very rarely that you will find guys with a sign on their door saying that ‘we buy apartment complexes.’ What this means, then, is that anyone trying to find the kind of people who would be keen to buy apartment complexes has to use some sort of a profiling technique if they are to get really good prospects.

So what is the profile of people who are likely to be in a position to buy apartment-complexes?

Well, for starters, the people who are likely to be in a position to buy apartment-complexes are those who are in the real estate business in a big way. Of course, this is too obvious to mention, and it might seem so, until you get to see how many people looking to sell things like apartment complexes to people who would not be interested in that scale of property even it was being offered for free, if only for the ‘management burden’ that a huge real estate project comes with.

It is important to note, with regard to the aforementioned attribute of people who are likely to be in a position to buy apartment-complexes, that having the type of money that can purchase such apartment complexes or not is not really a strong enough criterion for determining who can buy and who cannot buy, because the propensities to buy in real estate are typically a matter of interest, rather than ‘financial muscle’ – meaning that a real estate investor who has shown a huge appetite for small properties, gulping up thousands of such small properties (and who would be expected to be a good prospect when looking for a person to buy an apartment complex) might turn out to be utterly unable to purchase such an apartment complex, not because they are financially incompetent, but for the simple reason their interest is in the smaller properties, rather than in the bigger properties the size of apartment complexes.

So at the end of the day, the best way of determining people who would be in a position to buy apartment-complexes would be by looking at the scale of their operations alongside their interests, as manifested on their past purchase track records, so that people who have shown an interest in buying apartment complexes (rather than people you perceive as being ‘well monied enough to buy’ them) would make better prospects when looking for apartment complex buyers.

Buying Apartment Buildings – Good Move?

Buying apartment buildings used to be what people thought of when they were thinking about investing in real estate. However, thanks to the whole flipping phenomenon the popular notion of investing in real estate has become something more akin to fixing up junker houses.

Not that there’s anything wrong with fixing up junkers, you make good money. But when you are trying to figure out what is the best return on your time, fixing a junker just doesn’t compare to buying an apartment building.

Let’s consider the two, just for a bit of perspective.

1. When you buy an apartment building you have much less competition; you are one of only a few investors in your market going after deals. Chasing flippers you’re one of hundreds. Why? Houses are easy for people to get their heads around, so everyone and their cousin does it. Apartment buildings are more challenging, because of the high dollar figures involved and more details to master, so fewer people take them on.

2. Buying apartment buildings makes you “much” more money. When you fix up a house you get one check one time; when you sell. You might have 100 hours into a rehab deal, and when you sell you net $30,000. Nice! However, take those same 100 hours and put them into buying a 50 unit apartment building. Now, not only do you get paid more, your apartment building pays you multiple times. When you close you get cash back from pro-rated rents, you pay yourself a management fee for raising private money for the deal. Each month you receive positive cashflow from the property. Then, 18 months or so after closing, after renovating the units, raising the rents and filling vacancies, you refinance and pull out a six figure, possibly a seven figure check. These are loan proceeds and tax-free.

3. If your goal is to become wealthy, building a multi-million dollar net worth, buying apartment buildings with get you there quicker. You need fewer deals to reach the one million dollar mark (a single deal can do it for you) making it much more achievable.

4. Even though most real estate investors are afraid of apartments because of the big numbers, buying apartment buildings is in fact less risky than buying houses. If any single tenant stops paying rent you still have cashflow coming in from all the other paying tenants in the property to cover your expenses. When a tenant in a single family home stops paying, that’s it! You’re 100% vacant and personally on the hook for the mortgage, taxes and insurance.

5. Buying apartment buildings allows you to achieve economies of scale, making your per unit expenses lower and cashflow margins higher. Because you can generate more useable income with apartment buildings, it is financially feasible to hire a professional management company, freeing you from day to day management of the property.

6. Buying apartment buildings and managing them effectively provides you and your family with a lifetime of residual income.

As you can see buying apartment buildings provides you with everything you wanted when you first thought of getting into real estate; large lump sums of cash, monthly cashflow that grows over time, the time freedom to really enjoy your life.

Funnily enough, houses can provide few of these benefits, yet ‘flipping gurus’ tout them as the investment vehicle for your financial freedom.

Don’t be fooled. Educate yourself, take action to buy your first apartment building and enjoy the income for the rest of your life.

How to Buy Apartment Buildings and Create Wealth in Today’s Economy

Too many investors are under the mistaken impression that real estate is no longer a viable vehicle for their money. The reality is multi-family apartments can be an excellent addition to an investment portfolio. In these troubled financial times many families are being forced from their single-family dwellings, going from homeowner to renter and apartment buildings are more in demand than ever before.

With foreclosures coming at a record pace in this country, many people are finding it difficult to find affordable housing to replace their homes they can no longer afford with rising mortgage costs. Additionally, refinancing their existing home has become more difficult with tighter controls over mortgage loans, making it more difficult to secure funding for getting out from under their heavy debt. Many real estate investors shy away from owning rental properties, with visions of the perceived problems often associated with apartment ownership.

The idea of spending their free time maintaining rental properties and chasing down late rents has many investors turning to other form of investments to round out their portfolios. However, the return on an apartment building investment, especially in today’s volatile housing market, should provide the savvy investor more reasons to consider this type of investment. Understand that no matter the condition of the economy, people will always need a place to live.

Consider the opportunity to buy other forms of investments, such as stocks and bonds, with 20 percent down. There are very few opportunities for this to happen with most investments. On the other hand, an investor that can put down 20 percent of the purchase price for an apartment building has a good chance of securing the needed funding to purchase the property. Buying an apartment building offers investors millions of potential renters and provides a better return on their money than buying into foreclosed homes in an already depreciating market. In fact many people use owner financing and actually buy apartment buildings with no money down at all!

When looking for apartments, caution must be used to ensure the property has been cared for and can be purchased at the current market value instead of an inflated price. Many existing properties, that have been well maintained, can offer the opportunity to receive higher rents that can compete with newer apartment complexes, without the higher initial purchase price.

With any investment in real estate, the main benefit of ownership is being able to leverage the investment. With most lenders willing to loan 80 percent of the property’s value, any valuation increase will not only increase the property value, but will also improve the return on the buyer’s initial investment. Apartment owners can count on the cash flow from their investment, that is money left over every month once all expenses have been deducted from the rent income. This cash can be placed into an interest-bearing account to add to the return on the investment.

An apartment building in the right neighborhood can also improve the overall property values in the neighborhood with appropriate maintenance and an owner that considers the property as an investment vehicle as opposed to looking at it only as an income generator. Most apartment owners have found that if they take care of the property, as well as their tenants, the return on their investment will take financial care of them for the future.

Real Estate Fraud

This is an activity that is purposely done to misrepresent information on real estate documents. It also involves the money transfers. It is also called mortgage fraud. The reason that it is referred to as this is that the fraud generally takes place with the mortgage application. Real estate fraud, in the United States, can have heavy penalties like imprisonment and large fines.

Such a crime can be committed in many different ways. It appears to happen more often when property prices are on the rise. Because of the simplicity of the fraud, some types are seen more than other frauds. Some are not as common because they are more complicated. One of the common forms of such fraud, according to the IRS is preparing two settlement statement sets that are different from each other. In one of the statements, the accurate property-selling price is written, which the buyer receives. The other one will depict a higher selling price that is exaggerated. When the mortgage lender approves the loan for the exaggerated price, the seller is given the amount that is stated in their copy of the settlement statement. The one who committed the fraudulent settlement statements will keep the money that is left over. If there are other conspirators, the money will be divided among them. It could be the entire excess money or a percentage of it.

Using qualification that are fraudulent is another type of real estate fraud. These fraudulent qualifications are used when applying for a mortgage or home loan to help them get the mortgage. In this form of real estate fraud, the real estate agent will usually assist the buyer. The fraudulent qualifications can include fabricating credit reports or history of employment. These two involve the obvious misrepresentation of data but not all real estate fraud is easy to see as these two examples. If buyers who do not intend to commit real estate fraud because they do not know the laws can accidentally commit mortgage fraud.

If a buyer has a down payment by using money that was given as a gift it is legal. If this gift is re-paid to the who gave the gift, this is considered a case of real estate fraud. The gift used to make a down payment cannot be repaid for it to be legal. Another type of property fraud is when the buyer accidentally fails to disclose any financial liabilities on their mortgage application. It becomes fraud when it is not taken care of before the loan is approved. Property flipping can become real estate fraud if you make false representations about the value and condition of the property when you sell it for a much higher price than you paid for the property.

REAL ESTATE: Something You Might Want to Know

Real estate means the property consisting of land or buildings which also includes the natural resources of the land including uncultivated flora and fauna, farmed crops and livestock, water and minerals, simply speaking any improvements on it. Tenants and leaseholders may have the right to occupy or make use of anything that is within the dominion of the rented area depending on the terms and conditions set by the landlords.

However when we hear the words “real estate”, we often refer it to the “real estate market” from the perspective of residential living. This is grouped into three categories based on its use. It’s either be residential which is used for living purposes, commercial as used in commerce and industrial which is used in manufacture or production of goods. Residential are those undeveloped land, houses, condominiums and town homes. Commercial are office buildings, warehouses and retails store buildings and examples of industrial are factories, mines and farms.

Those who are buying a home often need to borrow money in the form of mortgage because prices are generally well above their savings. They can either avail of fixed-rate or variable-rate.

Commercial leases are mostly longer that residential and lenders may ask for higher down payment on a mortgage for commercial than home loan since generally residential real estate is usually less expensive so it is more affordable for small investor

Generally, this is affected by the primary condition to where the property is located. Profits or losses come through revenue from rent and appreciation of the estate’s value. There is also risk of tenant turnover especially if the business model is in bad condition, product is unattractive, or poor management and many more. So landlords, lessees has to make sure all is well set before lending the area/place.

Real estate can help you earn more especially if you are in hand with generating leads and setting well the properties in case you are into selling or offering rentals. You have to make sure you will be working more of what you invested. Usually property appraisals are of good and or high value, you just need to work on it. You must always and consistently putting your client’s best interests first. With that, your personal needs will be realized beyond your greatest expectations. Investing in this even on small scale, was tried and tested as true means of building an individual’s cash flow.

The Real Estate Resurgence of Glassell Park and Highland Park

Real estate in Northeast Los Angeles has been booming for years. We hear about it on television and in the news. Rarely does a news story get published where the term “Gentrification” is used to describe areas such as Eagle Rock, Mt. Washington and Highland Park, regions where home values have spiked. Is it something home-buyers and home sellers need to know?

By definition, “to gentrify” is to improve a house or district so that it conforms to middle-class taste. The middle class, or Bourgeoisie, is attempting to emulate upper-class standards. In the U.K., the gentry refer to people of high social position, specifically the class of people next below the nobility. Therefor the gentrification of an area is a process whereby those of lower socioeconomic status are forced out of a region in order to make it more attractive to the people of higher socioeconomic standing. Taking deteriorating inner city homes away from working class families to be renovated and sold to the privileged is also known as progress, or gentrification.

That is precisely what is occurring in the once run down neighborhood of Highland Park. This ongoing restorative transformation has helped to eradicate crime and strengthen the local economy. Juice bars and yogurt shops have sprung up in place of derelict Laundromats and liquor stores. Local businesses are now thriving, where the windows were once boarded up and car carcasses rusted.

Nowhere is this more evident than in the Northeast Los Angeles neighborhood of Glassell Park, where police not long ago bulldozed suspected gang homes in a dramatic crackdown on crime. Soon after, investors began investing in fixing up Glassell Park’s hillside view homes and property values began to rise with new shops and restaurants appearing in direct proportion.

At one time, Eco Park stood as the poster child for gentrification in Los Angeles. This forgotten slum went through a complete metamorphosis in the 90’s, turning it into one of the most sought after areas east of downtown. With Echo Park as a model, the restoration movement has continued its march east, rehabilitating other areas, such as Highland Park and Glassell Park, with great potential.

One telltale sign of the up and coming neighborhood is what is known as the Starbucks phenomenon. If this “7-eleven” of coffee houses has chosen to plant its green lady logo on the block, you can bet your bottom dollar that the ‘Hipsters are coming or more likely, the Hipsters have already arrived. This of course means that property values are climbing. In the historic region of Highland Park, York Boulevard is now book ended by Starbucks. Having a Starbucks on the corner is clear evidence that a moneyed community is on the rise. The values of homes for sale in Highland Park are absolutely exploding.

Another way of measuring affluence is by exploring the high volume of trendy restaurants, bars, and art galleries not to mention the cafes populated by too cool for school patrons everywhere. This enclave has become a hot spot for exotic dining among foodies and the like. Good eats just seem to go along with gentrification. That is one of the advantages. Today you can find French, Italian, Japanese, Vietnamese, and a wide variety of Vegan food in this once neglected district. It has become an amazing multi-cultural mecca. One more example of economic growth is improved public transportation. Business people can commute from paradise to downtown by train in a matter of minutes.

The median price for a house in Highland Park is now approaching seven hundred thousand. In relative terms, this area is still a bargain in Los Angeles’ exorbitant housing market. As the beautification of these older neighborhoods flourishes in NELA, the real estate naturally becomes more desirable and the property values escalate.

Shadow Inventory – What Is It and How to Find It

Many Investors have been asking me about shadow inventory how much is out there and how to get their hands on it. Shadow inventory usually refers to the supply of homes that has not yet hit the market, but “hiding” in the background. In Real Estate this refers to foreclosures (REO or bank owned properties) or those close to the process.

Banks and mortgage loan servicing companies typically hold onto properties that haven’t seen a mortgage payment for 90 days and in some cases even 2-3 years.

Why do they hold on so long?

Banks hold on since it allows them to release their inventory over time to keep their books in check and also to provide that easy liquidation to stimulate the real estate economy when necessary. Banks will now be getting more money for those newly released properties, then say 2 years ago, due to the steady increase in home prices and low inventory levels. If they chose to release all at once, it would flood the market with “distressed properties” and bring down property values.

How much “Shadow Inventory” is still out there?

Foreclosures have been steadily declining since 2013 with the highest shadow inventory then at 2.2MM. According to the National Association of Realtors, there is still about 4 years still on the books and it is possible that we could soon see more!

More “Shadow Inventory”? Why? (HAMP) Home Affordable Modification Program

In 2017 and beyond, many homeowners may find it difficult to make their mortgage payments due to “resets” with HAMP thus pushing them into foreclosure. The government’s Home Affordable Modification Program provided temporary relief to borrowers during the housing crisis. These reliefs ended after five years and now payments will be “reset” thus causing loan payment increases for nearly 900,000 homeowners. Some of those are likely to find it difficult to keep up with the payments in our current economy.

Where do Investors find “Shadow Inventory”?

Forget about calling the loss mitigation department or asking the cashier at your Big Bank. They won’t be able to help you. Instead, savvy real estate investors can approach the REO departments of smaller regional banks, credit unions and portfolio lenders to find out what could be “lurking” in the shadows. This presents an opportunity to beat out the competition and purchase at greater discounts.

But my favorite way to locate “Shadow Inventory” is what I call “Driving for Dollars”. Simply drive through areas that have high foreclosure activity and look for the white sticker posted on the front window or door of the house. This typically contains the information of the bank or asset manager of the property and their phone number. Give them a call and see where they are in the foreclosure process and if they’re ready to make a deal!

The NEW kind of “Shadow Inventory”!

There is a new kind of shadow inventory on the market these days and I’m not talking about the REO kind. Many successful agents have their own shadow inventory. If you’ve been in the business for an extended period and built up a clientele, these clients typically contact you well in advance of the property going on the market. You advise them of the steps needed to get the house ready to show which typically means doing repairs such as paint, carpet, landscaping, staging, etc. Therefore, there is a period of time before the property actually hits the market creating a different type of shadow inventory. Contacting your favorite realtor about this type of inventory can definitely increase your chances of finding that Dream home.

Happy House Hunting!

4 Daily Habits to Adopt for Success in Real Estate & Life

Good habits are the foundation of wealth. If you watch successful people you will see their day is filled with consistent habits that save time, improve focus and ultimately help accomplish more daily. Successful people get up early, learn daily, make lists & set goals and track their progress.

• Get Up Early.

Make the first two hours of your day the most important. It will not only set the tone for the day but will give you a game plan for everything else that follows. These two hours can be used for activities you enjoy such as exercise, meditation or completion of a project or activity from the previous day. The early morning is free from distraction allowing you to do more of whatever you enjoy.

• 20 Minutes Of Learning Daily.

It is important in any business to know what is going on at all times. Trying to master every aspect of the business may seem intimidating but is less difficult if you spend some time on it daily. Regardless of how busy you may be you can squeeze twenty minutes of learning into your daily routine. You can find this time on an audiobook driving to or from an appointment or on the treadmill as you get some exercise in.

• Make Lists & Set Goals.

Success is often easier if you plan exactly what needs to get done. Before you go to bed you should plan for the next day. Tackle the toughest task first and go from there. Planning your goals not only makes you efficient but gives you a sense of direction and purpose. The most successful people in the world have one thing in common, they all say their goals out loud three times daily. This helps to reinforce their direction and keeps them on track in accomplishing their goals. Try it and see how much closer you get to reaching your goals!

• Track Progress.

If you don’t know what is working, is impossible to gauge the results? At the end of every day you should take some time to evaluate what you did to build on your progress. If you failed to do anything, you need to ask yourself why and then develop a new plan to stay on track.

You ultimately control where you go in Life. Changing habits is never easy but is essential for growth. Start by incorporating these four habits into your daily life and see the difference it makes towards your success.