The Abandoned Property Investor's Kit: Find the Owner, Buy Low

The Abandoned Property Investor’s Kit Find the Owner, Buy Low (with No Competition), Sell for Big Profits REGGIE BROO...

Author: Reggie Brooks

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The

Abandoned Property

Investor’s Kit Find the Owner, Buy Low (with No Competition), Sell for Big Profits

REGGIE BROOKS

John Wiley & Sons, Inc.

The

Abandoned Property

Investor’s Kit

The

Abandoned Property

Investor’s Kit Find the Owner, Buy Low (with No Competition), Sell for Big Profits

REGGIE BROOKS

John Wiley & Sons, Inc.

Copyright © 2008 by Reggie Brooks. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging in Publication Data: Brooks, Reggie, 1948– The abandoned property investor’s kit : find the owner, buy low (with no competition!), and sell for big profits/Reggie Brooks. p. cm. Includes index. ISBN 978-0-470-26765-3 (pbk.) 1. Real estate investment—United States. 2. Abandonment of property— United States. 3. Real property—Purchasing—United States. I. Title. HD255.B757 2008 332.63 24—dc22 2008009616 Printed in the United States of America. 10

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CONTENTS

CHAPTER 1 How I Got Started Making an Extra $43,000 Investing in Abandoned Properties—And How You Can Too!

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Investing in Abandoned Properties Is a Public Service to Your Community

5

Foreclosures Feed the Abandoned Property Market

6

How I Got Started

11

The Beauty of Abandoned Property Investing: Very Few Competing Buyers!

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CHAPTER 2 Why Every Real Estate Investor Should Do at Least One Abandoned Property Deal

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Motivated Sellers

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Advantages of Abandoned Property Investing over Other Strategies

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Combining Abandoned Properties with Other Techniques

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CHAPTER 3 How to Nail Low- or No-Money-Down Deals

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Raise the Price, Lower the Interest Rate

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Government Programs

49

How to Research Grants in Your Area

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Available Loan Programs

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CONTENTS

CHAPTER 4 Find Abandoned Properties Fast

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Target Your Search

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Spread the Word

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Join the Club

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Other Commonsense Strategies

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Stick with a System

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CHAPTER 5 Track Down the Owner

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Ask the Neighbors

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The Tax Advantage

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Other Public Records

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Simplicity Itself

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CHAPTER 6 Negotiating: Understand What Owners Want 101 Key Principles

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Emotions in Negotiation

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Preparing to Negotiate

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Striving for a Win-Win

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Establishing Rapport

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What Does the Seller Need?

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CHAPTER 7 Want an Option? Be Convincing A Sample Option Purchase

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Purchase Agreement and Receipt for Deposit 126 Another Great Option Story

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Selling an Option

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Other Option Techniques

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Contents

CHAPTER 8 Creative Financing Techniques

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The Wraparound Mortgage

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The Subject-To Deal

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The Contract for Deed

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Other Creative Strategies

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CHAPTER 9 Turning the Corner and Heading Down the Home Stretch to the Abandoned Properties Winner’s Circle

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Determining the Value of a Property

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Making an Offer

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A Standard Real Estate Purchase Contract

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The Purchase Contract Explained

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CHAPTER 10 Rehabbing Abandoned Properties: Creating Curb Appeal and Homes in Demand for Maximum Profit

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Preparation and Inspection

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Renovating for Rental

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Renovating for Resale

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A Shopping Trip

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CHAPTER 11 An Abandoned Property Deal from A to Z

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Schedule Reggie Brooks to Speak at Your Event Special Bonus: How to Create Massive Wealth in Real Estate Here’s How to Get Your Free Wealth-Building Bonus . . . Who Is Reggie Brooks? Index

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CHAPTER 1

How I Got Started Making an Extra $43,000 Investing in Abandoned Properties—And How You Can Too!

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A declining market is the best market in which to make money. —Donald Trump

Abandoned properties represent a lucrative opportunity for you to make money no matter where you live—in the middle of a bustling metropolis or in the heartland of America. There are abandoned properties right now in your neck of the woods just waiting to be bought for less than market value. You can make some repairs and sell them for a quick profit, or hold them while you methodically build a real estate portfolio. Either way, by following the proven strategies that I lay out for you in this book, you can grow rich in a relatively short period of time. I know because I’ve done it, and many of my students all around the United States have done it, too. You’ll find our stories and what we’ve learned (and what we’ve learned that was wrong!) throughout this book. Before I get into all the details of how investing in abandoned properties works and how much money you can realistically hope to make, I think it’s important to explain exactly what an abandoned property is. The phrase abandoned property conjures up a mental image, probably negative, of a house that is falling down, a yard overgrown with weeds, broken windows, and boarded-up doors, in a seedy part of town. That stereotype is only partly accurate. 3

THE ABANDONED PROPERTY INVESTOR’S KIT

If you limit yourself to thinking of abandoned properties as fallen-down dumps like these, you will severely limit your market—and your income potential. Abandoned properties can also be houses in decent neighborhoods and sometimes even luxury homes in exclusive neighborhoods. An abandoned property can literally be any house in any neighborhood. Your profit potential is limited only by your imagination and your ability to seek them out. Basically, an abandoned property is one whose owner has walked away from it, usually with no regard for what will happen to it at some point in the future. People walk away from their homes for many different reasons. Sometimes it’s because of a job loss, a job relocation, or a divorce. Sometimes it’s due to an illness or even a death. Other times it’s because they feel they can no longer afford to keep it. Still other times it’s because they’re facing foreclosure. Rather than suffer the indignity or embarrassment of a foreclosure, people sometimes opt to cut their losses and walk away voluntarily. This presents a very special opportunity for you, and I show you in a later chapter how to combine foreclosure and abandoned properties into an exceptional moneymaking opportunity. Most people, when they learn through media accounts that the real estate market is in decline, automatically assume that the reports are accurate. What the general public often fails to realize is that gloom and doom are the media’s lifeblood. Media pundits are sometimes irresponsible (and often ignorant) about the way they report information; they take isolated numbers from selected markets to substantiate their theory of the day and thereby scare people into thinking there’s no money to be made in real estate anymore. This is especially true with the way the media reports on foreclosures. The ongoing increase in the number of foreclosures spells opportunity for you, because this increases the number of abandoned properties available to you. However, as a result of negative media reports about a declining housing market, many would-be investors sit back and decide to delay investing, and thus miss out on the tremendous opportunities 4

How I Got Started

that foreclosures—and abandoned properties—present in this kind of market. They put off their investing endeavors until times get better, and thus miss the chance to make a lot of money. I agree with Donald Trump that a declining market is the best market in which to make money. A declining market combined with high foreclosure rates and abandoned properties is exciting, not because people are hurting, but because these conditions make it possible to make money while helping people. In a heavy foreclosure market there are more people who are so desperate for help that they are on the verge of giving up and walking away. When this happens, the number of abandoned properties goes up exponentially. If you can make contact with these people when they most need immediate help and relief, they are highly motivated to work with you because they feel a sense of urgency. However, keep in mind that even if they decide not to work with you at present, this can change very quickly. Additionally, when the number of foreclosures is down—and keep in mind it’s been trending up for some time—there are still many good abandoned properties from which to choose. The point I’m trying to make here is that the foreclosure market is what it is. If you wait for the news media to endorse your real estate investing strategy, you’ll never jump in, because the media almost always gets it wrong. When they happen to get it right, it doesn’t last because they’re almost always reporting the trends incorrectly. Let me give you an example. Back in the 1990s when technology was the investor’s promised land, the media pundits didn’t get on board until the wave was cresting. If you had waited for the media’s blessing to make your move, you would have lost your shirt—maybe you did.

Investing in Abandoned Properties Is a Public Service to Your Community Beyond the obvious financial benefits to you, there’s another excellent reason to get involved in abandoned properties: You’ll be providing a vital service to your local municipality as well as 5


to law enforcement. Abandoned properties, even those in good condition, are magnets for criminal activity. An abandoned property is a problem for local officials because the windows can be broken out or it can be illegally occupied by people who want to use it as a squatters residence or for drug manufacturing and distribution. Local officials may even be happy to help you identify an abandoned property or to locate the owners of record. So not only will you be doing yourself a favor from a financial perspective, you’ll also be helping to solve the problem of urban blight, doing your part to reduce the incidence of petty and violent crime. As you can clearly see, investing in abandoned properties is a win-win for all parties.

Foreclosures Feed the Abandoned Property Market Foreclosure doesn’t require the active participation or agreement of the homeowner to take place. If a lender has started the foreclosure process and the owner simply walks away from the property, the foreclosure process will still play out. Sometimes there are so many foreclosures that they inundate the abandoned property market. As crazy as it might sound, at times lenders will take on so many of these properties that they can lose track of what they own! A good example of this is one of my first abandoned property deals. Even though the numbers on this deal do not reflect current prices, it’s important that you grasp the principles I’m illustrating. While the prices and profits on abandoned property investing may change over the years, the principles pretty much remain the same. Years ago, I was driving down Wilmington Avenue in Los Angeles, when I looked up and saw an apartment building that had been abandoned and was all boarded up. I wrote the address down and pointed the car towards home. Back at my home office, I began to research the address and soon discovered that it was a four-unit apartment building. Each apartment had two 6

How I Got Started

bedrooms and one bath. The property had already gone through the foreclosure process and had been taken back by a bank in northern California. When I contacted that bank, they said they didn’t have a record of owning this property. I gave them the street address and the loan information I had discovered, and asked if they would please research the property because I knew that they had taken it back; perhaps it just hadn’t surfaced yet. Two days later, they called me back to tell me what I already knew. They had already held the property for two years after foreclosure, and the building had become abandoned. I said I was very interested in it and asked how I could go about buying it. They told me they had a real estate broker in Marina del Rey near Los Angeles, which was a lot closer to me than their office in northern California, and suggested I submit an offer to him. Funny how one minute they were unaware that they even owned the property, and now there was suddenly a broker involved. I contacted the property broker, told him I wanted to submit an offer on the building, and asked if they had received any other offers. The broker said they had received six offers in addition to mine, which was $75,000. I was incredulous. Until two days prior, nobody seemed to know that the bank even owned the property; suddenly there were six offers on it. I smelled a skunk, but I couldn’t prove it. I suspect the broker probably called some friends and said, “Hey, I have a great deal for you! The crazy bank didn’t even know they owned it; it’s an abandoned property. They got it back in foreclosure, it’s a fourunit apartment building. It’s a really sweet deal. I’ve only got one offer on it for $75,000.” I opted to play it smart. I decided I’d ask two strategic questions: “Are bidders going to receive counteroffers?” The answer was yes. The next question: “Will you be fair and counter everybody with the same price?” When he answered in the affirmative, I sighed. It was a start, at least. The bank’s counteroffer was $80,000. It suddenly occurred to me that I needed to be creative and think outside the box. I needed to come up with a strategy that would give me an edge over my competition—sometimes that’s 7


all you need to be the winner. My competition knew this abandoned property was a good deal. They would probably be so excited when they received the bank’s counteroffer that they’d just sign it and submit it as soon as they could. I was smiling when I wrote at the bottom of the offer, “Buyer is willing to pay $82,000 for subject property.” I was fairly certain none of the other offers would be more than $80,000. If the other parties simply agreed to the bank’s counteroffer, I had a high degree of confidence that an $82,000 offer (which was beyond the bank’s $80,000) would be enough to put me over the top. Here’s why: I knew that all the offers and counteroffers had to go back to the bank in northern California, and I knew what the bank officers were up against. They were interested in dollars, so they would sell the property to whoever could give them the largest net. At the same time, I also knew that there weren’t very many investors who were willing—or able—to think outside the box, so I had a very good chance of getting the property. Sure enough, the bank awarded the property to me. My wife and I kept that property for many years, enjoying a positive cash flow every month. We eventually sold it for a tidy sum. Do you see the potential here that an abandoned property represents? It’s difficult to wrap your mind around the idea that a concept so simple can have such massive implications! When you add the power of foreclosures into the mix, it borders on unbelievable. Don’t be concerned that you don’t know enough about abandoned property. I’ll teach you how to approach the owner—and how to successfully negotiate with the owner. Regardless of the real estate market cycle or economic climate you might find yourself in, you’re going to be amazed at the consistent investment opportunities that abandoned properties represent. I’m going to give you the specific nuts-and-bolts skills to make this work. It may seem a little overwhelming, but I want you to realize it’s not difficult. Anyone, regardless of their educational background—or financial situation—can succeed in abandoned property investing. It doesn’t matter whether you’re brand-new to real estate or if you’ve been around the investing block before. What matters is that you have the desire to learn 8

How I Got Started

and the heart to succeed. By combining these two qualities you’re going to be unstoppable in your quest to become financially secure. In time, when you follow my program, you will become successful. One of my students, Gary Hoskins, is a prime example. Gary has been investing in abandoned properties for many years now, and he’s made a fortune doing it. I’m going to take you back to the very beginning of Gary’s abandoned property investing career, in hopes that you will realize that a novice investor who decides to specialize in abandoned properties can do extremely well for himself. When Gary came to me, he had no prior real estate investing experience and he had no money. All he had was a dream to improve his life and $20 for one of my real estate information seminars. He walked into that seminar with a quarter-sized hole in the bottom of one of his tennis shoes. He walked out with a plan for turning his life around by investing in abandoned properties. Gary still had no money, but he figured the money would come when he found a property, so he started looking. Very soon he found one. After locating the owners and some haggling over price and terms, he discovered they would sell it to him for $80,000. The catch was that he had to come up with $6,000 in cash. Gary left that meeting with the sellers feeling a little demoralized. He didn’t have any cash or any way of coming up with it. He began to fear that his dream might not come true, at least not right away. He didn’t own anything worth selling, and because he was on temporary disability, he couldn’t work overtime at his job to earn the money he needed. Gary decided to sleep on it. Maybe the answer would come to him while he slept. The next day Gary was telling a few friends about his dilemma. Three of them had some cash, and the fourth had a car he wasn’t driving; he had been planning to sell the car so he could repair the roof on his house. After a little thought, Gary had an epiphany: If the friend could sell the car for the cash needed to help invest in the house, there would be enough money left over for the materials needed to repair the roof! Since Gary knew how to do the roofing repairs, the friends could all 9


work together to fix the roof and then to renovate the abandoned property. He cobbled together a partnership and his friends ponied up the cash—$1,500 apiece. They had a house and the potential for a good payoff when the property sold. Now they needed to get to work on repairs and renovations. It was Gary’s first investment, so he played it safe by being very liberal in his estimates. He estimated repairs would cost $13,000, but with some creativity on his part, he was able to come in almost $4,000 under budget. He got many of the supplies he needed at a large discount by purchasing closeouts and discontinued items. There was nothing wrong with these items, and since he was already getting contractor pricing, he saved even more. Because he had to make repairs mainly on weekends and during the evening after he got off work from his regular job, it took about five months to renovate. He was able to make steady progress every day and he grew more and more excited as he checked each item off his list. Finally, it was done. Here’s how the financials on his first deal broke down: He bought the house for $80,000 by giving the owner a $6,000 down payment. Repairs were just under $10,000. The house sold very quickly for $140,000. After expenses, that initial deal netted the fledgling business partners a profit of $50,000! They weren’t done yet. Driving home from the closing, they saw another property that looked like a good possibility. When he made contact with the owner, Gary negotiated a subject-to sale for $145,500. Here’s an interesting side note. Gary was learning to do nomoney-down abandoned property deals, and subject-to was a strategy that this deal cried out for. Gary’s attorney was drawing up the contract for him, but when Gary introduced the idea of subject-to, it caught her off guard. The attorney did not understand the concept of subject-to. She was careful to inform Gary that this did not mean the technique could not be used; she simply needed to learn more. Gary called me from his attorney’s office, put her on the phone with me, and I explained it to her. Once she understood the strategy, the deal was on. (In Chapter 8

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How I Got Started

I explain this technique, as well as others.) After remodeling and expenses, they were able to sell it for $342,000! In just a few months they turned a profit of $96,000. Gary knew at this point that he had found a new career. It had become more lucrative for him to invest in abandoned property than it was to work at his regular job. It was time to make the leap. To celebrate, he surprised his girlfriend by flying her to Maui for a fantastic vacation. Gary told me the beaches were beautiful and it was easy to enjoy the surroundings as someone who could now afford some of the finer things in life. And he bought a new pair of shoes!

How I Got Started It hasn’t been all that long since I was a beginning investor in abandoned properties. But you have an advantage that I didn’t: You have a book to guide you and to help order your steps. Much of what I’ve learned I had to learn through trial and error. When I was younger, I decided I wanted something more than just a job. At that time I was working a bunch of dead-end jobs. I lived in a very poor part of Los Angeles, California, a high-crime area where witnessing criminal acts was a routine event. A police officer once told me, “You know, son, you live in one of the worst parts of town. The safest thing to run through your neighborhood is a speeding bullet.” When I was 17 I dropped out of high school. I had made it to the 11th grade when I decided I needed to help my mom by quitting school and getting a job. I thought I could best accomplish this goal by bringing money in from whatever menial job I could find—and I found a lot of them. I worked as a servicestation attendant, a welder, a machinist, and a mechanic. I really didn’t care what the job was or how backbreaking the work was; I just wanted a paycheck at the end of the week that I could take home to my mom.

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Then I got what I thought was my lucky break: I landed a job at the local phone company. They hired me even though I hadn’t graduated from high school, and I felt fortunate to finally have such a good job. I stayed with the company and worked hard for 18 years, eventually reaching the point where I was making $3,000 a month before taxes; after taxes, I probably netted around $24,000 a year. Yet it just wasn’t enough to meet my needs. I could not pay my bills. I needed much more than what I was making. By then my wife and I were just barely getting by financially. I was fortunate enough at that time to have a couple of cars, but unfortunately they were both wrecks and undependable. Since I got paid every two weeks, I frequently found myself a week away from payday, with both cars driving on fumes and less than two dollars in my hip pocket. Not only did I need a change—I was committed to making a change. Little did I know my life was indeed about to change—for the better. I came home from work one evening, dog tired as usual. As I was watching TV, an infomercial came on. The man in the infomercial said, “Hey, I teach real estate, and I’m going to be in your city. If you will come to my seminar, I’ll teach you how to make more money in your spare time than you can make in a full-time job.” As I watched, I got more and more excited. I decided then and there that I really didn’t have anything to lose. I went to that seminar. I sat there and I listened and I learned about real estate. I learned how I could not only make money but, more important, how I could legally keep the money that I did make, thanks to real-estate-friendly provisions in the IRS tax code. I realized this was a better way. It sure beat the heck out of what I had been doing. I became a sponge for knowledge. I found a way to purchase the home-study course they were selling at the seminar that day. Now, I didn’t have any money. As the saying goes, I was so broke, I couldn’t afford to pay attention. What I had was a commitment to my future, and one thing I found out was that

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How I Got Started

when you have a commitment, you find a way. I was so very committed that a way found me—an investing partner. We decided that, since my partner had more financial resources than I had, my partner would front the money for that single home-study course. We took diligent notes; we listened to the tapes; we read the books; and we even made a detailed outline for the future. We did something that many other people who go to seminars don’t do: We took action. A lot of people just sit there like a bump on a log, won’t take any action, and barely even take any notes, but we took action. Within six months I was making $4,000 a month from my real estate holdings, and, not too long after that, it skyrocketed to $42,000 a month. But that first $4,000 was the sweetest to me because it represented true financial independence. I was still earning $3,000 a month on my job at the phone company. To make that much I had to spend 8, 10, and sometimes even 12 backbreaking hours, five and six days a week. All of a sudden I could lie in my bed and sleep all month long and still bring in $4,000 a month. I didn’t have to do much of anything for that money to come in. I’d manage some tenants and the money would just show up every month. I began to realize that I was on the right track. The stories I’d heard about real estate were not only true, but they were working for me every day, every month. I was hooked. It occurred to me that I needed to find a way to leave my job at the phone company, because by this time I was making more part-time investing in abandoned properties than I was making on my full-time job! I remember telling my co-workers, “Man, I’m investing in real estate now. You guys should come to a seminar with me and learn about this wonderful thing because it’s going to change my life. And as soon as the phone company starts to get in my way of making more money, man, I’m out of here; I’m walking.” Immediately, my friends all turned on me. They said, “Reggie, that’s stupid. That’s dumb. You can’t change your life like that. You can’t get rich in real estate anymore. You can’t do nomoney-down deals.” They had bought into the notion that there’s

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no such thing as a win-win deal. If somebody wins, somebody else has to lose. That may be true in football or baseball, but in real estate I had learned to put together win-win deals in which everybody wins. I made a decision, and I encourage everyone to make the same decision: Don’t trust your future to the financial advice coming from your broke friends. If they don’t have any money and you follow their financial advice, you’re going to end up exactly where they are! I decided then that I was only going to listen to successful people. I figured if I wanted to become a multimillionaire, I had better be listening to multimillionaires. They would probably have the insights I needed to become one of them, part of their exclusive club. I went ahead and gave notice to my boss. Now I had no choice but to kick myself into high gear and prove that my reason for quitting wasn’t a fluke. I had to prove that I could go out there and do real estate deals whenever I wanted to. More important, I had to prove to myself that quitting a stable job of 18 years wasn’t a mistake. It was kind of scary. There I was, listening to tape after tape and reading books and listening to a ton of good advice from multimillionaires. But two weeks later I was still looking for a profitable deal, and couldn’t seem to find any. Then, on one of the tapes I was listening to, this multimillionaire sounded like he was talking directly to me. It even sounded like he said, “Reggie, listen to me! I want you to tell everybody you know that you are now investing in real estate.” Well, I was done listening to my broke friends. I was listening to this millionaire, and I took his advice. I told everybody I knew that I was investing in real estate since I quit my job at the phone company. About a week later, I got a call from my cousin, Greg, who said, “Hey, Reg, I hear through the grapevine that you’re investing in real estate nowadays. Maybe you should come over to my neighborhood because there’s this great property that’s a little beat-up, a little run-down, but maybe you can do something with it.” I got in my car and I shot over there like a bolt of lightning. 14

How I Got Started

What I found turned out to be the first abandoned property that I ever invested in. The windows were all broken out; the door was hanging off its hinges; there were even holes in the side of the building. The grass would have been overgrown, but it couldn’t grow anymore because it was dead! When my wife and I first looked at that property, we thought, “Oh, my goodness, what can we do with this?” My training in those seminars had been like going through boot camp. We had educated ourselves by listening to tapes and reading books, so I realized this was a diamond in the rough. This was exactly what astute investors looked for: a property that was distressed and an owner who was highly motivated to sell. We found that owner, learned that he was ready to sell, and I told him that if he would deed the property to us, we would give him $10,000. Remember, this was our first abandoned property, as you can see from the numbers on this deal. Making that offer was a big mistake. When we said we’d pay him $10,000, he almost jumped out of his skin and asked, “Where do I sign?” That was enough to tell me I was paying too much. I was leaving too much money on the table. I could possibly have given him $2,000 and he would have been just as happy. But we had offered $10,000 because we just didn’t know any better. What we had now was an abandoned property that yielded us, in a month and a half, $43,000. The property had a first mortgage of $19,000 and a second mortgage of $5,000. We gave the owner $10,000 for the deed, so that’s $34,000 so far. We then spent about $7,000 to fix it up, so now we’re in it for a total of $41,000. We sold it for $84,000, making a profit of around $43,000. If we had not been so new at this, we would have checked the value of comparable properties (comps) and learned that we could have sold it for $125,000, which would have been a profit of around $84,000. We left $41,000 on the table because of a lack of knowledge. However, for a kid who had never finished high school, who had dropped out in the eleventh grade, who had just quit his job at the phone company after 18 years when he was making $36,000 a year, this looked like a great opportunity. This abandoned 15


property opportunity just fell into my lap. Before I even knew what I was doing I had made $43,000, and I had made it within a month and a half! I consider the $41,000 that I left on the table as the tuition that I paid to learn a lesson about comps.

The Beauty of Abandoned Property Investing: Very Few Competing Buyers! When we did this deal, my wife and I learned an important lesson. We now knew that you make money buying distressed properties from motivated sellers. This property was highly distressed. The owner was highly motivated. But the situation lacked one element that was present in every other strategy we had ever tried—it lacked competition. See, nobody knew anything about this property at all. It wasn’t listed in the multiple listings. There were no ads running in the newspapers. There was no sign out in front of the building. Nobody knew anything about this property at all, except my cousin, Greg, who told me about it. Since then, I’ve made millions of dollars working the principles and techniques that I share with you in this book. I know this system works because I live it every day. But it hasn’t worked just for me. Hundreds of other people have replicated my success by investing in abandoned properties. And that is probably the most satisfying element of what I do: seeing my students succeed. Jonathon and Maryann Scott came to one of my abandoned property seminars. Maryann had just retired after many years as a schoolteacher and she was hungry for a new career. She had looked into her job prospects in a number of different fields and decided she really didn’t want to be an employee anymore. She and her husband wanted more for themselves and more out of life than what punching a time clock offered. They took my training and began to invest in abandoned property. They took action. Instead of doing what so many people do—which is basically to read part of the text, shrug their shoulders, and say, “That could work for someone, somewhere, but probably not for me,” 16

How I Got Started

and then toss it on a shelf—they studied it and took action. They genuinely wanted to know how to change their tomorrows. As Maryann said, “I followed Reggie’s advice and found several abandoned properties. They’re everywhere, just like he said. We were getting excited because we just knew we were going to be successful with this!” They finally settled on a property they had seen earlier. It was a former model home that needed only a few repairs. As novice investors, they wanted their inaugural real estate deal to be one that wouldn’t be labor intensive or require a lot from them in terms of creativity and renovation. Because this property seemed to fit all of their parameters, they decided to go ahead with their offer. But before they could make an offer they had to find the owners. The Scotts quickly found, through simple online research, that the house had recently been taken back by the bank in foreclosure and wasn’t listed by a Realtor. This deal is a prime example of a key principle that I teach. Foreclosures actually feed the abandoned property market. So they contacted the owners (the bank) and submitted an offer for $127,000. Predictably, the bank rejected their offer. They said they couldn’t possibly accept less than $155,000. The Scotts were a little gun-shy about getting in quite that deep, so they opted instead to counter the bank’s offer with a bid of $135,000. Now it was time to wait. And wait. And wait. But the Scotts weren’t nervous. “The suspense of waiting to hear what the bank would say was so exciting!” said Maryann. “Then, finally the bank called and said they would accept our offer. I couldn’t believe it! We got the house! And for a good price!” Adhering to the theory that you only get one chance to make a good first impression, the Scotts immediately began sprucing up the outside to create an interest in the property. A property that looks good on the outside will spark interest in what the inside will look like. Anticipating huge profits, the whole family chipped in on sprucing up the property. They reseeded the yard and did some minor landscaping work. They spent $46 repairing the automatic sprinkler system and let nature do the rest while they got to work on the inside. 17


They repainted the interior from one end to the other, installed new carpeting, and added linoleum in the kitchen and bathrooms. Knowing that sometimes the simplest details can make all the difference in the world to a prospective buyer, they added new light fixtures and cabinet handles to give the home a more polished look. Finally, after two months of work, they were ready to see how fruitful their labors had been. They carefully placed an “Open House” sign in the front yard and waited anxiously for their big day to arrive! On the day of the open house, dozens of people showed up, and they quickly sold the home for $209,000. They had succeeded on their very first abandoned property deal. Even after allowing for the $7,000 they spent on repairs and remodeling, they had managed to turn a profit of almost $70,000 in just over two months. While they credit their success on this deal to the knowledge they gained with my course, I have to commend them for believing in themselves and taking those first, proactive steps to change their lives. I’m thrilled that they succeeded. And they’re not content to stop with that first deal—they’re already looking for another property they can buy so they can replicate their success. The Scotts are a prime example of the success you can have in abandoned property right out of the gate. You learn what you can as quickly as you can, then you wind yourself up and turn yourself loose on the investing world. You won’t know all there is to know when you first start out. A lot of what you pick up will be through practical, real-world experience. I’ll help you with the important details, so you can avoid making many of the same blunders I made when I was first starting out. I got started by following the advice of a multimillionaire who said to let everyone know that I invest in real estate. It was as simple as that. Then the deals started coming to me. I began to realize that there must be other ways to get the deals coming to me, rather than the way that my wife and I were doing it at the time. We would jump in our car, drive up and down streets, and look for signs of abandonment. Then, when we would find 18

How I Got Started

one, we would jot the address down and find the information in the public record through our title company. If you do not have access to a title company, or title information, you can go to wherever public records are kept. That could be the hall of records, the county courthouse, or the like, where you should be able to find the property information you’re going to need. However, if you have access to the public record through a title company, this process is going to be a lot easier. When you get the public record information, you’re going to need the name and address of the owner of record. You’ll also want information about the property, such as the number of bedrooms, number of baths, square footage, lot size, zoning, and, most important, the comparable sales of similar properties. This way you can better determine the value of the property, which will be extremely helpful when you get ready to sell it. Don’t worry—it’s easier than it sounds. I explain all of this in later chapters, and in no time you’ll feel right at home doing it yourself. There are a lot of different ways to find the owner of an abandoned property, and I go into detail on how to do that later in this book. Once you find him, you need to find out if the abandoned property is for sale. Frequently you will discover that the owner would love to sell the property because he’s paying a mortgage, taxes, and insurance, and there’s no money coming in on the property. One of the reasons a person continues to pay on an abandoned property is because he doesn’t want his credit to be affected. Part of the fun of investing in abandoned properties is figuring out what the owners really want and finding creative solutions to their problems. For example, I found an abandoned property at Thirty-Sixth and Arlington in Los Angeles. I tracked down the property owner, who didn’t live too far away. I told her I was interested in buying the property. She replied that even though there was no money coming in, she was going to keep it. When I asked her what she was going to do with the property, she said, “I’m going to hold it for my grandson. That’s going to be his when he grows up.” I asked her how old her grandson was, and she said he was 12. 19


I was incredulous. I knew that he couldn’t legally sign a contract on the property until he was 18, and that was six years away. That’s six more years of deterioration. When the grandson turns 18 he’s going to be given a headache. He’s going to be given a property that hasn’t been lived in for 10 to 15 years. He’s going to inherit a financial drain, and it’s going to have a very negative impact on his life. I told the owner that the grandson might not even want the property. He could be in college, but he would still be the legal, responsible party. Also, there might be transients or drug users on the property that might cause problems. I asked her to sell the property to me, and pointed out that she would then have enough cash to purchase a four-unit property that had tenants. When her grandson turned 18, he would already be receiving income from the property. Plus, if she were to buy it now, it would appreciate during the next six years and be worth more when she turned it over to him. Furthermore, if he needed a place to live, he could vacate one of the units, and live on his own property. I said, “Isn’t that a much better solution than to give him this property, which will be an eyesore and a headache for him?” She saw the value of selling it to me now rather than waiting six years and dumping it on her grandson. There are lots of abandoned properties and property owners who need relief but may not know that they do. However, when you are armed with the proper knowledge to do these deals, you can go out and find the people who need your help. You can present them with remedies and solutions to their problems. They will love you for it, and you will make a lot of money. Now you’ve had a taste of what is to come in this book. I want you to have all the tools you need to take full advantage of this highly lucrative opportunity. In Chapter 2 I tell you why every real estate investor should be doing abandoned property deals, and I also show you how to combine abandoned property investing with some other types of investing so you can begin to make a lot of money as you build a real estate portfolio and assure yourself of a rock-solid future. It’s going to be a wild ride, so let’s go! 20

CHAPTER 2

Why Every Real Estate Investor Should Do at Least One Abandoned Property Deal

21

Whether you are still cutting your investing teeth or already have a full set, I want to challenge you in this chapter to make a commitment to do at least one abandoned property deal. I’m convinced that when you see how lucrative they are you’ll want to do many, many more. You may even decide to pitch some of your other investing strategies out the window in lieu of what I think is one of the best ways to secure your future. Investing can be an extremely competitive endeavor. You can choose to travel the route that everyone else is traveling, or you can strike out in a slightly different direction. If you are willing to go your own way, you can essentially write your own ticket and become extremely wealthy in the process. However, most real estate investors typically don’t start out as mavericks. Typical real estate investors put a lot of work into their initial investing efforts and bounce from idea to idea, looking for that one golden idea that is going to make them very rich. They hunt, investigate, and search. If this describes you, don’t despair, don’t cry, and don’t worry. You’re no different from other investors in your experiences and feelings up to this point. But you can move closer to the front of the class and cut years off your wealth-building process by learning some new techniques. You have a tremendous resource in your hands because abandoned property investing can build more wealth, more quickly than any single technique I know. The typical real estate investor starts out working with Realtors. If you’re like most beginning investors, you’ll probably 23


approach Realtors and try to enlist their assistance in locating an investment property. You’ll let them know you’re looking for fixer-uppers that you can invest in. It’s rare, initially at least, for a real estate broker to send you what you’re looking for. First of all, you may not be crystal clear in your expectations, or the Realtor may not really understand your needs. Consequently, the Realtor hears “real estate investor” and thinks “real estate.” He faxes you what he thinks you’re looking for—property listings—but that’s only half right. Understand that Realtors usually work with families who are looking to buy a home in which to live. These families are not investors. They usually buy property at market value. As investors, we can’t afford to buy at market value. We have to buy low enough or with favorable enough terms that we can make a profit. So the listings that were faxed to you aren’t appropriate for your needs. Not knowing any better, you may peruse them, see a few that seem promising, and decide to look at them. It’s not until after you’ve looked at the properties and run the numbers that you realize these properties won’t work. Why won’t they work? Because they’re all priced at market value—there’s no profit in them. So you call the Realtor back and let him know this isn’t what you wanted. You explain that you are an investor, and that the only properties listed by a broker that are really viable options are those properties you can buy below market price. Thinking you’ve accurately conveyed your needs to the broker this time, you await the next list of properties. And it happens again—more listings with no profit. As a result you grow increasingly frustrated because you’re not having the success you had envisioned. Occasionally, a good deal (or what you hope will be a good deal) happens along. You begin to get excited, thinking of the financial rewards waiting for you just around the corner. You run the numbers and you realize your excitement is well-founded. Then your hopes are dashed once again when you learn there are already 15 offers on the same property. The competition can become so great that it takes the wind out of your investment sails. You now realize that because of 24

At Least One Abandoned Property Deal

competition, prices have been driven up to the point that the property is no longer a good deal. And if you can’t find a deal, you can’t make a buck. Contrast that negative experience with the experience you can have with an abandoned property investment. You’re driving along in your car and you see a home off on a side street. The yard is a little overgrown, and upon closer inspection you realize there’s nobody living in it. You walk around outside the property and you note a few superficial problems with the house. The screened door on the rear of the house is loose. There are a few broken windows. The house has some loose guttering and the roof over the kitchen looks like it could use some repair. You peer in the windows and what you see looks pretty good. The place could use a coat of paint and the carpeting doesn’t thrill you, but you know these are items that are easily corrected. The house isn’t perfect, but on balance, it’s still an attractive home with loads of potential. Your curiosity is aroused. You introduce yourself to the nextdoor neighbor and learn that the family that was living there moved cross-country due to a job transfer. The neighbor has the contact information for the owner; they were close friends because their children played together. You make contact with the owner by telephone and you learn that not only do they want to sell, they need to sell. They’re pressed for cash due to their move, and making two mortgage payments is killing their budget and will soon affect their credit. They’re highly motivated and you are the solution to their problem. This is a deal just waiting to happen! The owner of the house has some equity and he’s willing to let you have it if you’ll just take this problem off his hands. You do some quick research, crunch some numbers, and decide to proceed. You write up a simple offer to purchase this abandoned property using owner financing with no money down, and you present it to the owner. By the way, don’t worry about your skill level in negotiating and writing offers. I teach you how to negotiate and write killer offers in future chapters. But for now, let’s get back to this property because the owner just accepted your offer! 25


A week later the house is yours; within three months you’re selling it for a hefty profit. You acquired this property with no cash and no credit. You renovated it, improved it, and sold it in short order with very few problems, for a large profit—and most important, you did it with absolutely no competition. Let me ask you: Which way was better? The second way, the road less traveled, was easier than the first way. This is why I say that every real estate investor should do at least one abandoned property deal. I don’t think you’ll want to go back to a field packed with competing investors and a limited chance of success once you see how lucrative this kind of investing can be. There are other pitfalls associated with traditional property deals. You might have purchased a property from an owner who has to pack up and move. Sometimes when you close on that property, the owner either doesn’t want to leave or can’t leave. Let’s say you’ve purchased a property from an owner who is in foreclosure. After you pay all the foreclosure fees and make the back payments that have to be brought current, there might not be a lot of money left for the owner. I’ve had situations where an owner was perfectly willing to move but simply lacked the means to do it. In order to expedite this process, you may have to help the owner move. It could cost you a little money just to get him out of the house, put his furniture on a truck, pat him on the back, and send him on his way. But sometimes you aren’t that lucky and, for whatever reason, the owner refuses to leave. In such case you may have to do an eviction, which requires hiring an attorney and spending even more money. An eviction is expensive, time-consuming, and painful. You become very aware that you have to put a family out on the street. You may be the nicest person in the world, but if you have to do an eviction to get somebody out of your house, you’re going to wind up looking bad and probably feeling bad. By contrast, abandoned properties are already vacant, so there are no evictions involved. I’m not saying that traditional real estate investing strategies are worthless. My point is simply that abandoned property investing has fewer problems and more overall profit potential with less competition. When you factor in all the variables, I 26


think abandoned property investing should be a major part of your investing strategy. One reason is that you can often do an abandoned property deal without a bank. For most investors, especially when you’re first starting out, investing gets to be a little tough because most investors are looking to get a bank loan. What are some of the expenses associated with getting a bank loan? Usually you have to have to pay discount points to the lender. You have other expenses, too, such as escrow fees and sometimes attorney fees. You also have title fees and all kinds of other miscellaneous fees that can cut into your profits. How’s your credit? If you seek bank financing for a commercial loan, you have to have pretty good credit. In most cases the bank will require a hefty down payment and will probably expect you to have a steady job, to give them some degree of confidence that you will repay the loan. All of this makes it a little tougher for an investor to finance a profit-making deal. This doesn’t paint a very rosy picture of some aspects of investing, does it? I’m not trying to chase you away from investing in real estate. I’m trying to paint an accurate picture of some of the pitfalls you’re going to face if you decide to go down the path of most resistance. I don’t want to scare you, confuse you, or confound you. I told you previously that I wanted to arm you with all the tools you need to succeed. That includes having information that you may not want to hear, but I think you need to hear. When you do one good abandoned property deal, you are most likely going to be hooked—and probably for life. Why? As I’ve stated previously, the profits can be substantial. Not only have I personally realized huge profits investing in abandoned properties, I’ve seen others do it as well. Remember the Scotts from Chapter 1? They had never made a penny investing in real estate and they made a small fortune off of one deal. Others have done even better. Can I state that you’ll get rich doing this and that you’ll do it overnight? Absolutely not. I have no way of knowing what degree of success you’ll attain. Be leery of anybody who says that you can’t fail at something. Anyone can fail at anything if they work at it hard enough. 27


Motivated Sellers As investors, we make our money buying distressed properties from motivated sellers. Don’t waste your time if the owner is not motivated. There’s a whole laundry list of reasons you would want to buy an abandoned property, but why should an owner of one of these properties sell to you? The short answer is that the owner of an abandoned property has an Excedrin headache and you are a walking, talking, ready-to-do-business cure for that headache. The owner is probably making a mortgage payment every month in order to keep the property out of foreclosure. Even if he owns it free and clear, he is still paying taxes and insurance. That means money is going out but no money is coming in. A good indicator that the owner is feeling the financial strain of holding an abandoned property is the condition of the house itself. If the yard is overgrown and necessary repairs aren’t being made, it’s a pretty good bet the owner is feeling stressed. I’m sure the owner would love to generate some money from that property. He may have even called Realtors and asked if they could list it. But the property needs some degree of work so the average Realtor, even if he does list it, won’t put much energy into selling it. Often brokers will decide they can’t list the property. They believe it won’t sell very quickly because it doesn’t show well. They may say, “I need you to spend a little money on this property to fix it up first. After you do, give me a call. Then I’ll be able to list it, but until then I can’t help you.” Even if the owner is managing to keep up with the mortgage payment, taxes, and insurance, he still has a headache, because he’s still unable to spring for fix-up and repair costs. So what happens? The property continues to deteriorate and suck money out of his wallet month after agonizing month. At this point, the owner can become a highly motivated seller. That owner has a very serious headache. Many times owners will give away equity because they just want the bleeding of money to stop. Many of them are so highly motivated that they’re willing to sell you their property with tons of equity in it 28


with very little or no money down. When this happens, in essence their headache can become your gold mine. When you are dealing with the owner of an abandoned property, you often don’t need to have credit, money, or a job. The owners of these abandoned properties sometimes become so desperate to sell that they will forego the requirements a lending institution would call for—assuming a lending institution would be willing to even extend a loan on an abandoned property. Why will a commercial lender typically avoid lending on a property like this? For many of the same reasons you want to purchase it in the first place. Banks don’t like to extend loans on abandoned properties because they may need work. If a bank gives you a loan and you don’t complete the work or make the payments, the property becomes a foreclosure. The bank doesn’t want to run the risk of having to take back a property that may require substantial repairs in order to improve its condition enough that it can be sold. If a bank or finance company won’t touch the loan and the seller truly is motivated, how can they sell their property? Through owner financing. When this happens, the owner essentially becomes the bank. When you are dealing with an owner-financing situation, most times the owner isn’t going to require much of you. While many owners do insist that you have a little more than a pulse, they’re not usually very demanding. Some may require a certain degree of creditworthiness, but in my experience, most of the time, credit, income, and debt-to-income ratios don’t enter into the equation. They simply want assurance that you’ll make the payment every month, since they have agreed to act as the bank in the deal. I honestly can’t remember the last time a potential seller asked me to pay points like a traditional bank would, because ultimately all these owners really care about is getting their money each month and making the abandoned property headache go away. The owners of abandoned properties also know that if they don’t get their money, they can take the property back. They had nothing coming in before, so it’s worth taking the chance. 29


Owner financing of an abandoned property has another benefit: lower interest rates. As a real estate investor going to a traditional bank for financing, you must be prepared to pay a higher rate of interest than John Q. Homeowner would on a consumer home loan, because investor interest rates are often higher. But when the purchase is being financed by the owner of the abandoned property, you can usually get the homeowner to give you a much better deal than the biggest banks would if you had sterling credit. Let me tell you a story about a motivated seller. Cheryl attended one of our two-day abandoned property boot camps in Los Angeles. After the first day in training she went home feeling jazzed. An interesting thing happened. She pulled into her driveway, got out of the car, put her key in the door—and something said, “Turn around.” It wasn’t a voice anyone standing near her would have heard, but something inside her said to turn around. She did, and there was an abandoned property right across the street. Here’s the interesting part: Cheryl had lived in that same house for about 12 years. That abandoned property had been there for so long that she had forgotten it was there. Every time she walked out her front door she would see it, but it didn’t register. It may as well have been invisible—till now. After the second day of training, she went home to start her new abandoned property business. She quickly found the owner of the abandoned property. He was a sick man who had a very meager income. The Social Security he was receiving wasn’t nearly enough to make ends meet. He needed a monthly income to supplement what he was already receiving; he especially needed money for medical care. As he and Cheryl talked about it, the owner decided to sell her the abandoned property— on Cheryl’s terms. Cheryl explained to the owner how to participate in owner financing and offered him $165,000. The owner agreed to finance the entire amount. Cheryl paid 12 percent interest on that $165,000, so now the seller received monthly payments. Cheryl was the new owner of this property and she did it with no money down. 30


The property didn’t need much fixing up. Cheryl put in new carpet, painted inside and out, put new handles on the cabinets, and relandscaped the front and back yards. She spent less than $10,000 doing it and eventually she sold the property for $257,000. She made a profit of over $80,000 while she helped another person who needed her help. It was a great win-win because in his later years the owner got exactly what he needed, which was an income to supplement his Social Security. Actually, it turned out to be the other way around: The Social Security supplemented the income on that one property. That’s just another reason why abandoned properties are such a great strategy.

Advantages of Abandoned Property Investing over Other Strategies There are distinct advantages to investing in abandoned properties versus many of the other techniques you may be familiar with. I’ve touched on how the owners of abandoned properties are motivated to sell for a multiplicity of reasons. They may have hidden or not so hidden financial difficulties that affect their ability to make mortgage payments, pay property taxes, and pay insurance premiums. In addition, because of the financial strain their properties begin to fall apart. Roofs need repair, toilets need to be fixed, and air conditioners quit working. The lack of competition is another advantage. Real estate investing has all kinds of practitioners, but most of them are conditioned to the traditional ways of doing things. They see competition as an expected matter of course. Investors in conventional real estate know foreclosures, probates, defaults, and trustee sales. They know about the common strategies for making money in real estate. But abandoned properties are such an uncommon strategy that there is very little competition. In a traditional investing situation, you have to chase prospects and try to sweet-talk them into selling. With abandoned properties, there are strategies you can use to get people to seek you out. While they won’t necessarily cry and plead for 31


you to buy their property, in Chapter 4 I show you a winning strategy that will inspire people to try to contact you. How’s that for a confidence booster? I started my career finding deals through Realtors doing it the conventional way. The first three months I was in my real estate business I only did one deal. My profit was less than $20,000 on that deal, which was marginal at best. We want to make much larger profits than that, and we also want to do it without the competition. I moved on from finding deals with Realtors to finding foreclosures, HUD foreclosures, probates, and so on. I didn’t do much better with those strategies either. There was a lot of competition and profits were not nearly as great as the work that was involved. I was banging my head against the door, begging for a place at the foot of the investing table, searching for any scraps that I might find. I just wanted to find some avenue whereby I could make larger profits, and I could make them smoothly. My wife and I developed an affirmation at that time: “We are going to get rich! Everything we do from this point on will be done smoothly, comfortably, and profitably.” We wanted to get rich with a smile on our faces. We were always looking for unique or uncommon strategies that would allow us to make money without a lot of competition and with high profits as well. When we started working with abandoned properties, that’s exactly what we found. Not many people knew about abandoned properties at that time—many still don’t. I found that the people who owned abandoned properties were much easier to work with, which speaks to their level of motivation. They were paying the mortgage, the taxes, and the insurance with no money coming in. I was in a unique position to seek out these people, who didn’t advertise in the newspaper, and who didn’t or couldn’t list their properties with Realtors because they weren’t nicely fixed up. These owners needed my help. These were motivated owners with distressed properties, and I was getting paid to help them with their abandoned property headache. That’s when I found that extreme motivation could mean extreme cash. 32


There is very little competition with an abandoned property. You can make big profits and help people who are essentially invisible to other investors, who walk right past them. That’s okay, though. Let other investors remain blissfully ignorant of the possibilities that abandoned property investing has in store. While they’re swimming upriver, battling the current, you can stay safely on the riverbank with a net, catching abandoned properties as they float silently downstream, making you rich one deal at a time. There are a couple of other important advantages to abandoned property investing. When you’re investing in other types of properties, they are frequently owner-occupied or have tenants living in them. When this is the case, you have to wait for the occupants to vacate the premises before you can do any repairs or remodeling on the property. Not so with an abandoned property. When a property has been abandoned, it’s already vacant. It’s ready for you to tear into, so if you want to gut the property on the inside and out and create something truly spectacular, you don’t have to wait for it to become vacant. By the same token, if you just want to make some superficial repairs to the structure and sell it relatively quickly, you can do that as well. I’ll touch on another clear advantage fairly briefly here and then explain it in much more depth in Chapter 3. I’m referring to some of the government and nongovernment funding sources that are available for acquiring and rehabbing abandoned property. Government officials at the federal, state, and local level have developed some innovative sources to provide funds for returning abandoned properties to the housing stock of America. Not only are low-interest loan programs available, but also grants that don’t need to be repaid. In addition, you can actually combine multiple sources of government funding to rehab abandoned properties at a nice profit to you as an investor. The federal government has committed these funds to revitalization, yet tens of millions of dollars go unspent every year because people simply aren’t aware that the money is available. Since the money is there to be spent, why not let the government help finance the building of your road to riches? 33


In addition to government at all levels, many corporations, private foundations, and charitable organizations also have funds available. When you identify some of these sources and put them to work, your abandoned property can be fixed up for next to nothing. There are sometimes strings attached to receiving these funds, but the conditions are usually worth the cost. Agencies are competing with one another to give you money to bring your abandoned property back into the housing stock. Take advantage of these funds. This is an example of your tax dollars at work. Let them do their work. An abandoned property in many ways is like some of the homesteads out on the frontier in the 1800s. When they were abandoned, they just sat waiting for someone to happen along who wanted to own the property. When such a person appeared, there was a process in place to transfer ownership to the prospective buyer. You can be a present-day pioneer, scooping up abandoned properties and turning them into havens of opportunity for other families—and become extremely rich in the process! Don’t worry if you don’t understand yet how to locate these properties. As this book unfolds you’ll begin to understand more clearly how you can find them and turn them into cash. Now you know how investing in abandoned property offers advantages over other techniques. What you may not realize, however, is that you can also combine abandoned properties with other techniques and create a unique and unstoppable freight train of opportunity for yourself. My goal for you in this book is to give you tangible, easy-to-implement strategies to get your train chugging along, scooping up abandoned properties at every stop along the way.

Combining Abandoned Properties with Other Techniques Abandoned property investing by itself is a great strategy to develop a huge real estate investment portfolio, but there are a couple of other strategies you can use to stretch your investing 34


dollar a little further while ensuring your place at the head of the investment line. The first method I want to touch on is a purchase option. Have you noticed your community expanding in a certain direction? Let’s pretend for a minute that you’ve noticed there’s a move to revitalize a certain section of your town. You’ve been looking for abandoned properties and your efforts are rewarded: You’ve found a nice abandoned property in that same section of town, and you’re confident that investing in this property will surely bring you a profit. Here’s how you can put yourself in a position to turn a tidy profit at a very low cost. Approach the owner of the property and offer to pay him for the option to purchase his property. I hear you thinking, “So, what’s an option?” I’m glad you asked! An option on a property gives you the right to purchase that property within a specified time period, according to the terms of a contract. This is an extremely valuable tool for your investment arsenal, because it allows you to control property with very little money. You could offer the owner as little as a few thousand dollars for a one- or two-year option, thereby giving yourself some time to see if the revitalization actually does take place and how it impacts this property. If the property goes up in value within the option period, you’ll exercise your option and make a lot of money. If the property does not go up in value, you’ll walk away. How much have you lost? Only a few thousand dollars over the two-year period—a small price to pay to keep from making a large mistake. One of the reasons a seller will give you an option is because the option fee is nonrefundable. It’s cash that he can spend right now for anything he wants to spend it on. If you fail to exercise your option during the option period, it expires, but he still gets to keep the cash. Selling an option makes perfect sense to the owner of an abandoned property because of the fact that it has just been sitting there not earning an income. The option fee could be seen almost as free money to the owner of the property. I have a student, Henry Atkins from Utah, who made quite a bit of money using an option. Along a main highway just outside his city, Henry began to notice a few new businesses beginning to 35


sprout up. He investigated and found out that the city had okayed a massive revitalization in the area, and commerce was poised to explode! Henry had just discovered something very valuable, and he knew that it was real because he saw the plans himself! He immediately began to look for investment opportunities in the revitalization area. It wasn’t long before he discovered a nice commercial lot that was for sale. The location was perfect because it was right on the main highway, across from a new housing development. The owner wanted $120,000 for the lot and would not take a dime less. Henry offered to pay $125,000 for the lot if the owner would give him the option right to buy the property within three years. The owner drove a hard bargain. He said he would accept the $125,000 for the lot and, if Henry would pay an additional $5,000 as a nonrefundable option fee, he would give Henry the right to buy the property within the three years. Henry agreed. Between years two and three, Henry found out about an impending expansion by a major multimillion-dollar retail store. They were expanding into the area and this lot was in their way. To make a long story short, Henry exercised his option. He sold his very valuable lot for over $463,000, and made a profit of over $300,000. Is this technique foolproof? Of course not. Is it lucrative? It could be very lucrative. Every investment has risk and reward. With abandoned properties, the rewards far outweigh the risks. If you’re afraid that you won’t be able to exercise your option within the three years, and you don’t want to lose your option money, here’s an easy remedy: Insert language into the contract giving you the legal right to extend the option period for another year or two if you so desire, in exchange for you agreeing to pay another option fee. Alternatively, you could negotiate for terms with the owner and buy the property like any other abandoned property, make repairs, and turn a nice profit. Another technique you can use is an assignment of contract. I’m going to give you a quick example here to illustrate generally how this principle could work, but I give you a much more in-depth analysis of this technique in Chapter 4. Assignment of contract allows us to put an abandoned property under 36


contract and then assign that contract for valuable consideration to another person who recognizes the value in the property. For instance, we find an abandoned property that the seller is willing to sell to us for $150,000, yet we know it will be worth $220,000 once it is fixed up. We also know that it will only cost $5,000 to fix it up. Thus it will cost you $155,000 to secure this property and to get it to the point where it will sell for $220,000. But let’s say you are more interested in quick cash this time. You can run a simple ad in the newspaper and find an investor who will pay you $15,000 in cash if you will assign the contract to him. Now you’re in the property for $150,000 and he’s willing to pay you $15,000. That means he’s into the property for $165,000. He spends $5,000 to fix it up and sells it for $225,000. He now has a nice little profit of over $50,000. It’s a win for you because you got $15,000 in cash and you didn’t have to do much for it. It’s also a win for the investor because he didn’t have to chase this deal down, yet he made over $50,000. Win-win deals are good for everyone, and investing in abandoned properties opens up a lot of opportunities for you. These are just two examples of other programs we can use to make the abandoned property program more robust and profitable. As you learn more about abandoned properties and real estate investing in general, I’m certain you’ll develop ideas of your own that I haven’t mentioned in this book. If you think of an idea or a technique, don’t be afraid to try it. Just remember that we make our money by helping people who need our help. Who knows—you may just stumble across an excellent idea that can line your pocket with cash. In Chapter 3, I show you some techniques you can use to acquire abandoned properties without having to dip into your pocket for a huge down payment that you may not have right now. I also show you how you can incorporate your favorite Uncle (Sam) into your investment strategy. Not only does he have deep pockets, but he likes to spread cash around. I show you how to get him to spread some in your direction. It will enrich you, but will also do some good in your local community.

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CHAPTER 3

How to Nail Low- or No-Money-Down Deals

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You’ve learned a little bit about abandoned property investing and you’re ready to get started. You have visions of abandoned properties dancing in your head and you’re already counting the money you’ll make as an abandoned property real estate investor. Then it occurs to you: You have no money for a down payment. The wind comes out of your sails and you come back down to earth. Fortunately, there are a lot of ways you can buy abandoned properties with no down payment or a very low down payment. One of the biggest obstacles you face, especially at the beginning of your investing career, is finding financing for all the deals you want to do. Your biggest challenge will still be finding the deal, but once you have it you need to finance it. In this chapter I show you some strategies for getting low- or no-money-down deals. How many different ways can you name to finance a property? The average person only knows of three. If I were to ask 100 people to mention all the ways they can think of to finance a home, 80 of them wouldn’t be able to come up with more than three. Most people are at least slightly familiar with VA, FHA, and conventional financing, but that’s about where the knowledge ends. The problem has to do with conformity. People are generally natural conformists. If something seems different or uncommon, they automatically shrug it off as strange and avoid it. If there were only these three ways to finance a home, many investment properties, including abandoned properties, simply 41


wouldn’t be sold. Fortunately there are a lot more ways to finance properties. That’s the good news. The bad news is that the average real estate investor goes about transacting real estate backwards. Does this describe you? John decides he wants to buy an abandoned property, so he drives around the city looking for one. He finds a possible candidate: a three bedroom split-level in pretty good shape. All the pieces fall into place very quickly. With minimal effort he’s able to track down the owner, who is willing to sell for all cash, 50 cents on the dollar, if he can close in 10 days. John has a problem, though: no financing. He scrambles as quickly as he can, trying to work a miracle. This property is a golden opportunity if he can just come up with the cash. He can get it, but the lender is dragging his feet. He calls the property owner and asks for more time. No dice—if John can’t deliver the cash, somebody else can. As the deadline approaches John finds out the loan is approved, but he still can’t close for another 30 days. He begs and pleads with his mortgage broker. The answer: “I’m sorry, sir. We’re working as quickly as we can. These things take time.” John would love to cry, but he’s been told that real men don’t, so he resists the urge. Instead he smacks a housefly out of the air with a large flyswatter. Do you see the problem (other than misdirected aggression) with this strategy? John put the cart before the horse. The average real estate investor gets started on the wrong foot by finding the property first—and then has to beat feet to finance it before the deal goes the way of the eight-track tape. If you turn the process on its head and worry first about financing, you’ll put yourself in position to do a lot more deals. You will have a lot more flexibility to buy properties when you do it this way. In addition, by arranging for financing before locating an available property, you can pounce on a good property and close on it in a third of the time (or less) compared to doing it the other way. Since you want to do as many deals as possible, you should embrace the idea of doing as many owner-financed deals as you 42


can get your hands on. Beginners usually start off using institutional lenders, often someone recommended to you by a friend or a relative. But that can be doubly problematic for you, because that kind of recommendation is usually made by someone who has no business making such a recommendation. It’s a safe bet they don’t know enough about that person or bank to recommend anything. Be careful here because this is a recipe for disaster. Recommendations like this are dangerous to your financial health for another reason: The lender usually is not as astute as your friend or relative claims, and may not be the best lender for the type of project you’re working on. An institutional lender usually wants a big down payment. Normally when investors are going after a deal, they anticipate making a down payment and end up putting down the closing costs. Closing costs and escrow fees can add up to a substantial amount of money, but in an institutional lending situation you’ll also have to pay points to the lender at the closing. I call these garbage fees because they’re not really necessary and they can very quickly eat into the profitability of your deal. The more of these fees you have to pay, the less money you get to put—or keep—in your bank account. By learning how to buy abandoned properties with low or no money down, you’ll be able to leverage your way into a lot more properties and therefore do a lot more deals than the average person can. Your best bet from a financial standpoint is to put as little money as possible down on a property when you initially buy it. There are a couple of good reasons for this. First, money not spent on closing costs, points, escrow, and other similar expenditures is money available for fixing up a property. Money you don’t have to spend for repairs is money you can better put to work for you in other profit-producing ways, such as in buying additional properties. The key to maximizing your profitability in abandoned property real estate investing—or real estate investing in general—is leverage. In short, leverage is the degree to which your control of a property investment is secured by the property itself. So if you can control a property with no money down, it is 100 percent leveraged. If you put $10,000 down on a $200,000 43


property, your leverage is 95 percent. As your leverage drops, your out-of-pocket cash expenses rise (due to your down payment) and, consequently, your initial profitability falls. While you’ll get your cash back out of the property when you sell, that cash is tied up in the property until then. Unless you have a lot of cash in cookie jars or buried in your backyard, this is going to severely hinder your ability to acquire more property. The more successful you are at leveraging abandoned properties with owner financing, the more successful you’re likely to be. You’ll be able to control a lot more properties with a lot less money. I’ve mentioned previously that there are numerous ways of creatively acquiring abandoned properties with little or no money down. I introduce a few of them here, but I also cover more of them in Chapter 8. Bear in mind for now, as we progress through these various strategies, buying with low or no money down works when you have a motivated seller. We’re talking about someone who has to sell—not just someone who wants to sell. A motivated or highly motivated seller is much more likely to sell to you for a favorable price or favorable terms, or even both. It’s important that you know you are going after a motivated owner. Just as all sellers are not created equal, not all sellers are equally motivated. Let me tell you a little story about a friend of mine. Bill is an investor who had a beautiful home in a very upscale area of Los Angeles called Ladera Heights. He decided he wanted to see how much his house was worth, so he spruced it up and made it look nice and sharp, then put it on the market. He held an open house and let people in to look it over. I was curious to see what kind of response his open house would generate, so I drove by to take a look. I was astonished to see how many people were going in and out. Just as a result of the open house he got several offers. In talking with him, I learned that he thought his home was worth about $879,000. When all the offers were in he realized that if he had sold his home for what he thought it was worth, he would have been giving someone a cherry deal, because every one of the offers was for at least $949,000. 44


Bill had no intention of selling his house. Since he hadn’t done an appraisal he didn’t know what it was actually worth. He just wanted to gauge the marketplace and see how it would view his property, how much people would pay for it, and how quickly he could get it sold, but he had no intention of selling. You could not have classified him as a motivated owner. Denise is a woman I know who works for a major airline. She’s lived in Simi Valley, California, for the past 12 years and has just been informed by her employer that she’s being transferred to Syracuse, New York, at the first of the year. She’s lived in her home in Simi Valley since having it built in 1999. It’s a beautiful four-bedroom ranch-style home with wall-to-wall carpeting and an excellent view of the valley. Not only does she have to uproot her life and try to lay down new roots 3,000 miles away, she also has to locate new housing, move a houseful of furniture, get settled in and sell her old house before she can buy a new one. Would you say Denise is a motivated seller? This is the type of owner who will make you money. When you open your mind to creative opportunities, you’re able to solve a lot more of the owner’s problems—and that’s how you make money. Never forget that solving problems is a large part of what you will be doing. While you certainly have a goal of making money, never lose sight of the problem-solving component of the transaction. People in distress are crying out for help, and you can provide answers. Answering their cries for help doesn’t require you to be a social worker, but it does require a certain degree of tact. You should be ever mindful of their situation as you analyze a deal and remain vigilant to the task at hand. By helping them with their situation, you’ll also be helping yourself in the process. Being aware of your seller’s specific problems, you can address their issues and make yourself a tidy profit. You can feel good about solving a serious financial problem with a serious financial solution. These motivated owners are so desperate for a good solution to their problem that they’re willing to consider nontraditional financing structures. Do they care how you solve their problem? 45


Generally speaking, they don’t. They just want it to go away as quickly as possible with minimal discomfort to them. You can call the money you make at the front end of an abandoned property deal anything you like, but when you’re trying to help a distressed property owner out of what is at best an uncomfortable situation, the profits you earn could almost be considered a consulting fee. Many people would like to buy real estate—including abandoned properties—but never follow through with the desire, for a variety of reasons. Usually it’s because they don’t have enough cash and they’re locked into self-limiting thinking patterns. They assume that the only good way to buy real estate is to pay cash for property, not realizing the pure profit potential that real estate holds for the savvy investor. Another thing that often stops people from following through with buying is their assumption that obtaining a loan or financing is a difficult process. Because of their unfamiliarity with the process, they just cave in to their ignorance and do nothing. In the next section I mention a couple of ways you can obtain owner financing for an abandoned property deal. Bear in mind that these are not the only ways to obtain owner financing. Rather, they are a couple of creative strategies designed to fertilize your intellect with some of the possibilities for financing abandoned properties on a no-money-down or nearly no-moneydown basis.

Raise the Price, Lower the Interest Rate I had a student named Jim in Miami, Florida, who discovered an abandoned house in his area. The house was in fairly good condition, and Jim learned that the owner wanted $241,000 for it. Rather than pay cash or obtain traditional bank financing, Jim decided to try a very creative strategy to forge a deal between himself and the owner. This house had three bedrooms and two baths, and Jim found out it had been abandoned about two and a half years earlier. While it wasn’t in perfect condition,

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it didn’t require much in the way of repairs to get it ready for occupancy. When he found the owner, Jim offered him $241,000 for the house. (I tell you how to go about locating the owners of an abandoned property in Chapter 5.) The owner agreed on the price and also agreed to finance $216,900 at 9 percent if Jim would put up the remaining 10 percent, or $24,100, as a down payment. But Jim was a bit light on cash, so he went back to the owner with a second offer. Instead of an interest rate of 9 percent, Jim offered to pay an increased rate of 12 percent if the owner would be willing to finance the full $241,000. The owner agreed to Jim’s counteroffer. This was a good deal for Jim and it was a good deal for the owner. The owner was able to earn 25 percent more in interest by agreeing to carry 100 percent of the financing, and Jim was able to get in with no money down whatsoever. Everyone was happy. Right now this looks like a good deal for the owner, but what happens if Jim gets in the house with no money down and six months or a year down the road he decides not to pay the mortgage? It’s a simple proposition for the owner: If Jim doesn’t make his payments, the owner can initiate foreclosure proceedings, take back the house, and sell it all over again. While 12 percent interest is a much better deal than 9 percent in the owner’s eyes, that may not have been enough to get the owner to carry 100 percent of the financing. In such case, is there anything else Jim could do to induce the seller to agree to his terms? Yes—Jim could completely change his offer. In this particular case, Jim could offer to pay the owner $251,000 for the abandoned property and leave the interest rate at 9 percent. The additional $10,000 might be enough of an inducement to gain the owner’s agreement. There’s no magical formula for putting together an abandoned property deal that will fly with the owner. Typically, it’s simply a matter of playing with the numbers and finding out what motivates the seller. You may find that some owners are

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more motivated by a higher rate of interest, while others respond to a higher sticker price. Strangely, the total amount paid will usually be the same, but one offer won’t elicit the slightest bit of interest while, with slight restructuring, your revised offer could have the owner turning cartwheels in the street. You may not have any money and you may be completely clueless as to where to go about obtaining financing. If this mindset describes you, I’d like you to disregard that thinking pattern, especially if you already own some type of property. What kind of property ownership am I referring to? Basically any kind, from your primary residence to a vacation home, or even an empty lot that you own. If you own one of these types of property you can obtain financing, and you can usually do it with ease. This next strategy is one of the best wealth-building tools that I know of that will allow you to access almost unlimited wealth potential. I’m talking about notes. Even if you don’t already own property, this is a strategy you’re eventually going to want to know about, especially if you want to make a lot of money investing in abandoned properties. You can use leverage to your advantage by creating a note against another property you already own. Since you are the one creating the note, you can set the terms—you can determine the interest rate you’re willing to pay, and you can also make sure that the payments are within your budget. When you’re ready to trade a note for equity in an abandoned property, you’ll usually get face value. You’ll probably find that most owners would prefer to take a note on another property you own rather than on the abandoned property. Why? Because it gives them an added layer of protection. Without such a note, if you default on your payments, their only recourse is to take back the property that they’ve already abandoned once. They’ve demonstrated that they really don’t want it anymore. There is a greater likelihood that they might want yours, especially if it is in better condition than theirs. By pledging property you already own as collateral, you provide the owner of the abandoned property with some insurance—and assurance—that you will abide by the terms of that note.

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Government Programs As you get started investing in abandoned properties, I recommend you utilize government resources whenever possible. As a taxpayer you should know that there are literally hundreds of different government programs available that can help subsidize your investment activities. You can add hundreds of thousands of dollars to your net worth over the course of your investing career simply by utilizing federal, state, and local government programs. But before I tell you some of the specific programs available to you, I think it’s important that you have a basic understanding of how we got to where we are. In 1910, the U.S. Congress created the first federally funded enterprise that would eventually create the free enterprise system that we all know and love today. The U.S. Congress had altruistic goals when it passed this initial legislation. The idea was to help working-class families seek out educational opportunities, as well as to provide assistance in starting a business and owning a home. Before 1910, the federal government was largely uninvolved in higher education, business ownership, or homeownership. The nation’s primary focus was agriculture, which meant that a huge emphasis was placed on farming, land, and any other enterprise that would promote agriculture. A number of prominent leaders began looking into the future and realized that if we were to continue growing as a nation, we would have to shift our focus away from agriculture and develop a newer, more accessible, profitable financial structure that could benefit more Americans. Thus began the infancy of what we now know as the entitlement system. Entitlements are specific benefits given to individuals and entities. We all know what an individual is, but what exactly is an entity? Basically, an entity is an individual, corporation, limited liability partnership, or even a limited liability company. Another way of looking at it is to say that an entity is any business structure recognized by the federal government and, to a lesser degree, state, county, or even local governments.

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In order to understand the entitlement system, you must realize that an entitlement is exactly what the word indicates. If you are entitled to receive something, it means that you are owed whatever is being referenced. However, when the government gives you something, it always comes with strings attached. That means you have to qualify and, in exchange for receiving that benefit, the government expects you to perform in a certain fashion. This expectation is enforced by a set of rules, regulations, or laws. Knowing just what those strings are can help prevent that string from become a rope—tightening around your neck! The entitlement system entitles you to receive certain funds, provided you use them in the way specified. For example, if you receive an educational grant, you’re required to use that grant for educational expenses only. If you don’t follow the rules you run the risk of running afoul of the government. That can be an expensive and painful learning experience. As a taxpayer I’m sure you’re familiar with many of the entitlement programs in existence today. Some of the most common entitlements are Medicare, Medicaid, food stamps, Social Security, unemployment, Veterans Administration programs, federal employment retirement plans, as well as military retirement plans. When entitlement programs initially came into existence, the tax system was still in its infancy. As of 1915, the only income tax that the federal government received was a 1 percent business and personal income tax. If you didn’t earn in excess of $20,000 per year or have business income that was more than $20,000 in any given year, you were exempt. In 1925, the U.S. Congress decided it wanted to expand interest in promoting education, business, and homeownership opportunities. Congress decided it wasn’t satisfied with the progress being made with the original program, so it did what government has always done: It further expanded the program and the scope and authority involved in its administration. In 1934, Congress had again become disenfranchised with the progress being made in the area of homeownership. In an effort to achieve specific outcomes it passed the National Housing Act, and the Housing Authority was born. 50


In 1941, the United States entered World War II, and Congress increased the income tax on individuals and businesses from 1 percent to 5 percent. This legislation was passed because the federal government lacked the funding necessary to pay war expenses. The higher tax was supposed to end when the war ended, but then Congress realized it had 2 million very large problems on its hands: There was suddenly an influx of 2 million experienced and needy combat veterans, and Congress wanted to reward them for their service by providing housing and educational benefits for them. Since that time, Congress has levied thousands of additional taxes on the American people. Of course, we are all reminded of that every April when we fill out our federal income tax returns. Every tax increase that Congress levies theoretically increases the U.S. Treasury’s income. With the increased income, Congress has systematically increased government spending, and there are hundreds of government programs that all fall under the general heading of entitlement programs. Although some programs may or may not have funding at any given time, you’ll probably be able to find a program or two that can help you. Now that we know a little bit more about the history of government programs, let’s talk about how you can get your fair share. There are four distinct levels from which government cash is distributed. I have already alluded to the federal government, but you can also receive government entitlements from state, county, and local government agencies. In addition, each level of government also has a number of loan programs available. Although there are many different loan programs available, I want to focus on grant programs. A grant is literally free money that can be used to add many zeros to your overall net worth at absolutely no cost to you. Many people suffer from the misconception that grants are only for people who are destitute, down on their luck, or otherwise financially disadvantaged. This is simply not true. There are grants available for everyone regardless of income, social status, and so on. I think we’re all aware that poor people have benefited from many of the grant programs; however, there are also a number of highly lucrative grants available 51


for the asking. I’m going to tell you what they are so that you, too, can ask for them. Not long before my mother died, she had a strong desire to have her home fixed up. She didn’t want a lot, so we decided to look into the possibility of getting a grant to pay for remodeling her kitchen and bathroom. With a little research we quickly discovered that numerous government agencies had grant money available for the asking. Physically, my mother was in terrible condition. She was confined to a wheelchair, suffering from the debilitating effects of diabetes, and as a result had not only lost both her legs and one of her eyes, but her vascular system was beginning to shut down. She qualified for a very interesting government program. The government agency offered to give her $35,000 as a silent second mortgage. This means that she received the money and the agency placed a lien on the property, but the money didn’t have to be repaid as long as the title did not change hands. If for any reason she decided to sell the property and exchange title, then the entire $35,000 would have to be paid back. As a creative investor, I’m always looking for strategies I can use to create an exceptionally competitive advantage. Here’s how we did this. This government agency permitted us to place the property in a trust for the benefit of the owner. Under the terms of the trust, my mother was the beneficiary and I was the trustee. As long as the title to my mother’s house didn’t change hands, we would not have to repay that second mortgage. Eventually my mother died and my brother lived in the house, but because we didn’t change title we didn’t have to repay the mortgage. Instead we simply changed the beneficiary of the trust. My brother is now listed as beneficiary and he essentially calls all the shots. As the trustee I handle all of the business of the trust; in this case, the business happens to be the house. This is an example of a government program that served the purpose for which it was designed. The agency provided a grant at tremendous benefit to my mother, which was very helpful to her during her last days on this earth. Many times a simple government grant program can serve secondary purposes as 52


well. While there are many state, county, and local government programs that are extremely beneficial to people, the federal government has some of the most lucrative programs available. I’ll explain a few of them here and then tell you how to go about researching government programs in your area. In case you’re not familiar with it, the Department of Housing and Urban Development (HUD) oversees a massive program called the HOME Program. This grant program is allocated more than $2 billion every year. Congress gives HUD the money, which is then distributed to the various programs that are funded by the grant program. State and local governments across the country receive what are called formula grants that they can then redistribute within their own communities. The grants provide rental assistance as well as homeownership opportunities for millions of Americans. Because Congress has determined that there is an overall shortage of affordable housing, this program was created to address that need. As a real estate investor, why would you be interested in the HOME Program, especially if you are already richer than Job? The reason is that most of the properties you’ll be selling happen to be located in bread-and-butter communities. Having a good, solid knowledge of available government money can be beneficial to you both when you’re buying property and when you’re selling it. Let me give you an example of how this strategy could be financially beneficial to you. Let’s pretend that you have a property for sale for $230,000 and you’re willing to sell it to a young couple on a 25-year note at 10 percent interest if they can come up with a down payment of $15,000. But they’ve told you that all they have is $3,000. You really want to sell them this house, but they don’t have the resources. If they can’t come up with the financing, they could very well be locked out of attaining their piece of the American Dream. So you tell them about HUD’s program, and they are able to apply for and receive a grant for $15,000. This does a couple of good things: It puts them into a nice home that they otherwise wouldn’t have been able to afford, and it also puts cash in your pocket and gives you a warm and fuzzy feeling inside for helping your fellow man. 53


Another grant program is HUD’s HOPE program. HOPE stands for Home Ownership and Opportunity for People Everywhere. The HOPE Program is a multifaceted government program that provides a variety of finance options for recipients. A resident of a public housing complex could receive a grant to use as a down payment on a home. Grant money in the HOPE Program is also available to provide financial assistance to other home buyers. When I say this is a multifaceted program, I mean that it provides many different types of benefits. For instance, the HOPE Program also provides interest rate buy-downs, which allow people who have received bank financing to buy their way down to a lower interest rate. Under the HOPE Program you can also receive money for down payment assistance, for rehabbing property, and for resident relocation assistance. As you can see, you can use government grants to help you in many different ways to invest in abandoned properties. An often overlooked grant program is a Community Development Block Grant (CDBG). If you locate an abandoned property in certain areas and you plan to hold on to the property as an investment, CDBG can be a lucrative source of cash. You apply to a state, county, or city agency in order to be considered for the funding. As part of the review process, you must show that the grant will somehow benefit low- to moderate-income families or aid in the prevention or elimination of slums and urban blight. In other words, the government is willing to help subsidize your investing career if you’re willing to follow their rules. With the CDBG program you can receive funding to help you buy or fix up an abandoned property if you plan to hold that property as a landlord. However, you can also use the CDBG program in the event you ever come across an abandoned commercial property that you want to buy. You can receive up to $27,500 to improve the physical appearance of a nonresidential commercial building. The government realizes that certain areas lack the infrastructure to grow the economy in primarily urban areas. These aren’t necessarily bad neighborhoods, but we’re also not talking about Wilshire Boulevard in Hollywood. So if you see an abandoned commercial building, you might keep this in 54


mind as a potential source of cash for fixing the property up if you decide to purchase it. If you decide you want to be a landlord, government programs just might be your best friend. When deciding whether to enter the fray as a landlord, one of your primary considerations should be how effective you’ll be at collecting rent when it’s due. By participating in the HUD Section 8 assistance program, you can guarantee that rent will be paid on time. Section 8 is a federal subsidy program that provides rental assistance as well as security deposits to low-income people. Here’s how it works: Low-income families are awarded a housing choice voucher. When the owner of the property agrees to participate in the program, the Section 8 subsidy payment is made directly to the owner for rental payments and security deposits. When you participate in the Section 8 program as a landlord, the bulk of your rent money comes directly from the federal government. Typical Section 8 tenants don’t pay more than 30 percent of their income toward rent; the government steps in and makes up the difference. I have had tenants who have paid as little as $25 per month, and I even had one tenant who didn’t pay rent at all because the government funded 100 percent of the rent payment. There’s a lot to be said for the Section 8 program because those checks come in like clockwork. If the first of the month happens to fall on Sunday or a holiday, you receive your rental payment from the government the day before. You never again have to suffer through hearing some of the creative excuses renters sometimes come up with as to why they can’t pay their rent on time. The federal government doesn’t make excuses. So it’s a great way for you to guarantee that you receive the bulk of your rent money on time. Nevertheless, being a landlord isn’t always all it’s cracked up to be, because some tenants can, will, and do tear up property. If you decide to rent out property that you have purchased that had previously been abandoned, be aware that it can be a labor-intensive proposition. You really need to know what you’re doing or you can get burned. With that said, it can still be highly lucrative. Be careful, be aware, and be willing and able to reap 55


the financial rewards that can come your way as you practice and perfect the skills necessary to be a good landlord. Depending on the situation, there are times when you can combine programs. This can provide a tremendous benefit to the recipient of the grants. One of my students combined a number of different government programs to buy her very first home. Kim lived in an area of Dayton, Ohio, that had very low home values; in that area, prices remained stagnant. Kim was dedicated to the idea of becoming a homeowner, so she scrimped and saved and finally accumulated $1,000 to use as a down payment on her very first home. The problem was that the house she wanted to buy was priced at about $86,000. Kim discovered that she qualified for a grant offered by Chase Manhattan Bank in the amount of $41,269.42. In addition to that, she received a grant from the city of Dayton in the amount of $4,184.04. The Farmers Home Loan Mortgage Corporation had a two-for-one credit program, which meant that whatever down payment or deposit amount she made, they would double it. Because she had a $1,000 deposit they doubled it to $2,000 and gave that to her as a credit. Kim was a busy beaver, hunting high and low for all of the available grants, so she located a few others. Her gas and electric company awarded her a grant of $2,500. The federal government also awarded Kim a Community Development Block Grant in the amount of $35,000. The total that Kim received in grant money from all sources was $85,953.46. Now Kim had a major problem: She would be unable to buy her home until she came up with another $47. Because Kim was so persistent in leaving no stone unturned, she was able to buy her first home for only $47.

How to Research Grants in Your Area I’ve already told you about a number of the federal grant programs that are available. This is just the tip of the iceberg, though, because there are thousands of other grants available from state, county, and local governments. And besides government 56


grants, there are also thousands of public and private foundations, businesses, and other organizations that give away hundreds of millions of dollars. While the grants available in your area may differ from some of the grants available in mine, it is possible for you to locate a grant that can help finance your abandoned property investing career. You may have to treat it like a scavenger hunt, but if you’re willing to put forth a little effort, I’m certain you will find that it’s worth your while to leave no stone unturned as you hunt for cash. A good place to start is by navigating to your state’s web site and searching for grants there. After you have explored all of the available grants for your state, you might try doing the same thing within your county and local governments as well. With the advent of the Internet and the growing popularity of reaching large audiences with the World Wide Web, researching grants has never been easier. In addition to the following grant sources, you can also do a Google search for grant givers. The last time I checked, there were more than 625,000 grant givers listed. Unless you are an unusually motivated abandoned property investor, that should be enough to keep you busy for at least a year or two. 䊏

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www.grants.gov. Grants.gov is a place where you can both find and apply for federal government grants. The U.S. Department of Health and Human Services is proud to be the managing partner for Grants.gov, an initiative that is having an unparalleled impact on the grant community. www.grantspy.com. Grant Spy’s daily e-mail bulletins notify you of the latest funding opportunities and let you get a jump on tight deadlines. Brief summaries of new and updated grants (including links to original announcements), together with useful news and information, are presented in an easy-to-read HTML format. www.cof.org. The mission of the Council on Foundations (COF) is to “provide the opportunity, leadership and tools needed by philanthropic organizations to expand, 57


enhance, and sustain their ability to advance the common good.” Over 2,000 grant-making foundations and giving programs worldwide are members of the COF. 䊏

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www.nal.usda.gov / ric / ricpubs / funding / funding1.htm. This is the web site of the National Agricultural Library, which offers a guide to funding resources. It gives a brief overview of the funding process and access to extensive information on private and public sources of funding. www.tgci.com / magazine / 01fall / statedirs.asp. This is a list, created by The Grantsmanship Center, of statespecific directories that support locally based projects and organizations.

How to Apply for a Grant

In order to receive a grant you’ll have to apply for it, which includes writing what is called a grant proposal. In order to write an effective grant proposal, you must do some research on the grant you want to apply for, because every agency that offers grants wants to advance a specific purpose. If you can show them that they can accomplish their purpose by awarding you a grant, you increase your likelihood of receiving that grant. Therefore you should carefully read and research the actual grant requirements. Educate yourself about the conditions and purpose of the grant to ensure that you can help fulfill the mission of the grant giver. Essentially, you need to sell yourself to the giver of the grant. This can sometimes be a daunting process, but if you do your job well, your grant request stands a very good chance of being approved. You must demonstrate that you have a specific need and then describe the solution to that need. In order for your grant request to be approved, you will have to establish a vision and then repeatedly reference that vision throughout your proposal. You’ll also want to research granting institutions. There are many good, grant-giving institutions that can assist you with your abandoned property investing activities, and by carefully 58


perusing them you can maximize the cash that is available to you. Grants alone won’t make you rich, but over time they can certainly go a long way toward changing your financial future. Once you know which granting institutions you want to approach, find out just what kinds of grants they have and the purpose their grants serve. Carefully target your proposal to relevant institutions. In other words, make sure your proposal will stay within a specific category. While there are a lot of institutions willing to give away money, not all of them will necessarily fall into your category. Do yourself a favor: Don’t waste your time or theirs by asking for money from a grant giver who does not participate in your category. You also want to ensure that you present your proposal in the proper format. Telephone the granting institution and get the name of a person you can work with throughout the entire application process. When you speak with this individual, find out what the proper format is in which to deliver your grant proposal. They will likely refer you to a web site where you can download a list of specific instructions on how to put the proposal together, what the proper format is, and all other pertinent details. Sometimes if you write out the first draft of your grant proposal and send it in, they may be willing to review your copy and then make suggestions for improvement. This will dramatically increase your chances of having your grant proposal approved. As I said earlier, every grant-giving institution wants to ensure that its mission is being fulfilled, and the primary way they do this is by measuring results. So before they give you the money, they will want to find out exactly how you plan to use it and how long you anticipate the process taking. In addition, the granting institution will be very interested in knowing how the results will be measured. In other words, they want to know, in plain English, how you will define success. This is a very important step, and if you miss it you can stumble, and discover that it is a long way down. Granting institutions like to give money away, but only if they have an assurance that their goals are being met. It’s your job to give them the 59


information they need in order to sell them on giving you the money that you want. To recap, before you start writing your grant proposal, be sure to clearly define the project you have in mind; identify potential funding sources; make initial contact with the grant-giving institutions; review all of the pertinent proposal guidelines to ensure that you qualify; and learn as much as you can about the application and proposal process. The bad news is that winning a grant can sometimes be difficult and time-consuming. The good news, however, is that it is possible to receive a grant for your project. The big question is, are you willing to do the work necessary to win a grant?

Available Loan Programs In addition to grant programs, all levels of government also have a wide variety of loan programs available that are designed to help people acquire a home. As a real estate investor interested in investing in abandoned properties, you can also utilize certain federal loan programs to help subsidize your investing activities. A loan has to be repaid, so it isn’t exactly free financing; however, if you are a landlord, your tenants’ rental payments can cover your loan payments for you, so I have included a few loan programs here as well. First let me explain briefly how these programs work. There are basically three types of loans available: insured loans, guaranteed loans, and direct loans. With an insured loan you apply directly through a conventional lender, such as a bank, and they extend the loan to you. That loan is insured by the federal government, which means the government guarantees repayment of the loan. If for any reason you fail to repay it, the government will step in and pay the loan for you. If this happens, be prepared for the government to track you down and demand its money. With a guaranteed loan, you also apply directly to a conventional lender such as a bank, and the federal government guarantees something less than 100 percent of the amount borrowed. 60


With this type of loan you are not required to pay any kind of insurance premium as part of the mortgage payment process. A direct loan bypasses a lender, and the government agency issuing the loan becomes the lender. A direct loan has the lowest interest rates available. You apply for your loan directly to the government, which funds the loan, and you make your payments directly to the government. You probably didn’t realize it when you started this chapter, but there are tens of thousands of sources of revenue to assist you in abandoned real estate investing. The government serves a vital function; however, it is limited in what it can do. Another way you can take advantage of the federal loan program is through the FHA 203(b) program. This is the typical home loan program that millions of Americans have used for years in order to purchase their very first home. As an abandoned property investor, you can point a potential buyer for one of your properties to the FHA 203(b) program. When you have already renovated an abandoned property and are ready to sell it, if your potential buyer lacks the resources to obtain a conventional loan, you can help them obtain one of these loans. Then they only have to come up with a 3 percent down payment in order to buy the property from you, and you receive your cash up front. You can also use this program yourself on a one- to fourfamily residence because the government considers anything from a single-family residence to four units to be residential. A property isn’t considered a commercial investment by the federal government unless it is five units or larger. If your property qualifies, the down payment using an FHA program can be as low as 3 percent. A lot of your closing costs can be covered by this FHA 203(b), and the lender’s fees are limited by federal rules and regulations. Another loan program you can utilize as an abandoned property investor is the FHA 203(k) program. This is a tremendous program and a wonderful way to renovate a property that you’ve already purchased. Millions of real estate investors have utilized this program to make needed repairs. As I said, while it is a loan program and the money must be repaid, your 61


tenants can be making your payments for you in the form of rental payments. With this program, the property must have between one and four units, or be a single-family residential unit that you plan to convert into a two-, three-, or four-unit real estate development. The loan can also be used to move a property from one lot to another lot. So if you locate an abandoned property that must be moved, you may get a sweetheart deal on the property. You can then use available government money to convert it into four apartments and generate an awesome monthly income. It can even be used for mixed-use property. Let’s say you locate an abandoned property that has a storefront business and perhaps several apartment units above it. You can receive rental income from the merchant renting the building, as well as rental income from the apartments above. You’ll also discover that HUD will permit you to combine multiple programs simultaneously as you build your abandoned property portfolio. The specific rules change from time to time, so you’ll want to visit the web site to find out what the current rules and regulations are. In this chapter you learned a number of techniques you can use for low- or no-money-down purchases of abandoned properties. I’ve also pointed you toward a plethora of free government financing sources and told you how to research government programs in your area so you can bring home the bacon with just a little help from your favorite uncle. In the next chapter, I show you how to find abandoned properties. Finding a good deal can sometimes seem like looking for a needle in a haystack, but with the proper knowledge you can burn the hay off and find that your needle is buried in a pincushion. In Chapter 4, not only will you learn how to find good abandoned properties, but I’ll introduce you to a foolproof method that will actually bring abandoned properties to you. Let’s get going, and get rich!

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CHAPTER 4

Find Abandoned Properties Fast

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So far I’ve explained how I got started investing in abandoned properties, and I’ve also told you why I think it’s so important for you to do it as well. In addition, I’ve presented a number of creative and government financing techniques that can help you capitalize on this lucrative opportunity. What I have presented to you is useless, however, if you don’t know how to locate these properties. In this chapter, I teach you how to do just that. When trying to locate abandoned properties, your activities will generally fall into two categories: Either you’ll be chasing abandoned properties or you’ll have them chasing you. It’s all right to chase abandoned properties, but it’s much better to have them chasing you. You’ll recall that in Chapter 1 I told you how I located my very first abandoned property. It didn’t happen because I got lucky. It happened because I had the foresight to open my mouth and tell everyone I knew that I was investing in real estate. So how did that property come to me? It didn’t materialize out of thin air. It came to me as a direct result of my cousin Greg remembering that I invest in real estate. This falls under the broad category of getting abandoned properties to chase you. Some of my students like to start out chasing abandoned properties on a deal-by-deal basis. They’ll typically pound the pavement and locate a single abandoned property, close that deal, and take the profits from their inaugural deal to prove to themselves that investing in abandoned properties is worth their time and effort. After they do their first deal they’re willing to invest 65


more of their time in advancing their new careers. It’s at this point that they begin to lay the groundwork for building an abandoned property machine. What do I mean by machine? I’m talking about establishing your own system of acquiring property, wholesaling the property to another investor or fixing it up, and then either renting the property to a good tenant or selling it and realizing your profit. Then you do it again and again—just like a machine. If you choose to begin your real estate investing career by chasing abandoned property, that’s fine. But eventually you’ll get sick and tired of chasing these properties and realize that it’s much more lucrative to have them chasing you. I speak directly with a lot of people across this country, and the majority of them have one thing in common: They don’t have a system in place, nor do they have the slightest inkling in their mind as to how they are going to acquire property once they get out into the big bad world. If you take nothing else away from this book, I want you to embrace the idea that investing in abandoned properties is nothing short of being a game of numbers. The more numbers you process, the better success you will ultimately have. Not every property you look at will have the capacity to make you rich. For that matter, not every property you look at will even make you money. You need to be willing to walk away from a property that won’t get you where you want to go. Don’t be afraid to say “Next” and quickly move on to another property that presents a better opportunity. If you knew that for every 10 abandoned properties you looked at, you would eventually buy one, and that that single purchase would eventually net you a profit of $100,000, you’d probably have a totally different outlook on your abandoned property investing. You would have no problem getting up in the morning to talk to the owners of these properties. If you saw one owner and he wasn’t interested in the deal you had to offer, you wouldn’t be too concerned, because you would know that each no you get from an owner puts you that much closer to making that $100,000. If you didn’t get a yes until the tenth abandoned property, you can figure that each no you have 66


received was worth a whopping $10,000! If you’ve gotten four no’s from abandoned property owners, you’ve just made yourself $40,000. You’re only six no’s away from your $100,000! With each successive no, you realize you’re that much closer to a very lucrative yes. Here’s a little game I’d like you to play. If you’re looking into a crystal ball, you might see that the success you have your eye on is surrounded by a series of small steps that look like mistakes. But they’re really not mistakes—they’re learning opportunities. Let’s say you have a goal of making $50,000 on an abandoned property. You look into your crystal ball and see that you will make 50 mistakes before you realize that $50,000 profit. You also know that every mistake carries a very valuable lesson. Your job is to make each mistake, learn and apply the lesson that comes with it, and move forward. Doing a little simple math, you see that every mistake you make and every lesson that you learn and apply is worth $1,000. When you look at it this way, it changes your entire perspective—it actually makes you look forward to making mistakes. This is a very valuable tool that can help pave the way to your profits. Making these mistakes is a positive thing—but you can’t move forward to the next creative mistake until you embrace the learning experience that the current one gives you. You are constantly building your foundation for your success, one mistake and one lesson at a time. If you move on to a new mistake without having learned the lesson embedded in your prior mistake, you are building your success on a very shaky foundation. That does nothing to advance your learning process; in fact, it creates more distance between you and your abandoned property success. This process can be used in any endeavor you desire to excel in. You can even learn your success lessons while bagging groceries at Wal-Mart, but you’ll never get rich doing it. Instead, you want to move beyond that and to a higher plane where you know that anything is possible and a lifetime of wealth and abundance is within your reach if you’re willing to learn and apply the knowledge you gain while investing in abandoned properties. So how do you find an abandoned property? In the next several pages I teach you a number of methods you can use to find 67


abandoned properties. While you read about these various techniques, let your creative imagination flow. As other ideas about finding abandoned properties come to you, jot them down. You can come back to them later to develop and refine your ideas. Until that happens, use some of my techniques.

Target Your Search The first thing I want you to do is select your targeted area. Here’s a quick and easy way to do that. Many of the larger communities around the country have a book of local maps that you can get. In Los Angeles it’s called a Thomas Guide, and it shows all the different communities within the very large city of Los Angeles. The one for your area may have a different name on the cover, but it will serve the same function. Locate your home on your local map and put a pencil mark on the spot where you live. Next, draw five concentric circles around that dot, each circle a two-mile radius out from the previous circle. You will wind up with a bull’s-eye with a 10-mile radius, with your home at the center. You now have your first abandoned property target area. This is where I want you to concentrate your initial investing activities. The reason you should concentrate on your own neck of the woods, at least initially, is that you know this area—this is your own backyard. You will increase the likelihood of success by working in an area that you’re already familiar with. You may have a desire to go traipsing across the countryside looking for new, better, greater opportunities. But never forget that some of the best opportunities you’re likely to find are within a few of miles of your own home. You have ample opportunity to make a lot of money in your own backyard without spending a small fortune on traveling across the country looking for abandoned property opportunities. Now you’re about to become very, very familiar with your own backyard. Take your map book, along with a notepad and a pencil or a pen, drive through your target area, and categorize 68


the areas in which you drive. Every community has areas that are more affluent than others. As you drive around the neighborhoods in your target area, assign a numeric value to each, on a scale of 1 to 10, with 1 being the least desirable, what I call war zone areas, and 10 being the most desirable and affluent areas. In your quest for good abandoned property candidates you’ll probably want to avoid the “10” areas of your target region. These areas might be very desirable places to live, but you probably won’t find many abandoned properties here. If you do find one, it is likely to be a very lucrative investment. So, while you don’t want to concentrate your efforts in this area, keep your radar tuned in to this area. If a blip pops up on your screen, be prepared to scramble immediately and seize the opportunity before it slips away. By the same token, you’ll also want to avoid the areas you’ve rated as 1, or war zone areas. How will you know if you’re in a war zone area? If you feel as if you need a flak jacket, a helmet, and armed backup just to safely walk the streets at high noon, you’re probably in a war zone. You may find an abundance of abandoned properties there, but you might be better off passing them up. In a war zone area, there is likely to be a greater concentration of abandoned properties than in any other location within your city. Keep in mind, however, that merely finding an available abandoned property is not your goal. Your goal is to find an available abandoned property that you can actually make money on, and to do it smoothly and comfortably. While you can usually do abandoned property deals fairly easily in a war zone, with great cooperation from the owners, turning the property around might be a problem because most people will not want to live there. Would you? If every second or third property in a given neighborhood is abandoned, there’s a very good reason for it. If it’s an exceptionally high crime area, the police may not venture into that neighborhood, even if the donuts are free. You want to concentrate your efforts on the areas ranked 3, 4, 5, 6, and 7. Your greatest opportunities for workable, profitable abandoned properties will most likely lie in these areas. 69


As you drive up one street and down the other, remember what you’re looking for. What are the signs of abandonment? The grass and shrubs might be overgrown or dead. The door could be boarded up. The windows could be broken out or boarded up. At the front of the house you may see old, undelivered newspapers collecting on the front porch or advertisements stuck in the front door. There might be trash in the yard that has been there for a while. These are all classic signs of abandonment. As you begin driving around your target area, it will be helpful to have a friend or spouse with you to help you locate potential properties. When I first started investing in abandoned properties, I enjoyed taking my lovely wife with me, and we would work together as a team. It’s difficult to simultaneously watch traffic and look for signs of abandonment on both sides of the road. However you approach your search for abandoned properties, do it safely. When you see a property that appears to be abandoned, jot down the address. In Chapter 5 I tell you how to go about locating the owners of these properties. It sometimes involves a little sleuthing, but it can be a challenging, invigorating, and profitable experience. When my wife and I found what we thought was a promising property, I’d pull over and we’d get out and check it out. My wife had a camera with her so she would walk around the property and take pictures, as well as make notes about the condition of the property. Meanwhile I would step next door and try to touch base with the neighbors to find out exactly what had happened with the owners. I would talk to as many neighbors as necessary to find out where the owner of the property was and how I could contact him. When you use this system, you’re sure to locate a number of good abandoned property opportunities in your target areas. Your options here are somewhat limited, however, because there is only one of you, and with just 24 hours in any given day, there is only so much you can do by yourself. That’s why it’s so important that you find a way to get these properties chasing you. This is the very foundation of your abandoned property money machine. 70


Spread the Word I mentioned the following strategy earlier in this book, and I’m repeating it here because I believe it is critical to your ultimate success. Very simply, let everyone know that you are a real estate investor, and that you are actively seeking vacant and overgrown property. You’ll note that I did not say vacant and overgrown houses. Your investing activities do not have to be limited to just singlefamily houses. There are numerous types of property in which you can invest, and the profit potential can be even more lucrative than you might find with a single-family home. You may find a duplex or a triplex. There may be an abandoned commercial building whose owner is no longer receiving an income from it; perhaps the owner is sick and tired of dealing with it and has walked away from it. Occasionally you will locate an abandoned apartment building. Be alert to the opportunities that an apartment building can bring you. It may have a higher aggregate cost than a singlefamily home, but just one apartment building has the potential to permanently alter your tax bracket in a very positive and profitable way. When you tell your friends and family about your investment needs, make sure you state clearly that the types of property you’re interested in are vacant and overgrown. A property can simply be vacant for any number of reasons. The owner could be in the hospital or on the other side of the country visiting family. If this is the case, obviously they will soon return. If it is simply vacant, you may also discover that it is a VA or FHA foreclosure. You’re not looking for a VA or FHA foreclosure because it’s not lucrative and government agencies can sometimes be difficult to work with. This type of property could be a good target for you at some point in the future; however, it’s not a good idea as an abandoned property investment. One reason is because it doesn’t lend itself to an owner financing situation. If the property is overgrown as well as vacant, it indicates a certain level of property distress and a possibly motivated owner. Motivated owners have a serious problem on their hands and 71


might be seeking an equitable solution to that problem. You make money by solving problems, so this is the type of owner you want to find. So when you tell people that you’re investing in abandoned properties, be very clear about the fact that you’re looking for vacant and overgrown properties. If they know exactly what you’re looking for, it will be much easier for them to bring properties to your attention that meet the investment criteria you have established. You may think you don’t know many people, but if you flip through your address book, I bet you’ll come up with a sizable list. They can be people you know, friends, relatives—even mere acquaintances count. If they know who you are and won’t hang up on you when you call them, write down their names—and call them. You’ll recall that this strategy is exactly how I got my very first abandoned property. While I was still working for the telephone company I called my cousin Greg and told him what I was looking for, not really expecting major results, but believing in my heart and mind that it was possible because the idea made sense. Within a couple of weeks Greg called me back to tell me about a property just down the street from his house. As a result I bought my very first abandoned property and was able to put $43,000 into my favorite bank account. This strategy really does work. I think you’ll be pleasantly surprised at the results you get when you put this strategy to the test.

Join the Club Next I’d like you to seek out and join your local real estate investment club. If you live in a smaller area there may be only one real estate investment club, but some of the larger cities could have several. These clubs generally meet once a month, usually in the evening. Typically the host of the meeting will give those in attendance information about the local real estate market. I can’t think of an easier way for you to stay informed about what’s going on locally than to join in these meetings. 72


By getting involved in your local real estate investment club, you will also have ample opportunity to meet people who have dreams similar to your own. You can share ideas as well as strategies with other members. In addition, a real estate investment club tends to have a lot of high-energy members with great ideas. A real estate investment club has many different types of members. Some members may have money and great credit but lack the time to get very involved in real estate investing. This could be a golden opportunity for you to locate an investment partner. As you get to know the other members of the club, you can tell them what types of investments you are involved in, as well as what you’re looking for in a partner. You might also want to tell some of them about the types of abandoned properties you’ve located. Don’t be surprised if you leave that meeting with 15 to 20 business cards from serious-minded investors. Why is that? Good deals never chase money; money always chases good deals. Even if you have no money, locate a good abandoned property investment, let people know what you have, let them know that you’ll wholesale the investment for a fee, and the money will flow your way. Joining your local real estate investment club could be a down payment on many lucrative deals. However, I want to warn you about one negative aspect of real estate investment clubs: You can get so wrapped up in going to meetings and simply talking about real estate that you stop actively investing in real estate. Use the investment clubs as a tool for your abandoned property investing. You will find that some real estate investment clubs have people who want to do nothing more than discuss real estate and talk about what they’re going to do someday. While it is important to learn everything you can about real estate investing, you also need to gain realworld practical experience. You can talk all day long about real estate and not put a single penny in your bank account, but your road to abandoned property riches is paved with action. Take action and you will not be disappointed. If you haven’t already done it, have 500 or 1,000 business cards made. They don’t have to be fancy. They simply 73


need to serve a practical function: People need to be able to contact you.

Other Commonsense Strategies Now let me tell you about some commonsense strategies you can implement that will get more abandoned properties chasing you. As you read through this section, keep an open mind and let your creativity and imagination run wild, because you’ll probably think of a few alternative ideas you’d like to try, or modifications to some of these ideas that could very well work for you. Over the past 20 years, I have had a wonderful income, a wonderful lifestyle, and increased opportunities for personal and professional advancement because I was able to build my own system that had abandoned properties chasing me. More of my time has been spent checking out—and buying—abandoned properties. I’ve also taught my son and my daughter to make money with abandoned properties, as well as hundreds of my students from all over the country. There are other ways to get abandoned properties chasing you instead of you chasing them. The first thing to do is to get prepared to receive many, many telephone calls. If you don’t already have a good quality digital voice mail system, consider investing in one. Because you can’t always be available to receive telephone calls when they come in, this will allow you to automatically record the calls that are essentially going to make you very wealthy. If you can afford it, a live answering service will prove to be much better than a voice mail system. When motivated owners are ready to sell their abandoned property, they usually want to talk to someone immediately. If they get an answering machine instead of a live person, they will be inclined to hang up and move on to the next opportunity. That means you will lose that opportunity. Profit-making opportunities don’t just sit around and wait for you to get ready; they move on to find someone who is ready for them. My web site, www.reggiebrooks.com, has a link to a company called PATLive. This is simply the best live answering 74


service company that I’ve had the pleasure of working with. Click on the link and read all about it. One of the most effective ways that I’ve found to get abandoned properties chasing you is to run a very small, inexpensive newspaper ad. One well-written and effective ad can have an army of people bringing highly lucrative abandoned properties to you. The following ad works extremely well. (Do, however, put your name and telephone number in the ad instead of mine!) Reward: Free Money. Hundreds to Thousands of Dollars. We buy vacant, overgrown properties. Seen any? Call Reggie, I’ll explain. 555-5555 Let me explain why I phrased the ad that way. You’re offering to give people a reward for finding abandoned properties and telling you where they’re located. “Free Money” automatically attracts attention, and people will want to know more. The second line in the ad tells them what they need to know: You buy vacant and overgrown property. As I said before, you’re not interested in just any vacant property. You want vacant and overgrown because that demonstrates to you that the owner actually has a problem you can help solve. When you run the ad, be very careful to include the words “I’ll explain.” As ridiculous as it may sound, if you don’t include “I’ll explain,” you could very well receive calls from people saying, “Hi, I saw some vacant and overgrown property. Is this Reggie? Okay, where can I pick up my free money?” Obviously you’re not willing to pay someone for seeing something. There’s a bit more to it than that. When a call comes in, I inform them that we operate in their city and we buy vacant and rundown property. Then I ask them if they know where one is. At this point they’ll usually try to give me an address and I’ll stop them right away. I don’t want the entire address. All I’m interested in is what street the property is located on. I don’t want them to think I’m trying to steal this property from them. If they give me the address of the property, they have absolutely no assurance that I will actually follow through with paying them if I purchase it. 75


So I ask for only the street name. Then I check to see if I’m already working with a property on that street. If I am, I give them the address of the one I’m already working on and ask if this is the property they’re calling about. If it is, I let them know I’m already working on it. Obviously, I have no intention of paying for information on a property that’s already on my radar screen. But I also assure them that I don’t have every abandoned property in the city, and I encourage them to continue bringing me other abandoned properties. Before I end the call, I always ask one final question: Do they happen to know anything about the owner of the property that they called me about? They may have more information than they’re letting on. If that’s the case, you may want to offer to pay them a small amount of money for their information. Of course, if the address they bring me is not one that I’m already working on, we have a property that could be a potential deal. In the next couple of chapters I talk about how to find the owners and how to negotiate a good deal for yourself. By having a small army roaming about the city looking for abandoned properties, you free yourself up to locate the owners and negotiate lucrative deals for yourself. The amount of money that you pay these people is very small and, compared to the profit potential that just one of these properties can bring, is well worth the investment. Now that you know what the ad needs to say, the next decision you have to make is what publication to run it in. Depending on where you live, you may have many choices. Obviously you don’t want to run your ad in USA Today. What kind of response do you think you would get if you were to run your ad in a large national newspaper like that? I’m guessing it would be minimal, because abandoned properties are largely a local issue. If you were to receive calls, they wouldn’t do you any good unless you had in place a national network of investors capable of working these leads. The logistics and expense in building such a network as a beginning investor would be prohibitive. You basically have two choices on where to run your wonderful ad: either in a large-circulation newspaper or in a small-circulation newspaper. If you choose to run it in a 76


large-circulation newspaper such as the Los Angeles Times, you might find yourself driving all over the city. At this stage in your investing career, that probably wouldn’t be the most prudent thing you could do. Instead, your best bet is to run your ad in a newspaper that has the greatest potential to bring you the greatest response, as well as the greatest financial reward. Generally that will be a small, local newspaper. It might be a small, low-cost daily with a limited circulation, or it could be a free throwaway newspaper with a slightly larger circulation. Because abandoned properties are a very local issue, community newspapers are your best bet for soliciting good prospects. This next method can be tremendously powerful and can have abandoned properties chasing you down like you wouldn’t believe. Go ahead and have those business cards printed up, and make a commitment to hand out at least 100 of them within the next 30 days. Business cards really have only two purposes: to inform and to impress. You’re investing in abandoned properties, not running for political office, so you don’t need to impress anyone. As a matter of fact, if your business card is too fancy, you might offend the sensibilities of potential clients. The owner of an abandoned property may be a little bit nervous about selling his property to an investor. He could fear that you’re trying to steal his property from him. Don’t let a fancy business card intimidate a homeowner into believing that you are a slick, fast-talking huckster. Save your fancy business card for your meeting with the president of the bank when you try to arrange a $1 million loan. Instead, go with a model of simplicity. I have found that a very basic white business card with black embossed print works best. A business card has two sides, so you might as well use them both. On the front of the card you might just run your “Free Money” newspaper ad, described earlier. On the reverse side, you have an opportunity to inform your owner of other services that you might be able to offer: “We can purchase your property in 10 days”; “We can pay all cash”; “We can close in 15 days.” List everything on that card that you can do to benefit the owner. 77


There may be some things that an abandoned property owner needs that you don’t do. See if you can form a relationship with the people who can do those things, such that you refer your owners to them and take a fee for the referral. You may be thinking, “Reggie, I can’t pay cash for property. In fact I’m broke, have no job, and my credit stinks.” It doesn’t matter. Don’t let little things like a lack of money stand between you and the achievement of your dreams. Instead of limiting yourself, get out there, find a great deal, and take it to your local real estate investment club. Find somebody at the club who has some cash. If you’re broke, there’s a pretty good chance that another member would be willing to pay you $10,000 to $15,000 for simply assigning the contract on the property that you are interested in buying. Let’s say you have located an abandoned property that is worth $270,000 and you happen to know that you can pick it up for $190,000. You simply write up an agreement to purchase the property for $190,000, and you place an assignment clause into the contract. The clause might say, “The buyer has the right to assign this contract to another person for valuable consideration.” This strategy is called an assignment of contract and it’s one of the most common real estate occurrences in this country. As a matter of fact, it happens with more than just real estate. Have you ever bought anything on a time payment plan and received a letter instructing you to make all future payments to a different entity with a different address? Why did this happen? For whatever reason, whoever you were making your payments to actually sold your loan. This is an assignment of contract. It’s an almost seamless process and it happens every day in this country. As an individual investor you can do the very same thing with real estate. If you had access to a $270,000 property and you were able to pick it up for $190,000, you could sell that contract to another investor for $10,000 to $15,000. That would permit the person who bought the contract from you to work that contract themselves. If you do the math you’ll very quickly see that it would be a highly lucrative deal for an investor who doesn’t have to do any real work to find that profitable abandoned property. 78


You found the deal and made their life easy, and they rewarded you handsomely. This is yet another way you can put yourself in position to make money with abandoned properties while helping the owners out of a bad situation. By bringing in another investor who can put this deal together, you satisfy the seller’s needs as well as your own, and give a cherry deal to another investor. If there isn’t a real estate investment club in your area, you can still sell these contracts. Millions of Americans have the money and the resources to invest in real estate, but may not have the time or the knowledge to actually do it. You can locate some of these individuals by running an ad in the newspaper as well. An example ad might say: Investor wanted for real estate transaction. $20,000 investment, 20% return. Short term, very safe. Call Reggie, 555-1212 That ad could easily attract an investor who has the financial resources to do this deal but no time and limited knowledge. Remember, good deals don’t chase money; money chases good deals. Many times people just need to be made aware that there is a deal available. By passing out your business cards you can set up a stream of abandoned properties coming your way with very little effort on your part. While little effort is required, it does take a certain level of commitment on your part. I want you to commit to pass out 100 business cards within the next 30 days. This will require that you hand out three cards each and every day to people you don’t know. It’s tremendous fun making new friends; making money while making new friends is even better. Your business card is designed to do a couple of things. First, it announces to the world that you buy vacant and overgrown properties. In addition, your card announces a reward. Before you advertise the reward, though, ensure that doing so will not violate any local laws or ordinances. Your marketing efforts will be only as effective as the creativity you choose to employ in trying to reach people. While you 79


could get the word out by hiring an airline pilot to do some skywriting for you, it wouldn’t be the best use of your advertising budget. Besides costing hundreds or thousands of dollars, the advertising will only stick around for a few minutes. Instead, I would rather see you spend $10 to $20 for a much more costeffective solution to your problem. Besides being effective, it doesn’t necessarily have to be daytime for you to see the results. I’m talking about a radio ad. You may think I’m crazy or misinformed when I mention $10 to $20 per minute for a radio ad. No, it’s not a misprint and I’m not out of my mind. Keep reading. The radio is a wonderful way to reach potential clients. The beauty of it is that people can be listening while doing almost anything else. Walk into almost any business and you’re likely to hear a radio playing in the background. While there are many different radio station formats, there is really only one format where you should be running your abandoned property ad: the talk format. If you’re listening to a talk radio station program and it moves into a commercial, what happens? Nothing changes, does it? The transition from talk to commercial is pretty seamless. So the chance of listeners staying on that station is very good. What follows is an example of a one-minute radio ad that can have your phone ringing off the hook. Imagine that there is upbeat music in the background, the kind of call-to-action music that makes you want to jump out of your seat and grab your credit card. Then the music fades into the background and you hear the announcer say: Are you a homeowner? Do you need to sell your house? Have you fallen behind on your mortgage payments? Maybe you transferred jobs or have recently been laid off. Is your property vacant, overgrown, and do you need to sell? Urban Financial Services can buy your house on the spot, pay all-cash, and close in as little as 48 hours. We are not Realtors. We are a company that buys houses and we can buy yours right away. Write this number down: 555-5555. Call right away. You’re going to learn how to 80


sell your house right away, even if you have no equity. You’ll learn how your mortgage payments and your bank needs can be taken care of right away, why you don’t need to pay a Realtor commission when you sell your house, and how you can sell your house in as little as 48 hours. Urban Financial Services buys houses and we have a program to buy your house. Call right now, 555-5555. There’s absolutely no obligation. Every call is confidential. Call right away. Don’t delay. 555-5555. Call now. That’s the body of your one-minute radio ad. It quickly gets the attention of the person listening to the ad. Yes, they are a homeowner. Yes, they need to sell an abandoned house or whatever house they have. Have they fallen behind in their mortgage payments? You’re capturing their attention. Did you notice that your telephone number appears three different times in that short ad? The reason is simple. When we give the telephone number out the first time, they may not be prepared to write it down. They may have to put their fork down or pull over to the side of the road while locating a pencil and something to write on. We want to give them that opportunity because we want them to have our telephone number. So to guarantee that, we give it out two more times. Here’s the beauty of a radio ad: You provide the script and send it in to the radio station, the engineer will add the upbeat music, and the announcer will read your script live on the air. Because your ad is being read live, if for some reason you find that it is not effective, you can very easily have it changed. All you need to do is fax the corrected ad copy over to the radio station, and the next time your ad runs, it can play with the new changes in it. I got your attention at the beginning of this section by mentioning your ad might only cost $10 to $20 per minute. People presume that advertising costs considerably more, and they are usually right. If you buy radio time and you want your ad to run on a certain day at a certain time (prime time), you can pay through the nose. However, there is a cheaper way. It’s called remnant time. Remnant time is cheap. A remnant is a leftover—so remnant time is simply unsold advertising time. 81


This means that your ad may not run until 3:00 or 4:00 in the morning. To you, that does not matter. Guess what? The people you’re trying to reach with your ad are people who have problems, serious problems. Maybe they’ve walked away from their property, they are in foreclosure, or they have other financial problems that are affecting their ability to properly manage their lives. Because of this, they are frequently awake until the wee hours of the morning worrying about their problems. This is where you’re going to have to get very serious as to how you prepare for these calls. This is why I like PATLive as a live telephone answering service to handle those calls. You’ll lose fewer calls and you’ll make more money. If you’d like to find out more about PATLive, visit my web site at www.reggiebrooks.com and click on the PATLive link. By going through my web site you’ll get the same great service and you’ll get a big discount. As you can see, remnant time advertising is an excellent use of your money in reaching people with problems. Not long ago I was leading a seminar in Los Angeles, teaching people to make money with abandoned properties. While I was discussing some advanced techniques, a woman in attendance who works for a radio station informed me that remnant time can be had for as little as $10 per minute. But let’s assume that you pay even $50 for that one-minute remnant ad. If 20 people call you who have vacant, overgrown properties that need to be sold quickly, is it worth $50 to get their names, addresses, and telephone numbers? As a conservative estimate, you will probably be able to work with at least one of them. If you turn a profit of only $20,000 on that one abandoned property, it’s a good deal for you. Wouldn’t you be willing to invest $50 if you knew that you were going to turn a $20,000 profit?

Stick with a System Many of my students start off dead broke and, in a relatively short period of time, wind up making hundreds of thousands of dollars. There is one very important lesson that they have learned. Developing, learning, and following a systematic abandoned property 82


process is key to their success. Following a system requires that you do the same thing over and over and over again. McDonald’s is one of the most successful businesses in American history, but it’s not because of the quality of their food. Quality has very little (or nothing!) to do with their success. McDonald’s is successful because they learned long ago that success is obtained by finding a system that works, and working it over and over. Abandoned property investing is the same way. And you don’t have to ask, “Would you like a hot apple pie with that?” Success in fast food and success in abandoned property investing is nothing more than doing a series of small things correctly. When you step up to bat, you do not have to swing for the bleachers. You can be a winner by laying down a bunt. A bunt could put $30,000 to 40,000 in your pocket. Now that you know how to locate abandoned properties, I’m going to show you how to find their owners. Once you locate the owners, I’ll show you how to craft a proposal that solves the owner’s abandoned property problem and rewards you with spendable cash that will make your abandoned property dreams come true.

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CHAPTER 5

Track Down the Owner

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You may think that tracking down the owners of an abandoned property is as difficult as Chinese arithmetic, but in this chapter I show you some commonsense yet highly effective ways to go about finding them so you can put together lucrative deals that will solve their problems while providing you with the potential for huge profits. By now you’ve probably located at least one or two abandoned properties that you would like to purchase, but you feel as if your hands are tied because the owners are nowhere to be seen. You could conduct a door-to-door search of your community for the owners, but I can show you a much better way. Before we begin our search, let’s review the reason we need to find these owners. Frankly, you have something that they need. You have a commonsense solution to an abandoned property problem that the owners have and may see no way out of. While they are very well aware of their problem, to them an equitable solution seems as elusive as Bigfoot. Because no one is living in their property, we know they have a major problem on their hands. It’s highly unlikely that they own the property free and clear, so not only are they responsible for property taxes and insurance, they’re also responsible for a monthly mortgage payment. If this is the case, one of two situations is taking place. They’re either struggling to make their payments, or they’re playing hide and seek with reality and pretending that skipping out on the property—and on the payments—will make both problems disappear. 87


If the payments are being made monthly, there is a giant sucking sound that the owners hear on the first of every month as hundreds or thousands of dollars come out of their checking account to make a payment on a property that is not producing any income. However, often when the owners walk away from their property they also walk away from their payment. For the owners this means that the foreclosure clock is ticking, because sooner or later the friendly banker who loaned them the money for their home is going to be replaced by the financial equivalent of the Grim Reaper: an attorney with the power to wreck their financial futures. To prevent this from happening, you need to reach the property owner before things reach a boiling point. Even if the owners hold clear title to the property, you can still help them out by taking a major headache away from them. While they may not have a monthly mortgage payment going out, they’re still responsible for taxes and insurance on the property, as well as maintenance expenses. If they don’t do something quickly the property will begin to deteriorate, and the situation will quickly erode as pests or squatters move in, or local bureaucrats begin harassing them about public nuisance issues. Simply by playing detective, you can find out what you need to know to get in touch with the owners. It may take you six or seven different steps, but how many steps are you willing to take if you know that on the last step you’re going to make a huge profit? At the same time, as important as it is for you to locate the owner of the abandoned property, don’t lose sight of your conscience, and always remember to make legal, ethical, and moral decisions as you search for these sometimes elusive people.

Ask the Neighbors The first step you should take in your search for the elusive owner is to check with the neighbors on either side of the abandoned property. It’s also very helpful to speak with the neighbors across the street, and even people who live farther down the block. 88


When you introduce yourself to the neighbors, be sure to give them your name and mention that you’re aware that the property has been vacant for a while. Let them know you’d really like to buy the property and spruce it up. It’s also helpful to mention that fixing the property up will tend to increase home values throughout the neighborhood. Not only is this a good icebreaker, but the neighbors will be able to see a tangible financial benefit to telling you what you’d like to know. Now that they’re aware of why you’re there, simply ask if they know how you might go about getting in touch with the owner. Typically, they will either volunteer what they know, including the owner’s current address and/or telephone number, or they’ll tell you that they didn’t know the owner very well, if at all, and can’t put you in touch. It’s always a good idea to give the neighbors your business card. They may initially deny knowing the owner or his whereabouts because they might be trying to protect a friend. Since the owner has abandoned the property, there’s a great likelihood that he is experiencing severe financial difficulties, so the neighbor may fear that you’re a process server or a bill collector. By giving them your card, you dramatically increase your chances of being called back later, either by the neighbor or by the owner of the abandoned property. Or the neighbors might eventually come into some new information about how you could contact the owner. If they have your card, they’ll be able to get in touch with you if they learn anything useful. If the neighbors deny knowledge of the property owner or his whereabouts, many novice real estate investors give up. But instead of thanking them and walking away empty-handed, you should ask one last follow-up question. Ask if the owner of the abandoned property was friendly with anyone else that they know of. While the answer might be no, it never hurts to ask because often people don’t volunteer everything that they know, or they may simply have forgotten. Either way, it could literally be a $64,000 (or more) question if it leads you to the owner of the abandoned property and you ultimately purchase it. If the answer is yes, you’ll frequently find yourself walking to a nearby 89


house with the name of someone who knows exactly how to get in touch with the owner. You’ll repeat this process at the next house and continue asking questions. Do you remember that famous television detective, Columbo? He was a great detective because he was relentless and never gave up. As a result his success ratio was extremely high. Yours can be high, too, if you are willing to pull out all the stops and not cave in when you get a no. A little persistence and creativity will go a long way toward reaching your goal of not only finding the owner of the abandoned property, but ultimately coming up with a deal that will put a boatload of money in your pocket. Years ago, my wife and I went to a weekend boot camp put on by real estate guru Dave Del Dotto. One of the classes we took was called “Creative Thinking.” As I recall, there were about 100 students in the class, with 50 on each side of the classroom and an aisle that went straight down the middle. Our instructor had a lot of creative techniques and ideas that he wanted to illustrate. In order to drive home his point, he had us do something highly unorthodox. He had us all stand up on our respective sides of the classroom. The 50 students on the left side of the room stood against the left wall at the rear of the classroom, while the others stood against the right-hand wall. Then he gave us our instructions. Starting with my group, he told us to go down the center aisle from the back of the room to the front. Then he hit us with a curve ball: We could go down the aisle any way we liked, except we were prohibited from doing it the same way as anyone who had preceded us. I was very well aware that there were 50 students on my side of the classroom, and I was also well aware that I’m a big guy and not very creative. I hustled to the front of the line so I could do something simple, just so I could get down the aisle and say I had done it. Every one of us on my side of the room got down that aisle a little differently differently from the person before us. The first person simply walked down the aisle, while the next person ran. Someone else hopped on one foot and someone else skipped. I

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saw someone do cartwheels down the aisle, while another person slithered like a snake. We were so proud of ourselves—50 people, 50 different ways to move down the aisle. Once we had completed our challenge and were standing in the back of the room, we had quite a laugh. We looked to the other side of the room at the unlucky 50 who had to follow us. We were pretty confident that we had pretty well burned up all the ways of getting down the aisle, and we waited expectantly to see what they could possibly come up with. But they had a trick up their sleeve, and they showed their ability to think creatively. They gathered together as one big group at the back of the room and discussed their strategy in a huddle. Then they implemented their master plan: They came down that aisle together in one big huddle, so there were only 51 trips down the aisle—50 by us and one by them. They taught us a very valuable lesson in thinking outside the box, and I’ve never forgotten it. Regardless of the situation, there is always a solution to whatever challenge might be facing you. So if you don’t initially succeed in locating the owner of the abandoned property, take a different approach. Try swinging by the property at various times of the day and night. You never know what an owner’s situation might be. You might find someone at the property (maybe even the owner) who can help you get the information you’re looking for. It’s also possible that the owners have very busy lives and the only time they can come by and check on their property is on the weekend. Be alert to any unusual activity that could be happening on or around the property, and you just might locate the owner. Another tactic you could try is to leave a note on the front door of the property with your name and contact information, letting the owners know you’re interested in purchasing it. I know of a man who had been trying to reach the owner of an abandoned property for some time, repeatedly driving by it to no avail. After about three weeks he was beginning to get discouraged. It mystified him because he knew there were still remnants of furniture inside the house, but he had received pretty solid

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information that the person who lived there was gone. On a whim, he drove by on a Sunday and noticed that a yard sale was taking place on the front lawn. Excited, he parked his vehicle, strode up the front walk, and began looking at some of the items for sale. He made his way over to where the owner was standing and he asked, “I see you’re selling everything—are you moving?” The owner replied, “Why, yes, we are.” It turned out that the owner had relocated to another area and had already purchased a new home. Now he had double trouble. He had two mortgages and only enough income to pay one. Obviously he had a major league headache on his hands. My friend took the initiative and simply asked how much he wanted for the property. It turned out that the owner was willing to let the property go for a very low price, so my friend left a yard sale with a signed real estate contract. On his way back down the walk after purchasing the home, he noticed a 1965 Mustang hardtop sitting in the driveway. He turned and looked back at the former owner of the abandoned property, smiled, and said “How much?” Long story short, he bought the Mustang, too. It’s important that you remain focused on the task at hand. If you insist on giving up prematurely, you’re never going to get decent results. However, if you’re willing to go the extra mile and leave no stone unturned, there’s no telling what results you can see. So take that extra trip around the block, and don’t be afraid to swing by the house at an unusual time of day or night. You never know what you’ll see; the answer could be sitting in the front yard, and you might never know it if you didn’t drive by. You might discover a gardener out cutting the grass or watering the lawn when you drive by. Don’t be afraid to stop and ask him about the owner of the property. He’s not being paid by reverse osmosis, so someone knows where that check is coming from. It’s up to you to ask all the right questions and find out what you need to know in order to make a connection with the owner of the abandoned property. Sometimes the information you’re seeking is right in front of your face and you wouldn’t know it if you didn’t keep an eagle eye 92


out at all times. Simply by looking around the property, you can find clues that a less astute investor might overlook. Remember, a great detective leaves no stone unturned. Take a look around the yard. Is there an old “For Sale” sign lying on the ground? If it has a telephone number on it, jot the number down. It may or may not work, but it’s worth a shot. Carefully look around the area near the front door. There may have been a Sheriff’s eviction, in which case a notice was probably posted on the front door or in the living room window, facing out, providing notice to the world that a legal eviction has been conducted at that property. If you do see a Sheriff’s notice, look for the case number on it. Then go down to the public records office and research that number to find out where the person lives who filed the eviction, and you might find the owner. Drive down to the county courthouse and do a manual public records search. Using the address of the property, you can locate the name of the owner. While you have the owner’s name and the address of the abandoned property, you still need their telephone number. Navigate to www.reversephonedirectory.com and put in the information that you have. Frequently, the reverse phone directory will give you the owner’s current telephone number. Sometimes, if all you have is the name of the owner and a telephone number, you can key that in and get the owner’s new address. This does not always work; however, while it’s a shot in the dark, it’s worth the cost of the bullet. If all else fails, you can always put the power of the federal government to work for you. I like to call this my secret weapon. Address an envelope to the vacant abandoned property. It’s not necessary to put anything inside the envelope, but if it makes you feel better, slip a blank sheet of paper inside. The U.S. Postal Service probably won’t tell you the owner’s new address if you call them and ask; however, if you write on the outside of the envelope “Address Correction Requested, Do Not Forward” and drop it in the mailbox, you might have your answer within a few days. If the Postal Service has a forwarding address on file for the owner of the abandoned property, they’ll print that information on your envelope and return it to you. Why? Because you 93


gave specific instructions on the front of that envelope that said “Do Not Forward.” You don’t want that empty envelope making its way to the owner without you; otherwise you might never locate him. You’re especially interested in the address if it is local to you, because you can drive over in person and discuss purchasing the abandoned property with the owner of record. For nothing more than the price of a first-class postage stamp, you can come up with the address of the owner, which can be used to turn a substantial profit with abandoned properties. In Chapter 6 I show you how to negotiate with owners and understand what they want so you can present an offer they can’t refuse.

The Tax Advantage You may feel like you’re banging your head against a brick wall trying to locate the owner of this property, and getting nowhere. Don’t despair, because locating the owner is nothing more than knowing where to look. Because every property in existence is subject to tax laws, an excellent place to look for information is at the various local taxing agencies and taxing bodies that are responsible for not only assessing the tax but also collecting it. Taxing bodies typically take a zero-tolerance policy toward nonpayment of owed taxes. If the owner isn’t paying the property taxes, the property is subject to foreclosure and sale at public auction. But first, let’s assume the taxes are current. Usually the person paying those taxes will be the owner of the property. You can usually find out who has been paying the taxes on a particular property by taking a trip down to the local courthouse and doing some simple research. The owner might also have an agent or representative taking care of this function for him. Locating the nugget of information necessary to find the owner of the property sometimes takes some digging, but if you dig long enough and deep enough you’ll usually find buried treasure. It’s possible that the owner of an abandoned property is really hard up and is not paying the taxes when due. If you 94


don’t pay your property taxes, you eventually run afoul of your local taxing body. When this happens a tax lien is generated and recorded against the property. The local taxing body isn’t content to just politely make a note that you owe them money and wait patiently in the hope that they’ll eventually get paid. They are bound by law to collect all taxes owed, and they take their mission seriously. As a result, tax lien certificates and tax deeds are made available to investors who want to turn a profit based on tax sales. Typically, taxing bodies will hold an auction, and for the amount of back taxes and administrative expenses owed on a particular property, they will sell an investor the right to collect the taxes and a hefty interest penalty. The owners of the property have a certain period of time to pony up the cash, pay the back taxes and expenses, and bring everything current. If they don’t bring their account current, the holder of the tax instrument can foreclose on the property and gain title. If you’re really serious about buying an abandoned property, you can seek out one of these tax instrument holders and find out exactly what they are interested in, because if they’re looking for a quick profit and don’t want to keep the property, you can offer to purchase their tax instrument. Essentially what you’re doing is buying the right to go after the owner of the abandoned property. Not only do you improve your bargaining position, but if for some reason you wind up not purchasing the property, you’ll still be compensated with a significant penalty interest profit for your efforts.

Other Public Records A title company can provide a wealth of information, particularly when you need accurate, current data on comparable sales. A title company has the best information because they’re the ones that actually record property deeds in the public record. They know exactly how much a property has sold for. I’ve said before that information is power, and I truly believe it. When you’re trying to buy an abandoned property you need reliable information, 95


because a single miscalculation can skew your numbers and destroy a profit margin. I’m sure you can tell by now that the public record is a tremendous resource to you as you search for the owners of an abandoned property. Sometimes the owner of a property that you’re interested in purchasing also owns property in other cities or states. Go to the public record. Not only can it pay off handsomely, it can be challenging, invigorating, and more than a little fun. I’ve told you about many of the more common ways of locating the owner of an abandoned property. There are also a number of methods that are frequently overlooked. Homeowners are generally civic-minded people. Whenever possible they tend to volunteer and they also tend to vote. Because this is also a matter of public record, all you have to know is where to look. A matter of 15 minutes can make the difference between locating the owner and turning a potentially huge profit, or giving up prematurely and walking away from untold profits because it seemed like just a little more effort than you were willing to put forth. What other ways can you think of that might yield information as to the location of the owner of an abandoned property? If you think about the basic demographics of the average homeowner, you can give yourself a whole list of places to look. The good news is most of these are matters of public record, which means you can find what you need if you waltz into the correct office to mine for the information you seek. As you know, an abandoned property can be indicative of a host of problems that someone could be going through. Financial problems are frequently precipitated by marital difficulties and strife, so it’s not unusual for people to walk away from a bad marriage at the same time they walk away from an unwanted mortgage. The county courthouse also keeps a record of divorce filings, so you may find the owner of your abandoned property listed in the divorce filings as well. If the owner of an abandoned property is having financial trouble or having trouble making their house payment, chances are they’re also having trouble paying their other bills as well. 96


When they can’t pay their bills on time, they tend to get sued. If this is the case, the owner of an abandoned property could be the target of a pending civil suit. Because of this, there’s a good chance that the court will have an up-to-date address on the owner of the abandoned property you are hoping to buy. Other public records that you can check include probate records and information related to where this individual could work, especially if they have any kind of public license. In addition, you could check and see if they’re in the military and possibly get a current address through that route. Besides the public records, online directories are also very good sources of information. I’ve had outstanding results using a number of public directories in the past, including www.InfoSpace.com, www.AnyWho.com, www.switchboard .com, www.yellowbook.com, www.DexKnows.com, and www .SuperPages.com. These are certainly not the only public directories available. If you think you need more, I suggest you try doing a Google search for online directories. I guarantee you won’t be disappointed, and you’ll be up to your eyeballs in online directories in no time. These online directories can help you find the property owner you’re looking for. Sometimes the owners of abandoned properties can be so difficult to locate that you begin to think they’re intentionally playing hide and seek with you. This isn’t the case; most of the time they’re just trying to put as much distance between themselves and their problems as they possibly can. Tracking down the owner of an abandoned property is sometimes a matter of luck. You can invest considerable time and effort in trying to locate someone and wind up walking away empty-handed. Was it Forrest Gump who said “Life is like a box of chocolates—you never know what you’re going to get”? I submit that tracking down the owners of abandoned properties is much the same. While you never know what you’re going to get, or how hard you’re going to work, one thing is abundantly clear: You could walk away empty-handed, but you could also wind up with the largest, sweetest, wealth-creating abandoned property imaginable. 97


Simplicity Itself Tracking down the owners of an abandoned property is not always such a difficult endeavor. Sometimes an abandoned property will fall into your lap, and the owner winds up being just a phone call away. I recall an abandoned property that I located in a very nice neighborhood. Most of the homes in the neighborhood were nicely manicured and the yards were very well kept. The houses all looked good and a few of them were even freshly painted. Not a single home was run down in any way, except my abandoned property prospect. This particular property met the first criterion I had for a potential moneymaking investment: It was the worst house in a good neighborhood, but the worst wasn’t at all bad. Because I liked what I saw, I searched the public records and quickly located the owner’s name. Often the owner of an abandoned property will have moved but stayed in the general area. I decided to roll the dice and simply dial 411 and request a current telephone number from the operator. I just about fell over when the operator gave me that number. I was doubly surprised when I reached the owner on my first try. Unbelievable as it might seem, dialing 411 has put me in touch with a local abandoned property owner more than just a few times. You just never know. While you can pull out all the stops with your creative, unconventional thinking, once in a while it doesn’t hurt to drive with the flow of traffic on the off chance that all the stars are in perfect alignment and harmony. Sometimes the most direct path to abandoned property riches is the most direct path. He answered the telephone on the first ring, and I quickly discovered he was a very kind gentleman who was eager to unload his property. In our 10-minute conversation I was able to establish that not only was he interested in selling the property, he would sell it to me on terms that I could easily live with. When I hung up the phone my knees were shaking and I was grinning from ear to ear. This was very early in my real estate 98


investing career, and I distinctly remember thinking that this was the most exhilarating feeling I had ever felt in my life. I can’t tell you how many abandoned properties I’ve bought since then. I get a rush every time I buy an abandoned property, but there was something very special about that one. It was just about as easy as dialing 411. Here’s the deal he offered me: The sales price would be $160,000, and he would finance the entire amount if I would agree to pay 10 percent interest. He also suggested that the entire $160,000 would be due and payable within five years. That wasn’t a bad beginning because I knew that I was planning to fix this property up and then sell it, so I wouldn’t be into that property for very long. As good as that offer was, I’m a firm believer that every offer could be better, and the only offer that has no chance of being accepted is one that isn’t offered. So instead, I offered to pay the owner 12 percent interest, all due and payable in five years, if he agreed not to take the monthly payment, but to add the payment due to the principal every month. So instead of making my payment, I essentially signed an IOU every month and added that amount to the principal. What this meant for the owner was a cash bonanza. He would receive an additional $266 per month, and if we were to carry the loan out for the full five-year term it would mean an additional $15,960 for the owner. That wouldn’t be a bad payday for the owner of that property if I were to keep the property for the full five years. The owner felt good about the deal because he knew that if for any reason he had to foreclose on me, he’d get the property back in better condition than it was in when he sold it to me. He was also very happy about receiving a 2 percent premium on the interest rate that I agreed to pay. I started working on the property immediately. I relandscaped the front and back yard, installed new carpet, made a few minor repairs, and then painted the house inside and out. I also added granite countertops in the kitchen because this wasn’t a bad neighborhood, and I wanted to give the house an added competitive edge. 99


Overall I spent less than $9,000 doing all the work. It took fewer than three months to fix the property up, and then I sold it. This beautiful home sold for $221,000 and I made about $50,000 profit in that three-month period. Increasing the interest rate from 10 to 12 percent cost me less than $800 because I turned the house around in less than three months. That was one of my favorite deals. How was I able to make this money? I did a very simple thing. I found an abandoned property that I liked, located the owner’s name, and did something unconventionally conventional: I simply dialed 411. In Chapter 6, I walk you through the very serious process of negotiating with owners once you locate them. It’s almost impossible to craft a winning abandoned property proposal if you don’t understand exactly what the owner wants. Every property owner is a little different, and their needs and wants are as varied as the people who live in any given city. Once you know what the owners want, it’s a lot easier to negotiate with them. So in Chapter 6, I show you how to discover those wants and satisfy an owner’s expectations as well as your need for a lucrative deal. The two do not have to be mutually exclusive, as I will prove to you.

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CHAPTER 6

Negotiating: Understand What Owners Want

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Other than public speaking, death, taxes, and an IRS audit, nothing strikes fear more quickly in the heart of the average person than negotiation. People are just uncomfortable with the concept of negotiating about anything. Most times, they would rather pay too much or get too little than have to negotiate for it. As a result, people tend to miss out on lucrative opportunities, get too little, or—perhaps worst of all—pay too much. Think of the last time you bought a new car. There you were on the car lot, with a nice shiny machine sitting there in front of you. You knew you wanted that car, but the sticker price was a little higher than you wanted to pay. The salesman looked at you, saw the desire in your eyes, and invited you inside “just to talk it over.” Once you were seated inside, the salesman probably crunched some numbers on an adding machine and told you what he could do for you. You looked at the offer and knew it stunk, but did you actually negotiate? I’d bet almost anything that you looked at his offer and did one of two things: (1) You immediately accepted the offer because you didn’t want to bother with negotiating, or (2) you tried to start the negotiating process by telling him you thought the selling price was too high. Then you probably asked him if that was the best he could do. Why would you begin the process and then wimp out?

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The reasons most people start to negotiate and then immediately cave are because they’re afraid of offending the other party, they don’t know how to negotiate, or they think it’s just easier to pay more than to put forth the effort necessary to ever get what they want. The same is probably true in this car-buying example. So what happens when a good negotiator uses psychological tricks? They win every time. My guess is that your car salesman probably went into an office and came back five minutes later with an accomplice, and when they double-teamed you with a sob story about costs, giving the car away, and so on, your pulse rate probably skyrocketed. When they came back with a figure of $500 less than the one they started with, you gladly accepted it. On the way home, you may have even patted yourself on the back about what a great job you did while you rehearsed the story you were going to tell your wife about how you worked over the dealership. But the truth is, you overpaid for that car, and in your heart you knew it. So what stopped you from getting the best deal you could have gotten? You were either afraid to negotiate or you didn’t know how, but either way, you overpaid. Regardless of whether you’re trying to negotiate for the best sale price on a car or with the owner of a really hot abandoned property, if you don’t know how to effectively negotiate, you’ll overpay every time. When it comes to abandoned properties, just because the seller’s back may be against the wall doesn’t mean they will automatically accept whatever cash you might be willing to throw their way. The seller has wants and needs that have to be met and emotions that will probably have to be massaged in order to arrive at a deal that you’re both happy with. A lot of different emotions are involved in negotiating with the owner of an abandoned property, the primary ones being fear and anger. If you don’t realize this, you’ll put yourself at a competitive disadvantage and handicap yourself from the outset. In this chapter I show you some solid negotiating principles that I’ve picked up through the years that you can use repeatedly in all phases and aspects of your life in order to (almost) always get what you want. 104


Key Principles When you sit down with the owner of an abandoned property, you must understand, first and foremost, that the seller is a real person with real emotions. If you walk in with the idea that you can trample on those emotions or dictate the terms of a sale simply because the owner is strapped for cash or facing some other financial problem, you’re going to find it difficult to succeed. There are a lot of negotiation techniques available, and unfortunately many are predicated on either working someone over or ripping them off. Some negotiators liken it to a military campaign: You have to hit hard with everything you’ve got, kill, fight, destroy—in other words, win at all costs. That’s a terrible tactic. It may work well in war, but to succeed in the game of negotiation, you have to practice—and perfect—the art of persuasion. Effective negotiation is not about winning at all costs. Instead, always make it your practice to ensure that both parties get what they’re looking for. Obviously both parties won’t always get everything they want, but if you concentrate on arriving at a consensus that satisfies both, everyone can walk away from the negotiation table feeling like a winner. In order to do that, you have to be able to assess what the other party needs. A key principle to remember when negotiating with the owner of an abandoned property is that both parties want something. You’ve decided you want their house; they’ve agreed in principle that they might be willing to sell it to you. From this starting point you need to give the seller enough to make it worth their while to sell it to you, while at the same time getting enough from the seller to make the transaction worth your while. Not only is it practical to structure a win-win transaction, it’s necessary.

Emotions in Negotiation Emotions play a greater role in the process of negotiation than you probably realize. If the owner of an abandoned property is 105


feeling angry or scared, it will directly impact what he thinks of your offer and how he responds to it. Negotiation would probably be simpler if we weren’t all so high-strung. In all stages of this process you need to be extremely sensitive to the seller’s situation. Sellers of abandoned properties are usually highly motivated and, as a result, are probably experiencing varying degrees of financial or emotional anxiety about having to sell. There is an excellent chance they will be at least a little touchy about a lot of things. Whatever you do, you don’t want to check your tact at the door. Keep it with you, or you’ll be picking it up when you sail through the door as you get tossed out. The way you speak to sellers will directly impact the ultimate success or failure of your negotiations. If owners perceive that you’re being pushy or that you’re not willing to listen to what they have to say, there’s a pretty good chance they’ll tune you out. If this happens, all the negotiating in the world won’t bring them back. If they’re not listening, there is nothing to negotiate. You may as well be talking to a brick wall. To prevent this from happening you need to have—or develop—a winning bedside manner. You want to develop as much rapport with the seller as you possibly can, as well as demonstrate to them that you’re actually listening to what they have to say. At the end of the day, if both you and the seller feel that you’ve gotten a deal you can live with, you’re both winners. That’s really the name of the game: structuring a win-win transaction.

Preparing to Negotiate There are a number of things you can do to mentally prepare yourself to negotiate. They sound like common sense but they are frequently overlooked. Make sure you are well rested, dressed comfortably, and not hungry. If this sounds like the advice you might be given the day before a test, you’re right. Negotiation is a test of your ability to remain cool under fire, to think on your feet, and to manage and massage the emotions of another person whom you don’t really know. Now that’s what I call a test! 106


It’s best to do a little research before you meet with the seller. Avoid walking into the property without having some idea as to what it’s actually worth. By knowing ahead of time what the property is worth you can keep that figure in mind as you negotiate with the owner. When determining the value of a single-family home or a small income property, it’s best to use a comparison approach, or even the replacement approach to value. If the property is a larger income property, such as an apartment building, you will need to use the income approach to establish its value. (See Chapter 9 for an explanation of these three approaches to valuation.) Regardless of what type of property you’re looking at, it’s essential that you establish exactly how much money you’re willing to spend. Otherwise you run the risk of throwing too much good money at a bad property, sort of like Congress throws good money at a bad program. Keep your own desires in check. It’s not a crime to like a property, but it’s akin to criminal activity to overpay for a property because you senselessly let your emotional desire to own it override your better judgment. Keep in mind that a property is merely that: a property. If you don’t buy this one, the sun won’t stop in its tracks. Life will go on just as it did before. Take a look around. There are always a few other properties you could buy if this one doesn’t work out.

Striving for a Win-Win Not long ago I was speaking at a real estate investment expo when a young couple, Michael and Susan, approached me. They were grinning from ear to ear and were anxious to share with me why they were both so happy. They began their story by telling me how much they enjoyed my seminar they had previously taken and the profound impact it had had on their lives. The week following that seminar, Michael and Susan located several abandoned properties that they were interested in buying. They bought two of them, and one of them changed their life. 107


The property was a three-unit apartment building in a decent part of town that had been both vacant and abandoned for several years. This property was unattractive and overgrown. As is the case with so many abandoned properties, there was trash strewn about in both the front and back yards, the windows and doors were boarded up, and junk mail was overflowing from the oversized mailbox. Michael and Susan started by researching the property in the public record. They discovered that these three units were all two-bedroom apartments, and each had one bathroom; the building had a total living space of over 3,000 square feet. They figured that because of the overall size of the building there might be an additional profit potential. Michael said my seminar had given them a strategy that they wanted to incorporate into this deal, a technique I teach that can take a moderate abandoned property profit and increase it exponentially. When Michael and Susan finally found the owner of this property, they were hesitant about making an offer. Like many owners, this man (Mr. Davis) knew nothing about negotiating. Fortunately, both Michael and Susan had learned a lot about proper negotiation techniques and how to use them. The first thing they had to do was determine what the seller wanted. Mr. Davis was an older gentleman living in a nice, small house about six miles away from the abandoned property. He had paid off the mortgage on the apartment building several years before and was living a very comfortable life. When they asked Mr. Davis what he wanted out of this transaction, his answer was typical of almost every seller: He wanted all cash. He was adamant that he did not want to carry a mortgage. Mr. Davis was retired; his home was paid off. His primary income was enough to permit him to buy food, pay all of his bills, and sometimes rent a movie. He didn’t need or want another monthly income. At this point in the negotiations Michael and Susan did something very smart: They asked him what he wanted to do with the money from the sale of this property. Mr. Davis responded that he wanted to fulfill a boyhood dream. It had always been his dream to travel the world. Now that 108


he was retired and had the time, he wanted to travel; however, he lacked the resources. Asking simple, gently probing questions during the initial phases of the negotiation process can pay huge dividends. Had Michael and Susan not taken the time to ask questions and, more importantly, to listen carefully to the answers, they could very easily have given up on the opportunity or been unable to structure a deal that would be palatable to Mr. Davis. Michael used this information to structure a deal that would give Mr. Davis the money he needed to travel, in a way that was sensitive to his needs. Michael pointed out that if Mr. Davis received all cash from the sale of property, he’d likely have to pay a significant amount of money in taxes. He also pointed out something that is true of people in general: When we have large amounts of money available to us, we tend to waste it on small, inconsequential expenditures. Before we know it, our cash is gone. Michael suggested to Mr. Davis that if he were willing to carry the mortgage on the property, not only could he save a substantial amount of money on taxes, but he could also receive a very nice monthly income that he could use for travel expenses. Regardless of what Mr. Davis might choose to do with the money in any given month, his monthly installment would be in his mailbox the very next month. Michael also pointed out that if he wished, Mr. Davis would actually be able to afford to travel to some different exotic location each and every month. Mr. Davis really liked that. There was another benefit to structuring the transaction this way that Mr. Davis really liked. Under provisions of the Internal Revenue Code, an installment sale naturally receives a favorable tax treatment. When you’re negotiating with the owner of an abandoned property—or, for that matter, any property—be sure to point out any opportunity they might have to save money on taxes. If there is one common thread that ties us all together in this country, it’s an aversion to taxes and a dislike of the Internal Revenue Service. When he looked at the possibility of carrying the mortgage on the property from this new and improved perspective, Mr. Davis quickly changed his mind. 109


Michael and Susan also did something else right. When you begin negotiations with the seller, you must resist the temptation to talk numbers before you’ve had an opportunity to get to the negotiation stage. When you’re looking at a property, sellers love to try to coax figures out of you, and they might be able to do it if you’re not prepared. As difficult as it may be, you absolutely must resist the temptation to mention numbers before you’ve had a good opportunity to go through the house and thoroughly look at it. If you make the mistake of mentioning a number before you’ve had a chance to do all of your homework, you might paint yourself into a corner that you can’t easily get out of. This is especially true if you mention a number that winds up being more than you’re willing to pay for the property. You might be able to retract that figure, but at the very least it’s going to be difficult to get the seller to agree to a reduced offer. Talking numbers too soon also dramatically increases the odds that the seller is going to be unwilling to negotiate further, or that you’ll reach a negotiation stalemate. It’s possible that such a blunder could plant seeds of doubt in the seller’s mind that could ultimately grow into full-fledged hostility toward you and your offer. If the seller begins to think you’re trying to take advantage of them or otherwise rip them off, negotiations could be stalled while you attempt to restore the rapport that you previously had. As they walked through the property, Michael asked Mr. Davis about the condition of the property. Instead of asking very pointed questions, he was almost nonchalant in the way he posed the questions. He asked about the roof, the plumbing, the heating, and the electrical system. He then asked about the overall condition of the interior. Specifically, he wanted to know about the condition of the kitchen and bathroom cabinets, countertops, and even the flooring. This is a good way to get the owner thinking about all the things that could possibly be wrong with the house, questioning in his own mind the actual condition of his property. If he begins to think that there is more wrong with his property than he originally believed, he’ll begin to think that it is not worth nearly as much as he had hoped. This is a mental leap you want the seller 110


to make. The better job you do leading him down this path, the better your chances of him making the jump to the conclusion that his property isn’t as valuable as he had previously hoped. Then Michael asked the magic question: “Mr. Davis, what’s the absolute least you’ll take for this property?” Then, instead of saying more, he simply waited. When you ask this question, you have to be quiet and wait for a response. This may be very difficult for you, but you need to bite your tongue at this point. Don’t say a word. If you have to pinch yourself or hop on one foot, do whatever it takes in order to keep your mouth shut. There is a very important psychological reason for this. Silence can be very uncomfortable, but it can also be one of your best friends. If you’re able to tough it out and wait for his response, you’ll win. Remember this rule: He who speaks first loses. If you make the mistake of speaking first, you will surrender your position at the head of the bargaining table. Once you put the seller in the driver’s seat, you may as well climb in the back and enjoy the ride, because you won’t have any input on where the car is going. In this case, Mr. Davis blinked first. He really didn’t have a clear idea of what his property was even worth, but he did know he needed to sell. Since he already had the mind-set that his property had a number of problems, he was more receptive to accepting a lower offer than he might otherwise have been willing to. Michael and Susan wound up buying his property for $217,000, and the seller carried the entire amount at 9 percent interest only, all due and payable in 10 years. The payments on the property amounted to $1,628 per month for Mr. Davis. Since Michael and Susan had already determined that they planned to hold the property and rent it out, they immediately went in and spruced it up. They were amazed at what a little paint and carpet can do for a property. Once it was fixed up and rented out, this abandoned three-unit building was worth between $286,760 and $312,000. After paying Mr. Davis the monthly mortgage payment of $1,628, they were able to pocket more than $1,000 each month. Because Michael and Susan took the time to learn how to set up a win-win transaction, this was a 111


very good deal for them, but it was also a very good deal for the seller because he wound up getting exactly what he wanted and needed from the property.

Establishing Rapport It’s usually best to personally negotiate whenever possible, because you can build rapport with the seller as well as get right to the heart of what it is that he wants out of the transaction. It’s also helpful to be able to look the seller in the eye and discuss the specifics of your offer. When you can see the seller, you can make assessments about what he is thinking based on physical characteristics, such as body language and mannerisms. Always keep in mind that what is important to you isn’t necessarily important to the seller. As the buyer it’s your job to try to figure out what it is that he wants and needs out of the property. Realize also that the seller won’t necessarily articulate exactly what it is they want. You’ll probably have to play detective once again. While it may be in your nature to dress up in a three-piece suit, that can put a seller off. It’s important to dress in a nonthreatening way and be as unintimidating as you possibly can. You’re just an average guy trying to buy an average house, so dress the part. I’m not saying you should wear jeans and a T-shirt, but business casual wouldn’t be out of the question. One of the most critical things you can do to put the seller at ease is to radiate friendliness and good cheer. You definitely don’t want to come across as a big-shot businessman, or he’ll tune you out. If that happens, your negotiations are going nowhere. Whatever you do, try to refrain from talking down to him. Do what you can to make him feel like you are equal, because in almost all ways, you are. If this is your first visit with the seller, it’s important to be patient and concentrate on building a relationship based on mutual trust. It’s highly unusual to get into serious negotiations on your initial visit. Instead, gather information about the seller

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and concentrate on laying the groundwork for future negotiations. Establishing trust and credibility with the seller is usually a matter of simple psychology and common sense. Don’t assume it’s okay to address sellers by their first name. For all you know, a seller could have a massive ego; you don’t want to do anything to unnecessarily jettison your chances to acquire their property. Unless or until they inform you otherwise, presume they prefer that you address them by their proper name. You’ve previously established that the seller is motivated to sell the abandoned property. Chances are you won’t have to browbeat them to find out what their needs and wants are. If you’ll simply close your mouth and open your ears, they’ll probably tell you everything you want to know—and more. Learn as much as you possibly can about the seller’s interests, because this information will come in handy when it comes time to craft a creative offer for the property. If you incorporate their interests in your offer, you’ll exponentially increase your chances of getting the seller to accept it. For example, if you learn that they like to gamble, you might incorporate the mention of a trip to Las Vegas or Atlantic City into your offer. As you walk through the property, inspect it as thoroughly as you possibly can. Fill out your property inspection checklist as you make a walk-through, to ensure that everything that’s wrong with the property—or that could be—is properly noted. Avoid relying too much on your memory, because most people’s memory is as fickle as the weather. While it’s important from a strategic standpoint to point out repairs that obviously need to be made, try to refrain from pointing them out with a statement. Instead, ask questions that allude to those problems. There is a very simple psychological reason for this. When you make a statement about property deficiencies, the seller tends to internalize these deficiencies and assumes that he is being attacked. Human nature is to get defensive when you’re being attacked. Instead, ask questions about any problems that you notice. This forces the owner to verbally acknowledge the problem. Each

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problem he verbally acknowledges helps build circumstantial evidence in the seller’s mind that the property might not be worth nearly as much as he had hoped. Good examples of questions you can ask are things like, “So how long has your water pressure been low?” or “How much do you think a new roof would cost?” While you certainly want to point out deficiencies, you don’t want to appear to be overly critical of the property. This can sometimes be a very difficult line to walk, but it’s absolutely imperative that you try. Whatever you do, never, ever criticize the seller about anything. Not only will you destroy the goodwill you’ve worked so hard to build with the seller, you’ll sabotage your negotiations and wind up making the seller less flexible, dramatically decreasing your odds of being able to get the seller to accept your offer. In some ways, negotiating with the property owner is a never-ending psychological battle. Sellers are often emotionally attached to their property, and you may have to counteract that attachment by utilizing psychology and reverse psychology. It’s important to let owners know that their property isn’t worth nearly what they had hoped. But once again, they’ll get defensive if you tell them this directly. Instead of telling them with words, use body language. It’s a much more powerful technique, and it spurs them into action. They’ll begin to worry that you might not be interested in their property after all. Keep in mind that they really want to sell it. If they think there’s a chance you might back out, they’ll probably do their best to sweeten the pot. There’s a simple yet highly effective way of communicating this to the owner: Simply act detached and disinterested in the property. When you do this, the seller will invariably want to sell you the property. They’ll lay on the charm and bend over backwards trying to convince you to buy. When this happens, they’re essentially eating out of your hand. The harder they are willing to work in order to sell you the property, the more likely they are to accept the terms of your offer, regardless of how unacceptable they would normally find your offer to be. When this happens, you’re in the driver’s seat to stay. 114


What Does the Seller Need? You must identify the needs of the seller so you can structure a win-win transaction. With time, you’ll begin to understand the various aspects of creative financing, and you’ll be able to put together transactions that will meet each party’s financial—and sometimes emotional or psychological—needs. If the owner of the property suddenly finds himself without a job, is going through a divorce, or has been informed by his employer that he is being transferred, he may become a very motivated seller with certain needs. Your job as a real estate investor is to create a mutually beneficial solution to his problem. Don’t be afraid to ask the seller about his financial needs when it comes to cash. Sellers will usually tell you that they want all cash. That’s the perfect opportunity to innocently ask what they plan to do with the money. The seller will usually respond with something like, “I just want to cash out of the property.” If this happens, you might say, “Okay, I can give you cash, but do you mind if we spread it out over a period of time? I was thinking maybe 48 to 60 months; would that be okay?” The owner might say he wants the cash in order to purchase another property. In this case, you might suggest a creative technique that could allow the seller to buy the new property with little or no money down. If he’s able to do this, his need for cash will be minimal, so you can then try to get the seller to carry your down payment. The seller may also tell you that it’s none of your business what they want to do with the money. Don’t be offended by this answer. Instead, simply respond, “I’m sorry for asking; I thought that if I had some idea as to what you were planning on doing with the cash, I might be able to structure a way where we can both get exactly what we want.” Several years ago I had located an abandoned property in a solid working-class neighborhood of Los Angeles. I thought the place had strong potential and I really wanted the property. The negotiations were going pretty well, but we seemed to be getting hung up on the issue of how much cash I was willing to put down. 115


The seller wanted $7,500 down and I wanted a no-moneydown deal. I tried multiple strategies to structure a deal that would allow me to buy the property without a down payment, but regardless of what I came up with he resisted. I tried to raise the interest rate and lower the price, but he still wanted a $7,500 down payment. So I quickly switched gears and raised the price with a corresponding drop in the interest rate. That didn’t work either. I began to think it just wasn’t going to happen, so I decided to take a few days to think it over. The seller offered to walk me out to my car and while we walked, we talked. About halfway out to the driveway I had an epiphany. It occurred to me that I had forgotten to ask him what he might do with the money if he were to receive a down payment. As is typical when I ask someone this question, his eyes narrowed slightly and he suspiciously asked, “Why do you want to know that?” I explained that if I had some idea about what he wanted to do with the money, I might be able to structure a deal that would work for both of us. At this point he said, “Well, I really need the money so I can buy a used car to get back and forth to work. Since I got laid off, one of our vehicles was repossessed.” I wasn’t sure what kind of vehicle he was looking for, but at the time my wife and I had an old Buick sitting in our driveway that we weren’t using. I asked him if he might be willing to consider taking that car as a down payment on a house. I called home and asked my wife if she would be willing to drive the car over so he could look at it. She brought the car by about 20 minutes later and he loved it. He looked under the hood, kicked the tires, and decided he’d like to at least take it out for a test drive. My wife and I stood in the front yard while he drove it. I started to worry when he still hadn’t returned after about 30 minutes. Just when I was convinced he wasn’t going to come back, he came around the corner and pulled in the driveway. He had a smile on his face when he got out of the car. At this point I knew I had him. I asked him if he’d like to go back into the house and talk about it. 116


The car was worth about $5,000 and he was willing to take it as a down payment, but he still wanted $1,000 down for the house. I smiled and asked him why, and he answered, “I want to pay for the insurance.” Well, long story short, I offered to pay for the insurance with my credit card and got my no-money-down deal. I guess it wasn’t technically no money down, but at least it was a no cash down deal. As you can see, negotiating with sellers is really nothing more than finding out what they want or need and then finding a way to fill that need. It’s not a highly scientific process, but it does require you to pay close attention to what they’re saying. Don’t expect to become an expert negotiator overnight. Successful negotiation is an art that can take years to develop. You won’t be an instant success, but with practice and time, you’ll learn how to win by listening to the subtle and not-so-subtle hints the seller gives you about what they want and need out of the transaction. In Chapter 7, I show you how to convince the seller to give you a lease option on the property. Lease options are a great way to acquire an abandoned property. Not only does a lease option give you a lot of flexibility, but it also gives you the ability to control a property without the burden of actual ownership. There is a right way and a wrong way to structure a good lease option purchase of an abandoned property. I show you how to successfully navigate through these very uncertain waters and craft a lease option that is guaranteed to be profitable each and every time.

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CHAPTER 7

Want an Option? Be Convincing

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To a direct marketer, it’s a keen understanding of what makes customers tick. To a politician it’s a slick turn of phrase. To Earvin “Magic” Johnson it was the no-look pass. To an abandoned property real estate investor, it’s the option. What am I talking about? Each of these examples names a tool that can make a job easier. In the case of abandoned property real estate investing, certain tools can allow you to make a tremendous amount of money. An option can not only drive you to greater profitability, but it can do so with almost no risk to you. On the surface, this sounds almost too good to be true. So what is an option and how does it work? An option is a potential purchase agreement between two parties: the optionor (seller) and the optionee (buyer). In exchange for a fee the optionor gives the optionee the legal right to purchase property within a fixed amount of time at a price and terms determined when the contract is originally signed. The fee given to the optionor is sometimes referred to as the option fee; other times it may be referred to as consideration. The option is closely related to the lease option, which is actually two agreements wrapped up into one: the lease and the option. The option is packed with benefits for you as an investor because it gives you an extended period of time to decide whether a property purchase actually makes sense to you. If you determine that an abandoned property purchase does make sense you have the entire option period in which to execute the purchase. 121


However, you might decide you don’t like the color of the paint on the outside of the house, the neighbors, or the market value of the property. In this case, you have the legal right to walk away without penalty (other than losing any option consideration paid when you executed the agreement). There are precious few legal contracts that give you this kind of flexibility. In many ways it’s a try-before-you-buy contract. You couldn’t get away with this in most other contracts; however, with an option contract it’s almost expected (and even hoped for by some sellers). There’s another benefit to you with an option contract. The seller is on the hook for the duration of the contract, so although you can decide to walk away at any time, the seller doesn’t have that flexibility. If for any reason the seller tries to walk away from the deal, you can see them in court. If you decide to walk away, all you need to do is say “See ya!” Still, if you decide to walk away you will lose your option fee, which can sometimes be a substantial amount of money. Later in this chapter I show you how to minimize your exposure in this area. There are two other things you stand to lose if you walk away: You lose the time and the energy it took for you to put the deal together in the first place. The popularity of the option comes and goes, but its overall use seems to rise and fall with economic uncertainty and a soft real estate market. This is good for you because if the abandoned property rises in value, you can exercise your option and make the purchase. If, however, something unforeseen happens (like a toxic waste dump being built in the neighborhood), you can either attempt to renegotiate the contract or you can simply walk away. This is a great safety net for you because it gives you plenty of time to think things over. When the seller gives you an option on a property, he’s letting you tie his property up for the duration of the option contract. If someone comes along and offers him more money for the property, he can’t sell it to them—he’s under contract to sell that property to you for the price and terms spelled out in the option contract. The ability to tie up a property at today’s price and pay for it years later is extremely valuable! Remember, real estate 122


tends to go up in value. That’s why we don’t mind giving the seller an incentive in the form of an option fee. However, an option can also be a great deal for the seller. Let’s say that you negotiate a three-year option with a seller on an abandoned property. Your creative mind will probably start thinking of ways you can develop the property during the option period to turn a quick, strong profit. Many of these plans might involve spending money. You might have surveys done, apply for permits, or even have architectural plans drawn up. It might be necessary to invest money just to test the feasibility of your project. You may find yourself in a position where you’ve put a lot of money into a project with no real assurance that you’ll ever reap a financial reward. This is suddenly looking like a cherry deal for the seller because he stands to make money regardless of what happens. If you exercise your option, the property sells and the seller gets paid. If you walk away from the property, not only does the seller keep the property, and your option fee, but he could find himself in position to get the benefit of all of your work. The time and expense of applying for permits, meeting with expensive architects, and every other expense incurred when putting a project together has a monetary value. I’m going to introduce you to a technique that will swing the pendulum in your favor. Instead of giving the seller all cash as an option fee, let’s get creative. Let’s offer the seller no cash at all. Your option fee will be the value of all of your plans, permits, feasibility studies, and so on. After incurring these necessary expenses, you might decide not to pursue the project. Those plans will do you no good, so why not see if you can get some mileage out of them by convincing the seller to take them instead of cash? Let’s structure it so that it becomes a win-win deal. We’ll tell the seller that, if we do exercise our option, we’ll pay the option money along with a bonus amount at the time that we exercise our option. This keeps the money in our pockets to use as we please. Make the bonus amount attractive, maybe 10 to 20 percent on top of the agreed-on option amount. If we do not exercise our option, we don’t pay any cash. Instead, the seller will get the 123


benefit of all of our work—the plans and permits, the feasibility study, and so on. It’s possible that the seller will go for this because they might love your plans for the property. They might decide to take your idea and run with it, especially if they think that it will make them money. Even if the seller decides not to pursue your plans, it’s possible they might find a third party with money who could see the project as a winning idea. If this happens, the work you invested will make the abandoned property more valuable to the seller. If at all possible you should encourage the seller to accept these items instead of an option fee. As I’ve demonstrated, they have a tangible value. Regardless of what the seller ultimately decides to do, don’t give these items away and then pay an option fee on top of that.

A Sample Option Purchase Let’s look at an example of an option at work. Assume for a minute that you’ve found an abandoned property on the outskirts of a growing metro area. After checking with the city’s planning department you arrive at the conclusion that the property is in the direct path of growth. You’re convinced that this could be a real moneymaker. You’re excited! In order to get the ball rolling you approach the owner to see if he might be interested in selling. Because he is interested, you begin negotiations. It doesn’t take long for you and the seller to agree on a sales price of $160,000. In exchange for an option fee of $5,000 the seller agrees to a five-year option on the property. You and the seller sign the contract and you’re both very happy with the price and terms. You are in a superior position because you know that your newly acquired abandoned property is right in the path of the city’s growth. While you were at the city planning department you decided to look up the timetable. What you saw shocked you. Within the next five years some very significant expansion is expected to take place. 124


If this happens, your abandoned property stands to become very valuable. At the same time, if it turns out that you are wrong and property values remain stagnant or even fall, your only real risk is $5,000. If you spread that out over five years, you’re only talking about a few cups of coffee a day. Once you factor in the potential payoff, you decide the risk is minimal. As you monitor the city’s expansion into the outskirts of town, you’re amazed at how rapidly this growth is taking place. Within a year a few housing developments begin to dot the horizon. Two years later you’re shocked to discover that the feeder roads on the outskirts of town have been widened and there are even more housing developments. You were right! The city’s line of growth is bearing down on your little abandoned property. It won’t be long now. Four and a half years ago you were almost embarrassed to give the owner of the abandoned property $5,000 for the option right to purchase his property from him. When you look around now, you don’t even recognize the area anymore. What were once open fields are now business parks with available office space; several shopping centers now grace the area that used to house a mobile home park and a used car dealership. Next week is the grand opening for a brand-new, state-of-the-art fire station. You decide you’ve waited long enough. You do a little research and your eyes just about pop out of your head. Can this be right? You double-check with the appraiser just to be certain that his figure is correct. Yes, it’s right. The value of your abandoned property has shot up to $383,000. With a grin on your face you pick up the phone and call the seller to let him know you’ve decided to exercise your option after all. You stand a good chance to earn over $200,000. That’s not a bad return for only $5,000 in option money. Investing in abandoned properties is so lucrative—and the profit potential is so great—that you’ll probably want to exercise your option whether it turns out your abandoned property is in the path of growth or not. During the option period, property taxes, insurance, and maintenance expenses are all paid for by the owner of the property. That’s not you. You only have an option right to buy the property at some time in the future. Over five 125


years, a lot of bills can roll in. Aren’t you glad you don’t have to pay them? As lucrative as this situation was, it could have been even better. Pretend for just a minute that you had planned to tear your abandoned property down and build condominiums in its place. Assuming that you would have spent about $10,000 between surveys, architectural plans, scale models, and the like, you might have offered to share all of your plans instead of the cash. Because you had such lofty plans for the property it only makes sense that the seller might be interested in trying to turn a profit just in case you’d stumble. Considering your plans might be worth twice as much as the option money, it could be worth a shot. What follows is an example of a good way to write up an option contract for this situation.

Purchase Agreement and Receipt for Deposit The following was received from investor “Your Name,” hereinafter known as “Optionee,” the sum of one dollar ($1.00) as deposit for an option on the property at 142 Abandoned Property Lane, Anytown, Any State, USA, hereinafter known as “property,” under the following terms and conditions: 1. Buyer is to have an option to purchase property for the price of one hundred and sixty thousand dollars ($160,000) for five years from the date of acceptance. 2. In lieu of an option fee, the optionee promises to deliver all plans and permits, and any other instruments accumulated or created that were accumulated or created with the intent to bring increased value to property, to optionor for the use of optionor in case optionee should decide not to exercise his option. 126


3. The sales price is to be paid at close of escrow. 4. Buyer to get all inspections, reports, etc., done before close of escrow and sale is to be strictly “as is.” Remember, option consideration does not have to be cash. The law only requires that option consideration be something of monetary value. For all practical purposes it could be the keys to your car (assuming that it has some value) or your part of a timeshare in Somalia. In addition, just because you backed out of the plans to improve an abandoned property doesn’t make it a bad deal for the seller or another buyer. Someone else could effectively pick up where you left off and still turn a tidy profit. Convincing the owner of an abandoned property to give you an option is really nothing more than matching the seller’s needs to your desire to own his property. Sometimes it’s good solid planning on your part and other times it seems like you simply fell into a very lucrative deal. Don’t rely on Lady Luck to smile on you, because if you do, you’ll probably be pushing up daisies before you turn a profit.

Another Great Option Story One of my students, Edgar, told me an interesting story. Several years ago, having a little time to kill, and the courthouse being just a few blocks away, Edgar decided to pop in and do a little research. While he was there he stopped in at the county planning commission office. For the previous two years Edgar had been following the story about a new airport the county was planning to build. He decided to check out the map of the proposed airport while he was there. The first thing that this young man noticed was that the new airport was going to be huge—more than twice the size of the last one. He was very interested in the area because he had been looking at a few abandoned properties in that 127


neighborhood. It was a borderline area, but he thought that if by some stroke of luck he was able to pick up a property in the area for the right price, he could make quite a bit of money off the transaction. The second thing Edgar noticed was that there were a number of new developments planned in the area surrounding the new airport, including hotels and a number of condominium complexes. The economy in this area was about to come full circle and he was bound and determined to get his share. Armed with this information, he drove out to one of his target properties and took a look around. The property he had in mind had been vacant for several years, and weeds had overtaken the front yard. Edgar spoke with the next-door neighbor, who told him that the owner didn’t live far away. Edgar paid a friendly visit to the owner. After a brief conversation, the owner informed Edgar that, while he was the owner of the property, he wasn’t sure what he had in mind for it. The owner felt that it was going to cost quite a bit more to fix up than he had available, and he wasn’t even sure if he wanted to keep it any longer. Edgar mentioned the possibility of optioning the property. The owner wasn’t opposed to the idea, but he couldn’t see a real point because it needed what he considered to be quite a bit of work. The owner said he was willing to talk about it. When Edgar asked him how much he wanted for the property, the owner said he wasn’t really sure but he thought it was worth about $145,000. From the research that Edgar had done, he knew the actual value of the property was closer to $190,000— and that was at the low end. They settled on a price of $140,000, and Edgar also negotiated for a five-year option. The owner seemed more interested in knowing how much he could get for an option consideration fee than for the sale of his property. Initially he wanted $10,000, but he realized that wasn’t likely to happen, so he backed off that figure very quickly. He seemed pretty firm that he wanted $5,000. Edgar didn’t want to pony up any cash on the front end of this deal, so he had to use a little creativity. Edgar learned 128


that the owner had a daughter in Chicago whom he hadn’t seen in several years. Instead of cash, Edgar offered to buy him a round-trip plane ticket to Chicago so he could visit his daughter, and for good measure, Edgar included an additional $1,500 in spending money that he could use for incidental expenses on the trip. But he didn’t stop there. Since Edgar knew he would be spending about $10,000 on architectural plans, permits, variances, and so forth, Edgar offered instead to let the owner have his entire work product in the event that he didn’t exercise his option. The owner agreed. Over the course of the next few years the area really came to life. Construction of the airport was well under way and the new hotels had gone in as well. But then something very interesting happened. Edgar learned there was another real estate investor in the area who held options on six other properties—all of them surrounding the property on which Edgar held an option. The value of the property had increased to well over $350,000, but that investor needed Edgar’s little abandoned property to complete his project. What a great position to be in. Because Edgar knew that the investor needed his property, Edgar was able to negotiate a very good deal for himself. He and the other investor agreed on a great price with great terms, then Edgar informed the owner that he was exercising his option. They had a double closing, so Edgar never really took physical possession of the property, but he still sold it for $415,000. Could he have made more? Without a doubt, he could have made a lot more, because that investor really needed that abandoned property to complete the puzzle that would make it possible for him to make a lot of money. But Edgar was very happy. In the end, he pocketed over $250,000 and all it cost him was a plane ticket to Chicago and a little bit of spending money. The original owner of that abandoned property was happy because he got his $140,000, and the real estate investor was ecstatic because now he could move forward with his condominium development with the full knowledge that when it was complete he would make a bundle. 129


That’s the beauty of investing in real estate, especially abandoned properties. By using the option to leverage opportunity, you can create a great win-win deal without the risk. You can do something nice for your fellow man, improve lives and neighborhoods, help the economy, and make a huge deposit into your favorite bank account. There is almost no work involved, and at the end of the day you get to go to sleep with a warm fuzzy feeling inside.

Selling an Option Sometimes you can get an option on a property, not knowing for sure that anything will ever come of it. Of course you probably wouldn’t want to run all over town optioning every piece of property you see in the hope that it might be a lucrative deal some day. But when good solid research indicates that an option is in order, by all means do it. If you have an option on a property that is in an up-andcoming neighborhood, you stand to make a lot of money. Occasionally your timing might be a little off and you find yourself short on the cash needed to exercise your option, at the same time that you are long on opportunity for profit. Whatever you do, don’t fumble your chance to make money just because you don’t have cash in the bank. Instead, punt for cash. If you don’t have the cash to make a deal happen, you can always locate someone who would love to have a property like the one you have optioned. Simply make a deal with them by selling them your option, or even trading it for a piece of property that they own. Is there any way in the world that somebody would ever trade an existing piece of property for an option on an abandoned property? You bet your life there is! If you hold an option on an abandoned property in a really hot area, that option is almost as readily spendable as cash. You increase your chances exponentially if the property is worth considerably more than the option price, and an investor decides they really want it. Remember

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what we said in Chapter 6 about negotiation? Human emotion plays a huge role in our decision-making process. If another investor looks at your abandoned property and sees dollar signs, you’ve got a lucrative transaction in the making. It would do you no good to hang on to an option on an abandoned property if you don’t have the cash to exercise your option. If you don’t do something proactive—or get some cash in the bank before the option expires—not only will you lose your option consideration, but all you’ll be left with will be a worthless contract with which to paper your wall. If you’re in doubt about how to locate someone to take your option off your hands, look no further than your local real estate investors club. If you announce your need, other investors will be clamoring for the opportunity to get their hands on your abandoned property. Always remember, good deals don’t chase money. Money chases good deals. You shouldn’t have any trouble finding another investor who will take your profitable option in exchange for a property you can buy with no money down, or even cash. If you do this, you’re a winner because you’ll be left with cash or a workable deal that you don’t have to split with anyone. And it will save you the trouble of putting a useless option contract on the wall of your home. So how does this process work? The first step, which you’ve already completed, is to find a good abandoned property and convince the owner to give you an option to buy it at less than fair market value. The second and third steps involve finding a property you want to buy from an investor who is willing to sell his equity in exchange for your option. As long as there is significant profit in your option and the investor has a property that you want, you can both wind up very happy. Your primary investment strategy might be to always buy property on a no-money-down basis. Obviously you can’t buy every property you would like to because you have financial and other practical limitations as to what you can do. Options help you split the difference. You might find that you just don’t care to own a particular property, but at the same time, you wouldn’t mind turning a profit from that property. What better way is there

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to make money than to control the future appreciation in value of an abandoned property without having to take on the burden and expense of ownership? In real estate, a lot of people have made a boatload of money selling real estate courses promoting the idea that the three most important factors critical to your success are location, location, and location. While I agree that location is important, I think that timing is even more important. Let me explain. Pretend for a minute that you found a property you could option for five years for only $25. It’s worth $200,000 and you can buy it for $175,000 when you exercise your option. Five years pass; you have no money, and you don’t know of anyone to whom you could sell your option. The expiration date arrives and your option expires, unexercised. Two days later, not only do you come into enough money to exercise that option, but you learn that the value of that property has gone up overnight to over $1 million. Wouldn’t you agree that timing has suddenly become important? My best advice to you when optioning a property is to time your jump so you can capture the maximum amount of appreciation without sticking your neck too far out over the line. Your goal is to maximize appreciation while minimizing your risk and obligation. While you’re aiming for perfection, you can settle for satisfaction and be perfectly happy with the cash you receive.

Other Option Techniques Here’s another situation that may come up when dealing with options. You may find what looks like a great option opportunity on an abandoned property, so you sign on the dotted line, only to realize later near the end of your option period that you’re not going to be able to exercise the option before it expires. You didn’t plan it this way; that’s just the way it worked out. Instead of crying in your coffee, use your creativity to come up with a workable solution. One way of doing this is a three-way exchange. Let’s refresh: You have an option that you can’t afford to exercise, and you have located another property you wouldn’t 132


mind owning, but you don’t have the cash to buy the second property, either. Check with the owner of the second property to see if he might be interested in the property on which you have the option. There are no guarantees, but it’s possible that he may be sick and tired of his own property, or he might decide he likes the potential he sees in the property on which you hold the option. If he likes it, you may have a deal right off the bat. If he’s not interested, you could simply locate a third person who has cash and wants a house. In that case, you simply play middleman, bring the two parties together, and get the deal done. Here’s another idea that I call the contingent sale. Let’s say you have an option on a house that can make you a small profit. You’ve already decided that you’ll sell the house if you exercise your option. We’ll call it house “A” for clarification purposes. And let’s say there’s another house that you’ve found, and you think you’d like to buy it. We’ll refer to this house as house “B.” First you tie up the house you want, house “B,” with an option. You get the seller to sign a contingent sales contract, giving you a certain amount of time to sell house “A” before closing escrow on house “B.” You also inform the seller that this transaction is part of an IRS 1031 tax-deferred exchange. Then you go ahead and exercise your option on house “A.” You take title to the property and immediately start looking for a buyer for it. When you find a buyer, you inform him, too, that this transaction is part of a 1031 tax-deferred exchange. Then you work out the following transaction on paper. The person who wants to buy house “A” buys house “B,” the house that you want, instead. Let’s say that he buys it for $165,000 with $15,000 down and a $150,000 mortgage. He then turns around and exchanges that house for house “A,” which you are selling for $140,000 with no money down and a $140,000 mortgage, even though the house is actually worth $155,000. You and the buyer both agree on this. He then gives you the deed to his house, house “B,” and you give him the deed to yours, house “A.” You get the house you want, everyone else gets what they are after, and everyone is happy. It is the same way that most exchanges work. The only difference is that first you have to exercise your option on house 133


“A” and take title to the property so you can exchange it. But by doing this you get the full benefit of the profit you earned with your option. You then use this profit as your down payment on the property you want, house “B.” Here’s how it looks on paper. House “A” Property Value

$155,000

Purchase Price

$140,000

Existing Loan

$140,000

Equity

$15,000

House “B” Property Value

$165,000

Purchase Price

$165,000

Down Payment

$15,000

Existing Loan

$150,000

Equity

$15,000

The three contracts you would need to write up would look something like this: House “A”: Purchase Agreement and Receipt for Deposit (Option) Received from “Morton Middleman,” hereinafter known as “Buyer,” the sum of one dollar ($1.00) as deposit on the purchase price of one hundred forty thousand dollars ($140,000) for the property known as One Three-way Exchange Thruway, Anytown, Any State, USA, under the following terms and conditions: 1. All-cash to seller at close of escrow. 2. Contingent upon property appraising for at least one hundred fifty-five thousand dollars ($155,000). 134


3. Contingent upon buyer and property qualifying for a loan in the amount of one hundred forty thousand dollars ($140,000) at prevailing interest rates and terms within twenty (20) working days of acceptance. 4. Contingent upon buyer’s approval of a complete structural inspection report to be done at buyer’s expense within 10 days of acceptance. 5. Seller to deliver property in clean, livable condition. House “A”: Purchase Agreement and Receipt for Deposit Received from “Balthazar Buyer,” hereinafter known as “Buyer,” the sum of one dollar ($1.00) as deposit on the purchase price of one hundred fifty-five thousand dollars ($155,000) for the property known as One Three-Way Exchange Thruway, Anytown, Any State, USA, under the following terms and conditions: 1. Buyer to make cash down payment of fifteen thousand dollars ($15,000). 2. Buyer to assume existing loan in the amount of one hundred forty thousand dollars ($140,000). 3. Seller to provide a clearance from a licensed pest control contractor. 4. Buyer agrees to participate in a tax-deferred 1031 IRS exchange at no cost or risk to Buyer and to close escrow simultaneously with escrow number 531234 at Anytown Title Company, Anytown, Any State, USA. House “B”: Purchase Agreement and Receipt for Deposit Received from “Morton Middleman,” hereinafter known as “Buyer,” the sum of one hundred dollars ($100) as deposit on the purchase price of one hundred sixty-five thousand dollars ($165,000) for the property known as Two Three-Way Exchange Thruway, Anytown, Any State, USA, under the following terms and conditions: 135


1. Buyer to make cash down payment of fifteen thousand dollars ($15,000). 2. Buyer to assume existing first loan in the approximate amount of one hundred fifty thousand dollars ($150,000). 3. Seller to provide a pest-control clearance. 4. Seller agrees to participate in an IRS 1041 taxdeferred exchange at no cost to Seller and to close escrow simultaneously with close of escrow number 531233 at Anytown Title Company, Anytown, Any State, USA. 5. If the balance of existing first loan should turn out to be less than one hundred fifty thousand dollars ($150,000), the buyer’s down payment will be lowered accordingly. As you can see, there are a lot of different methods and strategies you can use in order to convince the owners of abandoned properties to give you an option on their property. One of the most important things you mustn’t lose sight of is the fact that an option is nothing more than a tool and, as with any tool, if you use it incorrectly you can smash your thumb. You don’t want the option to be your number one strategy for acquiring abandoned properties. Your first strategy should always be a no-money-down deal, followed closely by a lowmoney-down deal. However, if an abandoned property is located in an area that is up-and-coming or you think its value will dramatically rise in a very short period of time, it makes perfect sense that you’ll want to ride the wave as far as it will take you. An option makes very good sense when utilized as just one part of your overall abandoned property investment strategy. You don’t want to lose your shirt, and if you use some common sense you’ll do very well using options to minimize your risk. If you play your cards wisely, and use options as a tool for reaching your financial goals, you, too, can reach the abandoned property promised land, a land filled not with milk and honey,

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but an ever-increasing mountain of cash and a fat real estate portfolio. In order to maximize the world of opportunity in abandoned property investing, you need a full stable of creative financing tools at your beck and call. In Chapter 8, not only do I provide you with multiple creative techniques, but I give you real-world examples that will help you capitalize on this very lucrative opportunity. So turn the page, and let’s get started.

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CHAPTER 8

Creative Financing Techniques

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The average real estate investor launches his investing career with big dreams and high hopes, and boldly strikes out on what he thinks is a sure pathway to success, only to run into a brick wall on his very first deal. Abandoned property real estate investors are no different. The boogie man that has stopped so many promising investing careers before they’re even fully launched isn’t some hideous looking creature from a swamp, but instead is a reasonable sounding, pleasant looking individual from your local bank. Your local banker will do more to stifle your big plans than almost anyone else you will encounter. The reason is simple. Bankers are married to the idea that the only legitimate way of purchasing real estate is to obtain traditional bank financing by putting a considerable amount of money on the table as a down payment on the property and financing the remaining balance over a 20- or 30-year term. While this thinking is not very creative, I can understand it. By promulgating the idea that traditional financing is the only way to buy real estate, not only are bankers giving you bad advice, but they’re laying the groundwork for future loans and massive profits for themselves. That’s their world; to deviate in any way from conformity is unacceptable. Creative financing techniques aren’t a part of their world because they don’t stand to make any money by promoting them. I want to ensure that you don’t make the same mistakes that so many others have made and continue to make. Not only is 141


creative financing viable, it’s an easy way for you to get rich investing in abandoned properties. We are all taught from an early age that conformity is good, and that to deviate from what is considered normal is somehow radical or bad. The natural progression calls for you to grow up, attend a trade school or college, get married, work for the same employer for 40 years, retire, and die. People who order their lives a little differently are considered odd ducks. For instance, if someone deviates from the norm by returning to college for a degree in their forties or fifties, a lot of people chuckle and wonder what’s gotten into them. That’s probably the reason your family and friends reacted the way they did when you told them you’re going to get rich investing in abandoned property. Any mention of creative financing can seem strange to people because it’s unusual and it doesn’t conform to the way it’s always been done. However, creative real estate transactions take place frequently and the practitioners don’t always realize they’re being creative. Let me give you an example. John and Ray have been lifelong friends. They were on the same ball teams together, were college roommates, and even went to work for the same company after college. One day they were talking and they struck up a deal to trade John’s mountain cabin for Ray’s hunting lodge. They didn’t know it, but that’s a creative transaction. Yet if you as a real estate investor were to approach John and tell him you were interested in buying his cabin, but you’d like to do it creatively, there’s a strong possibility that he would look at you like you were nuts and tell you that he’s not interested in a creative purchase because he doesn’t believe in them. Why is this? I think a lot of people have a basic misunderstanding of what creative financing is. Sometimes even real estate investors are oblivious to the fact that they are doing creative deals. My mentor, Dr. Albert Lowry, talks about a couple of his students who march to the beat of a different drummer. Before Robert and Ella Hill launched their real estate investing careers, they were already successful with a business they previously owned. The Hills were convinced they could get rich by investing 142


in real estate so they sold their business and dedicated all their energy to being successful investors. In their first 18 months they had done extremely well. Not only had they made themselves a lot of money, they were able to live their dream. A year and a half isn’t very long, but during this time they had accumulated more than 180 units and they managed all their own investments. Things were going great; they had experienced positive cash flow and they loved what they were doing. But there was a problem. As happy as they were with their results, they were not convinced that they were truly using creative techniques to buy their properties. “We didn’t buy all of our properties with no money down,” they said. “We bought most of them with zero down, but with a few of the properties we had to give the seller some cash. So even though they were pretty good deals, they were not no-money-down deals.” When Dr. Lowry heard their story he tried to reassure them that just because they had put cash down on some properties, it didn’t necessarily mean they had made mistakes. In the spirit of full disclosure he also confessed that he was occasionally willing to put down some cash depending on the situation. Dr. Lowry told the Hills that as long as they got decent terms and had positive cash flow, it really didn’t hurt to use some of their own money as a down payment if they could afford it. “Oh, no,” they replied, “we didn’t mean we had put up any of our own money. When we had to give the sellers cash, we never took it out of our own pockets. We borrowed it!” The Hills didn’t realize it but they were putting together creative, no-money-down deals. They didn’t use their own cash, but instead found other ways of providing sellers with the cash they were looking for. You can get rich using these creative finance techniques to buy abandoned properties, but you may have to be patient with sellers and bring them up to speed by explaining what creative finance is. So don’t be afraid to play the part of teacher when you present these deals. By giving the seller a little more information, it will give you a better chance of buying abandoned property with creative financing techniques. 143


In previous chapters I’ve shown you how to locate lucrative abandoned properties in your neck of the woods, how to use good old-fashioned gumshoe detective tactics to track down the owners, and how to negotiate win-win purchase contracts on these properties. All that’s missing now are some creative financing techniques you can use to put together winning offers. This final piece of the puzzle is critical because without it you’ll be severely hamstrung and standing in line at your local bank with your hat in your hand, begging your banker for the privilege of paying unnecessary and outlandish fees. In this chapter I show you a few of my favorite creative financing techniques that you can use to build a fat abandoned property investment portfolio. While there are many such techniques, you’ll probably find a few pet financing strategies that you particularly like that tend to work very well in your geographic area. When you’re putting together a deal, don’t be afraid to think outside the box and imagine alternatives to what you’re used to, because the greatest wealth isn’t always accumulated by continually doing things the same way. There may be more than one path to your success. If you encounter a roadblock on the path you’re on, you have a choice: You can wait for traffic to clear or you can seek a different path. This chapter is dedicated to showing you alternative ways of getting to the same destination. Familiarize yourself with as many creative financing techniques as you possibly can, because you may find yourself in negotiations with the owner of an abandoned property where your well-planned offer is rejected. You don’t want to expose yourself as a novice investor by having to refer to a book before countering with a new proposal. If you have at least a working knowledge of a number of different creative real estate financing techniques, you’ll be able to immediately select a different technique that will be more suitable for your given situation. You may have heard that sellers won’t do creative financing because they’re afraid of not getting their money. The reality is, you can buy real estate on a no-money-down basis, using creative financing techniques, and you can do it every day of the week, with ease. The reason is simple. We’re not dealing with a normal 144


situation, where John Doe decides he wants to sell his house, so he either lists it with a broker or puts a sign in the yard and sells it himself. John Doe is not stressed, distressed, broke, or maligned, and he is in no hurry to sell his house. This kind of seller can take his time and patiently wait for the perfect offer to come along. But with an abandoned property, a highly motivated individual is facing unique, motivating factors. First of all, the owner of an abandoned property has already walked away from it, which indicates a certain level of frustration with the property. He may be going through a nasty divorce, or may have lost his job or been transferred to another state, or maybe he just can’t keep up with deferred maintenance on the property. In any event, some switch in his mind was somehow tripped that caused him to walk out the door, climb in his car, and drive away. Now he’s in a world of hurt. Besides facing the problem that pushed him into walking away from his property, now he has a mortgage payment due the first of every month, as well as property taxes and homeowner insurance premiums. If he doesn’t do something quickly, the friendly banker who was kind enough to loan him the money on the house is going to sink his hooks into him. When this happens, he faces complete financial devastation. If the banker doesn’t jump in line looking for money, it’s a sure bet that the property tax collector or the local code enforcement office will, because vacant properties decay quickly. Either way, the seller knows it’s just a matter of time before he becomes ˜ the centerpiece of a pinata party. So he’s highly motivated to do something—quickly—to prevent this from happening. This is where you come in as a kind of caped crusader, fiercely committed to rescuing him from his financial dilemma. While you may not be able to put his life back together, you can get him on the road to recovery, by taking his problem property off his hands and letting him get on with his life. The following creative financing techniques are not the only ones out there, but I think they’re among the best. Because real estate prices can fluctuate so wildly depending upon where you live, I use a different city in each example. The prices of the 145


properties may be considerably higher or lower than you might expect to pay, so don’t get so wrapped up in the pricing that you fail to understand the underlying principle. The techniques are what really matters, because they’ll work anywhere regardless of what local real estate values are. As long as the numbers work, the technique will be a winner.

The Wraparound Mortgage The wraparound mortgage is a tremendous creative financing technique when investing in abandoned properties. It works best when the property you’re buying has some equity and the interest rate and terms are favorable. A wraparound mortgage is sometimes referred to as an all-inclusive trust deed, but what it does is wrap new financing around the existing financing on the property. The wraparound mortgage is a junior mortgage given by the owner of the property to the buyer. Let me give you an example of how this would work. You locate a good abandoned property in St. Louis, Missouri, and after locating the owner you discover that she has lost her job because the airline she worked for went belly-up. Since she was unable to locate another job within her industry, she’s been forced to relocate to Detroit, Michigan, for a new job. Her back is against the wall because she can’t find a buyer for her house. In talking with her you find that she’s extremely motivated to sell her house, but she wants to retain her equity. Fortunately, she doesn’t have a present need for cash; she just wants to ensure that her monthly payment is being paid so that her credit is not wrecked. The seller has owned the house for eight years and she originally financed $170,000 at 7.5 percent for 30 years. Her payments are approximately $1,188 per month. She’s agreed to sell her house to you for $210,000 with no money down. Because interest rates have fallen since she originally bought her house she’s willing to give you a 6 percent interest rate for 30 years, with monthly payments of approximately $1,259 per month. 146


The wraparound mortgage makes it possible to get her out from underneath a payment she can’t afford, because in effect you’re making her payments for her. When she receives your $1,259 payment each month, she’ll turn around and make her $1,188 payment to the bank and keep the remaining $71. In 22 years, the original mortgage will be paid off, and when that happens, you’ll continue paying her $1,259 each and every month. When the underlying mortgage has been satisfied, 100 percent of the payment will be for her equity. The wraparound mortgage technique is good for both of you. She can get on with her life with the knowledge that her credit will be intact, and you can acquire a good abandoned property with no money down. With this method the seller has the security of knowing that if you don’t make your payments each month, she can simply foreclose and take the property back from you. For example, if you were to make monthly payments on the property for three years and then you default on the mortgage, she can take the property back and laugh about it. She would still have the property, plus all of the profit she would have gained during the three years you were making the payments. As you can see, she has nothing to lose. Because her payments are being made each month she can retain her good credit and have a little income coming in. Once the original mortgage loan is paid off, she’ll have a substantial income to work with while you pay off the remaining balance. If she has a loan on her new home in Detroit, this would give her an opportunity to take some or all of the money you’re paying her and apply it to her new mortgage, which could allow her to pay her home off much more quickly, while at the same time saving a lot of money on interest. To recap, the wraparound mortgage is a great technique to use when the seller doesn’t need immediate cash for their property and is willing to take payments for their equity over a period of time. In addition, it’s good for you as an investor because you don’t have to rely on a bank for financing, you don’t have to come up with a down payment, and you can avoid paying a lot of unnecessary fees to an already wealthy banker. 147


The Subject-To Deal Possibly one of the most exciting creative financing techniques to come along in a long, long time is the subject-to deal. When you purchase an abandoned property with a subject-to deal, you’re not replacing the existing financing on the property. Instead, you’re simply acknowledging the existence of the financing. Subject-to financing deals are a great means of acquiring abandoned properties when the owner has very little equity. If a property doesn’t have much equity, it’s not necessarily a bad purchase, but it can severely hamstring your options regarding how you can finance it. Creatively financing your purchase with a subject-to deal can solve that problem. Essentially, you take on the seller’s monthly payment obligation in exchange for their house. Depending on the agreement you work out with the seller, you would compensate them for their equity when the property is refinanced or sold. They would be able to move on to bigger and better things without worrying about whether the monthly payment is being made, because you would bring in a neutral third party to ensure that you’re living up to your end of the bargain. Let’s look at an example of a creative subject-to offer. You live in Atlanta, Georgia, and just down the street from your home is an abandoned property. It turns out that the owner is in financial trouble and wants to talk. You learn that he was unable to keep up with his payments after an acrimonious divorce, so he’s really hurting. Between monthly child support payments, rising gas prices, and other obligations he just doesn’t have enough money to make his payments. He confides in you that he’s very deeply in debt and has two mortgages on the property. The first mortgage is for $160,000 for 30 years at 7 percent. He was trying to buy some time after his divorce, so he took out a second mortgage on the property to pay off some bills. That mortgage is for $70,000 at 8.5 percent for 15 years. When you work the numbers you realize this is an ideal property for you to purchase. You and the seller agree that you will buy this property subject to the two mortgages on it. This 148


way you don’t have to qualify for a bank loan. You arrange for the seller to sign a quit claim deed and you agree to make the monthly mortgage payments. The only problem is that the seller has no guarantee you’ll make the monthly payments. You want to reassure him that you will make the payments each month, so you simply hire an attorney, an escrow company, or a property management firm to accept your monthly payments and forward them on to the mortgage companies. For added security, you agree to deposit an amount equal to two months’ worth of payments to ensure that there is always money available for the monthly payment. If for any reason you fail to make your payment, the management company can inform the seller. Because the seller doesn’t want to have to deal with any potential problems, an independent third party gives him the security of knowing the monthly payments are being made on his behalf. The seller ultimately doesn’t want to be bound in any way to this property, so you agree that this arrangement will only last five years. This gives you five years either to refinance the house or to sell it. During the five years of your agreement, you’re able to rent the house out for $200 more each month than the payment is costing you. So not only are you building equity in the property, but you have a decent income each month. Five years later you decide to sell the property when your tenant inquires about the possibility of purchasing it from you. You purchased the property for $230,000, but during the ensuing five years real estate values have increased dramatically. Your rental tenant is willing to purchase the house for $340,000, which gives you a profit of $110,000. The subject-to deal lends itself to abandoned property investment success because it allows you a great deal of flexibility to negotiate special terms with the seller. If the seller happens to have a little equity in the property and agrees to this arrangement, you can defer paying him for the equity until the house is sold. You can be just about as creative as you like with this technique. If the seller has no equity in his property when you make the deal, you can even agree to pay him a percentage of the 149


difference between what you pay for the house and what you sell it for, as a way to sweeten the pot. This is a good strategy to use if the seller is trying to get a down payment out of you. It doesn’t hurt you at all, because you only have to pay based on appreciation of the property during the time that you hold it. If for some reason the property does not increase in value, or it falls in value, making that agreement won’t cost you a penny.

The Contract for Deed Sometimes when you locate an abandoned property you may discover that the seller is really nervous about deeding it to you. If this is the case, the contract for deed is a tremendous creative technique that satisfies the seller’s need for security and lets you gain control over the property. The contract for deed is ideal for situations where the owner of the property is willing to take payments from you over a period of time. When you purchase an abandoned property in this way, the property remains in the name of the seller until you pay for it. Instead of signing a mortgage, you sign an agreement to buy the property for a fixed cost by making monthly payments at an agreed-upon interest rate, for a certain period of time. You have some flexibility with this arrangement because you can either finance the property until it’s paid for, or you can work in a balloon payment that will require the property to be paid off within an agreed-upon time. Let’s say a friend tells you about an abandoned property in Austin, Texas, that is owned by an elderly lady who has now moved in with her children. She was unable to keep up with property taxes, and maintenance had become a problem for her because of her advancing age and declining health. She’s willing to sell her property to you creatively, but she is unwilling to deed the property to you until you’ve paid for it completely. Because she doesn’t have an existing mortgage on the property, your monthly payment can be an additional source of income for her. In talking with her, you discover that she is just scraping by on a widow’s pension and she has exhausted 150


all of her savings. Since she lives with her son and his family, her needs are modest, but she would like to have some additional funds. She agrees to sell you the house for $285,000 at 6.5 percent interest if you’re willing to give her a down payment of $5,000. You will then have 10 years to either pay the house off or obtain your own mortgage. Her offer seems reasonable to you; however, because you’re a new investor you don’t have the $5,000 she needs for a down payment. You really want this deal to work, but you’re not sure how to overcome the $5,000 hurdle. You’re at your wits’ end about how to solve your problem until you ask her what she plans on doing with the down payment money. She tells you she’d like to buy her son some furniture and fly to Maine to visit her other son. While you don’t have $5,000, you do have a credit card. So you ask if she’d be willing to let you use your credit card to buy the furniture and pay for the airline ticket. It doesn’t bother her as long as she gets what she needs, so she agrees. Remember, a contract for deed can be used if the seller wants the security of knowing that ownership of the abandoned property won’t transfer until it’s paid for. You can adjust the specific terms to creatively work a deal that both of you are happy with. The contract for deed is a very flexible, creative technique that works for long-term or short-term financing. If the seller is willing to go for a 30-year contract, you can stretch it out that long, or you can use it for short-term financing. If it’s an extremely high-priced real estate market, you can sometimes negotiate an interest-only contract for deed purchase to ensure that you have a positive cash flow from the property.

Other Creative Strategies I mentioned earlier in this chapter that a bank loan is not necessarily a good way to buy abandoned property. In certain situations, bank loans may make sense. For instance, you might locate an abandoned property that doesn’t need a lot of work. 151


The owner is willing to sell the property to you at a very low cost, but is unwilling to participate in the financing. In such case, it might make sense to go to your local bank and obtain a loan, especially if it’s a property that you can quickly repair and flip for a large profit. I’ve given you a few of the best creative strategies you can utilize in buying abandoned properties. There are literally dozens of techniques you can use, and as you gain experience as a seasoned, savvy investor, you’ll no doubt come up with a number of other techniques and strategies that you’d like to try. As time goes on and your confidence and knowledge grow, you’ll probably decide to combine numerous techniques. The wonderful thing about creative real estate financing is that the combinations are almost endless. You’ll reach a point where you will have a plethora of different strategies trying to jump out of your head at once. It may get tempting at times to come up with the most creative and unique financing strategy you can think of, but I caution you to be careful in doing this. While a creative strategy makes it possible for you to buy abandoned properties without having to resort to institutional bank financing, if you get too creative you can run the risk of confusing the owner of the abandoned property. If this happens, all bets are off, because people reject what they don’t understand. A complicated, creative financing strategy might work well if you’re buying an apartment building or a commercial property from another investor, but simplicity usually works best with abandoned properties. In Chapter 9, I show you how to establish the value of your abandoned property. This is something you must know, regardless of whether you plan to hold it as a rental or flip it for a quick profit. I give you all the tips you need to make mega profits in abandoned properties.

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CHAPTER 9

Turning the Corner and Heading Down the Home Stretch to the Abandoned Properties Winner’s Circle

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I’ve shown you a lot of great techniques to locate moneymaking abandoned properties and their elusive owners, as well as a plethora of creative financing techniques. You have a lot of knowledge about what it takes to get rich in abandoned properties investing, but if you stop learning now you’ll run out of gas midway through the race. Since you’re in it to win it, I’m going to guide you down the home stretch by showing you how to establish the value of abandoned property, decide whether it’s best to hold it or sell it, write a winning offer, and deal with banks and other lenders. Once you locate a potential abandoned property, you must carefully analyze all aspects of the purchase so you can determine precisely how much profit is possible. Since properties are not all created equal, you need to know what you’re looking at in profit potential to help you decide whether it’s worth moving forward, or if you’re better off taking a step back and moving on to a more lucrative opportunity. There are only two times when it’s critical that you know as accurately as possible, how much your subject property is worth: when buying and when selling. That pretty much covers it. If you over- or underestimate a property’s value that you already own, it really doesn’t matter much; if you make a mistake, it may affect your ego or your balance sheet, or have a minuscule effect on your borrowing power. But if you’re too far off base when you’re buying or selling, it could cause you to overpay for a property

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you’re buying or unnecessarily leave money on the table when selling. It’s been said that knowledge is power. So, if you can’t pinpoint with some degree of accuracy what a property is worth, that mistake could potentially cost you all of your profits from a deal. You became a real estate investor to make money or you wouldn’t have gone through all the trouble to learn as much as you have so far. Let’s dive shoulder-deep into this so you can keep your cash and your newfound status as an abandoned property real estate investing professional.

Determining the Value of a Property There are three primary ways of establishing the value of an abandoned property—or, for that matter, any property. If this isn’t your first rodeo, it’s good review. If you are a brand-new investor, pay close attention to this section because what you learn here will be either instrumental to your success or the primary reason for your failure. The three main ways of establishing a property’s value are the replacement approach, the comparison approach, and the income approach. The replacement approach is determined by estimating how much it would cost to build something very similar to the property being considered, then adding the cost of the land. I know what you’re thinking: “How can I find out the value of the land without the value of the house”? You can talk with Realtors, contractors, architects, and appraisers. Give them a call and you’ll probably be surprised at just how easy it is to get the info you need. Once you have this figure, you subtract an amount that would allow for the deterioration of things like carpeting, paint, the roof, and so on. For example, imagine you’ve located an abandoned property that you think might make a good investment. You really like this property because it’s in a decent part of town and it doesn’t need a lot of refurbishment. The owner has indicated that he would be willing to consider your creative offer, and he’s seemingly very 156

Turning the Corner and Heading Down the Home Stretch

motivated to sell. The house has about 2,000 square feet and boasts three bedrooms and two bathrooms. To top it off, it’s in a good school district and has a nice, large yard. You need a figure to work with, and since you don’t build houses, you pick up your telephone and call a couple of local contractors and describe the type of property you’re interested in. You tell them that you need to know approximately how much it will cost and how long it will take. After asking you a few questions, the contractors tell you they would be willing to build that house for $85 per square foot. Keep in mind that a variety of different factors can play a dramatic role in building costs. Building materials such as lumber, roofing shingles, and so on, are priced differently depending on what part of the country you’re in. If you are in Georgia, North Carolina, or South Carolina, the lumber for your building project might come from a mill that’s only a couple hundred miles away, but if you’re in an area where wood is scarce, it might have to be trucked in from 1,500 miles away. In addition, local rules, regulations, and labor costs can affect the rate. But for this example let’s use $85 per square foot. Additionally, we’ll assume the land costs $7 per square foot. House:

2,000 ft.2 × $85 = $170,000

Lot Value:

5,000 ft.2 × $7 = $35,000

Total:

$205,000

Less Deterioration:

$12,000

Value by Replacement Cost Approach:

$193,000

The replacement cost approach has a built-in weakness: the subjectivity involved in computing the deterioration figure. At best, this figure is an educated guess based on years of practical experience, and at worst it’s a wild guess, a random figure plucked out of the air. Either way, it’s not very accurate. Since I’ve already pointed out the importance of accuracy, you can see why I don’t recommend this method. If the figure you were guessing on was only a few dollars it really wouldn’t matter, but in this case a 157


small error could mean thousands of dollars—and the difference between a small profit and a large loss. The second approach, which I recommend, is the comparison approach to value. This approach is less subjective than the replacement cost approach because it uses real numbers instead of your best guess. Here’s how it works: We take a number of similar properties that have recently been sold in the vicinity of your abandoned property and compare certain points with our subject property. We want to compare the number of bedrooms and baths, the square footage, the lot size, and the sales price. If the properties have any dissimilar characteristics, they’re taken into consideration and adjustments are made. Here are some examples 䊏

䊏

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Terms and conditions of sale. For a creative real estate investor, the terms and conditions used to make an abandoned property purchase have a direct impact on what the property is worth. If you can get very favorable terms on a property, you might be willing to pay more. By the same token, when you’re selling a property, you might be willing to sell for a little less depending on the financial arrangement you’ve worked out with the buyer. Location. It’s not unusual for physically similar properties to radically differ in price from neighborhood to neighborhood. Just as a high crime rate can cause property values to suffer, an exceptionally good school district or local attractions can have a positive impact on property values. Date of sale. If significant economic changes have taken place since the sale of the comparable property, you should make an adjustment. For instance, from time to time our mortgage market can experience extreme corrections which have an effect on property values. Mortgage companies can go belly-up, which can affect the availability of credit in the subprime mortgage market. Any comparisons made just prior to or just after this type of event will certainly require an adjustment. 158


䊏

Physical features. This category probably has the greatest potential to affect the comparison price of properties. Many features can affect price, including but certainly not limited to these: 䊏

Number of rooms.

䊏

Interior conditions.

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Exterior condition.

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Existence or absence of a fireplace.

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Type of construction.

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Size of the lot.

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Landscaping.

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Square feet of living space.

䊏

Garage or lack of one.

When you’re selling a property, try to use favorable financing to your advantage. It really doesn’t matter if you bought the property a couple of months ago, gave it a quick rehab, and are trying to sell it for a quick profit, or if you are selling a property that you’ve held as a rental for the past 10 years. The principle is the same. Obviously, when you’re selling a property the roles are reversed, so favorable financing could potentially allow you to lower the price if you gain a higher interest rate. If you work the numbers, you can come up with any number of creative offers that will have people lining up to buy your property. Here’s where the comparison approach to value can add tens of thousands of dollars to your net worth. The interior and exterior condition of any abandoned property need to be taken into consideration when deciding what you’re willing to pay for it. You’ll probably have to do some work on it before you can resell it or expect to be able to rent it out. Two factors can come into play here: 1. Properties generally have a fair market value that can vary by as much as 10 percent. 159


2. The average person is usually not up to date about what their property is worth and how much anticipated repairs will cost. If you locate an abandoned property with a fair market value of $225,000, it might be worth as little as $202,500 or as much as $247,500. As you can see, that’s a range of $45,000. Many times owners will guesstimate repair costs as being considerably higher than they would actually be. When you combine these two factors, it’s almost a perfect storm of runaway profitability waiting to happen. I am not suggesting or advocating that you take advantage of anyone. Your honesty and integrity will contribute heavily to your success as an abandoned property real estate investor, but if you establish a track record as someone willing to do or say whatever it takes to make a buck, eventually the toll will have to be paid, and you’ll find yourself out of business or without a deal to work. Instead, I’m suggesting that if you are able to negotiate well, you should try to buy property at the low end of the fair market range, do a good job of fixing it up, and maximize your opportunity to sell at the high end. Will this always happen? It won’t, but it’s a worthy goal to strive for. Using fair market range to your advantage can put extra cash in your pocket and turn a good deal into a great deal. The third method of determining the value of an abandoned property is the income approach to value. This method is primarily used for larger investment properties, such as apartment buildings, and is also the predominant method of determining value for commercial properties, like office complexes or even shopping centers. You would typically use the income approach in determining the value of any property that has more than four units. The income approach to value is based on the premise that an income-producing property is worth a multiple of the annual net income it can produce. It’s a completely unemotional process—simply a mathematical computation.

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This is a radical departure from the way most real estate values are determined, because with smaller properties emotional factors arise, such as desire, greed, or even a wish to keep up with the Joneses, routinely causing people to pay more for a property than they should. How many times have you heard it said that a property is worth no more and no less than somebody is willing to pay? A smaller property might sell for what it does because people fall in love with it. They have memories that form the basis for strong emotional attachment to their property. You generally don’t see property owners forming that sort of emotional bond with a commercial property. Because emotion is not a serious part of the equation, it’s easier for a real estate investor to take a step back and evaluate the property from the perspective of “What have you done for me lately?” If the answer is “Not much,” it’s easy enough to get rid of the property without tears or multiple visits to an overpriced shrink. The formula that is generally used for determining the value of any commercial property involves first estimating the annual gross income of the property, and then making deductions to allow for vacancy and other rent losses to determine the property’s effective gross income. From there you simply deduct annual operating expenses for the property. The figure you have left is known as the annual net income. Next you determine the capitalization rate. This is a simple formula that requires you as a real estate investor to decide what sort of return rate you would demand in exchange for investing your money in a property. The capitalization rate can be determined by comparing the relationship of net income to the sales price of similar properties that have been sold in the current real estate market. Let me give you an example. Assume that you have located an abandoned apartment building with five units. After tracking the owner down and running the existing numbers on the property, you determine that once the property is rented it will pull in an annual net income of $35,800. Based on these figures you could expect to sell the property for $358,000.

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Gross income:

$51,000

Vacancy/rent loss:

$1,200

Operating expenses:

$14,000

Net income:

$35,800

Capitalization rate:

10

Value = net income × cap rate:

$358,000

Making an Offer When you’re buying an abandoned property, whether it’s a singlefamily home or a 10-unit apartment building, once you know the upper limit of your offer, you can confidently write the offer with the full knowledge that you’ll make money on the deal. You’re an investor who makes many offers on abandoned properties each and every month. If you don’t get the deal you’re looking for, don’t be afraid to push away from the table and ease on down the street to the next deal. I’m not saying you need to be overly demanding, but if a potential deal doesn’t make you money on the front end, don’t buy it. I know you’ve heard it said before, but I’ll say it again: You should make your money in real estate when you buy, not when you sell. Does that mean you won’t make money when you sell? No, it simply means that you shouldn’t have to wait for the market to go up in value before you make your profit. That sounds like speculation to me and, to tell you the truth, speculation scares me. I want to let you in on a little secret that can make all the difference in the world to your bottom line on this deal, and any future deals that you make. When you write your offer, don’t limit yourself to just one offer. Instead, give the seller an offer that he simply can’t refuse. Give him choices. The multiple offer strategy is the golden child of creative real estate financing, and your sure ticket to a pot of gold at the end of your abandoned property rainbow. The multiple offer is effective when trying to creatively buy real estate, and it works 162


exceptionally well when dealing with motivated sellers. I didn’t invent it, but because it works so well when investing in abandoned properties I’m willing to borrow it. When you present your offer, you present two or three offers that are each structured to create mutual benefit. The beauty of the multiple offer strategy is that it is very appealing to the average human being. Usually, people hate to make difficult decisions. If I were to ask the average person, “John, where do you want to go for lunch?” 9 out of 10 times he’ll answer, “I don’t know. Where do you want to go?” Instead, let’s turn that idea on its head. Personally, I really don’t care where we go for lunch, as long as we can go to Taco Bell, Kentucky Fried Chicken, or Wendy’s. Instead of making you think about a destination for lunch, I’ve given you three viable choices—you get to pick the one that you like the best. What have I just done? I’ve controlled where we’re going for lunch to a certain degree by giving you three choices. You don’t seek a fourth option—you pick one of the three that I gave you. Any one of those three will satisfy the hunger pangs I’ve been experiencing for two and a half hours; even though I would really prefer Wendy’s, I can live with Taco Bell or Kentucky Fried Chicken. The same is true when presenting multiple creative real estate offers to the seller of an abandoned property. The trick to getting one accepted is to write the offers in a way that ensures that both your needs and the needs of the seller are met. When you present multiple offers, be sure you let the seller know that each offer stands alone, and you’re not willing to blend your offers together. Another technique that can help line your pockets with gold is called the assignment of contract (described in more detail in Chapter 4). This handy little trick allows you to pocket some cash quickly and easily by assigning your purchase contract to another investor. If your offer is written well and you stand to make a good profit on a real estate transaction, you can stick some fast cash in your pocket very easily by assigning that contract to another investor. When you write up your real estate purchase contract, simply place the phrase “and/or assigns” next to your name. This 163


gives you the legal right to assign your contract to someone else for valuable consideration. If you locate another investor with cash, you can sell them your right to the contract for quick, significant cash.

A Standard Real Estate Purchase Contract It is vital to gain a full understanding of your real estate purchase contract. A lot of money is left on the table because so many investors have never taken the time to learn the elements of their purchase contract. The accompanying example is a real estate sales contract, followed by step-by-step instructions on how to fill it out. You’ll need to familiarize yourself with the contract so you can take advantage of all the ways you can make money investing in abandoned properties. Before you use this or any other contract, I suggest you let your attorney take a look at it and advise you further. Downloadable Standard Real Estate Purchase Contract and Receipt for Deposit∗

When completed and signed by both parties, this document becomes a legally binding contract. If this contract is not fully understood, the services of a competent professional should be sought. (1) City of , Date

, State of , 20

(2) BE IT KNOWN, the undersigned, , and/or assigns, herein referred to as Buyer, offers to purchase from , herein referred to as Seller, the real property set forth below, and all improvements thereon ∗ A customizable version of this contract is available for download at www.wiley.com/go/abandonedproperty.

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(herein referred to as Property), on the terms and conditions set forth in this contract. (3) Said Property is located in the County of , City of , State of , and is commonly known as , and bears the legal description of:

. (4) The sum of $ ($

Dollars ) evidenced by (form of remuneration), payable to , to be deposited upon removal of all contingencies, as deposit on account toward purchase of days from above described property. Within acceptance of this offer, Buyer shall increase the deposit Dollars ($ ). by $ Balance of down payment of $ Dollars ($ ) shall be deposited with Escrow/Settlement Holder before close of this transaction.

(5) Additional financing terms are as follows:

(6) Total purchase price shall be $ ($ ). (7) NEW CONVENTIONAL FINANCING This offer is contingent upon Buyer and Property qualifying for a new conventional loan in the approximate amount of at the best rate and terms $ available at the close of the transaction. The interest rate %. to be paid by Buyer is not to exceed shall pay loan origination fees required, and comply with all other lender requirements.

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(8) FHA FINANCING This offer is contingent upon Buyer and Property qualifying for a new FHA 30-year loan in at the prevailing FHA the amount of $ interest rate at the close of this transaction, plus the applicable Private Mortgage Insurance. Loan origination fees and required FHA Lender costs to be paid as follows:

Seller to pay not more than for a new loan. appraisal.

. discount points to pay for FHA

(9) VA FINANCING This offer is contingent upon Buyer and Property qualifying for a new VA loan in the amount at the prevailing VA interest rate at of $ the close of this transaction. Loan origination fees and required VA Lender costs to be paid as follows: . discount points for Seller to pay not more than to pay for VA appraisal. a new loan. Seller to pay for all Buyer’s closing costs. (10) ASSUMPTION OR SUBJECT TO This offer is continassuming taking property gent upon Buyer subject to the existing loans of record of approximately , presently payable at $ per $ month including principal, interest, taxes, and insurance, %, all due and payable in with interest at years. All payments, including impounds and association fees if any, shall be current at the close of this transaction. Any difference in present loan amounts to be adjusted by sales price cash trust deed or mortgage and note. (11) HOMEOWNERS ASSOCIATION Seller to furnish Buyer through escrow/settlement a copy of declarations of restrictions, bylaws, and Articles of Incorporation affecting rights to the property with regard to homeowner

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association, if applicable. The monthly homeowner asso. ciation fees are approximately $ (12) NOTE AND DEED OF TRUST (OR MORTGAGE) Buyer to execute a Note and Deed of Trust (or Mortgage) in favor of Seller in the approximate amount of % per annum, payable including interest at $ or more per month, all at approximately $ years from the close of this due and payable within transaction. Said Note and Deed of Trust (or Mortgage) shall contain the following clauses: a) SUBSTITUTION OF COLLATERAL: “The Maker reserves the right to substitute collateral for this Note at any time during the term. Beneficiary or assignee to approve, but shall not unreasonably withhold approval.” b) PREPAYMENT DISCOUNT: “In the event Note is paid years of its term, Maker in full during the first % discount from the shall be entitled to a remaining balance.” c) RIGHT OF FIRST REFUSAL: “The Maker reserves the right to purchase the Note back for a price a third party would pay, in the event the Beneficiary sells the Note during its term.” d) SOLE SECURITY: “The Real Property collateral shall be the sole security for the Note, and the Beneficiary shall have no recourse other than the property itself.” e) RIGHT OF ASSUMPTION: “This Note shall be fully assumable, as is, by any future acquirers of its collateral.” f) ROLLOVER BALLOON PROVISION: “In the event that the Maker cannot find acceptable financing to refinance this Note, the Maker reserves the right to extend the balloon payment, at his option, for an additional years, and make a $ payment on the

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principal amount owed. All other terms and conditions to remain the same.” g) PERFORMANCE MORTGAGE: “Payments on this Note shall be made after all senior liens have been paid. In the event no payment is made to the Beneficiary, then interest is to accrue and not compound, and shall be paid at the final due date.” h) DEFERRED PAYMENTS: “Payments on this Note months after the date of closing. shall begin Interest shall accrue on an annual basis and not compound. All accrued interest shall be paid at Note due date, along with remaining principal.” i) STUTTER CLAUSE: “The Maker reserves the right to miss one payment each year during the term of the Note with no penalty or interest accruing.” (13) ESCROW/SETTLEMENT INSTRUCTIONS Buyer and Seller shall deliver signed instructions to the escrow/ days from settlement holder within Seller’s acceptance which shall provide for closing within days from Seller’s acceptance. Escrow or Attorney’s fees shall be paid as follows: . (14) CLEAR TITLE Title shall be free of liens, encumbrances, easements, restrictions, rights, and conditions of record or known to Seller, other than the following: a) Current property taxes. b) Covenants, conditions, restrictions, and public utility easements of record, if any, provided same do not adversely affect the continued use of the property for the purposes for which it is presently being used, unless reasonably disapproved by Buyer in writing within days of receipt of a current preliminary title report furnished at Seller’s expense. (15) POLICY OF TITLE INSURANCE Seller agrees to deliver at Seller’s expense, good and marketable title as evidenced by a policy of title insurance to Buyer. Buyer, 168


at Buyer’s option, may terminate this offer to purchase and Buyer’s earnest money shall be returned if Seller fails to deliver as herein provided or if the improvements on said property are substantially destroyed or materially damaged prior to transfer of title, in which case this agreement between Buyer and Seller shall have no further effect. (16) RIGHT TO ACCOMPANY PRESENTING AGENT Buyer shall reserve the right to accompany agent upon presentation of this offer. (17) RIGHT TO SHOW PROPERTY Buyer shall reserve the right to show property to potential tenants during the contingency period. (18) RIGHT TO FINAL INSPECTION Buyer shall reserve the right to inspect and approve the property within 48 hours prior to closing. (19) ALL INCLUSIVE INSPECTION AND APPROVAL This agreement is contingent upon Buyer’s inspection and approval of all books, records, tax bills, leases, personal management contracts, preliminary title reports, termite inspections, underlying encumbrances, and physical inspection of property. Buyer shall have business days to remove all contingencies in writing, or this offer will be null and void, and all earnest money shall be returned in full to Buyer. (20) SELLER’S WARRANTIES AND BUYER’S RIGHT TO INSPECT Seller agrees to maintain premises in existing condition until the close of this transaction. Seller warrants that all appliances, personal property, air conditioning, heating, plumbing and electrical systems shall be in working condition at the close of this transaction or upon possession, whichever is sooner. If property has a swimming pool, Seller warrants that the pool motor, filter system and heater (if so equipped) will be in working condition at the close of this transaction. Buyer reserves the right of inspection of plumbing, heating, air conditioning, electrical, mechanical, and structural condition of the 169


property at Buyer’s expense. Seller shall pay for any repairs. Seller also warrants that all roof areas are free of leaks and defects. Seller agrees to provide Buyer with a roof certification from a licensed roofer. Buyer to pay for costs of inspection and Seller to pay for all necessary repairs. (21) LEASE AGREEMENTS Seller agrees not to enter into any lease agreements between the date hereof and the close of this transaction without the written consent of Buyer. (22) PERSONAL PROPERTY BILL OF SALE Seller shall deliver a bill of sale for all personal property at the close of this transaction, warranting all of same to be free and clear of all liens and encumbrances. (23) TENANCY AGREEMENTS Seller shall deposit all leases, month-to-month tenancy agreements, and rental applications with escrow/settlement holder, and shall assign same to Buyer at the close of this transaction. (24) BUILDING PERMITS AND COMPLETION NOTICES Seller agrees to furnish and pay for all necessary building permits and/or completion notices. (25) ASSIGNMENT OF OFFER Buyer reserves the right to assign this offer. (26) STRUCTURAL PEST CONTROL REPORT Seller shall furnish a structural pest control report by a State licensed operator and pay for any corrective work necessary. Seller shall instruct escrow/settlement holder to furnish Buyer with copies of report and/or completion. (27) PERSONAL PROPERTY Included in selling price are real property, fixtures and fittings together with, but not limited to, existing window and floor coverings, light fixtures, hardware, TV antenna, air coolers and conditioners, landscaping, mailboxes, water softener, outdoor plants, window and porch shades, venetian blinds, storm windows and doors, screens, curtains, drapery rods, attached mirrors, linoleum, floor tile, awnings, fireplace screens and grates, refrigerators, washer/dryers, built-in kitchen appliances, and any other personal property currently on 170


the premises that is used in the normal operation of the building. The foregoing constitutes the entire agreement between Buyer and Seller, and no verbal statements made by any party are a part hereof unless incorporated in writing. In the event that either party shall prevail in any legal action commenced to enforce this agreement, that party shall be entitled to all costs incurred in such action including attorney’s fees. This agreement shall be binding upon their respective heirs, executors and assigns. Unless Seller’s acceptance of this offer to purchase (a.m./p.m.) is communicated to Buyer by , 20 , this offer shall be deemed revoked and earnest money shall be returned to Buyer in full. Real Estate Broker:

Buyer:

By:

Address:

Address:

Telephone:

Telephone:

ACCEPTANCE Seller hereby accepts and agrees to sell to Buyer the herein described property on the herein described terms and conditions. Seller has employed as Broker, and agrees to pay compensation for services as follows:

The undersigned acknowledges receipt of a copy of this offer, and authorizes Broker (if applicable) to deliver a signed copy to Buyer. , 20 Dated: Seller: 171


Address: Telephone:

The Purchase Contract Explained This section provides an explanation of various items on the Real Estate Purchase Contract. When this agreement is filled out and signed by you and the seller, it becomes a legally binding contract. Remember, if you are unsure, do not hesitate to consult with a competent professional. In this sample contract you will find numbers in parentheses along the left side. Match these numbers with the following explanations to get a clarification of these items. (1) Write in the city and state where you are physically filling out the contract. Also, write in the date. (2) Write in the buyer’s name on the first line, and the seller’s name on the second line. If the seller’s name is unknown, then substitute the words “Owner of Record.” (3) On the first line, fill in the county in which the property is located; on the second and third lines, fill in the city and state. On the fourth line (“commonly known as”), fill in the street address of the property. On the next five lines, fill in the legal description. If you don’t have that information, don’t despair—fill in the words “to be determined in escrow/settlement.” (4) Fill in the amount of deposit in words on the first line, and in numerals on the second line. On the third line, the “form of remuneration” will be as cash, cashier’s check, personal check, money order, and so on. The fourth line will be the party who is entrusted to hold the deposit. This should be your escrow company, your attorney, or any other neutral third party. If there will be an increase in the amount of the deposit, on the fifth line write in the number of days that this shall occur from the day the offer is accepted. On the 172


sixth line, write in the amount of the increase in words, and write the numerical equivalent on the seventh line. If the down payment will increase, write the amount of increase on the eighth line and the numerical equivalent on the ninth line. (5) Use this area to describe any other financing terms, such as “Seller to carry a second mortgage of ($ amount),” or “Buyer to purchase property subject to the first mortgage of ($ amount).” (6) Write in words the total amount you intend to pay for the property on line one, and the numerical equivalent on line two. (7) If new conventional financing is required, write in the amount on line one, and the maximum interest you would be willing to pay for that financing on line two. On the third line, write in who (Buyer, Seller, or Broker) will be responsible to pay the loan origination fees. (8) If new FHA financing is required, write in the amount on line one. In the next space, describe how the origination fees and costs shall be paid. Then write in the number of FHA discount points to be paid by the Seller, if any. On the last line, write in who (Buyer, Seller, or Broker) shall pay for the FHA appraisal. (9) Handle the same as FHA Financing. (10) Check line one for assumption, or line two for subject to. Whether assuming or taking subject to, add the sum of these loans on line three, and the approximate monthly amount on line four. The current interest rate goes on line five, and the term on line six. Check the appropriate line to reflect how the difference between the sales price and the current loan amounts will be handled: line seven if the sales price will be adjusted downward, line eight if cash will be added to the transaction, and line nine if the difference will be carried as a note. (11) Write in the amount of the monthly homeowner association fees, if any. 173


(12) On line one, write in the position of the mortgage to be carried by the seller (first, second, third, etc.). Write in the amount of that mortgage on line two, the interest rate on line three, and the approximate amount of the monthly note on line four. On line five, write in the term the note is to be carried. (13) On line one, write in the number of days needed for instructions to be drawn up. Give your escrow/settlement holder enough time to produce the documents. On line two, write in the number of days you’ll need to complete the transaction, and on lines three and four describe how the closing fees shall be paid. (14) Write in the number of days you’ll need to review and approve the preliminary title report. (19) Fill in the number of days you’ll need to review and approve all records associated with the property, and to make your physical inspection. (27) Write in the time of day and the date by which the Seller’s acceptance of this offer to purchase must be communicated to the Buyer.

The rest of the contract is for the addresses, phone numbers, and signatures from you, the buyer, the seller, and possibly a Realtor. This explanation should go a long way in helping you understand the rudiments of a real estate purchase contract. Be smart and let an attorney look at your contract before you submit it to an owner. Understand that different laws apply in different parts of the country, and make sure you are compliant with the laws in your area. As important as it is to know how to fill out a real estate sales contract, it’s just as important to know how to fix your property up. Knowing the right things in which to invest your rehab dollars can mean tens of thousands of dollars more on your bottom line and a faster journey to your financial goals. In the next chapter, I show you how to rehab an abandoned property. There are distinct pitfalls that you can face when renovating a property, 174


both when you’re planning to hold it as a rental and when you’re planning on renovating it to resell. If you don’t renovate smart you can lose your shirt. Rehabbing involves making some good decisions, and it can make the difference between whether you’re drinking champagne or cheap beer a year from now. Your prosperity and profitability are as close as your nearest home improvement warehouse store.

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C H A P T E R 10

Rehabbing Abandoned Properties: Creating Curb Appeal and Homes in Demand for Maximum Profit

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You’ve finally pulled the trigger on your first abandoned property purchase. After locating a prospective abandoned property, tracking down the owner, and negotiating the purchase, you’re finally beginning to think you have arrived. Now that you have possession of your abandoned property, you might think the only thing that stands between you and the runaway profits you envisioned when you first laid eyes on the house is a little bit of paint and maybe a brass door knocker. Before you book that cruise and make arrangements for a six-month Aruban vacation, I want to warn you that now it’s time to get down to the serious business of rehabbing your property. If you’re not careful, you could be in for a very rude and costly awakening. Bob Vila makes rehabbing look easy, but he’s been successfully rehabilitating properties for most of his adult life. It takes a good deal of skill and attention to detail to make it happen. Without that, you run the very real risk of turning your gold mine into your very own “Big Dig.” I want to help you keep your rehab project on track and under budget so you can grab your piece of the American dream and realize runaway profits from your abandoned property deal. Your first inclination when rehabbing an abandoned property is probably to jump into your car and drive down to your local home repair superstore, grab some fix-up stuff, roll up your sleeves, and get to work. Before you do that, take a deep breath,

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relax, and realize there’s a right way and a wrong way to rehab a property. While painting may be the first thing on your mind (other than making big money), there’s a lot more to rehabbing property than slapping a fresh coat of paint on the walls and planting a sign in the front yard. There are other mundane details to handle that aren’t nearly as sexy as putting on the finishing touches. When you’re rehabbing an abandoned property, the first decision you have to make is whether you’re rehabbing for resale purposes or you plan to hold the property as a rental. The steps you take may be different depending on what you plan to do with the property once the paint dries. However, even though there are some very stark differences, there are also a number of common steps regardless of your ultimate plans for the property. I’ll discuss the commonalities first, and then break the balance of the chapter into two sections: rehabbing for rental and rehabbing for resale. You can come back to this book later for specific guidance on future projects, regardless of whether you want to sell your abandoned property or hold it. I see this book, and specifically this chapter, as a valuable resource to which you can repeatedly turn for specific advice and guidance for maximum profitability.

Preparation and Inspection One of the first decisions you have to make is whether you plan to do the lion’s share of the repair work yourself or hire a professional to do it for you. If the repairs are relatively superficial, you might want to consider doing the work yourself if you’re confident in your ability to do quality work. If, however, you find yourself tempted to hire a contractor to change a light bulb in your own home, you should think seriously about utilizing the services of a competent professional. The time and money that you’ll save in the long run will more than offset the short-term cost of hiring a skilled technician to make the renovations for you.

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Rehabbing Abandoned Properties

Before you can begin any rehabilitation project, you need to conduct a thorough inspection of the property to get a good idea of the extent of the repairs you’ll need to make. If you’re not confident that you can accurately assess what is needed, it wouldn’t hurt to contact a local contractor and ask for a bid for your rehab project. Many reputable contractors will be willing to provide you a written estimate at no cost, especially if they think they stand a good chance of getting the work. Keep in mind when reviewing the estimate that many contractors will mark up the cost of materials to give them an additional profit margin, or to mask how much they are charging you for labor. While their estimate won’t necessarily reflect exact costs, it can be a very useful tool in giving you a ballpark figure. As time goes on, and the number of properties you own increases, you might consider having a contractor do all of your rehabbing for you. When you get a little more experience as a real estate investor, you will probably decide to delegate your rehab projects to someone else, while you concentrate your efforts on locating abandoned properties in which to invest. When you inspect your property and decide what repairs are necessary, avoid the temptation to overrehabilitate your property. While some repairs are necessary, it can also be very easy to spend money unnecessarily. The goal of investing in abandoned properties is to create profit centers, not a money pit. Often it doesn’t take a lot of work to really bring a property back to life. Cosmetic repairs can frequently bring out the character of a property, enhance its value, and create a living environment that many people will find desirable. If your rehab project is an investment and not a property that you plan to live in, make sure to plan on repairs appropriate for the type of property you have. If your property isn’t located in Beverly Hills, California, don’t rehabilitate it like it is. It doesn’t make much sense to use expensive materials such as granite and marble, expensive flooring, and expensive kitchen cabinets in a less affluent neighborhood, while in the much more affluent neighborhoods you wouldn’t use anything but the best.

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THE ABANDONED PROPERTY INVESTOR’S KIT Exterior

I suggest you begin your initial inspection on the outside of the house. This is the first thing a prospective renter or buyer is going to see, so you want to be sure that it looks good. A property with strong curb appeal can entice a potential buyer or renter into taking a closer look. We’re naturally drawn to things that look good, and if your property looks great on the outside, it sends a strong signal that the inside is just as special. Make sure the exterior paint on the house and the landscaping at the front and sides of the property are something special. If the paint on the house is faded or chipped, plan on repainting it. Before deciding on a color, think about what will look good on your particular property, complementing the decor and landscaping. Also, remember that light colors tend to make things look larger and resist fading much better than dark colors. A good quality paint that’s resistant to fading can add a great deal of curb appeal to your property. If you start by fixing the property up from the outside, a potential buyer or renter will like what they see on the outside and project that beauty into the inside. Even if the inside is torn up because you’re in the middle of an extensive rehab, because the outside is so well done, they will feel good about how they envision the inside to be. We call this rehabbing from the outside in. Sometimes it can be tough deciding on a good paint color while standing in a paint store, because what you imagine might look good will frequently look terrible in application. Instead of choosing the paint color for your property at the paint store, here’s another idea: Climb in your car, cruise through the neighborhood, and see what you like. People are generally attracted to lighter colors. You can choose a complementing color for all of the trim on the property, and consider painting the porch (if it has one) the same complementing color. It’s important that the house look great for maximum curb appeal and value, so whether you do the work yourself or you have it done, demand top quality, both in the paint you buy and the quality of the painting.

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While nobody particularly enjoys doing it, make sure the old paint is scraped and sanded. Before applying the new primer and paint, carefully inspect the house for any holes that may need to be filled. This will allow the property to look as good as possible for potential tenants or buyers. As a side note, you may want to consider using the same color combinations on all of your rehab projects. That will save you the time and trouble of trying to decide on a new color combination each time you buy a new property. Also, if your property is unfortunately tagged by graffiti, you won’t have to try to remember what color paint to take to the property to remove the graffiti. You only have one color to remember. This is one of the many little things that have simplified my life as an investor. Ensure that the gutters are in good shape and that all gutter extensions are in place, to help keep water runoff away from the house. If the gutters are old, leaky, and generally look bad, consider replacing them. If you’re going to resell the property, think about seamless gutters. The price has come down considerably, and they can add value to the house.

Landscaping

Whether you’re renting or selling, the landscaping you decide on will play a bigger role than you realize in how well your property is received. It might make the difference in whether the property is even looked at, or if the potential buyer or renter keeps on driving. Everyone likes to live in an attractive house, and a few strategically placed shrubs and some pretty flowers can really set off a good-looking house, and possibly tip the scale in your favor. If your goal is rental, you’ll attract better renters with a few aesthetic changes. If resale is your ultimate goal, you might be able to squeeze an extra few thousand dollars out of the property by spending a few dollars on brightly colored plants. The lawn should be well groomed, lush and green. If it’s not, you can usually rectify the situation by treating it with fertilizer and regularly watering it. A well-cared-for lawn can add vibrant

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color and personality to any property, and it invites people to stay a while. If the grass is dead and lifeless, you can buy an instant lawn by laying down sod and giving it a little TLC.

Foundation

The foundation serves as more than just the base of the house. If it’s in sorry shape, it can affect the rest of the property in a very negative way. Foundations in disrepair can lead to major structural problems and defects, such as improper settling of the house, and doors and windows that don’t operate properly. If left untreated, these defects can lead to major cracks in exterior and interior walls. We’ll consider two main types of foundations here: the concrete slab and the raised foundation. The concrete slab foundation is probably the most common, and properties built on this type of foundation are secured by anchor bolts that protrude from the concrete. One major drawback of this type of foundation is that there is no way to get underneath the building if you need to. Properties with a raised foundation are preferable to those sitting on a concrete slab because they have a crawl space underneath the house which makes it possible to make certain repairs if necessary. A raised foundation extends all the way around the property, and the house sits directly on top of it. When you inspect the foundation, try to ensure that there are no cracks that go all the way through, because this is a sign of impending disaster. Many times if the foundation has cracked, it means that the ground the house is built on could be shifting. While this process could take a very long time, if uncorrected it could cause the house to literally split into two pieces. If the foundation has cracked, get a few itemized estimates from professional foundation specialists, and have them spell out what the deficiencies are, the methods they would use to correct them, and the costs involved. The more estimates you get, the better comparisons you can make, and the better decision you can make. 184


If your property is located in the Midwest, it probably has a cellar or a basement. Carefully inspect these walls as well and be prepared to make necessary repairs. The basement may be finished or unfinished; usually the floor is constructed of cement or concrete, but occasionally on an older home it may have a dirt floor. If the floor is made of cement, cracks could permit a potential killer into the home. Radon gas, which is known to cause cancer, can seep upward into the main part of the house, and in time has the potential to sicken people living in the house. This risk can easily be eliminated with very little cost by sealing cracks in the wall and floor of the basement. Plumbing

Another critical system that needs to be inspected is the plumbing. Water always flows into your property through a water meter, which in many geographical areas is located at the front property line. You may find in cold climates—and very old houses—that the meter is located inside the house. The main water shut off to the house is mounted above grade in most cases, and can usually be located near the front of the property on the same pipe as outdoor faucets. The pipes that carry water underground to your property are usually galvanized, copper, or plastic. Interior pipes are typically galvanized or copper. Be sure to check with your local building code enforcement department for local regulations, because building codes can vary dramatically by jurisdiction. If your property is located in a rural area, there’s a possibility that instead of city water service, water supply to your abandoned property could be provided by an underground well. Although this is rare, wells are still occasionally seen. While active wells rarely serve as the main water supply for a property, many houses in rural areas do have abandoned wells. If this is the case, be certain that you properly cap the well to prevent someone from accidentally falling down the shaft. It doesn’t cost much to cap a well, but it can absolve you of legal responsibility and potentially save someone’s life. 185

THE ABANDONED PROPERTY INVESTOR’S KIT Roof

Carefully inspect the roof. Make sure there are no missing shingles or roofing tiles; if there are, you need to replace them. When you inspect the roof, ensure that it is not sagging, because this can indicate a serious problem. If your roof does sag badly, or it’s badly deteriorated beyond repair, you’ll need to replace it. While a new roof can be very pricey, this is one of those repairs that will probably require professional assistance. A new roof can cost anywhere between $3,000 and $10,000. Roof replacement can be extremely hot, dirty work, and roofing shingles tend to be heavy. Unless you’re some kind of Superman and you know what you’re doing, it’s best to hire a professional. If you do need to replace the roof, contact a reputable area roofer for an estimate. While some roofers might charge a fee for the estimate, most will credit the fee charged to the total cost of making repairs if you ultimately hire them. The quality of the work done by roofers can vary dramatically, so be sure to get several estimates and check their references before hiring one. Sometimes you can catch a lucky break on your roofing project at your local roofing supply company. You might find a roofing contractor who happens to be between jobs and is particularly hungry for work. If this is the case, you might get your roofing work done for a very reasonable price. Often you can get top-quality work for rock-bottom prices simply by supplying the materials and opening your mouth and asking. I bought an abandoned house that needed a new roof and I was quite limited on funds, so I had to think creatively. I needed a roofer who was willing to work for a reduced price. Maybe an outof-work roofer would be willing to give me a good, professional job and take a cut in pay. Where could I find an out-of-work roofer? The roofing supply house! The next morning found me at the local roofing supply store where I talked to a lot of out-ofwork roofers. I got the job done in a few days and saved a lot of money while I gave some workers an opportunity to feed their families.

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Rehabbing Abandoned Properties Electricity

The electrical system is the nervous system of the interior of the house. If it’s not safe and up to date, the entire house is in jeopardy. Carefully inspect the electrical system to ensure that every circuit has a standard circuit breaker. Make sure every room has at least two electrical outlets; the outlets in the kitchen should be on separate circuits. Light switch and electrical outlet covers are very inexpensive, so you might want to replace them all for maximum visual appeal. If you have any of the old-style pull-chain light fixtures, replace them with standard fixtures and wall switches. Nothing screams “out of date” louder than a light you have to turn on and off with a yank. Electrical components are tricky and can be extremely dangerous if you don’t know what you’re doing. Instead of playing Russian roulette with safety, you’re better off spending a few dollars and bringing in an electrician who can properly diagnose any potential problems and fix any issues you may not be aware of.

Sinks, Toilets, Showers, and Tubs

Sinks are one of the most popular features in a house. In the kitchen, if the sink doesn’t feature a double-well unit, replace it. Single-well sinks were popular 50 years ago, but today people demand more. In the past it was common for dishes to be handwashed in a washtub; today, people expect to wash dishes in one side and rinse them in the other. Make sure the sinks are in proper repair and that all faucets turn on and off properly. If you have a leaky faucet, try replacing the seats and washers. Unscrew the cap at the end of the spout and ensure that the screen is clean and isn’t being blocked by small pebbles. Lastly, make sure that you have two shutoff valves under the sink, one for each water supply line, and that they operate properly. Because the toilet is one of the most popular seats in the house, ensure that it is securely attached to the floor and it’s

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not leaking. If it leaks at the base, it can easily be repaired by installing a new wax ring underneath it. This is not a difficult job; a quick trip to the library will tell you all you need to know in order to make the repair. If the toilet continues to run after being flushed, the tank ball assembly or flap may need to be replaced. If that doesn’t do the trick, try adjusting the water level so that it shuts off before it reaches the top of the overflow. Your abandoned property could have any combination of standard bathtub, shower over tub, shower enclosure, or even a stall-type shower. If the shower or tub has a glass enclosure, it needs to be tempered safety glass or an approved plastic. If the shower doesn’t have a sliding glass enclosure, either put up a new shower rod and curtain or install a sliding glass enclosure. Make sure the shower head, faucets, and waterspout are all in good working condition. If they’re not, they can also be replaced very inexpensively. If the caulk at the base of the tub is worn and the shower leaks, it’s possible for water to get down underneath the linoleum. If this happens, expensive water damage can take place. Water could saturate the wood in the floor or under the tub, and over time could weaken the floor. In addition, if water is permitted to stay under the linoleum it can cause mold to grow. A quarter’s worth of caulk can prevent this problem.

Water Heater

The water heater in your abandoned property needs to be in good condition. There are a number of different valves on the unit that control different functions on the water heater. If any of these are defective, they can affect the performance of the hot water heater. The good news is they can easily be replaced. In addition, the water pipes connect to the water heater by flexible connectors. If the connectors are defective, replacement is very simple. If the water heater is in disrepair, is very old, or you think it might cause trouble, it might be better to go ahead and replace it rather then wait for problems to develop later on.

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There is a new energy-efficient product on the market that eliminates altogether the need for a water heater. An on-demand hot water system is something worth considering if you have a particularly nice property in a very good neighborhood and you’re planning to sell it. Because these units are so new, they’re still relatively expensive. However, if you have a special property, you might want to consider the expense if you think it could make the difference between the property selling or not selling.

Renovating for Rental When renovating an abandoned property that you plan to hold as a rental, the steps you take may be different than if you intend to resell the property for a quick profit. I can sum up the difference in one word: mind-set. Oftentimes renters are not as diligent about keeping a property in tip-top shape when they are renting it as they would be if they were the owner. Because they don’t have the pride of ownership, many renters don’t feel an incentive—or an obligation—to ensure your property looks as nice when they leave it as it looked when they initially moved in. Many tenants don’t realize the extent of the wear and tear they have caused to a property until they’re moving out and it’s time to make a walk-through inspection of the property. It may have been freshly remodeled when they moved in, but by the time they move out it will probably need a fresh round of repairs and paint to bring it back up to spec. When I point out lingering stains and other damages, renters invariably say “I didn’t think it was that bad.” What you or I might construe as normal wear and tear doesn’t necessarily translate the same way to a renter. Not all renters are rough on a property, but those who are generally create more damages than can be covered by a $500 or $600 damage deposit. I’ve had some very good renters through the years; however, the incidence of excessive wear and tear is high enough that it has affected the way I rehab my properties for rental.

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When you are rehabbing an abandoned property that you intend to keep for rental purposes, keep in mind that the housing requirements for most renters are usually different from the housing requirements for most buyers. As a landlord, you’re looking for a low-cost solution to your rehab challenge that will help to make you high profits. The two rooms most critical to the perceived success or failure of your entire rehab project are the kitchen and the bathroom. I think the centerpiece of any kitchen is probably the cabinets, so if they look old, faded, or out of date, they’ll detract from the kitchen and turn off potential renters. If the cabinets are structurally decent but have lost their gloss, you can add a lot of value and save yourself considerable cash by simply stripping and restaining them yourself. And if they’re paint-grade cabinets, if you feel good about stripping, sanding, priming, and painting your cabinets yourself, then have at it. If you’re doubtful, you might want to hire a good craftsman to do the job for you. In addition, new handles will go a long way in breathing new life into old cabinets by giving them the appearance of being new. If the cabinets look rough cosmetically but are in otherwise good shape, you can have them refaced for a fraction of the cost of new cabinets. Attractive countertops are a favorite with people, so if the countertops are stained and have cuts or other abrasions, replace them. Ceramic countertops are a little more expensive than their Formica counterparts, but they last longer and look much better. They will also increase the value of your abandoned property. Want to know how you can enjoy the beauty and durability of ceramic tile for a fraction of the cost? Read on . . . You can save yourself a lot of time by breaking out your telephone directory and looking up your tile supply stores. When you walk through the front doors of a tile supply store, usually the first thing you see is a display of beautiful, expensive tile for you to fall in love with. You must resist temptation. Walk past the beautiful, expensive tile to the back of the store. There’s usually a guy in charge of an area in the back where they store the tile. Ask the magic question, “Do you have any closeouts?” He’ll usually 190


point to an area where he stores the closeouts. You’ve just hit pay dirt! When stores decide they no longer want to carry a particular line of tile, they sometimes drastically reduce the price and remove it from the showroom. When you look at the tile you see that it’s beautiful, and very similar to the beautiful, expensive tile on the showroom floor—only without the expense. Where the similar tile sells for $6 to $10 per square foot in the showroom, we buy it for $.99 to $1.99 per square foot! That’s a huge savings that can go a long way in building a big abandoned property profit. When you walk through the property, look at all of your light fixtures. If they are old, painted over, out of date, or otherwise questionable, consider replacing them with some inexpensive fixtures. If the property has a dining room, you might wish to add a chandelier. It doesn’t have to cost a lot of money. You don’t have to buy the most expensive chandelier you see, but an attractive chandelier can add a touch of class to an otherwise mundane-looking room. When I rehab for a rental, I go to a building materials warehouse like Home Depot to get most of my materials, including my light fixtures. I can easily replace all of the fixtures with good, attractive, and inexpensive (from $10 to $30) light fixtures. If I install a chandelier in the dining room, I might pay between $59 and $179, depending on the quality of the property and the neighborhood. If your property doesn’t have central air conditioning, ceiling fans for the bedrooms and the living room will help provide air circulation and are quite attractive. You can get a decent ceiling fan for less than $100, and renters really like them. When you paint the walls, it’s a good idea to use a semigloss paint throughout your rental property, because it’s very easy to wash, and tenants like the convenience of knowing they can clean small fingerprints and stains off the walls. Various shades of white paint are as close as your nearest paint store. I like to use a shade of white because it makes the rooms appear to be larger than they are. You can save a lot of money using what I call “oops” paint. When a person orders paint to be mixed for a job and the color 191


turns out to be wrong, the store ultimately ends up with the paint. The paint might have sold for $25 per gallon without the mistake being made. But, because of the mistake in color, the store might drop the price down to $1.00 per gallon! What a savings, if you can use the colors. But what if the colors are a little varied? You can still take advantage of oops paint. First, select all of the various shades of white. There might be a total of 20 gallons of white, pearl white, Navajo white, antique white, cottage white, and so on. When you buy your oops paint, make sure the ones you choose will be compatible when mixed together. Then buy a big 32-gallon plastic trash can and mix your 20 gallons of oops paint together. You should come up with an acceptable shade of white that you can use. At $25 per gallon, that paint would have cost you $500. Not you, because you’re smart. You only paid $20 and the cost of a 32-gallon plastic trash can. Wow! The final step in your rehab project will be installation of new flooring. In the kitchen and bathroom you have a few basic options: linoleum or some form of tile. Linoleum is considerably less expensive than tile, but its major drawback is that it isn’t usually very durable. While there are some very good linoleum products on the market, they are still susceptible to gouges and punctures. Although a bit more expensive (unless you use my tile closeout strategy), another option is tile. You may decide that the additional cost is worthwhile, when you consider how much more attractive it is than linoleum and how much longer it will last. By the time you install linoleum twice, you could have instead opted to pay for tile just once. The carpet you choose for the floor in your abandoned property can bite a big hole in your profits; however, there is a way to manage this cost. There are a few different styles of carpet you can choose from: plush, berber, commercial, or shag. Shag carpet is the least expensive and plush is the most expensive. I generally use a mid-quality berber carpet with a high-quality pad. I use a small carpet company that I found after visiting a number of carpet stores. I have been using this same small company for over 20 years. Why? Because I get my berber carpet, good-quality pad, 192


and the labor for less than $10 per square yard. Look for a company with whom you can build a relationship, and grow together.

Renovating for Resale When you’re renovating an abandoned property that you plan to immediately resell, you want to create visual appeal, a touch of class, and sophistication—all on a budget. If you’re not careful, you might run the risk of having ugly cost overruns that eat into your profits. People who are shopping for a home usually want something that will last, and they generally want something a little nicer than they might be able to rent. So when doing your rehab project, keep this in mind when you shop for supplies. Pretty tile, nice light fixtures, beautiful kitchen cabinets, and shiny new bathroom fixtures are members of a club called eye candy. I invest a little more money to put eye candy in my resale properties because this is where a large percentage of my profit comes from. When you rehab to resell your abandoned property, seek to create an emotional experience for the buyer. You’ll sell your properties faster and for more money. My mentor, Dr. Albert Lowry, taught me about the bushel baskets of money that investors leave on the table. They never learned the value of creating an emotional experience. Here’s one of my first-hand experiences on the subject. My wife and I once lived in a beautiful, executive-style home in an area near Los Angeles called Ladera Heights. This home had six bedrooms, five bathrooms, and over 4,400 square feet of space. I had installed all the bells and whistles. We had a central vacuum system installed in the walls during construction along with all the wiring for custom lighting and home entertainment. The outside boasted a koi fish pond with a romantic waterfall, a gourmet barbeque area, beautiful professional landscaping, and a majestic ocean view. It was a truly beautiful home. When my wife and I were ready to sell it, we decided on a price of $839,000, but we felt that was a little high. When I mentioned the price to Dr. Lowry, he told me I was leaving a 193


lot of money on the table. He suggested I market the property for $1,200,000 for 30 days and see what happens. If it didn’t sell within the first 30 days, we could remarket it by saying, “Hurry, Hurry! Seller’s loss is your gain! Reduced over $200,000 to $995,000!” That’s still over $150,000 more than we would have made had we sold it for the $839,000 that my wife and I had come up with. Dr. Lowry was looking at two elements when he came up with this strategy. First of all, there were no comparable properties in the area to lock us into a value. Second, we had created an emotional experience with this home. We knew that everyone who saw it would love it. Dr. Lowry was banking on the probability that at least one of those people would just have to own it. I was in New York just taking a break from teaching a real estate investment class when my cell phone rang. My wife’s voice was so low that I barely recognized her voice. “Honey, there’s a man and his Realtor here looking at the house and I think he’s going to make an offer,” she said. We sold the house to that gentleman within the first two weeks of marketing it, for $1,020,000! We made $180,000 more than we expected. When you create an emotional experience with your rehabs, you give your buyers the opportunity to own a superior home, and they are willing to pay you handsomely for the privilege. At times you might feel like you’re walking a tightrope, but if you use a little common sense and keep your eye on the bottom line, not only will you do just fine, but you’ll rehabilitate an abandoned property that will be in demand and sell for a premium. I stated previously how important kitchens and bathrooms are to renters—and they are—but this is doubly true for people who are shopping for a home. The cabinets need to be something special, because they’re more than a storage device for dishes. When they look good, cabinets are a beautiful addition to the kitchen and can add considerable value to your abandoned property. If the cabinets aren’t in excellent shape, you can strip and refinish them or paint them, as long as you’ll end up with a good

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looking set of cabinets. If you’re thinking of refinishing them yourself, refer back to the “Renovating for Rental” section and follow the advice I shared there. If you have to replace the cabinets, you can buy prefabricated ones from your local building supply warehouse, or you can contact a local cabinetmaker and have some built. Look at the cost from both perspectives and make a decision. You might be better off buying a good-quality prefabricated cabinet that can be easily installed. They’re very attractive, and they’ll add the value and sophistication you’re looking for. If you want to add perceived value to your property for a nominal cost, you can bring in a new stove and refrigerator. Many of the people who will be interested in buying your abandoned property will already have a stove and refrigerator; however, when people purchase a new home they frequently like to have new appliances that they know are going to last for a period of time. These items do not have to be terribly expensive, but they add a lot of appeal to your property. To really set your property apart from others, you’ll want to install new countertops in the kitchen. Formica countertops don’t last very well and they tend to look cheap. If you install ceramic countertops, not only do they look great, but they last exceptionally well. Don’t forget to look for tile closeouts as I described on previous pages. In the bathroom, you may want to install his-and-her sinks, though it’s not an absolute necessity. Along with your matching sinks, you may decide to put in new cabinetry with plenty of bright lighting. Lighting is quite cost-effective these days, gives a bright and cheery appearance to the room, and can make any bathroom seem charming. New faucets and showerheads can also make the room look much better. You don’t have to spend a lot of money on these items, because many of them can be purchased for somewhere between $25 and $75. With a rental property semigloss paint is a good option; however, properties you are rehabbing for immediate resale look better with a higher-quality flat paint in the living areas. Use

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semigloss in the water areas, like the kitchen, the bathrooms, and the laundry room. You don’t have to spend a king’s ransom on the paint, but do be sure that it is decent quality. As with the property you’re going to rent, you might want to use a variety of white paint. Three shades of white that seem to be popular are pearl white, Navajo white, and antique white. If the master bedroom is particularly small, you might want to install mirrored doors on the closet to give the room the appearance of being larger. If the master bathroom is large enough and your budget projections for the property allow for it, you might add a garden tub. It would be a welcome addition to the room as well as make it easy to differentiate your property from others. Your rehab project is almost complete. You’ve been through the entire property and you’ve made the additions you think will add maximum value to your first abandoned property rehab. All that is left are the floors. For rental purposes, my cut berber carpet works very well, and the quality is good enough for most resale projects as well. This berber carpet will last a long time if it’s taken care of, and you can help guarantee this by installing a good-quality carpet pad underneath. Carpet pad comes in various thicknesses—the thicker the pad, the better. By using high-quality carpet pad you can sometimes double the life expectancy of carpet. When you price carpet, try to locate a style that will wear well, because nothing looks worse than a carpet that is showing premature signs of aging. It won’t be cost-effective to buy a 30-year carpet, but you should still be able to get a decent quality berber carpet for a reasonable price. Combining a highquality carpet pad with a mid-priced berber carpet should give you a resulting look that will impress the new owners of your abandoned property. As with the rental property, instead of linoleum in the kitchen and bathrooms, I recommend you go with a tile floor. It costs a bit more, but it looks better, and when you combine a tile floor with ceramic countertops in the kitchen and brand-new cabinets, the kitchen will be more than a functional room: It will

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be a trophy that the new owners will be proud to show off to their family and friends.

A Shopping Trip Now that I’ve walked you through the process you would undertake in rehabbing your first abandoned property, I’d like to discuss how you can maximize your profits even further. You may have a local hardware store or home renovation center that you do business with on a regular basis. But now that you’re a real estate investor intent upon maximizing your profit, in order to capitalize on all the tools at your disposal, you need to rethink your approach to shopping for supplies. As an average citizen, if you want to remodel your home, you simply drive down to any local store that sells supplies and buy them. But a real estate investor is in business to make money, and because of the nature of the endeavor, you qualify for special perks that other people don’t. I’m referring to special contractor pricing. You may argue that you’re not a contractor, and while that may be true, as someone who will be consistently making large purchases for rehabbing properties, you don’t want to pay retail. If you do, you’re throwing money out the window. When you’re ready to make your initial purchase of building supplies to rehab your abandoned property, stop in at the customer service desk. Let them know you’re a real estate investor and you’d like to open a corporate account. Many times, they’ll be more than happy to accommodate you, and as an added bonus you’ll get a discount every time you buy something. The best way to go about purchasing supplies for your rehab project is to make a list based on different phases of your project. It might be daunting to purchase everything you’ll need for the entire project all at once, so if you make a separate trip for each phase of rehab you can break it down into a more manageable task.

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Rehabbing an abandoned property will challenge you, captivate you, and invigorate you. If you’re attentive to the smallest details as you map out each step that you’ll take in rehabbing your abandoned property, you’ll save yourself a lot of trouble and maybe quite a bit of money. Still, you will forget things; mistakes will be made. But if you approach the process systematically and follow the road map I’ve laid out, it will help keep you on the straight and narrow and making money the smart way.

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C H A P T E R 11

An Abandoned Property Deal from A to Z

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We have covered just about everything you need to know about abandoned property real estate investing. As you have seen, you don’t need an advanced degree, a banker, or deep pockets. Instead, you need the drive and determination to succeed, and the willingness to locate the answers to just a few questions: 䊏

Who are the owners?

䊏

Where are the owners?

䊏

How motivated are they?

As you embark on this magical journey, keep in mind that I did what you’re doing a little over 20 years ago. You might be wondering if there are still profitable abandoned properties out there. The answer is yes. Recently, the Wall Street Journal ran an article that mentioned the fact that there are more vacant properties in our real estate market now than there have been since they’ve been keeping those statistics. I learned what you’re about to learn: that creating tremendous wealth with abandoned properties isn’t hard. The owner has walked away from the property. He’s probably still paying a monthly mortgage, taxes, and insurance, with no money coming in from the property. The owner ran out of options—or at least thought he had. That willingness to walk away demonstrates evidence of being overwhelmed—financially or otherwise—which proves there’s a powerful motivation for the owner to unload the property before his friendly banker unloads on him. It’s your job 201


to locate the elusive owner and bring him back to the table so you can solve his problem. You’re about to launch your abandoned property investment career. As you take these first tentative steps toward the riches that are coming your way, take the time to reflect on what you’ve learned, because there are a number of steps involved in putting together a good abandoned property deal. Do you remember those pick-your-own-ending stories you used to read as a kid? You’d read a couple pages and then you’d have a number of choices to make. But you needed to choose carefully, because what you chose to do each step of the way had a direct impact on the choices available to you next. A random bad decision may not have a terribly negative consequence—at least not at first. But each decision would systematically limit your options later on in the story, until you were left with only one possible outcome. Sometimes you were the bird, sometimes you were the windshield. Other times you found yourself staring down the barrel of a gun. Investing in abandoned properties is kind of like that. While a poor decision usually won’t cost you your life, it could kill your chances to turn a profit on a property. Fortunately, you have the benefit of my years of tried-and-true real estate investing experience in abandoned properties to help you along the way toward reaching your financial dreams. This book is your manual—a blueprint for abandoned property prosperity. Not only do you get to pick your own ending, but you get to write your own story. Every time you work a deal you’ll have a different set of circumstances from which to choose. So how will your first deal go?

Imagine you are driving through your city, within your comfort zone, not consciously thinking about finding an abandoned property. You’re simply driving your daughter to a friend’s house for a birthday party. Although you don’t have your eyes peeled for a potential investment, it’s never far from your mind. But today you don’t have time to look. As soon as you drop your daughter off at the birthday party, you have to buzz across town to your job. 202


Your 10-year-old daughter is so excitedly chattering away about how much fun she’s going to have at the party that you miss your turn. That’s okay—you’ll just whip around the block and get back on track. No sooner do you make your turn than you see it: a white ranch-style house that sits back on a deep lot, overgrown with weeds. You can’t help noticing as you drive by that there’s an old “For Sale” sign lying on the porch. Thoughts of work evaporate as you start thinking about that house. As soon as you drop your daughter off at the party, you drive back to the property you saw. Unbelievable! It’s in pretty good condition. You quickly flip your cell phone open and call the office to let them know they’ll be a man short today. Hey, what are personal days for, anyway? As you walk around the property you marvel at the condition it is in. As nearly as you can tell, the property is in very good shape. Trying to contain your excitement, you snap a few pictures of the property with your cell phone digital camera. You attempt to peer into the windows, but the drapes obstruct your view. Since you have been disappointed in previous properties, you are trying to be careful not to read too much into what you see here; but call it karma or good vibrations, or whatever, you just have a good feeling about this one. Every real estate investor has a first property deal, and you are beginning to feel like this could be yours. As you walk around the property you keep looking for visual clues as to how you might be able to locate the owner, but so far all you’ve seen is a faded Realtor’s sign on the front porch. While a lawnmower engine drones in the distance, you jot down the Realtor’s telephone number. Feeling a little bit like a cop show detective, you keep looking for any trace of the owner, but there doesn’t appear to be anything. At the rear of the house, you see a door leading to what you assume is a kitchen, and when you draw nearer, you realize you can see inside from here. Opening the screen door, you shield your eyes from the sun and press your nose against the glass. You are able to see a slightly outdated kitchen—it’s very nice, it just needs updating. The kitchen is very large with a center 203


island. The cabinets appear to be of high quality, although the stain is a little darker than you would prefer. All in all, you’re very pleased by what you see. Turning from the back door, you see a pile of charred carpet and building materials. It looks like they had a fire. Making your way back around to the front of the house, you know you have to get inside to see the rest of it. This property looks like it has the potential to make you a significant profit. Before you start counting your money, you have to find the owner. Okay, that’s actually second—first you have to find out who the owner is. As you open your car door to leave, it suddenly occurs to you that perhaps the neighbors could shed some light on how you can locate the owner of this property. You knock on the doors to the left and to the right. You even knock on the neighbors’ doors across the street, but you get the same response—nobody is home. Since this is a weekday, you realize they’re probably all at work. You make a mental note to swing back by in the evening or on the weekend. Glancing at your watch, you realize you have plenty of time to drive by the courthouse and find out who the owner is. Beginning to whistle, you head in that direction.

Two hours later, you’re seated in front of your computer at home doing a Google search for Vivian Anderson. Your trip to the courthouse was a resounding success. Now that you know who she is, you just need to locate her. After spending a little time doing computer research you arrive at the conclusion that Vivian Anderson has dropped off the face of the earth. That’s okay, though, because you want to see what the neighbors have to say. Somebody knows where she is. You just have to find that “somebody.” You drive back to the house and, after a brief conversation with Mr. Martinez next door, not only do you have an address and telephone number for Ms. Anderson, you also have some valuable background information. It seems Ms. Anderson has been a widow for nearly 20 years. Her husband, a university professor, died suddenly of a heart attack. Heartbroken, she vowed never to marry again. Unfortunately, as she aged she began 204


exhibiting signs of Alzheimer’s disease. Subsequent visits to a neurologist confirmed the initial findings. Over time her memory faded and eventually she began acting strangely as the disease ravaged her once-active mind. Finally, near disaster struck when she left a curling iron turned on in her bathroom. She left it in a position where it was touching one of the wooden drawers. After several hours it ignited the cabinet and caused moderate damage to the bathroom and hallway, mostly from smoke. Her son, who lived in another part of the city, decided it was best to move her into his home so he and his wife could take care of her. Thanking Mr. Martinez for the information, you head home to give Mark Anderson a telephone call. As you drive, you think about what you’ve learned. According to the records you saw at the county courthouse, the property has no mortgage; and now you know that Ms. Anderson, who is unable to care for herself, is living with her son. Even though there’s no mortgage, property taxes are still due, and the insurance premiums will still be coming due like clockwork. If they tried to sell the house, they would probably be unable to until some repairs are made. You wonder what Ms. Anderson is doing for an income, and you realize that the members of the Anderson family are probably motivated to sell and are desperate to do something to improve their financial situation. When you reach Mark Anderson on the phone, you quickly decide that he’s a likable, outgoing gentleman who has a serious problem. After explaining to him that you’re a real estate investor and you might have an interest in buying the home, he seems very interested in speaking with you. As a matter of fact, the following week he’s going to be in town to pay the property taxes on the house as well as verify that no one has broken into it or otherwise further damaged it. You make an appointment to meet with him at the property the following week.

While you are waiting at Ms. Anderson’s home for Mark to show up, you pull out the comparable sales data that you got last week 205


on the Anderson property and you get excited all over again. Since you are considering this abandoned property and you don’t want to take a chance by overpaying for it, you knew that it would be a good idea to have a sense of what it’s worth before you sit down with the owner. Based on your comparable sales data, you determine that your abandoned property is worth somewhere in the neighborhood of $242,000. Even though the property seems to be in good condition, you know going in that you’re looking at some rehab to repair the fire damage, so you’ll want to plan for that when writing your offer. You put your paperwork away just as Mark Anderson is pulling into the driveway. He climbs out of his car, shakes your hand, and introduces himself. You make small talk as you step inside the house. Knowing how important it is to be a good listener, you listen intently as he describes the house and his problems. As you walk through the house you ask Mark about the faded carpet, the outdated light fixtures, and the Formica countertops in the kitchen that appear to have been used as a cutting board. As you make your way down the hallway, you commiserate with him over the extent of the water and smoke damage. Apparently someone had tried to clean up the damage, and then quit. The floor and the wall are completely gone. That will certainly make the repairs a little simpler, but they will still need to be made. Overall you’re very satisfied with the house and you see profit potential. Mark readily admits what is painfully obvious: The house needs work. You’re confident that the repairs can be made at a reasonable cost, but you’re going to need to crunch some numbers to know for sure. Mark seems to be in a hurry to make a deal if possible, so the two of you have a seat in the dining room to talk things over. Mark knows you’re a creative real estate investor, so he leads off by immediately telling you that he wouldn’t be able to participate in the financing because he needs all cash. He tells you of his desire to take care of his mother, and he’s sure that that will not be possible if he doesn’t have all cash from this transaction. As the two of you talk, it becomes apparent that he has a very small 206


immediate cash need—the rest of the money won’t be needed for several years, when his mother’s health deterioration escalates dramatically. Mark is an extremely motivated seller, so much so that he wants to meet the following day to discuss the property again. Shaking hands, you agree to meet again the following afternoon at his mother’s home.

Later that evening you sit at your kitchen table with a myriad of papers spread out before you, crunching numbers with a calculator. You really like what you see. The numbers tell the whole story. Except for the fire damage, this property is in outstanding shape. You didn’t initially know that it had had a fire, and that does affect your overall impression and opinion of the property. However, you don’t want to let that stand in your way as long as the numbers will work. Since you were already looking forward to a rehab project, you decide that the property is still a winner even though you will have to expand the scope of the project a little further than you had originally intended. Remodeling isn’t your thing. Everybody has something, and swinging a hammer doesn’t fall within your area of expertise. Because you’re not proficient as a remodeler, you decide you will need to hire a professional. With a simple telephone call you are able to discuss the scope and parameters of your remodeling project with a local contractor. Based on your conversation, he submits a ballpark guesstimate bid of $18,000. With a project of that size, you decide that once the property is remodeled you will probably resell it immediately for cash. Your current schedule isn’t conducive to dealing with landlord-tenant relations—plus you could use the quick cash. Even though you are going to have to remodel the property, you estimate that it will subsequently have a fair market value of about $335,000. In its present condition, it’s worth $242,000. Mr. Anderson told you earlier that he felt it was worth $230,000. 207


To maximize the chances that the seller will accept a creative offer, you decide to utilize the multiple offer technique. You create the following three offers: 1. Taking into consideration that the seller wants to receive all cash at closing, and that Mr. Anderson is motivated to sell quickly, you want one of your offers to be all cash. You realize that you can look in the newspaper classified ads and find a hard money lender who will lend you 70 percent of the present value of the property, which works out to about $169,400. Your money partner will come up with the balance. Your all-cash offer is for $195,274 with a 30-day closing. 2. Mr. Anderson indicated that he has a short-term need for cash in the amount of $5,000; some small bills have accumulated that he is unable to pay off. After taking this short-term need for cash into consideration, he doesn’t anticipate needing cash from the property for several years until his mother’s health begins to deteriorate much more rapidly. Since your ultimate goal is to rehab the house and immediately sell it for a profit, you decide to offer $230,000 with no money down at an interest rate of 12 percent, interest only, for 10 years. Since you don’t have $5,000 in cash to include in this transaction, you offer to pay his bills off with a credit card. 3. Even though Mr. Anderson’s house has a fair market value of $242,000, he believes it’s worth only $230,000. In exchange for an offer of $242,000, which is full fair market value, you only want to pay 6.5 percent interest, but you want him to carry the purchase for a full 30 years. You will still use your credit card to pay off his bills, which amount to approximately $5,000. The next day, when you meet with Mr. Anderson and discuss the three options for his property, you take the time to go through the merits of each offer, letting him know that each one stands on its own—they cannot be combined. All three offers are good for 208


both of you. Of the three, you aren’t crazy about option number one, but it is an offer that you can live with. Because Mr. Anderson seems most interested in paying off his accumulated bills, he accepts offer number two. You both sign the paperwork and seal the deal with a firm handshake and ear-to-ear grins.

You find a very good, highly regarded contractor to handle the indoor elements of your remodeling project on your first abandoned property. While they get started, you go to work outside and begin cleaning up the yard. You cut the grass and get rid of the accumulated junk as well as the fire debris. You want to announce to the world that this house will soon be on the market and available for sale, so you landscape the yard and very proudly plant a “For Sale” sign in front. You hope to generate public anticipation so that when the rehab is complete you can immediately have an open house and sell the property. You want to give the property as much curb appeal as possible, so you plant flowers on both sides of the front door as well as a couple of small trees in the front yard. In addition, you decide to install some inexpensive sidewalk lights. The inside work is progressing much faster than you anticipated. The contractor has completely rehabbed the bathroom and hallway. They also did some general sprucing up throughout the remainder of the house. New carpet was installed throughout the house and every room received a fresh coat of paint. The kitchen received a general makeover. Because the countertops were Formica and knife-damaged, new ceramic countertops were installed. The cabinets all received new handles and a lighter stain, which seems to brighten the room up and give it a cheery, inviting feel. You feel good because you know you got a great rehab, inside and outside, for only $23,000. The big day finally arrives, and approximately 25 people show up for the open house. Two days after the house went on the market, it sells. It doesn’t go for full market price, however. Full market price was $335,000; the property only brought $334,990. 209


Is that how you imagine your first abandoned property purchase will go? Do you think it will go that smoothly? Would you do everything the same way? If not, what would you do differently? In the example story, you would have turned a profit of almost $80,000 on your very first abandoned property. Is that more or less than you want to net on your first dance? As long as the numbers work, you can modify and play with your overall strategy to implement a plan that gets you to the same destination in a slightly different way. It’s also possible that you want to dive feet first into landlording and build a portfolio, along with a residual monthly income, beginning with your very first abandoned property purchase. The operative words here are cash flow. It is very difficult to make a single-family home cash-flow. If you can’t get a positive cash flow from a building, you should walk away. Remember, earlier I stated that you get to write your own story, not just the ending. The specific steps you choose to take are up to you. For example, you may choose to advertise on the radio, or you may opt for newspaper ads or even word of mouth. You have a lot to think about and a lucrative future to plan. When you started reading this book I promised to give you all the tools you need to succeed as an abandoned property real estate investor. As you finish, I want you to know that you’re not alone; others have gone before you and discovered what works and what doesn’t. Now you are at a crossroads. You can decide to follow the trail that I and others like me have blazed or you can strike out on your own. The choice is yours. If you go your own way, you can try to succeed by your own devices and discover through a process of trial and error what will put money in your bank account, and what will drain your energy and your resources. It can be an expensive and timeconsuming process, but you may decide this is what you’d like to do. If it is, so be it. Or you can follow the bread crumbs that I’ve dropped along the way and take a shortcut to the top of the abandoned property investing world. You don’t have to make the same mistakes I made, or pay the price I’ve had to pay. By following in my 210


footsteps you can confidently stride toward financial freedom, on a road paved not with gold but with abandoned properties— helping people, building a fat real estate investment portfolio, and lining your pockets with cash. Abbie Hoffman once said, “Today is the first day of the rest of your life.” I believe in the power of dreams, so take the rest of today to contemplate what yours are. You might want to write a few of them down to memorialize this moment in your life. Then get a good night’s rest, because your future starts tomorrow. Make tomorrow the best day of the rest of your life by creating wealth for yourself and your family by investing in abandoned properties. Do you have a cousin named Greg? If you do, give him a call. Let him know that you invest in abandoned properties. You might be surprised by what he has to say.

211

Schedule Reggie Brooks to Speak at Your Event

Reggie Brooks is one of the most electrifying, charismatic speakers in America. He instills a message of “Yes, you can!” and does so by sharing easily understood life lessons in a language that all people, young and old, can understand. To have Reggie speak at your event, e-mail us at reggie@ reggiebrooks.com or call (626) 733–7762. You can also visit us at www.ReggieBrooks.com. Click on “Reggie Speaks.” You’ll have access to Reggie’s picture and bio information. Be sure and leave your contact information as well.

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Special Bonus How to Create Massive Wealth in Real Estate

This FREE online class for readers of my book is filled with techniques and principles that you can use right away to become massively successful in real estate! I have used these techniques to become rich through real estate, and I can teach you how to use them, too! Bruce from Baltimore, Maryland, used these techniques to buy a couple of houses and realize a huge profit. Then, because he wanted to become a movie director, he used part of his money to finance his education in film. Now Bruce has successfully completed two movies, one of which was shot partly at my home! He learned, he took action, and he fulfilled his lifelong dream. What is your dream? This online class could surely help you make your dreams a reality. Get going now, and I’ll see you at the top! —Reggie Brooks

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Simply go to www.ReggieBrooks.com and click on “Here’s how to get your free Wealth-Building Bonus.” Fill in the boxes, and your e-class will begin. I’ll see you at the top! —Reggie Brooks

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Who Is Reggie Brooks?

Reggie Brooks has achieved what many people consider to be the impossible. He went from making $36,000 per year at the local telephone company to making over $40,000 per month in his real estate business. Starting with very little money, Reggie began his investment career in 1986. After taking a few real estate investment courses, he began investing in rental properties in Los Angeles. He quickly replaced his salary of $3,000 per month with over $4,200 per month from a few well-placed investments. He became financially independent within his first year of investing. Reggie is an international speaker/lecturer, an author, and an active investor specializing in a unique and very profitable niche called abandoned properties. Reggie teaches unconventional ways of finding distressed properties, strategically repairing those properties, and systematically selling them at higher than the prevailing market price. “It’s very simple when you take the time to learn how.” Over the years, Reggie has developed his Success Systems that consistently turn marginal $15,000 to $20,000 deals into $50,000 to $75,000 bonanzas. Reggie teaches his Success Systems across America. His students say that his combination of insightful knowledge coupled with his sheer joy of teaching makes learning from Reggie pleasurable. Reggie Brooks’s Success Systems will teach you: 䊏

How the big boys are finding deals right now—in this market!

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THE ABANDONED PROPERTY INVESTER’S KIT

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䊏

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How to make big profits from properties that most investors consider worthless! How to stop chasing deals and get them chasing you! How to use the Internet to find deals from the comfort of your home! Hidden cash-producing secrets that even so-called smart investors don’t know! How to make thousands of dollars in just weeks—no kidding! And much, much more!

Reggie has earned the respect of the real estate investment community because of his multiple investment accomplishments. Of his many successful students, Reggie is proudest of his two kids, Keith and Arlett. Through his mentoring, they have both become successful, full-time real estate investors.

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INDEX

Abandoned properties: advantages of investing in, 5–6, 23–27 reasons for abandonment, 3–5 ways to find, 18–19, 65–83 Abandonment, signs of, 70 Advertisements: remnant time and, 82 running in newspaper, 75–77 running on radio, 80–82 All-inclusive trust deed, 146–147 Annual net income, 161 Answering service, importance of, 74–75, 82 Appliances, property resale and, 195 Appreciation, maximizing of property’s, 132 Assignment of contract, 36–37, 78–79, 163–164 Assignment of offer, in standard purchase contract, 170 Assumption of property, in standard purchase contract, 166, 173 Atkins, Henry, 35–36 Attire, importance of wearing non-threatening, 112 Banks. See Lenders Bathrooms: inspecting fixtures in, 187–188 repairing for rental, 190 repairing for resale, 194–196 Body language, during negotiation, 114 Building costs, value of property and, 157 Building permits, in standard purchase contract, 170 Business cards: giving to investment club members, 74

giving to neighbors, 89 purposes of, 77–80 Buy-downs, HOPE Program and, 54 Cabinets: for rental property, 190 for resale property, 194–195 Capitalization rate, in income approach to valuation, 161–162 Carpeting: for rental property, 192–193 for resale property, 196 Cash, ways to raise, 9–10 Ceiling fans, 191 Ceramic countertops, 190 Chandeliers, 191 Clear title, in standard purchase contract, 168 Closing costs, avoiding lender’s, 43 Clothing, importance of wearing non-threatening, 112 Collateral substitution, in standard purchase contract, 167 Commercial properties, income approach to valuation of, 160–162 Community Development Block Grant (CDBG), 54–55 Comparison approach, to valuation, 107 elements of, 158–160 Competition: lack of, for abandoned properties, 16–18, 26, 31–33 traditional deals and price increases, 24–25 Concrete slab foundations, 184 Consideration, for option, 121–122 Contingent sales, 133–136

221

INDEX Emotions: negotiation and, 105–106 property resale and, 193–194 Entitlements. See Government funding sources Equity, financing and owner’s wish to retain, 146–147 Escrow fees, 43 Escrow/settlement instructions, in standard purchase contract, 168, 174 Exterior, inspecting of house’s, 182–183

Contract, assignment of, 36–37, 78–79, 163–164 Contract for deed, 150–151 Contractor pricing, 197–198 Contractors, working with, 180–181 Council on Foundations, grants and, 57–58 Counteroffers, strategy and, 7–8 Countertops: for rental property, 190 for resale property, 195 Creative financing techniques, 141–152 cautions about, 152 contract for deed, 150–151 lenders and, 151–152 need for, 141–146 subject-to deal, 10–11, 148–150, 166, 173 wraparound mortgage, 146–147 “Creative Thinking,” 90–91 Credibility, establishing with owner, 113 Credit, need for good if working with lender, 27 Crime prevention, 6 Curb appeal, 182–183 Damage deposit, from renters, 189 Date of sale, in comparison approach to valuation, 158 Declining market, making money in, 3–5, 44–46 Deeds: all-inclusive trust deed, 146–147 contract for deed, 150–151 deed of trust in standard purchase contract, 167–168 Deferred payments, in standard purchase contract, 168 Del Dotto, Dave, 90 Department of Housing and Urban Development (HUD): Community Development Block Grants, 54–55 HOME Program, 53 HOPE Program, 54 Section 8 assistance, 55–56 Direct loans, 60, 61 Divorce filing records, 96 “Do Not Forward” letter, 93–94 Effective gross income, 161 Electrical system, inspecting of, 187. See also Light fixtures

Federal Housing Administration (FHA): financing in standard purchase contract, 166, 173 203(b) loan program, 61–62 Fees: of lenders, 27, 43 for options, 121–122 FHA (Federal Housing Administration): financing in standard purchase contract, 166, 173 203(b) loan program, 61–62 Finance companies. See Lenders Financing techniques, 141–152. See also Government funding sources; Lenders; Owner-financing cautions about, 152 contract for deed, 150–151 lenders and, 151–152 need for creative, 141–146 in standard purchase contract, 165–166, 172–173 subject-to deals, 10–11, 148–150, 166, 173 wraparound mortgage, 146–147 First deal, example of, 202–210 Flooring: for rental property, 192 for resale property, 196 Foreclosure: feeding of abandoned property market by, 6–8, 17 inaccurate reporting about, 4–5 owners unwilling to move and, 26 Formula grants, 53 Foundation, inspecting of house’s, 184–185 Friends: not trusting financial advice from, 14 telling you are seeking vacant and abandoned properties, 71–72

222

Index Funding sources. See Financing techniques; Government funding sources; Lenders Government funding sources, 33–34 entitlement programs, 49–56 grants, 56–60 HUD programs, 53–56 loans, 60–62 Grants: applying for, 58–60 examples of, 51–56 researching of, 56–58 Grants.gov, 57 Grantsmanship Center, 58 Grant Spy, 57 Guaranteed loans, 60–61 Gutters, inspecting of, 183 Hill, Robert and Ella, 142–143 Homeowners association, in standard purchase contract, 166–167, 173 HOME Program, 53 Home-study courses, 12–13 HOPE Program, 54 Hoskins, Gary, 9–11 Housing voucher, 56 HUD (Department of Housing and Urban Development): Community Development Block Grants, 54–55 HOME Program, 53 HOPE Program, 54 Section 8 assistance, 55–56 Illustrative stories: changing life by investing in abandoned properties, 11–16 combining government programs, 56 convincing owners to sell, 19–20 creative financing, 9–10, 142–143 creative thinking, 90–91 determining seller’s needs, 115–117 financing by motivated seller, 30–31 finding owner, 98–100 first property deal, 202–210 government grants, 52 knowing worth of house, 44–45 learning with first purchase, 16–18 making offer on first property, 6–8 negotiating, 107–112 using options, 35–36, 127–130

Income approach, to valuation, 107, 160–162 Inspection: before repairs, 180–189 in standard purchase contract, 174 Installment sale, taxes and, 109 Insured loans, 60 Interest rates: buy-downs and, 54 owner-financing and, 30 price of house and, 46–48 Investment clubs: advantages of joining, 72–73 cautions about, 73–74 option contract sale and, 131 Investment portfolio: advantages of abandoned property deals, 23–27 assignment of contract in, 36–37 purchase option in, 35–36 Investors, finding other, 13, 79 IRS 1031 tax-deferred exchange, 133–136 Kitchen: in rental property, 190 in resale property, 194–197 Landscaping, repair of, 183–184 Land, valuation and cost of, 156 Lawn, 183–184 Law suits, public information about, 97 Learning opportunities, mistakes as, 67 Lease agreements, in standard purchase contract, 170 Lenders. See also Financing techniques; Government funding sources advantages of buying without, 27 arranging financing before finding properties, 41–42 creative financing and, 141 fees of, 27, 43 interest rates of, 30 lack of knowledge about abandoned properties, 6 unwillingness to lend to original owner, 29 when to use, 151–152 Leverage, importance of, 43–44 Light fixtures: for rental property, 191 replacing old, 187 for resale, 195

223

INDEX Loan programs, of government: direct, 60, 61 guaranteed, 60–61 insured, 60 Loans. See Financing techniques; Government funding sources; Lenders; Owner-financing Location of property: comparison approach to valuation, 158 in standard purchase contract, 165, 172 Low- or no-money-down financing deals, 10, 41–62 arranging financing first, 41–42 government entitlement programs, 49–56 government loan programs, 60–62 grants, 56–60 interest rates and price, 46–48 owner-financed deals, 42–46 Lowry, Dr. Albert, 142–143, 193–194 “Machine” system for finding properties, 65–83 answering telephone calls promptly, 74–75 establishing, 65–68 handing out business cards, 77–80 joining investment club, 72–74 running newspaper ads, 75–77 running radio ads, 80–82 sticking with, 83 targeting your search, 68–71 telling friends about search, 71–72 Maps, drawing target area on, 68 Market value, avoiding property priced at, 24 Master bedroom, resale and, 196 Media, inaccurate reporting by, 4–5 Mental preparation, for negotiation, 106–107 Mistakes, as learning opportunities, 67 Mixed-use properties, government loans for, 62 Mortgages. See also Financing techniques assuming seller’s, 146–150 silent second, 52 in standard purchase contract, 167–168 wraparound, 146–147 Motivated sellers, 15, 16. See also Owners; Owner-financing advantage of working with, 28–31 creative financing and, 145 making contact easy for, 74–75

Multiple offers, making to seller, 162–163 National Agriculture Library, grants and, 58 Needs of owner, determining, 115–117 Negotiation, 98–100 to avoid overpaying, 103–104 determining owner’s needs, 115–117 determining owner’s wants, 107–112 emotions and, 105–106 establishing rapport and, 106, 112–114 key principles of, 105 mentally preparing for, 106–107 Neighbors, speaking with, 88–90 Newspaper advertisements, 75–77 No- or low-money-down financing deals, 10, 41–62 arranging financing first, 41–42 government entitlement programs, 49–56 government loan programs, 60–62 grants, 56–60 interest rates and price, 46–48 owner-financed deals, 42–46 Notes: against already-owned property, 48 in standard purchase contract, 167–168, 174 Offers, strategies for making, 7–8, 162–164. See also Negotiation On-demand hot water system, 189 Online directories, 97 Options contracts, 35–36, 121–137 benefits to investor, 121–122 benefits to seller, 122–124 examples of, 124–130 explained, 121 how to write, 126–127 research work product offered as fee, 123–124, 126 selling of, 130–132 three-way exchange, 132–133 Owner-financing: benefits of, 29–31 as no- or low-money down option, 42–46 Owners: determining wants of, 107–112 determining needs of, 115–117 giving choices in offer to buy, 162–163 pros and cons of option contracts for, 122–124

224

Index unwilling to move, 26 what you can provide to, 87–88 Owners, ways to locate, 19, 25, 76, 87–100 being persistent, 90–92 with call to “411” information, 98–100 with “Do Not Forward” letter, 93–94 observing house and property, 92–93 searching property tax information, 94–95 searching public records, 93, 95–97 speaking with neighbors, 88–90 Paint: on exterior, 182–183 for rental property, 191–192 for resale property, 195–196 Partners, finding of, 13, 79 Passive income, 13 PATLive, 74, 82 Performance mortgage, in standard purchase contract, 168 Personal property, in standard purchase contract, 170–171, 174 Physical features, comparison approach to valuation, 159 Pipes, inspecting of, 185 Plumbing: in resale property, 195 inspecting of, 185 Prepayment discount, in standard purchase contract, 167 Price of house, interest rates and, 46–48. See also Value of property Probate records, 97 Proper name, addressing owner by, 113 Properties, locating vacant and abandoned, 18–19, 65–83 answering telephone calls promptly, 74–75 establishing system for, 65–68 handing out business cards, 77–80 joining investment club, 72–74 research work product offered as option fee, 123–124, 126 running newspaper ads, 75–77 running radio ads, 80–82 sticking with system, 83 targeting your search, 68–71 telling friends about search, 71–72 Property inspection checklist, 113 Property tax records, 94–95 Proposal, writing for grant, 58–60 Public record information, 19, 93, 95–97

Public service, buying abandoned property as, 5–6 Purchase agreement, option contract and, 126–127, 134–136 Purchase contract: explained, 172–175 standard, 164–172 Purchase options, 35–36, 121–137 benefits to investor, 121–122 benefits to seller, 122–124 examples of, 124–130 explained, 121 how to write, 126–127 research work product offered as fee, 123–124, 126 selling of, 130–132 three-way exchange, 132–133 Questions, waiting for response to, 111 Quit claim deed, 149 Radio advertisements, 80–82 Radon gas, 185 Raised foundations, 184 Rapport, establishing with owner, 106, 112–114 Real estate investment clubs: advantages of joining, 72–73 cautions about, 73–74 option contract sales and, 131 Real estate purchase contract, standard, 164–172 Realtors, getting good information from, 23–24 Receipt for deposit, option contract and, 126–127, 134–136 Rehab. See Repairs and renovations Remnant time advertising, 82 Rental properties: repairs and, 189–193 Section 8 assistance for renters, 55–56 Repairs and renovations, 179–198 Community Development Block Grants and, 54–55 contractor pricing and, 197–198 financial strain on owner and, 28 making simple, on first purchase, 17–18 motivated seller and, 28 pointing out need for with tact, during negotiation, 113–114 preparing for, 180–189 for renting of property, 189–193 for reselling of property, 193–198

225

INDEX Repairs and renovations (Continued ) saving money on, 10 value of property and, 159–160 Replacement approach, to valuation, 107, 156–158 Resales, repairing property for, 193–198 Revitalization area, buying property in, 35–36 Right of assumption, in standard purchase contract, 167 Right of first refusal, in standard purchase contract, 167 Rights, in standard purchase contract, 169–170 Rollover balloon provision, in standard purchase contract, 167–168 Roof, inspecting of, 186 Scott, Jonathan and Maryann, 16–18 Second mortgage, silent, 52 Seller. See Motivated sellers; Owners; Owners, ways to locate Seller’s warranties, in standard purchase contract, 169–170 Sheriff’s eviction notice, 93 Shower, inspecting of, 188 Silent second mortgage, 52 Sinks: inspecting of, 187 repairing for resale, 195 Sole security, in standard purchase contract, 167 Stutter clause, in standard purchase contract, 168 “Subject-to-sale”: example of, 10–11 how to do, 148–151 in standard purchase contract, 166, 173 Substitution of collateral, in standard purchase contract, 167 Successful investing, qualities needed for, 8–9 Successful people, listening only to, 14 Target areas, selecting and sticking to, 68–71 Taxes: installment sales, 109 property tax information sources, 94–95 Telephone calls, systems to answer, 74–75, 82

Telephone numbers, in advertisements, 81 1031 tax-deferred exchange, 133–136 Tenancy agreements, in standard purchase contract, 170 Terms and conditions of sale, comparison approach to valuation, 158 Three-way exchange, 132–133 Tile: close-out deals on, 190–191 for rental property, 192 for resale property, 196–197 Title insurance, in standard purchase contract, 168–169 Toilets, inspecting of, 187–188 Training seminars, 12–15 Trump, Donald, 3 Trust, establishing with owner, 113 Tubs, inspecting of, 188 Urban blight, preventing, 6 “Vacant and overgrown” properties, confining interest to, 71–72 VA financing, in standard purchase contract, 166, 173 Value of property, 155–175 avoiding paying market value, 24 comparison approach to, 158–160 determining before negotiating, 107 income approach to, 160–162 multiple offers and, 162–164 replacement approach to, 156–158 Voice mail system, 74–75 Voucher, for housing, 56 War zone areas, 69 Water heater, inspecting of, 188–189 Water meter, 185 Well, inspecting of, 185 Win-win transaction, negotiating toward, 98–100 avoiding overpaying, 103–104 determining owner’s needs, 115–117 determining owner’s wants, 107–112 emotions and, 105–106 establishing rapport and, 106, 112–114 key principles of, 105 mentally preparing for, 106–107 Wraparound mortgage, 146–147

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