Information on Exclusivity Agreements and Why (or why not) to Sign Them

An exclusivity agreement is an agreement that limits a buyer from dealing with other sellers. The seller involved on an exclusivity agreement should be the sole provider of the goods that the buyer demands. It is a partnership that gives the seller exclusive rights to supply certain goods or services to the buyer. The underlying significant question here is: Why should a buyer sign up for an exclusivity agreement?

In every decision we make, there will be always be pros and cons. The advantage of an exclusivity agreement is always more apparent for the agent. It could offer a higher selling price for the agent. After relatively securing the time and money involved, agents can control the negotiation time and can easily turn down any offer. It can offer advertising opportunities for the agent. It can save time for the agent because the agreement allows no last minute switching of the buyer to other agents. No paperwork will be wasted at all.

So how does the agreement benefit the buyer?

Signing the exclusivity agreement guarantees better information for the buyer. The agent is automatically committed to providing details and information that will guide the buyer. The negotiations are done faster, saving time for both parties.

It is the buyer’s call to make the agreement happen. As a buyer, who will potentially invest a great amount of money, it is prudent that you weigh your pros and cons before signing an agreement with a specific agent. You can base your decision on how the agent presents the whole agreement. You can actually have the option to put the agreement within a specified amount of time to give you the power to terminate it when you decide it is no longer giving you a good advantage. The agent should also be able to present your benefits when you sign the exclusivity agreement.

Do your research, ask the experts and, if you must, hire a legal consultant when you are having dilemmas on whether or not to sign an exclusivity agreement. You will be investing the money you’ve worked hard for; the lack of knowledge is the last thing you need.

How a Real Estate Closing Works

You’ve showed your client the property and he seems very interested in it, then he decides he’s going to buy it. Now you have reached closing, which is the final step in executing a real estate transaction. But you’ll have to go through a few processes before the transaction is actually over.

Several things happen during closing: the buyer and the lender deliver a check for the balance owed on the purchase price. Then the seller signs the deed over and gives it to the buyer. A recorder’s office, which will record the deed, will require the seller’s signature to be notarized. Commonly, the seller delivers possession to the buyer by giving them the keys to the property. Unless otherwise specified in the real estate contract, delivery of possession should be on the closing date, which is usually several weeks after the offer is formally accepted.

A title company, lawyer, notary, or the buyer will register the new deed with the local land registry office or recorder’s office. A declaration or statement by the buyer or seller regarding the purchase price may have to be filed with the government. Conveyancing taxes and recorder’s fees will typically have to be paid, which are part of the closing costs. The seller receives a check or bank transfer for the proceeds of the sale, minus the closing costs and mortgage payouts. Prepayments for real estate taxes and insurance may be taken from the funds allotted for closing costs, and fees charged by other parties are paid. Sometimes, closing in escrow, which is a neutral third party, may occur to prevent the two parties from getting ripped off.

At a closing, the basic idea is this: the buyer gives the seller their money and the seller gives the buyer the deed.

How to Run Numbers to Get Your Desired CAP Rate

When investing in cash flow or rental properties it is important to understand what your return on investment is going to be. Investors refer to this as a CAP rate. Investors will target a specific CAP rate to make sure the properties they are buying are going to give them the desired return they are targeting. We will go through numbers to show you how your offer amount will be able to give you your desired CAP rate.

CAP rate is defined by Net Operating Income (NOI) divided by the cost of the asset. I’ll call the cost of the asset the all-in cost, which may include rehab costs as well. To get the NOI, I have to know the amount I can rent the property for minus all the expenses associated with owning that property. Let’s go through some numbers to show you how to calculate CAP rate.

Let’s say I need an 8% CAP rate to buy a rental property. The property will also need 15K worth of work to make it rent ready. Once it is fixed up, the property will rent for $1,100 per month. Taxes and insurance will cost me $150 per month. This is information I will need to get my numbers dialed in.

First, let’s get our NOI. We are getting $1,100 monthly for rent but we have to take off the monthly expenses.

  • $1,100 – $150 (taxes and insurance) = $950
  • $950 – $110 (10 % property management company) = $840
  • $840 – $110 (5% for maintenance and 5% for vacancy) = $730
  • $730 * 12 = $8,760 (Yearly NOI)

Now we have our NOI. Here is the rest of the calculations to get our offer amount:

  • $8,760 / .08 (desired CAP rate) = $109,500
  • $109,500 – $15,000 (rehab cost) = $94,500
  • $94,500 – $2,835 (3% closing costs) = $91,665

This formula has given me an MAO (maximum allowable offer) of $91,665. This offer will give me an 8% CAP rate. Now, if we go one step further and want to wholesale this to an investor that wants an 8% CAP rate, we only have to subtract our assignment fee.

  • $91,665 – $3,000 (assignment fee) = $88,665 (MAO for an assignment)

By using this formula you should be able to calculate whatever CAP rate you or your investors are hoping to get from a rental property.

Understanding Home Inspections

A home inspection is an important aspect to consider when buying a home. This process enables the buyer to identify the overall condition of the targeted property. This operation will save the buyer a lot of money in the long run. The result of any home inspection can greatly influence the final decision of the buyer. As a buyer, you need to be very sure about the subject of your investment in order to avoid future trouble.

A home inspection is usually done by a professional home inspector. The expected output of the inspection must be detailed enough to identify system conditions, deterioration, and other aspects of the home that will help the inspector come up with a good recommendation.

One of the common and important aspects to consider during the inspection is the structural state. This is very vital because nobody wants to have a home with a weak foundation. That is just one common example of things to check during an inspection. There are many other features you need to consider if you want your investment to be worth it. These include landscape condition, potential pests that will surely provide some inconvenience, the state of the septic system, and many other details that can potentially cause stress in the future.

A home inspection would be futile without a good inspector. You need to check if the one you hired is experienced enough to offer you a quality outcome. The inspector must be certified and preferably a member of a professional association. Because you are seeking assurance on the overall condition of the home that will shelter you and your family for a long time, it is essential that you are dealing with the right people.

The report after the home inspection can vary in form. It could be a narrative, a checklist, or any rating system your inspector prefers to give you a clear view of the overall state of the property. During the inspection it is also be helpful if you have certain knowledge about what to ask and what to check. You should not fully depend on the inspector. It would be a big help if the buyer is present during the inspection, giving feedback and asking for advice, because it could help the inspector come up with a comprehensive report for the buyer.

Real Estate Investing Due Diligence

As a real estate investor, you will be presented with properties in a variety of financial and physical conditions. Depending on your investment style, location and financial goals, you may be looking for something very different than your fellow investors. No matter what type of property you are looking for, be sure to complete your due diligence before it ends.

Financial Due Diligence

As a real estate investor, you are an investor first and a homebuyer second. While your personal home search was about forming a connection to your future home, an investment property is very different. As an investor, it’s all about the numbers.

When doing your financial due diligence, complete this checklist:

  • Is the price fair? Understand what has sold in the area and for how much.
  • Are there any liens on the property or is the property in the process of foreclosure? Tax liens come with a property, so knowing how much they are before purchasing the property is critical.
  • Does the property have a tenant in place and/or a rental history? If you are purchasing the property as a buy-and-hold investment, you will need to know how much monthly income to expect.
  • Does the property require any specialty insurance? Flood insurance can be a large annual expense.
  • What are the average utility costs and, as a landlord, will you be responsible for any of the utilities?
  • What is the cost to maintain the property?
  • What is the going rate for a property management company?

As you can see, financial due diligence is much more than just getting the best price. Answering these questions will help set any investor up for long-term financial success.

Physical Due Diligence

The physical condition of a property is closely tied to its financial value. No matter how well the numbers from the financial section add up, the physical condition of the investment needs to be accounted for.

Before purchasing an investment property, find out:

  • When the major home systems were last replaced (HVAC, water heater, major appliances, )
  • How many years are left on the roof
  • If there is any structural damage
  • If there is evidence that routine maintenance has been completed
  • If the flooring need to be replaced
  • What year the home is and if you will be dealing with any code violations

To get that new feel to your investment property, new carpet and a coat of fresh paint are recommended. However, as an investor, you need to look out for the big-ticket items that will require cash up front. Taking the condition of these items into account will help you determine your initial investment, as well as your capital investment over the course of owning the property.

Finding the Right Investment Property

Due diligence is a critical element in finding the right real estate investment property. Many “real estate gurus” claim they “go with their gut,” but nothing can replace due diligence! Don’t be tempted by a “too good to be true” price. Complete your due diligence to ensure the property will meet your investment goals.

Understanding the Amount of Your Buyer’s Profit on an Assignment Deal

One thing that is not stressed enough in our presentations to our buyers is how much profit is on the table for them. By understanding the buyer’s profit, we can better inform our buyers as to the amount they can expect to make. It also can strengthen our position when negotiating the wholesale fee.

When calculating an offer, understanding the type of market we are in will make us more effective. If we are in a cold market, the buyer has a stronger negotiating position. In a hot market, the seller has the advantage. We are currently in a hot market. Therefore, we need to use strategies that will strengthen our offers and help our bottom line.

Let’s run through some calculations and see what we can do to make our offer more competitive. As we run the numbers on an assignment deal, pay close attention to adjustments that can be made to strengthen our offer:

Asking Price- $179,000

ARV- $250,000

Buyer’s Profit- 20%

Rehab- $30,000

Wholesale Fee- $8,000

Now, let’s calculate what our max offer will be with this information:

$250,000- ARV

X .8- Buyers Profit 20%

$200,000- All-In Price

Less $30,000- Rehab

Less $8000- Wholesale Fee

$162,000 Max Offer

$179,000- Asking Price

 

Now, let’s calculate what our buyer can expect to make on this deal. We must first determine if we are in hot or cold market, as this will influence some of our decisions regarding the property. Our current conditions tell us that market conditions are hot. So, this is how to determine the profit our buyer will make from the above offer:

First, we must subtract the all-in price from the ARV. Next, because it is a hot market, our buyer should consider paying costs such as real estate fees, closing costs and holding costs. This would cost about 40% of the gross profit. The buyer would keep 60% of the gross profit or the net profit. Let’s look at it as a formula:

 

$250,000- ARV

Less $200,000- All-In Price

$50,000- Gross Profit

X .6- Buyers Percent of Gross

$30,000- Buyer’s Net Profit

 

This $30,000 profit would be attractive to most buyers. However, closing the gap between the asking price ($179,000) and our max offer ($162,000) may be hard to overcome. So, let’s look at the things we could adjust to present a more competitive offer:

$250,000- ARV

X .85- Buyer’s Profit 15%

$212,500- All-In Price

Less $30,000- Rehab

Less $5,000- Wholesale Fee

$177,500- Max Offer

 

As you can see, our new max offer ($177,500) is much more competitive and the gap with the asking

price ($179,000) is much easier to bridge. Let’s calculate the new buyer’s profit and see if it is a good

deal for our buyer:

 

$250,000- ARV

Less $212,500- All-In Price

$37,500- Gross Profit

X .6- Buyer’s expenses 40%

$22,500- Net profit for buyer

 

It is a smaller net profit for the buyer than the first offer. I will not try to tell you if the $22,500 is a good or bad profit because that is for each buyer to decide. With a few adjustments to our offer there is a greater chance that our second offer would be accepted. We don’t always make the money we want; however, $22,500 is better than nothing.

Best of luck in your investing. Be creative and you will complete more deals than those who do not think outside of the box.

Seven Ways to Get More When Selling

Nobody likes taking a hit when they go to sell something, especially when it is one of the largest investments of their life. Purchasing real estate is a huge investment and selling it can be an even bigger one. In this article, we will go over seven ways to get more for your home. Hopefully some of these tips will help and you will be able to put them to good use.

 

  1. List for less than market value. This will make your home look highly desirable in a tight market and create some urgency with your buyers. Buyers will act faster because they don’t want to lose out on a deal and this should increase your odds of multiple offers.

 

  1. Brighten up the place. Clean out the windows, open the blinds and turn on the lights. Open concept is what many new home owners are currently looking for, and you can help create some of that simply by making the home look more open and spacious with some light.

 

  1. On that same note, clean out the closets. You can make a home look like it has more storage by removing at least 50% of everything in your closets. This will definitely help sell your home.

 

  1. First impressions are key, so paint the front door. While you are painting your front door, go ahead and install a nice, sturdy doorknob and lock. The fresh coat of paint and new lock will help make the place feel newer and less used. Everyone wants to feel safe at home and putting in that new, sturdy lock can help create that sense of security your buyer is looking for.

 

  1. Clean. Clean. Clean! Dust from the ceiling fans all the way to the floorboards. Don’t forget to pull the weeds and grass growing between the cracks in the driveway as well.

 

  1. Make everything neutral. Yes, the pink nursery looks great for you and your home; however, you are trying to sell it. Since it will no longer be your home, you need to help the buyer feel like it could be theirs. What if they only have boys? Pink might distract from all the other amazing features your home has to offer. A fresh coat of paint in a neutral color can help make a huge difference when it comes to the atmosphere the home brings.

 

  1. Put away the photos. Again, little Suzie is adorable; however, you need the buyers to feel at home and not like they are invading someone else’s home.

 

Now get out there and get the SOLD price you are looking for!

It’s All About the Numbers

One of the things I love about real estate investing is that it is all about the numbers. As long as I stick to my numbers, I make money. My wife and I have been investing in real estate for many years. We walk through several properties every week, and still, as we walk through a property my wife gets caught up in how nice this or that is, and I am behind her doing numbers and more often than not end up saying, “Well it’s not that nice, NEXT.”

Finding the right deal is a matter of numbers. It can take a lot of offers to get a deal. Many new investors will put an offer in and then wait and hope it gets accepted. But by doing that, it is keeping them from putting in more offers. Putting in offers is a numbers game. I have found that by developing a mindset of always focusing on the next offer, I am able to make the numbers work for me. All the information from each offer I submit is saved on my computer. This allows me to put an offer in, forget about it, and focus on the next offer. I continue to focus on the next offer until I get a counter offer from one of the previous offers I put in. I then go to the information I have saved on my computer and can refocus on getting that deal.

By always focusing on the next offer, I can keep frustration from sneaking in. When you put an offer in and then wait and hope for it to get accepted, it can easily lead to disappointment if someone else gets the deal. If you do this too many times, it can lead to frustration. But by understanding that this is a numbers game and that the more offers you put in, the sooner you will get a deal, you can stay focused and motivated.

Tips for Maximizing Profits Using a Rental Contract

When we buy rental property our primary goal is to make money.  In this article I would like to give some tips on how to maximize your profits by using the rental contract.  Not only can you increase profits, you can also increase the control you have on your property.  Let’s consider the following things you can do to help yourself:

  1. Consider when you make the rent due.  On most contracts the rent is due on the first of the month and then there is usually a three to seven-day grace period.  Stop allowing these grace periods.  Your cash flow is important and you should expect your money on the first of the month.  Understand you are making a free loan when you use a grace period.  None of us are in the business to provide free loans. 
  2. An effective way to maximize your investment is to offer a discount instead of having a grace period.  Let’s say we want to have a rent of $600 on our rental unit.  Tell the tenant that the rent will be $700 per month, but a discount of $100 will be extended if the rent is paid on or before the first of the month.  This will be beneficial to you in a couple of ways.  First, you are getting your rent paid on time.  Second, in the event there is a dispute regarding non-payment of rent, you will be able to claim the $700 as rent and not the $600.  At times judges may not allow all of the late fees, but rents are always allowed to be recovered. 
  3. Typically, we sign rental contracts for one year periods.  By so doing we are giving a lot of control of our property to our renters.  Try evicting a renter who is not taking care of the property, but is paying rent.  A solution to taking back control of your property is a month to month contract.  You can then raise the monthly rent each month until they leave or begin to take care of the property.  With the proper notice you will be able to raise the rent and have more control of your investment.  Also, consider the fact that the world’s greatest renter would break their lease in the event of a job transfer or other major life changing events.  Why should you be giving such control to someone else?  Instead you maintain control and maximize your investment.

   By taking a few simple steps you can make a rental contract more effective for you.  Be aware however, if you are going to have Section 8 renters you will have to use the government contract.  For all other renters use these simple techniques and have fun making your bank deposits!