by

Bernard Hale Zick

One of my students recently told me how he was applying what he learned. This approach gives you 100% financing... the money comes from a hardmoney lender! Sound interesting? What you are doing is making it easy for the lender to make up their own mind as to whether or not they want to play the game. Here's how it worked.

An investor liked fixing up properties. He found the type of house he wanted to buy in June of 1996. This house was for sale for $150,000. It had beenon the market for six months. The market was soft during this time. When markets are soft, only the cleanest and "most ready for market" houses sell.

The house needed many cosmetic improvements as well as some minor structural modifications to be a top dollar house. The investor thought could easily be worth between $190,000 and $220,000 at the end of a years time, given various factors. These factors included a cash investment of about $10-20,000 in materials, labor and supervision on the part of the investor. Additionally, the San Diego market was beginning to come back in June of 1996. And lastly, the house was being purchased at a discount because of all the things that needed to be done.

The investor in question wanted to structure the transaction in such a way that he could borrow a 100% of the option price at the end of eighteenmonths. The seller would consider an option if a.) His monthly payments were made, b.) He could get a little more for waiting c.) And theimprovements would begin immediately. The seller had set the option price at $158,000. Thus if the house was really worth only $150,000 it only needed to only appreciate about 4% to be worth $158,000 at the end of a year and a half. Hindsight on this example tells us that appreciation for thisparticular market was around 12% between June of '96 and December of '97 so this fact worked well for the buyer. And with luck, the buyer would like to be able to borrow the additional $10,000 that he was putting into the property. At least this way he would have all his cash back. If he could get any more for his time and effort, so much the better.

Lenders have a habit at looking at refinance loan application with an eye to whatever is lower cost, what you paid for the property, or currentappraisal. This same kind of outlook towards lending usually bubbles over into all sorts of situations where the buyer has possession or use of the property.

My student is a creative real estate broker. He helped this buyer and seller structure the lease option in the following fashion. Lease payments were$1200 a month. That's annual payment of $14,400. All the lease payments were to be credited to purchase at the time of purchase. As additionaloption consideration, buyer was required to do $20,000 worth of remodeling; decorating and repairs, with $10,000 of that being his own labor. The selling price was $192,000 rather than $158,000. This of course is the $158,000 plus the $34,000 in additional option considerations. ($14,400 in monthly payments and $20,000 in fix up.) Since $34,000 of the option consideration would be paid at the time of closing, the balance due at thetime of closing was $158,000.

At time of exercise of option the real estate contract was drawn for $192,000. It showed $34,000 being paid to the seller as option consideration, which the seller acknowledged being received. A loan was requested in the amount of $160,000 which is approximately 80% loan thevalue. The second loan source is also being considered which would give a 90% loan the value loan. If the buyer takes the second, he will also have his fix up cash back. No matter which loan the buyer takes, the buyer will have "financed out" the majority of the purchase price. With a 90% loan to value ratio loan they will have no cash in the house whatsoever.

What about the lender? Was this all done with mirrors? Absolutely not. A copy of the option agreement was attached with the purchase contract to the loan application. Both lending sources are fully informed and are totally willing to make the loan as described above.

Now I'm not saying every lender would give you this much leeway. I also know western lenders tend to be a lot more lenient then they are in otherparts of the country. Furthermore, some parts of southern California are in an up market again and lenders tend to be more generous in up markets. It isn't just that they think values are going to continue to increase for awhile, in an up market there is constant refinancing of old loans constantly giving Savings & Loans an abundant amount of cash to put out again. Thus they are anxious to make loans.

Furthermore, an appraisal of the house now all dolled up with the latest decor, showed an appraised value of $191,500. Who could ask for anything more? The ability of the property to appraise for the eventual for the contract price was a key element here. Because the property appraised sohigh, the remainder of the financial aspects of the transaction are a lot easier for the lending institution to go along with.

Lease options have always been an excellent way of controlling property where there is future appreciation potential.Had the lease option been written for $158,000, then the lender most likely would not have made the loan. Why? The general rule you are fighting is that lenders loan either contact price or appraised value, which ever is less. Yes, there was a contrived way of putting together the price, but by the book, the contract price was $192,000, thus fitting the lenders mold.

This control can often be obtained with far fewer dollars than what would be necessary in an outright purchase. Furthermore, in this example where major fix up repair decorating outlays are planned and these outlays are anticipated to greatly enhance the value of the property, the lease option is a perfect tool. Combined with this the manner in which the purchase price was computed and you have additional advantage with a lease option ofbeing able to recoup most all if not all of your acquisition cost at the time of exercise of option.

The broker had to wait to get his commission, which was paid by the buyer.

Lastly, a seller, who was worried about not being able to hold on to his house, got relief, and got a price he agreed to in cash.

Bernard Zick is one of North America's most respected real estate experts. His over 1,500 real estate related speaking engagements over 20 years benefits audiences because of his depth of experience. He has run residential and investment brokerage operation, been an apartment developer,a CCIM, a mortgage broker, a syndicator and more. His talks are laced with humor and insights. He is best known for his ability to give concise anduseful answer to question from the floor. For information about Bernard as a keynoter, a trainer, a consultant or a convention break out speaker, please contact The Frog Pond Group at 800-704-FROG (3764) or email susie@frogpondgroup.com.

by

Brad Inman

The one thing the online realty players don't have to worry about is an audience. The wired legions are growing by leaps and bounds, and according to one recent study, 38 percent of Americans older than 16 are already hooked up.

The IntelliQuest Information Group, Inc. study claims 79.4 million adults are already online, while 100 million will be accessing the Net by the year 2000.

The study was culled from IntelliQuest's Worldwide Internet/Online Tracking Service, which generates profiles of Internet users, their demographics and usage patterns, growth trends and brand awareness.

Sixty percent of Internet users shop online and 20 percent make a purchase, IntelliQuest found.

Another study by eMarketer shows that online "hub sites" will become funnels for $18.8 billion in e-commerce by 2002. Many online realty players, such as Realtor.com, E-Loan and HomeShark have sought out space on these Web portals to generate extra traffic and business.

By

Mike Brandly

Word Count: 916

What's your home worth? Your farm? Your investment property? Let's take an even easier example: What's that $1.00 bill in your pocket worth?

You might answer to the $1.00 question, that it's worth exactly $1.00. It's worth that because that's what you can get for it in terms of a candy bar, soft drink or today's paper. It's worth $1.00 at your bank because they'll change it for you -- into 4 quarters, 10 dimes or whatever combination you desire.

So, a $1.00 bill is worth $1.00. Your dollar bill is worth $1.00. Basically, that's because the market says it's worth $1.00. The rule in the marketplace for all $1.00 bills is: you can get $1.00's worth of things for your $1.00 bill if you, the holder of the $1.00 bill gives it to someone who has, in your opinion, a $1.00's worth of things, and the owner of those things wants to sell them, and values them at $1.00.

Let's look at real estate. You believe your home is worth $150,000 (150,000 $1.00 bills) You've had a plumber that did some work for you tell you that; a neighbor's house similar to yours sold recently for about that amount, and an appraiser three years ago said your home would be worth $150,000 by now.

But is it worth $150,000 because people say it is? Because you think it is? Remember our $1.00 bill. It wasn't worth $1.00 in goods or services because we said it was. Rather, it is worth $1.00 because people are willing to act upon that premise and "trade" you things worth $1.00 for your $1.00 bill.

Here's the rule for real estate: your real estate is only worth 150,000 $1.00 bills if someone out there has 150,000 $1.00 bills to give you for it, and you're willing to sell for that, and they're willing to buy for that. You've heard this type of phrase before: "willing buyer, willing seller, neither ..."

Now that we know what our home is worth, and why, let's look at the traditional real estate marketplace. You decide you want to sell your home, and decide you want $150,000 for it. A sign goes up and people start noticing that your home is for sale for $150,000. Is it worth $150,000? Maybe. Remember, only if someone is willing to pay that for it.

In traditional real estate marketing, your home will sell, eventually, for a value likely $150,000 or less. You might negotiate terms and conditions, guarantees, possession and other issues. Nevertheless, the total "package" will be $150,000, or more likely some other lower number you and your buyer agree to.

At auction, your home will sell to the highest bidder. The auctioneer will gather all those interested together on one day at one time, and keep asking for more until the bidding stops. Once the bidding stops, your home is sold.

But what if the highest bid was only $132,500? You wanted $150,000 for your home, right? The plumber said it was worth that, remember? Well, where was your plumber that day? He wasn't interested in buying your home, but rather interested in projecting his opinion about its value. If someone's not buying, their opinion really doesn't matter, does it?

And the traditional real estate advocates say "But that home was worth much more, and that buyer would have even paid more, but no other bidder forced the bidding any higher." Hmm, that never happens in traditional real estate, does it? It happens all the time. Offer - counter - counter - counter - counter - contract. Does that always mean the price was maximized? Surely not.

What an auction does is maximize the opportunity for the best price. It also maximizes the other issues, in that at most auctions, terms and conditions are not negotiable. It also sets a time and date for the sale, so other plans can be made easier. When is that traditional real estate listing going to sell?

In cases where you have to have $150,000 for your home, because of mortgages, etc, you may not be able to risk getting any less. So you list, and wait. You pay insurance, mortgage payments, taxes, maintenance and eventually, your home sells for what? What the market will bear -- maybe your price, but maybe not.

And what if your plumber was wrong and the marketplace said your $150,000 home was worth $160,000? Is that the likely sale price with a traditional listing? How would you ever know someone was willing to give more than the list price? You almost never do. Does that happen at auction? All the time -- auctioneers don't yell to the crowd "Stop, you're paying too much!" like your list price does.

What's that $1.00 bill in your pocket worth? $1.00 right? What's your home worth? All you can get for it. And how do you get all you can get? Consider an auction where the market is allowed to decide -- in your favor.

Published in FPG's March 2002 Issue

By

Dane Atherton

Word Count: 569

The property auction system of selling real estate when implemented effectively is without a doubt the most successful method of sale available. The auction system is designed to remove the price as an objection and encourage purchasers to act based on the benefits and features of the property itself.

Property is not unlike any other commodity whereby `the market' will ultimately determine the final selling price. Naturally, the quality of the selling system implemented and the caliber of the salesperson can have a positive effect on the end result.

It is fair to say that the highest amount of activity generated for a home is normally in the first three to four weeks from the date the home is announced for sale to the market. A property auction is designed to capitalize on this high buyer activity period as the auction date set's a date for the buyers to act after a 3-5 week marketing period.

Doesn't it make sense to sell your home in competitive environment and in a period when the maximum amount of buyer interest is at hand?

Non Fixed Price Strategy Vs Fixed Price Strategy

The most common objection we receive from buyers, which often prevents them from inspecting property is based on the perception that the property is too expensive.

The auction system removes the price as an objection and `casts the net' over the widest range of prospective purchasers. Our objective in an auction-marketing program is to make sure that all the likely buyers for a particular property are sold on the benefits of the home rather than the perception of price. Even buyers in slightly lower price ranges should be encouraged because we know that basic buyer psychology tells us that buyers buy up and they will normally pay 10-20% more for a property once thy have become emotionally involved in a property. We make sure that we don't exclude buyers in lower price ranges who could end up paying more for a higher range property once they have been given time to become emotionally involved.

For example, let's just say that we had two identical homes that are both worth around $100,000. House A decides to use the traditional method of marketing and uses an asking price of $119,000. House B however is being marketed via the auction system and calls for interest in excess of $90,000 and has set a date for buyers to act.

Now if you're a buyer in the $90,000 - $120,000 price range, which home do you think you would inspect first?

Of course it would be House B.

What has happened with House A, with an asking price, is the buyer has been encouraged to inspect the home based on an unrealistic price. Most buyers are obviously interested in buying well and as a result they have probably inspected House B first.

This is the pricing tool used in conjunction with an auction campaign.

Dane Atherton was the R.E.I.Q. Auctioneer of the Year 2000 & 2001 Finalist. He has conducted many landmark auctions with results as high as $125,000 in excess of the instructed reserve price. Copyright© 2002, Dane Atherton. All rights reserved. For information about Dane's real estate auction training program and the benefits of the auction selling system, please contact the Frog Pond Group at 800-704-FROG (3764) or email susie@frogpondgroup.com; http://www.frogpondgroup.com.

It amazing how often we are in a negotiation and forget to use basic negotiating principles. We negotiate everyday all day long and quite often we do so by giving up.

In a real estate situation you would think that the participates would be on cue to use all their negotiating skills. However, I find most of the people only think that negotiating has to do with price and do not realize that every word spoken as part of putting a deal together is part of the negotiation.

Here is a real life situation that I had to negotiate a "paper" transaction. In this case my negotiating skills were of the utmost importance in that I had blown it on the math.

Situation: In the early 1970's I owned a one story office building at 822 Figura Street, about a block up from the Hilton Hotel in downtown Los Angeles. (Don't tell me about how rich I would be if I owned that land today. I'm sure it's underneath a black glass office tower and no I didn't keep the property for more than a year. At that point and time in life I was so interested in making quick profits that I thought long term was six months. But that's a whole other article.)

I needed to sell the building I had obtained in a very complex exchange. I had a buyer for a note and not a buyer for the office building. If I could get the building sold I could cash out of the note.

At an L.A. exchange meeting I presented my property. I told them that I was opened to any creative ideas but a sale with a down payment big enough to pay any commission due was all I really needed.

I had planned to attend eight exchange meetings in a row, one each day, until I solved my real estate problem. This was the second meeting I had gone to and I wasn't really expecting an instant solution.

Ed Savon, a local broker, approached me after my presentation. There was a man who owned an office supply and stationery company who was losing his lease. He and his father had been on Figura Street for forty years with the same business and since they were to move it would be perfect to move down the block. (Isn't it amazing how things come together when they are suppose to.)

He said the only thing to overcome was that his client was looking for a new place to rent not to buy. However, if the payments could be kept extremely low, somewhat in line with the rent he was currently paying, at least initially, he might be willing to pop for enough money to cover the down payment.

In my euphoria I drafted a quick offer for him to take to his client. Since this was the first offer between us, I priced the building at my full asking price. I asked for only enough cash to cover closing cost for the down payment, asked for a normal market rate interest rate, but I said I would carry back a wraparound and stated the amount of the payments. I did not have a financial calculator and took a wild guess at what the payments should be to amortize the loan.

Low and behold, the contract came back signed. It was exactly how I had written it without a single change! When I got back to my room I got out my financial calculator and started figuring out the amortization period. The calculator kept refusing to give me an answer.

Finally I got a pad and pencil and took the interest rate times the debt to see how much was necessary to service the annual interest rate. I took the monthly payments I had offered to accept and multiplied them by 12 and compared the two. Whala! I found out my problem. I quoted him a monthly payment amount that WAS LESS THAN INTEREST.

Now you can do this if you have somebody pay less than interest with the rest of interest adds to principal and the note keeps getting bigger and bigger and bigger. However most of these situations, at some point and time, call for the payments to increase so that the note doesn't explode!

Well I had designed an exploding note. My heart sunk with the thought of the explosion. How was I going to go back to this man and get him to pay far more per month than what he had initially agreed to.

I got out my calculator and checked out all the possibilities. To get a 25 year fully amortized schedule he had to double his payments. I got out my calculator and figured out several possibilities. I waited till the next day to give him a call. I wanted him to have more time to tell 3 or 4 more people that he was buying his own office building in downtown L.A. Then I gave him the call. "Hello Mr.. Buyer, this is Barney Zick, the man who is selling you your new store and corporate headquarters.

I wanted to go over the details of the contract and see if there is any way to make it better for you. If I am able to give you everything that we have agreed to and it looks like everything you wanted. However, I am concerned with the financing we have in here."

He in a non-emotional voice asked how so. "Well, most people like to get out of debt as quickly as possible--are you one of those people?"

"Yes I am, I don't like borrowing money, that is the reason I hesitated signing to buy this place" said the potential buyer.

"I agree with you and I was looking at your monthly payments here. I did some calculations and if you will triple the amount that you are paying on monthly basis you will be out of debt in absolutely no time what so ever. (I quoted him the years). If you double the payment you will have the thing paid off in 25 years. At the rate you are paying on now, WHO KNOWS how long it will take to get the thing paid off. I know you have the desire but would you be in the position to pay more per month?"

He asked me to review the three proposed schedules again. I again avoided telling him that there would be no payoff ever, ever, ever with the last choice. I knew if he decided to stick with what was in the contract I would have to expose that fact I had messed up on the math and go through trying to restructure the deal all over again. Hopefully, I could appeal to his desire to have the property free and clear rather than to having to dwell on my mistake.

He thought for awhile and said he would call me right back. He called back and picked a number that was slightly more than the doubling the payment we had agreed upon. I was flabbergasted, but I had managed to hit right on the mark. He knew how long he could be comfortable in paying for such a building and did not want the interest to accumulate for such a long period of time.

This of course is another example of a trade out. I pointed out to him the benefit of paying his loan off early, the trade out was a reduction in exchange for the benefit I was receiving of a higher payment. And, saying this in terms of benefits to the other party rather than calling up and saying I'm not going to close with you unless you pay me more, got the job done.

While we are on this same story let me give you another example of the difference between keeping your negotiating lessons in your every day memory rather than assuming this is a subject that could be filed away forever.

About two months latter I had closed the sale of the property to the stationery office product store owner. I had a wraparound mortgage (actually in California it is called an All Inclusive Trust Deed).

I had contacted a note broker who was going to cash me out of the note. On Friday afternoon he said that he had a doctor who was going to buy the note and he would confirm the transaction over golf this weekend. He said we should be able to start the paper work for closing on Monday.

I was in the process of building a 48 unit apartment complex in Independence Missouri and was out of money. I wanted to get that note cashed out as fast as possible. I hopped on a plane on Sunday morning and when the note broker came to his office Monday morning I was sitting on my suitcase.

That's when he told me the great news. The doctor had changed his mind. I felt like someone had kicked me in the stomach. I really needed that cash to cover the payroll for the last of the construction of the apartment complex. And I needed it now.

The offer I was getting gave me about $.75 on the dollar for the equity in the wraparound. I had talked to one other person who offered me $.50 on the dollar but that seemed like throwing out the baby with the bath water. Most all my profit would be lost. I said a little a prayer that went something like this.

"Sir, I can't believe you let me get this far only to give up the majority of my profit because someone has changed their mind, what can I do with note?"

I got an answer back. Really. I don't get answers very often when I look up in the skies and ask the chief real estate investment consultant of the universe for help, but this time he really whispered in my ears, "Don't be a dummy, call the guy whose making payments on the note. Remember he's the one who didn't like being in debt."

I ran to a pay phone on the side of the highway there in Santa Barbara. I plunked in my coins and called Los Angeles and asked the owner of the stationery story if he would like to get out of debt in a hurry.

He asked me what I had in mind. I told him that I was thinking about selling the note that he owed me to somebody else and thought I would give him the courtesy of letting him have the opportunity to pay off the note instead.

He replied, "It just happens that a man paid off a trust deed owed to me last night. I got a lot cash in my checking account and would be interested in doing something smart with it. It seems the smart thing to do is pay down my debt. However, I wouldn't be willing to prepay the note unless you give me some kind of discount. What are you offering?"

My negotiating lessons (yes, I always considered my negotiating skill my number one skill even back then) came to the forefront. In this panic situation I didn't blurt out that I was willing to accept $.75 on dollar and might even accept $.50 on the dollar if I had to. I instead said with as calm a voice as I could muster "Well, how much would you have to have to make it attractive?"

His reply, made that same sort of special sound as having four sets of cherries come chucking together in a line on a slot machine in Las Vegas, "I have to have $5,000 or $10,000 off or I wouldn't think it was a good deal."

Now folks, we were talking about a third of a million dollar note. He would be very pleased if he got three or four thousand dollars off. I was looking at a potential $37,000 to a $50,000 discount!

I remembered a second negotiating lesson. Besides getting the other person to ask to make the first offer, never accept their first offer. If you give in it seems like you are weak and might give in more. If you give in, it makes them have less satisfaction with the transaction then if you argued some.

I told him that I could go $5,000 but $10,000 was a little steep. He said that he figured I would say that, that is the reason he asked for five. We both laughed. I asked him, "Where are you?".

He replied, "I am in the back room checking inventory." I said, "Stay right there, I'll be down to L.A. in two and half hours. When I arrived in L.A. I found that he only had $60,000 and the equity in the wraparound was more like $125,000. Not being willing to compromise or give in, but still wanting to get the cash. This was plenty enough cash to cover the completion of the apartments, I took his personal check and had him sign a promissory note for the difference due in thirty days. He paid in thirty days and I was cashed out of the note in two steps with out ever "compromising".

Like I said, when a deal is meant to happen sometimes, you can't just stop it from happening. However, if you keep your cool about you and remember to use your negotiating skills at each and every step of all your businesses' transactions, it is amazing how much the end results are effective.

Everybody negotiates everyday. Most people negotiate by giving in to the other peoples' wishes. They will tell you they don't negotiate because it is too small or too important or takes too much time. But the fact that they are involved in a transaction where both people wanted things that were opposed and the fact that the transaction was culminated with the other person getting what they wanted, they didn't negotiate--they just gave in.