I try to buy a lot of houses and every so often I think I am pretty close and am disappointed to hear the dreaded No from a seller.  Sometimes they are less polite and use words like: “cheap”, “crazy”, “wasting my time”, etc.

Here are some of the things I remind myself when I hear no:

This is a Numbers Game

You are not going to buy every house you offer on.  But if you stay in the game long enough and make enough offers you will eventually get to a Yes.

There is Lots of Inventory

The market is big.  There are a lot of distressed sellers right now.  Don’t worry about the deals you miss, focus on the things you can control.

No can be Temporary

The percentage of escrows that don’t make it to the finish line is substantial.  If the Seller picks another offer don’t give up on the property.

Investors are Required

Owner occupants cannot buy most of the stuff I go after.  My job of revitalizing a neighborhood is required and should be profitable.

Be Relentless

Persistence pays.  Keep at it.  You will hit slumps, but you can only get out of them if you don’t give up.

The process of buying should be a math equation.  If you normally get 20% of what you offer on and you need to buy 5 properties a month you need to make at least 25 offers on properties in a given month.

I have heard widely varying reports on the amount of foreign buyers snatching up real estate in America.  The National Association of Realtors (NAR) recently released a report based on the 12 months ending March 2011.  8% of all sales where from international buyers.

Foreign Buyers definitely have their favorite states.

32% of them bought property in Florida

12% in California

9% in Texas

6% in Arizona

These numbers don’t really surprise me.  I thought Arizona might have been higher…

62% of these purchases were all cash sales. That sure brings some foreign money into our economy.

NAR also asked what they intended to do with the properties:

37% for primary residence

28% vacation house for personal / family / friends use

16% residental rental

13% vacation home and rental property

I would have guessed a lot more of the purchases were for investments.  65% are for completely personal usage and 13% are for vacation houses (personal and to rent).

What countries these investors come from…

31% North America

26% Asia

11% South America

3% Middle East

3% Africa

2% Central America

Nothing shocking here, I would have guessed the Middle East was higher, but maybe the political climate hampers that.

Every so often when buying a new property the escrow officer will email and ask me for a document called a Resolution to Purchase.  I said that I would provide one, I had a general idea of what they where after, but I had no idea what it specifically need to say and what was required.

After consulting with Google and looking around a bit I found a general idea of what they should include.

• the address of the property, in question
• the purchase price of the property
• the authorized parties signature

This should work just like any other Resolution in your corporation and go in your corporate document folder, or log book.

To make your life easy, I have uploaded a blank copy of the wording I use.

You can download it here.

Some escrow officers will also ask for this if you are refinancing or selling a property through your company name.

I get quite a few emails with visitors asking me about earnest money deposits and real estate owned properties.  Here is a good Frequently Asked Questions for bank owned houses and earnest money deposits.

How do I provide the Earnest Money Deposit with the initial offer?

Here is the way we do it.  With every offer we have a scanned copy of check written out to “___________ Escrow.”  The idea is, if the contract gets accepted you can just take the check and write the name of the escrow company agreed upon.  So after the fact you’d squeeze in “ABC” before the word Escrow.

What amount of earnest money deposit should I provide?

There is no correct answer for this.  It depends on the price range of properties.  As an absolute minimum it should be $1,000 (for bank owned properties).  Another rule of thumb is for cash transactions a minimum of 10% of the purchase price is requested.  We usually do $5,000 or $10,000.  If the market you work is not very competitive you can probably get away with less but remember this portrays how serious you are as a buyer.

Who holds the earnest money deposit?

I do not provide the physical copy of the check, just this scanned copy with every offer.  Every so often agents will request a physical copy of the check to hold in their office, or sometimes they even want a cashiers check.

Who should the earnest money deposit check be made payable to?

See my above example, we typically make them payable to”___________ Escrow.”

Will a $1 earnest money deposit work?

A lot of gurus suggest using a $1, $10, or $100 earnest money deposit on all transactions.  This is especially true for people who write hundreds of offers a day.  DO NOT DO THIS WITH BANKS!  This will immediately show you are not serious about buying the property and you are not confident in the research you have done.

Is the the earnest money deposit refundable?

In most cases, YES.  Unless you specifically remove all contingencies in your offer you have X period of days to do your due diligence on the property.  I am sure every state is different, but I believe in California you have 7 days (review the CAR form).  Be careful though, most banks issue addendum that heavily modify the Association of Realtor default contracts and sometimes they completely remove your due diligence.

When will I have to provide the earnest money deposit?

Most banks issue an addendum to the contract you sent to them outlining additional terms and conditions.  Once you sign and agree to this contract you usually have to provide the earnest money deposit.  Most escrow companies will request a cashiers check in cash transactions.  So you will have to go the bank and get one (cashiers check usually guarantee funds are available).

What should I do if I do not have any money for a earnest money deposit?

This is a tough question, you can either focus on dealing with other segments of the market (private party sellers, probate sellers, etc) who are more flexible on the deposit.  You could also partner with someone who will provide the deposit for you or save up.

I would recommend you do not try to “fake” that you have the funds, if you cannot deliver on your promise it will ruin your reputation and believe me banks keep track of agents/buyers who do not perform.

Sunday October 11, 2009, California Governor Schwarzenegger signed the Buyer’s Choice Act, Assembly Bill 957, into law. The new law prohibits owners (typically banks) of foreclosed properties from forcing California homebuyers to use a particular title company, Escrow Company or other real estate service provider. The Buyer’s Choice Act requires that a disclosure notice be provided to buyers informing them of their rights to choose their own real estate services companies to close their transactions.

I was pretty excited about this law passing last year.  Basically, when we first started buying the banks would force us to use their escrow companies.  Most of these companies would do a terrible charge, charge huge fees, take a long time and just be unpleasant to deal with.

The banks found a pretty simple way around this.  In California, the standard practice is for the Seller to buy title insurance and pay half the escrow fees.  To get around the law the banks basically say you can pick who you want, but if you do pick you have to pay ALL of the escrow fees and for your own title insurance.  That basically boils down to $800 – $1,500 per transaction, so for the most part we end up letting the seller pick.

Some tips for working with a new escrow officer:

• be polite and organized
• read all emails and instructions carefully
• most escrow officers prefer email or electronic communication, but if something is going slowly or wrong it is best to call and call often
• communicate when you are hoping to close and time lines as early as possible
• oftentimes a small group of escrow companies have the REO accounts, you’ll see the same names coming up, so don’t burn any bridges

ServiceLink is one of my least favorite escrow companies. They are a national company that has a corporate office in Pennsylvania and I have found they have been really hard to work with.  I found their paperwork has been standardized for all states and really hard to follow.  I just got a 3 page email on directions of all the crazy forms they require.

We finally closed House #52.  This property fell out of escrow 4x, went to auction once and finally was sold to us.  With this purchase we helped the real estate get rid of one of their dogs (a difficult property), if we didn’t buy it, it probably would have been pulled and sent back to auction.  This should buy us a lot of future credit the listing office.

Basically the story is, the City has added a huge violation to the property.  The listing office and other Buyer’s have gone to the code enforcement officer and tried to negotiate the fine only to later cancel the escrow.  The code enforcement officer was eventually sick of the Seller calling and eventually refused to negotiate.  Our solution was to tell the agent we will make an offer subject to the fine and try our luck negotiating with the City.

To give some numbers, we bought the property at about 38% of ARV, the repairs would be 14% of ARV and the existing fine is 17% of ARV.   By my math, even if we have to end up paying the entire fine we would be at 69% ARV. Of course our goal is to negotiate the fine down.

Other investors have had some success negotiating with this City, so we are hoping we can go in.  We have two strategies:

First step, we will schedule a meeting at the property introduce ourselves as the new owners, explain our goals and see if the City is willing to provide a discount.  Hopefully, their goal is the same as ours, get the property repairs to an acceptable standard.

If that fails, we are going to hire a lawyer and have him dispute the fine with the City.  There is no real rhyme or reason on these fees.  So I am hoping we don’t have to attempt this strategy.  The last thing I want to do is pick a fight.

I will update you on how the progress goes.  But I am thinking this should be one of the better deals of 2010.

The times keep getting even more interesting for all the Real Estate Investors out there.  It seems like pending sales have crashed and retail buyers interest is slowing down.  Most investors haven’t got the memo and are still putting out tons of offers.

At this time we don’t have a ton of retail inventory and we are still getting calls and showings on what we do have.  I am thinking inventory is going to start going up, prices will stop increasing and probably slightly drop.  There will definitely be even more of a “two tier” market.  Entry level stuff, or stuff that cash flows probably won’t get hurt as bad as the middle class, to high end houses (300k+ for us in the Inland Empire).

Does this change our strategy?  Not really.  We are still happy to buy, probably going to lower our purchase prices a bit.

I think when times will really get interesting is December/January when the market is already pretty slow.  But who knows, by then the government could add some more incentives back-in.

Buyer’s agent seemed burned out right now, they sent in hundreds of offers for some clients and now they’re disappointed they couldn’t pull in the tax credit.

Here is a house we tried to buy pretty hard. It is in awful condition. It was built in the late 1950′s.  It is 800 sq ft and a 2 bedroom, 1 bathroom on a good sized lot.  The house needs about 25k in repairs to make it rent ready.

At the end of the day we missed out on this one, it was listed at 45k and sold for around ~70k.

We own House #28 about a block from this one and we paid about the same price, but our house is much better.  Built in 1980, 4 bedroom, 2 bathroom, 300 sq ft bigger, and only needed about 8k repairs.  A lot of the price difference probably has to do with the market going up, especially the low-end.

So if this type of property doesn’t get excited you might not like real estate investing!  At least buying the major fixers we do.

36th St – Outside

36th St – Inside

This is one of the most common things I hear in the business.  “Hey, you will love this house, it’s turnkey, it just needs paint and carpet.”

Depending who it is, there are two reactions:

If this person is telling the truth:

So if this is true and the house just needs paint and carpet, why is the Seller going to cut me a deal?  Typically banks and even FHA will loan on houses with old carpet and walls that need painting.  How am I going to compete with an owner-occupant.

If there aren’t other offers, why is no retail buyer interested.  You’re telling me if I paint the walls and put in new carpet that will want them to pay me enough extra to cover the cost of the supplies, real estate commissions, closing costs and a decent profit for me?  It’s a tough sale for me.

When an underwriter starts underwriting the loan, see the appraisal and what I did to the property are they going to feel comfortable giving me a profit just for paying for paint and carpet.  I’m not saying they won’t, but it’s a tougher sale.

Note: If I am renting the house I am not as worried.

If the person is not telling the truth:

They’re calling me a deal and they say it only needs paint and carpet.  I show up to a missing kitchen, a leaky roof.  They’ve qualified this as a “great deal” based on 3,000 in repairs and now I need to tell them I need to budget 15,000.

Now what is music to my ears:

This house is disgusting, I don’t want to even go inside, the City is threatening to demolish it and the Seller is telling me to sell it NOW. We have actually bought more than one house where the Bank has got quotes for the cost of demolishing it entirely.

Note: in this regard I am probably not typical to other investors.  We focus on projects that need substantial repairs.

All I have to say is finally.  We made our first original offer on this house in February.

Step 1: Our agent sent executed contracts to the HUD office in Sacramento.  45 Days later I noticed the product shows as Active again and call my agent.  He calls HUD and they never received the contracts.  Luckily, he is used to dealing with HUD and saved the tracking numbers.  The property is back to pending.

Step 2: Escrow tells me there property has no home owners association.  Both the agent and myself told them this was not the case.  After two weeks they emailed me and told me they cannot locate the HOA.  I have my title officer track it down and forward the email to them.

Step 3: The escrow company makes me drive to their designated office to get the notary’s done.  They have two options in Southern California.  The lady who is knew to the company proceeds to tell me that every customer she signs is extremely unhappy with the process.

Step 4: We’re now past our agreed upon closing date, so they are going to charge me a per day fee and extension fee unless I send all funds to escrow.  They continue to sit for 21 days while they wait for HUD to approve the final documents.

This process basically has had me re-consider buying other HUD homes. Or at least factor in a bigger margin for the difficulty involved.  The worst part is, the process makes me even less confident in government organizations.

The agent that we worked with on this one deals exclusively with HUD and tells me the average HUD foreclose falls out of escrow 3 times.  He has multiple listings that he has been dealing with for over two years!

Now some HUD Buying Tips

• For HUD escrows you get a minimum of 45 days.
• Deposit is a cashiers check made out to “HUD or Your Name.” $500 for under 50k, $2,000 for over 50k.
• HUD requires their agents to have special training and the offer forms are specific to HUD and not a association of Realtors form.
• The contracts are not assignable.
• Agents go to a web site to submit offers, they are reviewed every 24 hrs.
• They have guidelines, I think they automatically reject anything under 80% of the asking price, but I could be wrong.

PS: Have you noticed more posts lately.  My goal was 10 blog posts this month and I have a week to do 1 more.