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INSIDE

Law Are You Ready for

Dodd-Frank’s New Rules?

Investment Strategy The Case for Multifamily Housing

Management The Never-Ending Search for Great Tenants

JAN FEB

2014

e Premieer Issu Jo in th e io n C o n ve rs at Page 6

Investing in Families River of Refuge’s JOHN WILEY

wants to help working families find decent places to live.

www.communityinvestormedia.com


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DALLAS-FORT WORTH JANUARY 25th-26th AMERICA’S PREMIER REAL ESTATE EXPO

4 OPPORTUNITY 4 NETWORKING 4 EDUCATION 4 DEALS THE REI EXPO has quickly grown to become America’s new premier real estate networking and educational gathering. With incredible success and an over-whelming demand for more, the REI Expo has now gone national, from coast to coast. We closed out the year in Anaheim with record numbers of investors and look to build upon that success in 2014. On January 25th & 26th, 2014 we are making our way back to the Dallas-Fort Worth Metroplex for our 4th Annual REI Expo. Join over 1,000 investors from around the nation to hear from industry experts and leaders. Choose from over 50 classes, then network and build your business in the largest Real Estate Investor tradeshow in the nation.

THESE SPONSORS & MORE WILL BE AT THE EXPO: Color

B2R

Finance

“It was great. Not a lot of hard sales; with the books & stuff like that. We are fairly seasoned investors & got a lot of ideas we will put them into use.” – Emily

America’s Buy to Rent Lender

“The event was awesome. WellBlack planned. & White The speakers were well informed, very educational. I highly advise people to come next year.”

B2R

Finance– Patty L.

Color

B2R

Finance “There was a lot of great people Black &here, White it’s a fantastic opportunity to network, meet investors, find deals, a myriad of vendors...& just awesome resources.”

B2R

Finance

America’s Buy to Rent Lender th

– Shane E.

Dallas-Fort Worth January 25-26 at the Gaylord Texan Resort & Convention Center

B2R B2R WWW .REIEXPO.COM White on Dark Background

White on Dark Background

Finance

Finance

America’s Buy to Rent Lender


TABLE OF CONTENTS 12

e Premieer Issu Jo in th e io n C o n ve rs at Page 6

FINANCE

21 What’s Holding

INVESTMENT STRATEGY

Back Wall Street?

The Case for Multifamily Housing

Large firms want to provide debt to property investors— but big hurdles remain.

Why one veteran investor switched to multifamily after buying more than 100 houses.

DEAL

28 Selling Yourself How to show private lenders that you’re going to be a good partner over the long haul.

By Dave Anderson

22

LAW

30 Tough New Rules

Succeeding

on Balloon Payments

IN THE

URBAN CORE

They won’t be allowed on many high-cost mortgages. NEW KID ON THE BLOCK

You can make healthy returns in the urban core, but you need research and realistic expectations.

34 Building Your A-Team Find the professionals you need to succeed.

By Julius A. Karash

MANAGEMENT

38 The Never-Ending Search

32

for Great Tenants

PROTECTING YOUR INVESTMENT

Thorough screening and solid marketing go a long way.

Breaking the Mold

IN-DEPTH

40 Spotting the

Prevention is your best

Signs of Meth

strategy for fighting mold.

Is your property being used to produce meth?

By James Hart

INSIDE

Law Are You Ready for

Dodd-Frank’s New Rules?

Investment Strategy The Case for Multifamilyy Housingg

Management The Never-Ending Search for Great Tenants

JAN FEB

2014

Premier Issue

Join the Conversation Page 6

Investing in Families River of Refuge’s JOHN WILEY

wants to help working families

John Wiley River of Refuge Raytown, Mo.

4

Community Investor jan/feb 2014

find decent places to live.

1

Community Investor jan/feb 2014

www.communityinvestor.com

ON THE COVER

DEPARTMENTS

‘It’s the Right Thing to Do’

06 From the Publisher

River of Refuge’s John Wiley uses his skills as a property investor to help working families escape pay-by-the-day motels and find decent places to live.

08 News Briefs 1 1 At a Glance 49 Photo Page


Take Your Business To New Heights! PUBLISHER R. Michael Wrenn ADVERTISING & SALES Chris Zinn National Vice President of Advertising Sales Mary Davis Business Development ACCOUNTING Becky Cole Vice President/Controller EDITORIAL James Hart Managing Editor Brian McTavish Senior Writer PRODUCTION Carolyn Addington Production and Traffic Manager Jen Ross Graphic Designer Kevin Fullerton Design Consultant RADIO Larry Muck Host, Community Investor Radio Mary McKenna Executive Producer

Private lenders face many challenges in building their businesses but none larger than gaining access to sufficient amounts of capital to fund your deals. At Fairway, we have created a suite of offerings and capital solutions specifically to help you alleviate your capital constraints. Whether you’re tired of chasing after one-off trust deed investors and would like to put together your own mortgage pool or if you just need to sell some of your existing notes to fund new deals, we’re here to help! SERVICE OFFERINGS: • Fund Financial Modeling • Mortgage Pool Fund Creation • Capital Raise Toolkit • Fund Administration

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GUEST WRITERS Dave Anderson, Jack BeVier, John R. Bradford III, Lucas Hall, Julius A. Karash, Mark Nagy 7509 N.W. Tiffany Springs Parkway, Suite 200 Kansas City, MO 64153 (816) 398-4070 editor@communityinvestormedia.com sales@communityinvestormedia.com www.communityinvestormedia.com Copyright © 2014, Community Investor Media. All rights reserved. The information gathered and opinions expressed by the authors are intended to communicate information and are not necessarily the views of this publication. The intent of this publication is to provide the residential real estate investment industry with information and interesting articles and news. These articles, and any opinions expressed in them, are for general information only and are not intended to provide specific advice or recommendations for any individual or business. Appropriate legal, accounting, financial or medical advice or other expert assistance should always be sought from a competent professional. We are not responsible for the content of any paid advertisements. Reproduction or use, without permission, of editorial or graphic content, in any manner is prohibited. Community Investor magazine is published six times a year by Community Investor Media.

www.communityinvestormedia.com

5


FROM THE PUBLISHER

I

f there is one ironclad rule of business, it’s this: Results matter. Nobody cares how good your ideas are if you can’t deliver the goods. Dedication to results has been our guiding star as we put together this first issue of Community Investor. In these pages, you will discover information and advice that you can put to work in your own business today. You’ll find stories of real-life investors and lenders, folks who are in the trenches and face the same kinds of challenges you do—and better yet, you’ll see the solutions they found.

We present a distinctly entrepreneurial perspective to help improve your results, and build up the communities where you invest. Community Investor offers clearheaded solutions from people who are out there doing it and succeeding in this business. Their work benefits neighborhoods and families— and generates healthy returns. We’re a group of very experienced men and women who know this industry and who are determined to provide the “tough love” to help investors think, plan and be smart about the risks they assume. Better investors build

R. MICHAEL WRENN Publisher

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Community Investor jan/feb 2014

better communities, and that benefits everyone. Simply put, Community Investor is determined to help you become a wiser, more profitable entrepreneur. If you’re committed to investing in yourself and your business, we’re going to help you get results. That’s a big challenge, but one that we accept without reservation. Please let us know what you liked about this first issue and what kind of information you would like to see in future editions. If we work together, we’ll succeed together. And that would be a very worthwhile result.


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NEWS BRIEFS

FORECAST: VACANCY RATES TO DROP IN 2014 Vacancy rates for U.S. commercial real estate are expected to decline in 2014, the National Association of Realtors reports. Vacancies in the office market are predicted to decrease by 0.2 percent. Industrial and retail will see drops of 0.6 and 0.5 percent, respectively. Multifamily housing, meanwhile, is likely to see its vacancy rate increase by 0.1 percent. “Investors have been looking for better yields, and have found good potential in smaller commercial properties, notably in secondary and tertiary markets,” said Lawrence Yun, NAR’s chief economist.

BIGGER OPPORTUNITY IN OLDER HOMES? Older homes could offer an opportunity to smaller buyers who want to outmaneuver larger institutional investors. According to RealtyTrac’s Aging Homes Analysis, more than 70 percent of U.S. single-family homes were constructed before 1990. But in 2013, they accounted for only 60 percent of purchases. They were also about $23,000 cheaper on average. Jake Adger, chief economist at RealtyTrac, called it “an opportunity for buyers willing to take on that older inventory. Those buyers can purchase at lower price

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Community Investor jan/feb 2014

points and face less competition from institutional investors.”

STUDY LINKS HOME OWNERSHIP, UNEMPLOYMENT Higher levels of home ownership might have a negative impact on the U.S. job market, according to researchers from Dartmouth College and the United Kingdom’s Warwick University. The study looked at ownership and employment figures dating back to the 1950s and uncovered a link between the two metrics. Researchers theorize that home ownership makes people less likely to move to find new work.

CONDITIONS FAVOR REPEAT HOME BUYERS Jed Kolko, the chief economist at Trulia.com, believes that 2014 could be the year of the repeat home buyer. Prices are expected to rise, making purchases less attractive to firsttime buyers and some property investors. Current homeowners, though, might be ready to upgrade, and thanks to higher home prices, they’ll have more money available after they sell. In a recent survey, about 74 percent of Americans said home ownership is part of their American Dream— the highest result since January 2010.


LOOK AT INDUSTRIAL PROPERTIES, SECONDARY MARKETS IN 2014 Industrial real estate should be strong in 2014, particularly properties that deal with warehousing, according to the Emerging Trends in Real Estate study from the Urban Land Institute and PwC US. That's due partly to an increase in e-commerce and a trend toward shorter supply chains; large companies need more fulfillment facilities near population centers. Researchers also forecast more interest in secondary markets and more foreign capital. To read the full report, visit www.tinyurl.com/etre2014.

that was forgiven or reduced, up to $2 million. That rule was set to expire on the first of the year. At press time, Congress had introduced a handful of bills to extend the exemption, but their chances of passing were low due to the schedule of the House and Senate.

ARE YOU A HIGH-IMPACT ENTREPRENEUR? Only 5 to 7 percent of U.S. businesses are “high impact,” but they're responsible for most of the country's job growth, according to a report from Ernst & Young and the Ewing Marion Kauffman Foundation.

HOMEOWNERS STILL HESITANT TO SELL The inventory of U.S. homes for sale still hasn’t fully recovered, and the Federal Reserve Bank of San Francisco shares some possible reasons why in a new study. Some homeowners may owe more than their houses are worth, the economists said, while others believe that home prices are going to continue to increase. To read the report, visit tinyurl.com/fedres2014.

A high-impact business will create about 30 more jobs per year than a company of comparable size. They tend to be private companies, so they have the freedom to make short-term sacrifices that pay off over the long term, the study's authors noted.

GEN Y CHOOSES DOWNTOWN LIVING For now at least, members of Generation Y—those age 18 to 34—don’t want the typical suburban lifestyle, and that could have a big influence on the real estate industry, the Urban Land Institute reports. People in that age group prefer to rent in walkable neighborhoods with easy access to public transit. That could be good news for cities that are trying to draw residents to the urban core. But it isn't clear if these preferences will hold as this group gets older.

END OF TAX RELIEF RULE? Barring an 11th hour vote, the Mortgage Foreclosure Debt Forgiveness Act will probably have expired by the time you read this. Under the law, homeowners didn’t have to pay tax on mortgage debt www.communityinvestormedia.com

9


MOVERS & SHAKERS

INVESTOR TIP

LEADERSHIP MOVES AT AAPL The American Association of Private Lenders is adding a new member to its board of advisers and naming two others as senior advisers. Anthony Geraci and Jack Rollins were two of the original founders of AAPL, and as senior advisers, they’ll be responsible for developing an educational program for more experienced members of AAPL. The newest adviser, Vincent Spreuwenberg, is the managing partner of 1839 Asset Management in New York. He oversees a portfolio that invests in short-duration, collateralized, high-yielding securities.

TWO NEW CARRIERS FOR NATIONAL REAL ESTATE INSURANCE GROUP National Real Estate Insurance Group has signed two new carrier relationships. Thanks to a relationship brokered by Gretchan Francis of Proctor Financial, NREIG will use Ironshore Europe Limited for property, premises liability and named storm coverage throughout the United States. And NREIG will use National Fire & Marine Insurance Company, a Berkshire Hathaway property, to provide property coverage in 12 Western states. That relationship was brokered by Athena Baker of Crump Insurance Services.

PARK AVENUE PROPERTIES PLANS MAJOR EXPANSION To meet customer demand, Park Avenue Properties is opening satellite offices 10

Community Investor jan/feb 2014

DON'T GO OUT ON A LIMB Right now is a good time to take a hard look at the trees around your properties. Winter brings a higher risk of snows and freezing rain, which can cause limbs to sag, snap and damage your buildings. Obviously, tree limbs that touch or overshadow a property should be trimmed before they can break and fall on the roof. But you should also keep an eye out for trees that are close enough, in high winds, to brush against the roof. That contact can tear off or loosen shingles, setting the stage for leaks. Some property investors like to do as much of the maintenance as possible on their own buildings. Tree trimming, though, might be a case where you should defer to the professionals. It’s all too easy to suffer serious injury or even death while performing tree maintenance.

in Raleigh, N.C.; Greensboro, N.C.; Greensville, S.C.; Charleston, S.C.; and Memphis, Tenn. The residential property management and investment services company will continue to operate its headquarters in Charlotte, N.C.

NEW SHOW FROM PACIFIC PRIVATE MONEY DUO Mark Hanf and Edward Brown

of Pacific Private Money Loans have launched a new radio show, Mortgage Investing 101, which can be heard on KNEW 960 AM in San Francisco or via the show’s website, www.mortgageinvesting101.com.

PACIFIC CAPITAL SOLUTIONS DEBUTS Pacific Capital Solutions is a new Oregonbased firm specializing in “peer-to-peer” mortgage lending. Principals include Robert W. Cox, Morgan Hawkins and James F. Botsford. The firm is on pace

to produce eight to nine agreements per month, and will shortly be debuting a “pooled fund” to deal primarily with consumer purpose loans in the wake of the implementation of the Dodd-Frank Act.

TROWBRIDGE & TAYLOR, SIDOTI MERGE Trowbridge & Taylor LLP and the Law Offices of Jillian Sidoti have merged. The new firm will be known as Trowbridge, Taylor & Sidoti LLP. Gene Trowbridge, Kim Lisa Taylor and Jillian Sidoti all specialize in real estate and securities law.

BECKLES COLLECTIVE WINS CERTIFICATION The National Association of Women in Real Estate Businesses has certified the Beckles Collective of Washington, D.C., as a women-owned business that specializes in real estate. The firm is led by Ingrid Beckles. Have you just closed a great deal? Did you win an award, or do you have some other piece of good news? Share it with Community Investor's readers. Email your story to editor@communityinvestormedia.com.


AT A GLANCE

THE FIX

DATEBOOK

With winter weather here, remember to turn off the water at your vacant locations. Pipes will burst if you have turned off the heat. Not all policy forms cover water damage. Contact your insurance agent if you have specific questions about your coverage. But do turn off the water at your vacant locations. That simple step can save you thousands in costly repairs.

67% of Americans generally like their neighbors

53%

’14 Conferences Meetings to make you sharper Jan. 22-24 Winter Forum on Real Estate Opportunity and Private Fund Investing, Laguna Beach, Calif. www.imn.org

actually know their neighbors' names

Jan. 25-26 REI Expo, Dallas-Fort Worth. www.reiexpo.com

FAMOUS LOST WORDS

“ The four most dangerous words in investing are: ‘This time it’s different.’”

–Sir John Templeton

March 15 Ignite Expo, Birmingham, Ala. www.igniteexpo.com

April 26-27 REI Expo, Northern Virginia-Baltimore. www.reiexpo.com

FIELD NOTES

The top five markets in 2014 for commercial real estate investors, as forecast by the Emerging Trends in Real Estate report from the Urban Land Institute and PwC US.

1

San Francisco

2

Houston

3

San Jose

4

New York

5

Dallas-Fort Worth

April 29-30 AAPL/PREIMA Conference, Kansas City, Mo. www.AAPL-PREIMA.com

July 26-27 REI Expo, Chicago. www.reiexpo.com.

Submit your conference or meeting for possible inclusion in next issue's Datebook. Send details to editor@ communityinvestormedia.com.

www.communityinvestormedia.com

11


INVESTMENT STRATEGY

The Case for Multifamily Housing WHY ONE VETERAN INVESTOR SWITCHED TO MULTIFAMILY AFTER BUYING MORE THAN 100 HOUSES. by Dave Anderson

F

requently, I’m asked why after buying, rehabbing and selling or holding for rental more than 100 single-family residences (SFRs), I decided to change my focus to multifamily housing (MFH). The simple answer is I couldn’t buy houses fast enough to achieve my goals. It took about four years of hard work with active advertising—direct mail, billboards, radio, TV and Internet—to buy those 100-plus houses. Since switching to a multifamily strategy in 2009, I’ve used the same amount of time to purchase more than 1,000 multifamily units and co-found one of the fastest-growing property management companies in Houston. THE RELATIVE DRAWBACKS OF SFRS TIME When I started investing in real estate, I realized that my fundamental goal was to replace a certain amount of income. If I assumed that I would develop true net cash flow of $100 per month per SFR and I wanted to make $120,000 a year, I needed to buy 100 houses. To meet my cash flow goal—and to reduce the risk of ownership while creating wealth—I targeted houses that could be bought at 70 percent or less of repaired

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Community Investor jan/feb 2014

value, allowing me to wholesale or “flip” a number of houses along the way. These deals are available in all markets and at all price ranges, and I feel I did well pursuing them. However, I was left doing a lot of work myself to find those deals—interviewing agents, running advertising, dealing with wholesalers, taking calls and going on “buy calls.” FINANCING Further, I started having more difficulty getting long-term financing for my purchases. If I had a real deal, purchase money was no problem—I would either pay cash or use an asset-based (“hard money”) lender. These are lenders that will lend 70 percent LTV, often at hefty rates—I was at 10 to 11 percent plus 0.5 to 1.0 points, but I’ve seen rates as high as 15 to 18 percent with 3 to 5 points. One hard money lender literally told me, “You call around. If you find I’m not the highest rate in the market, call me back and let me know I need to go up.” Banks, meanwhile, will typically use Fannie underwriting guidelines for longterm lending, which means that you can only have four to 10 mortgages on your credit report. This was severely limiting to my goal. Getting beyond the conventional limit of four to 10 houses means finding lenders that will do a “portfolio” loan, meaning the bank will hold the loan on its books. These loans are normally issued on commercial terms from small or regional banks. They are typically shorter in duration (five years), have shorter amortization (15 to 20 years), and have higher, often variable, rates (say, WSJ Prime +2

with a floor of something like 1 to 1.5 points higher than current retail rates). MANAGEMENT I also found challenges in acquiring a large enough SFR pool to reach my goals. As I was building that pool, operational issues and costs ate into my time and profits. My portfolio wasn’t big enough to justify in-house maintenance or property management, so while I did everything I could to find “investorfriendly” vendors, I was still paying an outside party’s overhead and profit to do repairs. I tried to use an outside manager at one point but found several issues with that at my size. Unless you have a large number of units, an SFR property manager will typically charge about 8 to 10 percent of collections and a half to a full month’s


rate on new leases or renewals. With one vacancy for a month, you can be as much as 25 percent down on annual revenues before other costs. Finally, I’ll point out my SFRs are and were very geographically dispersed. In Texas, I still have 119 miles between the two farthest. This means that if I want to drive to a portfolio of, say, 25 units, I have 25 waypoints along a fairly long route. Many investors partially solve this by investing in one area. I didn’t. THE BIG ADVANTAGES OF SCALING UP TO MFH When I talk about the economies of scale that multifamily offers, I’m referring to the ability to acquire more units faster, for less money per unit, and with better financing and cash flow. Additionally, multifamily provides substantially more control of value creation with less personal effort. With larger multifamily, there is typically a

A SMOOTHER ACQUISITION PROCESS

THE MORE UNITS I OWN, THE BETTER STAFF I CAN HIRE, AND THE BETTER PURCHASING POWER I CAN GENERATE WITH MY VENDORS. small pool of very professional agents (and a smaller pool of second-tier agents) who do the vast majority of deals in a market. Those agents can quickly develop a sense of what you’re looking for—pure yield, distressed or value-add, Class A, etc. More importantly, these agents have the relationships with the lenders, funds and special servicers that have moved a lot of property in the last several years. In 14 multifamily transactions in the last three years, I haven’t yet dealt directly with a private seller. There are significant financing advantages as well. While the deal sponsor’s strength —balance sheet, reserves, operating experience—is a factor, the primary qualifier is the property’s BETTER LOAN TERMS

financials. There is functionally no limit to loan amounts available for these transactions, and owning or operating multiple properties is viewed as an advantage, not a limiting factor. Further, there is the opportunity to obtain both bridge and long-term non-recourse financing at attractive rates and terms. We’ve recently seen LTVs of up to 83 percent and amortizations of up to 30 years. (Of course, your market may vary.) SAVINGS ON PAINT, MANPOWER AND YOUR OWN SWEET TIME The cost economies are radically better with large MFH. The first time I engaged a commercial painter, it knocked my socks off. When it’s not done in-house, my current rate for labor on a two-tone paint job is $0.15 per square foot. That means I paint a two-bedroom apartment for $135 labor. The biggest economy, however, is the ability to hire full-time management and maintenance staff. My managers take care of marketing, leasing, tenant interaction, etc. In the Houston market, I can pay $14 to $18 per hour for a full-time, HVACcertified maintenance technician. That’s a tremendous savings on outside vendors. The key, though, is that when a property supports a staff, you as the owner now have more time to focus on growing your business and real wealth creation—setting strategy, researching and acquiring new projects or developing lender and investor relationships. With multifamily property, I can buy one 100-unit apartment building, have a staff run it and have one place to drive to when I want to see it. The more units I own, the better www.communityinvestormedia.com

13


INVESTMENT STRATEGY

staff I can hire, and the better purchasing power I can generate with my vendors.

return (“cap rate” or “8 cap”) and you had $100,000 of NOI, your building would be worth $1.25 million. What does that really mean and why is this so important relative to SFRs? You have no control over appreciation

Finally, with large MFH, you have far more control of your valuation than with SFRs. SFRs are valued by a large pool of owneroccupants, and intangible variables substantially affect YOU HAVE NO CONTROL OVER that value. I’d argue that APPRECIATION IN SINGLE rent rates are at best a derivative of home values. FAMILY RESIDENCES. MFH, on the other hand, is valued primarily on financials—net operating income (NOI). in SFRs, but in our example above, every NOI is essentially revenue less operating MFH dollar saved per year is worth expenses without consideration of debt, $12.50. If you are able to improve operaand the value of the building will be a tions by $1 per month (through a $1 rent multiple of that NOI. So, for example, if increase or $1 less in trash bills) then investors were looking for an 8 percent you’ve increased the value of your buildMORE CONTROL OF YOUR VALUE

ing by $150. Think a little bigger: Instead of a $1 improvement, what if you raised rent by $50? For a 150-unit building, that translates into $1.125 million in added value. You might get the impression that I’m somewhat opposed to SFRs. I’m absolutely not. SFRs are not only great investments in their own right, but are also often stepping-stones to larger opportunities. Ultimately, though, unless you’re BlackRock, the only way to grow your real estate investments quickly is to do more units per transaction—which almost always means investing in multifamily. Dave Anderson has more than 30 years of real estate investment, ownership and development experience. He is the co-founder of Hot Ocean LLC, one of the fastest-growing ownership and property management companies in Houston with more than 2,300 units.

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IF YOU ONLY DO WHAT YOU BELIEVE YOU CAN DO WITH ONLY THE RESOURCES YOU HAVE IN YOUR POCKET TODAY, YOU’LL NEVER DO ANYTHING GREAT.

16 Community CommunityInvestor Investor jan/feb jan/feb 2014 2014 16


COVER STORY

JOHN WILEY River of Refuge Raytown, Mo.

John Wiley is using his skills as a real-estate investor to help working families escape pay-by-the-day motels and find decent homes.

A River of Refuge

I

t’s all too easy, John Wiley says, to miss the problems right in front of our eyes. “We get into these routines, and we don’t really lift our eyes up

and look around, or we block things out that bother us,” said Wiley, a maverick real-estate investor, former city councilman and pastor in Raytown, Mo., a suburb of Kansas City.

John Wiley and River of Refuge want to turn a former hospital into temporary housing for the working poor.

Wiley’s blinders came off the day he was driving in Raytown and was bothered by the sight of children boarding a school bus. It was a scene that plays out millions of times a day in cities across the country, but it was where those children had been waiting that concerned Wiley. Their bus stop was the parking lot of a rundown motel only a few miles from his family’s home.

“I saw elementary-age kids getting on a school bus, in the city that I live in, in front of a skanky pay-by-the-day motel,” Wiley recalled. “I said to myself, ‘They can’t get off the bus here, because if they get off the bus here, they live here.' And I said to myself, ‘I have got to know what this is about.’ ” So Wiley began knocking on the doors of the motel residents. He discovered that many families of the working

Story by Brian McTavish • Photography by Alistair Tutton www.communityinvestormedia.com

17


poor were stuck there. Some were packed into a single room for years, sometimes sleeping in pushed-together chairs or having to sleep on the floor, forced to use their bathroom sink as the kitchen sink. They couldn’t get out, he was told, because they didn’t earn enough money to live anywhere that was decent. Wiley knew what it was like to live in one of those properties. Many years ago, before he was a successful property investor and leader of a place of worship, Wiley quit high school and ran away from home. When he ran out of friends’ couches to flop on, he found himself temporarily living in a pay-by-the-day motel. And it’s not anything that he’d want for any child or their family. “As a teenager, I lived in one, and I saw what happened,” Wiley said. “You’re going to have prostitution two rooms over, drugs in the next room. You’re going to have sketchy guys passing through that are probably up to no good. And, in the middle of all that, you’ve

YOU NEED TO SELL ME THIS BUILDING FOR A MILLION DOLLARS, BECAUSE IT’S THE RIGHT THING TO DO. got families just wishing they could get the hell out.” He decided to do something about it—using an entrepreneurial approach that helps working families help themselves and boosts the larger economy in the process. ‘YOU’VE GOT TO STRETCH’ Wiley’s commitment to the motel families he met led him to found the nonprofit River of Refuge project. It began informally, with Wiley and his friends paying out of their own pockets to bring food to the families and partner with motels that would reduce their rent. One by one, the assisted families began to accumulate enough savings so they could move into nearby rental apart-

Ron King oversees the day-to-day operations at River of Refuge’s building.

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Community Investor jan/feb 2014

ments or houses, where the parents could live with dignity and their kids could run and play in real yards and neighborhoods. “I can’t tell you how many times that I’ve had somebody say to me, ‘I had no idea. I didn’t know. I never realized,’” Wiley said. “But there are families trapped in motels around the country, and people can do something in the community that they live in. Anybody can. You don’t have to be a John Wiley, wired the way I am. Anybody can do the right thing.” Then Wiley got to wondering: If he could rescue families one at a time from motel hell, imagine what could be done if there was a facility to feed and house dozens, perhaps hundreds, of the working poor, at no cost to them, while they saved their hard-earned money to pay for a proper home. That dream took a step toward reality when Wiley’s eyes fixed on a closed Kansas City area hospital, the former Park Lane Medical Center, which River of Refuge was able to acquire in 2009 for $1 million—not that Wiley had the money to buy it. But he had the vision. “I don’t have a lot of care or concern for what everybody’s

planning to do one day when all their resources line up,” he said. “Entrepreneurism involves some risks and some unknowns. And somewhere along the way you want to have a good business plan and a good business model. “But if you only do what you believe you can do with only the resources you have in your pocket today, you’ll never do anything great. You’ve got to do something bigger than yourself and bigger than you’re currently capable of. You’ve got to stretch.” Wiley is no real-estate novice. He owns a rental portfolio of several single-family residential properties and a small shopping center in Raytown. He found a way to make the hospital deal work.


Donors have provided everything from money to mattresses.

When he approached a representative of the ownership group that had purchased the shuttered hospital on speculation to flip it, he was informed that the asking price was $2.3 million. Wiley used the direct approach. “I said to him, ‘You need to sell me this building for a million dollars, because it’s the right thing to do,’” Wiley recalled. “He looked at me like I had a third eye. And then he kind of cocked his head, and he looked at me again, and he said, ‘You know, it is the right thing to do,’ and he shook my hand.” Real-estate investors will benefit from River of Refuge’s efforts. After all, they need solid, dependable renters like the ones that River of Refuge is creating. When people gradu-

ate from Wiley’s program, they’ve got first and last months’ rent, a security deposit and two months of savings in the bank. “They’ve got jobs, they’ve got stability, their children can stay in the school district,” Wiley said. “We’re reintroducing them. Now instead of having to pay high rent in a motel, they’ve got more disposable income. It helps my community economically. It helps the children emotionally. It helps their school grades improve.” ENTREPRENEURISM AS A SOLUTION The hospital renovation is still a work in progress, with most of the remodeling being

done by volunteers. The entire 150,000-square-foot structure could eventually accommodate 350 beds, but Wiley needs to start smaller and will open an 11-unit wing first. “The greatest probability is that we will open the first wing in 2014, because we are so close financially,” Wiley said. “These are all private dollars that come in. If we can get a little more funding, we will get this thing open sooner.” In practical terms, Wiley relies on donations to make the mortgage payments. Earlier this year, when a balloon note came due for $960,000, he was able to renegotiate an interestfree loan with the note holder. “This building will be paid off eight years from now,” Wiley said confidently. “The $600,000 that we still owe, that is solid. We’re able to make that commitment, because of my special donors.” Wiley acknowledges that some of the potential backers he’s asked to fall in with the River of Refuge facility haven’t appreciated his unconventional approach to entrepreneurism. “One particular entrepreneur seemed very agitated by my presentation,” Wiley said. “He told me that I was irresponsible, that I was taking too huge a risk, that I had surrounded myself with a bunch of ‘yes’ people and that I was dangerous. He said there were other people that were more aptly trained with greater re-

sources, and that I was flying by the seat of my britches on this thing.” Yet Wiley’s plan for River of Refuge is grounded in firm rules. At least one parent in each participating family must have gainful employment, and they must diligently make deposits in a monitored savings account to afford the initial expense of their next home. If they break that contract with themselves, they’re out. “You can come back in 30 days, if there’s an opening, because there’s always grace,” he said. “But if you’re looking for a handout, somebody to feed you and change your diaper and coddle you, this isn’t the organization for you.” Still, does Wiley ever think he may be taking too big of a risk? His response is that it’s even riskier to not see the big picture, what he calls the financial ecosystem of a community. “Listen, there’s inherent risk in poverty,” he said. “When you are in poverty and your life is broken, and you’re living in a one-room motel room with four children who sleep on the floor and you’ve been like that for six years, and you still have to go to work every day, it’s more than heartbreaking, it’s nonproductive. “These families are paying more to live in the motel per month than what it would probably cost to live in a rental house. They could be spendwww.communityinvestormedia.com

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ing those extra dollars in the community, buying another set of clothes, going to a sporting event—but they’re wasting their dollars and they’re stagnating and they’re trapped and they’re sinking. “If I can get a family out of that endless cycle of poverty, I’ll take the risk.” ‘WE WOULD NOT HAVE SURVIVED WITHOUT THEM’ Ultimately, it’s the voices of River of Refuge families who have found new and improved lives that matter most to Wiley. Wendy Messina endured a motel-room existence with her construction-worker husband

and their seven children, ages 2 to 11, until River of Refuge “found us a house with an absolutely big yard for my kids to run around in,” she said. “We stayed in the house for the first two weeks without beds, because none of us wanted to go back to the motel.” Victoria and Michael Armstrong and their children lived in the same motel for three long years, before River of Refuge found the family a threebedroom rental home. Michael recently returned from disability leave to his job at a QuikTrip distribution warehouse. “We would not have survived without them,” Victoria Armstrong said. “They are survival.”

Shanta Wallace, an assistant manager at a Captain D’s restaurant, said that her adolescent son and daughter were thrilled to no longer be sharing a motel bed. But it was Wiley, she said, who most gratified her. “He’s not even pushing the church on you or anything,” Wallace said. “It’s just something that he’s doing within himself. He’s a person who believes in his heart. It’s all about who he can help. He had faith in me, when I think I didn’t have faith in myself.” Wiley still has to sell some landlords on accepting graduates from the program. But as a landlord himself, he knows how to “talk landlord talk.”

“I can go to them and say, ‘Listen, here’s the deal. I need you to take a risk with me and here’s why. This family went through eight months of hard work to rebuild themselves, and they’re graduating from my program, and by the way, my program has teeth in it. If you don’t follow the rules, you’re out.’ “So I can say to these landlords, they graduated, they finished. These people have drive, determination and discipline, and I need you to advocate with them and take a risk. We’re earning a reputation that our graduates are worth taking a risk on.” Brian McTavish is a senior writer for Community Investor magazine.

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Community Investor jan/feb 2014


FINANCE

What’s Holding Back Wall Street? LARGE FIRMS WANT TO PROVIDE DEBT TO PROPERTY INVESTORS—BUT BIG HURDLES REMAIN. by Jack BeVier

E

ver since the real estate crisis hit in 2008, loans secured by real estate have been hard to come by. For a while in 2009 and 2010, commercial banks stepped in to fill the void left by the larger institutions, but it’s arguable that they came in too quickly and didn’t fully appreciate how much further the market had to fall. By 2011, commercial banks were out of the market as well, leaving almost a complete vacuum for cash buyers from 2010 to today. Individual investors that look strong on paper (700+ credit score, strong W2 income, fewer than nine mortgages in their personal name) can get mortgages that are still traded on the secondary markets, and active investors over the past three years have gotten some great deals. Professional investors, however, have been in a precarious position. They are best suited to take advantage of the opportunities that today’s market presents, but are unable to get a loan to do so. As a result, private lenders have become more and more prevalent. High-net-worth individuals have begun lending into the space at very opportunistic rates (8 to 12 percent) for term debt. Absent an alternative, professional real estate investors have borrowed these funds in order to take advantage of market opportunities that were just too good to pass up. A NEW PLAYER EMERGES? Recently, though, a new player has taken notice: Wall Street. Blackstone, Colony and Cerberus, which are each big

players in the REO-to-rental market, see the opportunity to provide debt to professional investors and real estate funds that are buying single family homes at today’s great prices. Each of those firms intends to securitize the paper that they plan to originate. They have each originated a few loans, but none of them have really taken off yet—they are still trying to figure out what their loan product is going to look like exactly. It’s an interesting exercise in merging the needs of Main Street with Wall Street. Here are the main conflicts that are holding back the floodgates for loans to real estate investors: LOAN SIZE Main Street real estate investors typically refinance one, or a few properties, at a time. Wall Street wants large loan amounts that are cost-effective to originate. Wall Street’s legal docs for these loans are still 200-plus pages, and they

don’t have a national origination platform to source these deals. Wall Street is currently looking to originate $5 million to $10 million minimum tranches. STRUCTURAL REQUIREMENTS Main Street investors are used to commercial paper, which does not require audited financials, bankruptcy remote entities or reserve waterfalls. Wall Street feels that S&P and Moody’s, the rating agencies that will be putting ratings on this paper—which will be required in order to create a liquid secondary securitization market—will require each of these bells and whistles in order to put a decent rating on the paper. INTEREST RATE Main Street investors are able to afford 6 to 7 percent on real estate purchased in secondary and tertiary markets like Indianapolis and Baltimore, continued to page 48 > Jack BeVier is a real estate investor with the Dominion Group of Companies, the largest owner-operator of single-family homes in Baltimore and a leading investor in the Atlanta market. www.baltimorerealestateinvesting.com www.communityinvestormedia.com

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SPECIAL FOCUS

SUCCEEDING IN THE URBAN CORE INVESTORS WHO BUY DISTRESSED RESIDENTIAL PROPERTIES IN THE URBAN CORE CAN MAKE HEALTHY RETURNS. BUT SUCCESS REQUIRES RESEARCH, REALISTIC EXPECTATIONS AND KNOWING WHERE TO TURN FOR HELP.

T By Julius A. Karash

he uncertainty that has rocked financial markets There frequently is a “disconnect” between investors’ expectations and “the reality of what these areas will yield in recent years has driven scads of investors to operationally, yield financially,” said Shane Sauer, a copull their money out of stocks and plow it into founder of RentFax, a Kansas City residential real estate. area-based company that provides Many of those investors THE STORIES OF ‘I information about properties and have been drawn to single-family surrounding census tracts. BOUGHT THIS HOUSE homes and small multifamily According to Sauer, “the failures buildings in the urban core. AND LOST ALL MY you hear about, the stories These dwellings frequently are MONEY’—USUALLY THE of ‘I bought this house and lost in poor-to-fair condition, but MISTAKE HAPPENED all my money’—usually the mistake buyers are willing to make the BEFORE THEY EVER happened before they ever bought necessary repairs. the house. The No. 1 key is knowlBOUGHT THE HOUSE. “The homes are inexpensive, edge and understanding of the so it looks really good on paper,” challenges of being active in those Shane Sauer, co-founder of RentFax said Kevin Ortner, CEO distressed markets.” of Renters Warehouse, a So what are the biggest challenges to successful urban Minnesota-based property management company. core investing? “They can go into a neighborhood and buy a property that’s maybe a distressed home for, in some instances, LACK OF STABILITY $20,000, $30,000, $40,000, put a little bit of money into Many of the challenges faced by urban core investors it to fix it up and turn around and rent it.” revolve around lack of neighborhood stability. Distressed properties can score high on returns, but “Demographics change very rapidly, depending upon this kind of investment is no slam dunk. All too often, the certain influences to the neighborhood,” said Scott Abbey, bargain prices available in the urban core are accompanied a co-founder of RentFax. He said such influences can include “lots of board-ups because of foreclosures. It can include by a plethora of challenges.

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KEYS TO SUCCESS Have REALISTIC expectations Get DETAILED REPORTS about the property and the surrounding neighborhood TALK to people who already live in that area

a local, large employer shutting down, or laying off a large quantity of people. It can include a school closing.” The instability prevalent in many urban core neighborhoods often goes hand-in-hand with poor infrastructure and schools—attributes that cause people to move away, Abbey said. So while it may be easy to find distressed properties for sale, the same is not always true when it comes to finding stable residents to live in those properties. “Many times in these urban core areas, it’s more challenging to find tenants who will take the kind of care of the properties that you need to have positive outcomes,” Abbey said. HIGH VACANCY RATES High tenant turnover and resulting high vacancy rates pose a huge hurdle to successful urban core investing. “I’ve looked at hundreds of pro formas, produced by sellers and given to buyers, and the common plug number for vacancy is 10 percent,” Abbey said. “But 10 percent is not the number. It varies based on location and demographics. It’s not a number that can be used in a pro forma across the board.” Abbey said vacancy rates can be aggravated by rents that are too high for the neighborhood. “Then the outcome of that investment is going to be skewed to the negative, or at least less optimistic than the seller has promoted. If you sit

Invest in professional property management and tenant SCREENING

vacant, you have lost opportunity.” Not only do vacancies cut off the investor’s cash flow, but a vacant dwelling is more likely to be hit by vandalism, fire or squatter occupation. The cost of repairs takes more money out of the investor’s pocket. “Vacancy in a high-risk area is your worst expense,” Abbey said. “Being occupied is a critical component, and making certain that you have a realistic rent is an important part of that.” FINES AND FEES Investors in distressed properties also are challenged by municipal fines, such as for not maintaining standards of cleanliness and aesthetics. “Some cities around the country are really trying to step up their standards in their neighborhoods, and they’ll fine the owner-investor for things like the yard not being maintained properly or trash being outside or vandalism or graffiti on the property,” Ortner said. A lease on a single-family house typically specifies that the tenant is responsible for mowing the lawn. But if the tenant shirks that responsibility, “the city won’t bill the tenants, they’ll bill the owner, and if it’s not paid on time, it involves pretty excessive late fees,” Ortner said.

www.communityinvestormedia.com

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If the fine is the fault of the tenant, the property owner can pay the fine and then seek reimbursement from the tenant. But the tenant might refuse to pay or be unable to pay, Ortner said, “so it becomes a situation where you have to decide whether to kick a tenant out over not paying a fine and risk some vacancy time, or continue collecting your rent.” Investors often are surprised when they are charged certain fees, Ortner said. “I operate offices in 10 locations across the United States. In a lot of the big cities, such as the Minneapolis-St. Paul area, the city charges very high fees for rental licensing and rental permits. Investors in many cities have to pay upwards of $1,000 just to register the property as a rental. A lot of people have called me and said, ‘Holy cow, what is this fee for?’ It’s just something they’re not expecting to run across.”

OFTENTIMES IT’S BETTER TO MAYBE PASS UP A COUPLE OF APPLICANTS AND WAIT FOR A GOOD APPLICANT OR A BETTER APPLICANT TO COME ACROSS. Kevin Ortner, CEO of Renters Warehouse

Other obstacles to acquiring distressed properties include tax liens. “We’ve heard of properties with so many tax and special assessment liens against them, that paying off the liens and assessments would cost more than the value of the property,” Sauer said. Bottom line: Investing in distressed properties holds the potential for good returns, but success is not guaranteed. “I’m a believer that real estate is a great place to invest,” Abbey said. “But it is incumbent upon investors to understand the risks associated with it and get realistic,

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Community Investor jan/feb 2014

non-biased input to help make good buying decisions. Sometimes these investors go into foreclosure because their asset is not performing (at a level) to be able to service the debt.” So how can investors navigate these challenges? SET REALISTIC EXPECTATIONS Experts say the investors who attain the highest rate of success with distressed properties are those who enter a transaction with realistic expectations of what the outcome will be. “Oftentimes, the investment is doomed at the beginning because of a lack of full understanding of the dynamics of the property,” Abbey said. “That investment, with all the excitement and energy that’s gone into this, now comes to the property manager, and he’s expected to make the property perform, and meet the expectations that were set at the time of purchase, which many times are unrealistic.” OBTAIN RELEVANT INFORMATION In order to set realistic expectations, investors must acquire detailed information about the property they are considering and the surrounding neighborhood. One way to obtain that information is through a service such as RentFax. For example, a RentFax “Risk Report” provides investors with information about factors such as neighborhood crime, education, occupancy, education, income stability, housing types, housing values and the demographics of neighborhood residents. Such information can help investors calculate the right amount of rent to


charge, as well as the potential risks and costs associated with evictions and vacancies. And once investors acquire a property they should perform “forensics” periodically, said Abbey, who also manages the Oz Accommodations Inc. property management company. A forensics report should include information such as vacancy rates and an area risk index. “Having that as a tool to manage your asset over the course of time is very valuable.” HIT THE STREETS Sauer, who also is the founder and owner of Peak Asset Management, said he obtained the most success in distressed property investment when he walked around neighborhoods and talked to the people who lived there. “I had greater success shaking hands and going door-to-door, letting people know who I was, what I was trying to accomplish and how it benefited them,” Sauer said. “Nothing compares with the information I would get from a neighbor who says, ‘Oh yeah, Betty Sue left there because she got so tired of that one leak, or this one water pipe, or the bathroom upstairs would always do X, Y or Z.’ And this is stuff that even through a home inspection and everything I did, I could never uncover that.” Of course, not every investor has the ability or opportunity to walk the neighborhood and interview residents. Nonetheless, Sauer said the greatest success will go to those who employ an investment strategy that is “active” rather than “passive.” “There’s no silver bullet,” Sauer said. “But I do know that where I did yield positive results, I was extremely active in the process.”

An “active investor” mind-set and knowledge of the neighborhood tie with another strategy to ensure success: choosing good tenants. “It really comes down to good tenant screening,” Ortner said. “Oftentimes it’s better to maybe pass up a couple of applicants and wait for a good applicant or a better applicant to come across, and not just take the first one.” Ortner said a professional management firm will provide a property owner/ investor with tenant screening and other crucial services. “It depends on the company,” Ortner said. “But generally, they’ll market and advertise the property for rent and meet

the (prospective) tenants at the property and show them around.” And once the property is rented and occupied, the property management company typically will collect the rents, inspect the property, take maintenance calls from tenants, contact vendors to make repairs and handle the accounting aspects of the property owner’s investment, Ortner said. “Of course I’m a little biased on this since I run a property management company,” Ortner said. “But it really is a good idea, especially for people who are inexperienced in these areas, to get a good property manager that’s knowledgeable in urban areas.” Julius A. Karash is a freelance writer and editor in Kansas City, Mo. (913) 208-3640 :: julius.karash@gmail.com//www.juliuskarash.com

www.communityinvestormedia.com

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DEAL

Selling Yourself HOW TO SHOW PRIVATE LENDERS THAT YOU’RE GOING TO BE A GOOD PARTNER OVER THE LONG HAUL. EXPERIENCE Having a documented history of successful, profitable deals under your belt is the single most compelling piece of evidence you can provide, Antone said. “That, to us, is extremely powerful. That is the No. 1 thing in my book.” If you’re a younger investor without much experience, consider bringing in a more seasoned partner, Antone said. Or you could make other accommodations to win over the lender, such as asking for lower LTV or maintaining a higher level of reserves. And realize that lenders are always going to direct most of their money to their best, most profitable borrowers—people

AS PRIVATE LENDERS, WE'RE LOOKING FOR LONG-TERM RELATIONSHIPS.

by James Hart

B

elieve it or not, money isn’t the only thing that private lenders consider when they’re presented a deal, said George Antone, the investor, author and educator who created WealthClasses, a company that specializes in training for private lenders and entrepreneurs. Lenders also want to know about you. Don’t be mistaken: Lenders absolutely care about a deal’s profitability, but most

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of them also want to work with borrowers who will be good partners not just today but for years to come. “As private lenders, we’re looking for long-term relationships,” Antone said. “We actually go out of our way to invest in them over time so they can scale up. We really want to make sure this person is in it for the long haul.” Here are some of the most important traits and behaviors that lenders want to see in new borrowers—and potential long-term partners.

who have a track record with them. Sometimes it takes a few deals to really earn a lender’s trust. A lot of would-be borrowers assume that private lenders aren’t going to perform the same level of due diligence that a bank would. Wrong. “Some of them are shocked that we are actually checking everything,” Antone said. When you present a deal, you need to know the rehab budget, the scope of work, the days-on-market and the surrounding area’s fundamentals—and you PREPARATION AND DOCUMENTATION


need to have documentation of that at the ready. You also should be able to tell the larger story behind a deal and why it’s a good risk. Is a major employer building a new location just down the street from that property? Do you already have a buyer lined up? Then let the lender know. “The story is what makes a deal so compelling,” Antone said. Preparing a full business plan isn’t strictly necessary, but it’s evidence of your professionalism. “One of the things we look for is this person running their business like a business, as opposed to doing all the rehab themselves,” Antone said. “It shows us that we can help this person scale up.” Too many borrowers only present the best-case scenario of a deal. If a

REALISM

community’s average days-on-market is three months, don’t assume you’ll be able to sell a property in two weeks, Antone said. Presenting an unrealistic timeline will only undermine your credibility. COMMUNICATION It’s not a crime to shop

a deal to multiple lenders, Antone said, but you should let them know up front that you’re approaching other people. Frankly, they’re probably going to find out anyway. “A lot of private lenders know each other,” he said. “We all get together, and we know when a borrower shops a deal around.” By disclosing that information on your own, though, you’re demonstrating that you’re someone who can be trusted. That’s also true after a deal goes through. If something goes wrong—

maybe the permits are delayed or you aren’t able to sell as quickly as you thought—it’s important to let the lender know early on. “The more honest they are with us,” Antone said, “the more trust that builds with us.” If a lender turns you down, always ask exactly why they said no. It might just be they don’t have any money to lend right now. Or there might be some element of the deal that can be reworked to win them over. “They might be able to turn a bad deal into a good deal,” Antone said. “Always ask yourself how you can turn it into a yes.” James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

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LAW

Tough New Rules on Balloon Payments ARE YOU READY FOR THE LATEST CHANGES UNDER DODD-FRANK? by James Hart

O

ne of the biggest impacts of the Dodd-Frank Act will hit private lenders starting this month: In many cases, balloon payments will essentially be off-limits. To get a better understanding of the law’s effects, Community Investor spoke with attorney David Ambrose, an expert on real estate finance, and Robert W. Cox, founder of Pacific Capital Solutions and a frequent speaker on Dodd-Frank. Of all the changes caused by DoddFrank, they say, the new rule on balloon payments has the potential to be the most disruptive for private lenders and their borrowers.

HOW THINGS ARE GOING TO WORK Generally speaking, if a proposed loan involves a high-cost mortgage for household or personal use, the lender will have to fully amortize the loan. Thanks to new rules that require lenders to verify borrowers’ ability to cover monthly payments, what used to be a five-year loan with a balloon—a popular deal for private lenders—must be stretched out to 30 years in order to work. That’s not going to be an appetizing option if you’re a 65-year-old private lender—or if you’re just someone who wants his money back within five years. (Unlike institutional lenders, the

average private lender won’t be able to securitize a loan and sell it on the secondary market.) “They can’t commit to it for 30 years,” Ambrose said. “They’re not going to want to sit there and wait for 30-year amortization on a loan.” Many borrowers will be hurt, too, Cox said. Private lenders offer a much-needed service to people in their communities: loaning money to home buyers who can’t secure conventional financing. A private loan simply provides a bridge until a bank will work with these clients. Meanwhile, institutional lenders are struggling with new Dodd-Frank rules, too. It’s going to be harder and harder for the average borrower to find the money they need. “All of a sudden now,” Ambrose said, “you’ve got people who can’t get loans.” STARTING WITH THE EXIT STRATEGY One possible response for private lenders? Consider the borrowers’ exit strategy before you make the loan. Make sure your screening process looks at the borrower’s ability to secure refinancing after three to five years. Then structure the loan so that, after five years, the interest rate increases— from 9.5 to 12 percent, for example. That way, even if the original loan has a term of 30 years, the borrowers will have a strong incentive to refinance. One drawback is that lenders would have to verify that the borrowers can

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afford the higher rate, even if the borrowers fully intend to refinance before that higher rate kicks in. That’s

that equity. If that borrower isn’t working because of her health, she can’t prove she’ll be able to repay. So the loan can’t be made.

PRIVATE LENDERS OFFER A MUCH-NEEDED SERVICE TO THE PEOPLE IN THEIR COMMUNITIES: LOANING MONEY TO HOME BUYERS WHO CAN'T SECURE CONVENTIONAL FINANCING.

going to prevent a lot of borrowers from qualifying. And the lender could still be stuck with a 30-year note. If the borrowers’ circumstances change and they can’t find refinancing—or if they’re happy to pay that 12 percent—they can’t be forced to seek refinancing. “There’s no legal requirement that they have to,” Ambrose said. CONTACT YOUR CONGRESSMAN The new rule on balloon payments isn’t the only regulatory change that could create problems. From now on, borrowers won’t be able to include their closing costs in a high-cost mortgage. Those will have to be paid in cash. On a $130,000 home, for example, that could run to nearly $6,000 or $7,000—money that borrowers might not have on hand. “That’s going to be a big problem for private lender refinances,” Cox said. There also could be unintended consequences related to ability-to-repay guidelines. Let’s say a customer owns a $500,000 home free and clear, but has a medical catastrophe and needs to access

“There are no emergency-waiver provisions in place for financial hardship,” Cox said. The ultimate solution is for Congress to change the law, Ambrose and Cox

said. Neither has seen any indication that elected officials are working on the problem—or that they’re even aware a problem exists. Private lenders loan billions of dollars each year, but those transactions aren’t reported the same way that Fannie and Freddie totals are, Cox said. He’s not sure that Dodd-Frank’s authors were really thinking about private lenders at all when the legislation was being written. “They’re going to have to wait until they get enough complaints from their constituents,” Cox said. “Until something becomes a big red flag, it’s not going to get their attention.” James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

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PROTECTING YOUR INVESTMENT

Breaking the Mold WHY PREVENTION IS YOUR BEST STRATEGY FOR FIGHTING MOLD.

by James Hart

F

“If you wait until you see it,” he said, or a lot of property investors, “then it’s almost too late.” mold is a problem they never see until it’s too late. BUILDING A STRONG DEFENSE It’s one they need to take very seriMold needs two things to thrive, ously. Mold presents a risk to human Younts said. The first is organic matter health, and property owners can find that can provide it with the nutrients to themselves in magrow. Wood, nonjor legal trouble if polyester carpets PROPERTY OWNERS they don’t address and rugs, and even the issue. And the paper backing SHOULD FOCUS ON that’s not counton drywall—they KEEPING MOISTURE ing the high cost all serve as raw UNDER CONTROL. of remediation. fuel. The other In some ways, major ingredient mold is a little like is moisture. dealing with a serious medical diagno“Mold cannot grow if it has a relative sis, said Lindsey Younts, the president humidity of less than 60 percent,” and executive director of the Real Estate Younts said. Investor Education Center and a veteran Since it’s nearly impossible to own a real estate investor with more than 25 building that doesn’t have wood, drywall years of experience. Prevention and or carpeting, property owners should early detection tend to be less painful focus on keeping moisture under control. and costly than allowing the problem to MAINTENANCE MATTERS Leaks—whether go undetected. they’re in the pipes, roof or basement—

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are Enemy No. 1. Make sure your plumbing and drainage system is water-tight. Areas around kitchen sinks, bath-tubs and bath vanities are most susceptible to mold growth. If the property has a chimney, it needs to have adequate flashing. Landscaping should drain water away from your foundation to prevent moisture from migrating into the crawl spaces or foundation slabs. Forced-air HVAC systems by design remove airborne moisture, but can also be a breeding ground for mold. Keeping the units in good working order and periodically cleaned is one of the best preventive measures for mold control. If mold gets


into an HVAC system, mold spores will become airborne. These particles will be circulated throughout the structure and make it almost impossible to control mold growth. And while most pest companies don’t handle mold remediation, a lot of the moistureprevention work they do can create drier conditions in a property, preventing mold from getting a toehold. INVEST IN HYGROMETERS Younts has installed one of these devices, which measure air moisture, next to the thermostat in each of his properties. That way, tenants can easily track relative humidity and give him a heads-up if there’s a problem. Even better, hygrometers are a relatively inexpensive solution; Younts has never had to pay more than $20 for one. “It’s not very expensive,” he said. “It creates goodwill with my tenants, because I’m looking out for their comfort, but I’m also proactively protecting my property.”

money on the back end. I have countless examples where my cleaning crews have identified problems early and have saved me a lot of money in correcting small problems before they become major issues." FINDING AND FIXING THE PROBLEM Visual inspection—actually laying your eyes on the mold—is the first step to locating it. Unfortunately, mold often hides in attics, crawl spaces and even inside the walls themselves. Hiring an industrial hygienist or a remediation firm to perform an air-quality test can help confirm if there’s a problem. What if you actually find mold? A lot depends on the extent of the outbreak and the type of mold, Younts said. You can usually get rid of small patches of

green mold by wiping down hard surfaces with disinfectant. He recommends a 10:1 water-ammonia mix. Black mold, on the other hand, is associated with more serious health problems and demands a more aggressive response, possibly involving a firm that specializes in mold remediation. Unfortunately, the most effective solution in most cases is to remove the affected drywall, wood or carpet entirely and replace it—a fix that can cost several thousand dollars. That’s why prevention should be your primary strategy. “Once you have mold, you have a problem,” Younts said. “If you can be ahead of it and prevent it, you’re going to save a tremendous amount of money.” James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

SHARE YOUR NEWS Have you just completed a major deal? Are you expanding your operations? Maybe you’re hosting a major conference. If you’ve got news, be sure to share it with the readers of Community Investor magazine. Send your information to editor@communityinvestormedia.com for possible inclusion in the next issue or our email newsletter.

SCHEDULE REGULAR VISITS FROM YOUR

Every six months, Younts pays a professional cleaning crew to go through each of his properties. And while they’re in the building cleaning, those crews look for maintenance issues that tenants either won’t notice or won’t call about, especially leaky pipes and other problems that could lead to a mold outbreak. Of course, cleaning crews cost money, but it’s a valuable investment, Younts said. “It’s a little more expensive on the front end,” he said, “but it saves a ton of

CLEANERS

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33


NEW KID ON THE BLOCK

Building Your A-Team HERE ARE THE PROFESSIONALS YOU NEED TO SUCCEED AS A PROPERTY INVESTOR.

I

t’s one of the most important lessons that new property investors learn: a big part of your success in real estate depends on the people around you. That’s certainly been true for me. I have a separate full-time job, so I manage all my properties in my spare time. I’ve discovered that if you know by Lucas Hall who to call, and have the money saved up, property management becomes significantly less emotional. It becomes a business. In order to achieve this, I’ve assembled a reliable network of professionals—my

tions. They continue to treat me like a king as long as I keep sending them business. My A-Team includes the following professionals, and I would suggest that you look for the same when building your list: You want someone who has been a professional full-time contractor, in many trades, for most of their life. The more certifications they have, the better. You’re looking to fill a position called “hero”—and you might go through two or three handymen before you

AN EXPERIENCED HANDYMAN

In return, you will shower this person with tips and referrals. REAL ESTATE AGENT AND LENDER Unless you

are licensed and have a lot of liquidity, you will need an agent to help you find a property, and a lender to secure the financing. Many times, a purchase negotiation requires last-minute changes to the sales contract and redundant lender approvals. Agents often have a select few lenders whom they know and trust and, more importantly, work well with. Successful acquisitions require fluid collaboration between your agent and lender. REAL ESTATE MENTOR I

YOU'RE LOOKING TO FILL A POSITION CALLED ‘HERO’—AND YOU MIGHT GO THROUGH TWO OR THREE HANDYMEN BEFORE YOU FIND A PERFECT FIT.

own personal A-Team that helps me grow and manage my rental portfolio. IT’S ALL IN THE LIST At the closing of my first property, my agent graciously gave me her “little black book” of contractors, lenders and other professionals. Honestly, it was a godsend. Without that initial list of reliable professionals, I would have struggled to get my first property up and running. Years later, I have my own list of independent contractors who handle all my repairs, maintenance and new acquisi-

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Community Investor jan/feb 2014

find a perfect fit. Preferably, he or she is skilled in everything from plumbing, electrical and drywall to even getting kittens out of trees. This person could ideally be trusted with the keys to all your properties, and will treat your tenants with respect.

suggest finding a mentor who has already accomplished what you are seeking to do—someone who has been a successful landlord in your area for many years. A great mentor will give you critical advice on dealing with tenant issues, recommendations on property acquisition, and guidance on running a smooth and stress-free rental business. REAL ESTATE ATTORNEY They can be expensive, but absolutely crucial when a legal issue arises. I’ve built connections with a few local


Insurance attorneys in case I ever need their services. I typically ask to pay a one-time fee for the service, and I only sign a retainer contract if I have an issue that needs their attention over a long period of time.

for

Real Estate Investors

A “TECH GUY” Not an actual person, but rather a very specific set of online tools to help you find tenants and manage your properties. Start with Craigslist (craigslist.org) for creating rental listings, and then use Cozy (cozy. co) to collect rent, track the leases and manage the finances. Google Docs or Dropbox are also great tools to store and access your non-sensitive documents from any device.

Renovation

THE PROS AT YOUR LOCAL HARDWARE SHOP

When you are in the middle of a DIY faucet repair, proximity matters. Local shops often have experienced staff who know how to fix anything and can guide you through your repair project. Whether you are buying your first property, or already have an empire of rentals, I believe you will accomplish more if you have a stellar network of competent professionals that you can delegate responsibilities to. As you continue to build your portfolio, try to remember that the many will almost always achieve more than the few. Lucas Hall is a successful landlord and project management professional (PMP). He's been able to produce a viable second income with rental properties while managing dozens of happy tenants. You can connect with him at www.Landlordology.com.

Vacant

Occupied

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35


INSURANCE

The Hidden Costs of Out-of-State Investing YOU HAVE TO KNOW WHAT YOUR INSURANCE POLICY WILL—AND WON’T—COVER. by James Hart

E

verybody knows the old saying that “knowledge is power.” But too many property investors forget the flip side of that rule: A lack of knowledge can be a huge weakness. That’s especially true for people who buy houses in another state, far away from their hometowns. Take Jane, for example. (That’s not actually her name—to protect her privacy, we’ll use a pseudonym.) She attended a turn-key investing seminar on the West Coast, where she lives. If she put up $45,000, the operator would buy a house on her behalf in another state, renovate the property and guarantee to find a tenant for it. According to the pro forma, Jane could expect about $400 in monthly profit. It sounded like a great opportunity. She took the deal. THE UNKNOWN UNKNOWNS Several months later, Jane got a phone call from her insurance agent. There had been a break-in at the rental property, and the turn-key operator submitted a claim on her behalf for about $25,000. Jane didn’t know about the break-in. Frankly, she didn’t really realize that her property had an insurance policy—it was something the turn-key operator had handled. She also learned that her policy covered actual-value losses, not replacement costs. It might take $25,000 to fix the damage, but the insurer could write a

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Community Investor jan/feb 2014

check for only $7,000 to $8,000. And her deductible on the claim was going to be $4,000. Jane knew that her property was in Georgia, but that was about the extent of her information. She had never had the chance to see it in person. She didn’t know much about the neighborhood and whether it was a high-crime area THE TENANT WHO WASN’T THERE Unfortunately, situations like this pop up more often than you’d like to see, said Mike Wrenn of the National Real Estate Insurance Group. When investors live hundreds of miles away from their property, they don’t always possess crucial information. Wrenn remembers another recent claim involving a break-in. The investors were a married couple who bought an

out-of-state property through a turn-key operator. They too suffered a break-in, and a claim of nearly $25,000 was filed. Their building was insured, but unfortunately, it had been unoccupied for some time. Many policies won’t cover certain types of claims, such as breakins, if a property sits vacant more than 60 days. In the couple’s case, the breakin occurred around Day 80. The policy wouldn’t pay for any of the damage. The couple had no idea the investment property was vacant. The turn-key operator hadn’t been able to find a tenant, but had continued to send the couple a monthly rent check in order to live up to the terms of their deal. Luckily, in the couple’s case, the turnkey operator stepped up to help with repairs, as Jane’s did. That doesn’t always happen. Some investors have found


themselves with expenses that have vastly outpaced their property’s cash flow. In the end, many of them have walked away from those houses entirely. FILLING IN THE BLANKS This isn’t to say that turn-key investments or other out-of-state deals are bad. In fact, under the right circumstances, they can be very solid opportunities, Wrenn said. The industry is like any other: There are some professionals you can trust—and others you can’t. Wrenn has some advice for people who are considering an out-of-state investment. First, research your partners. You might not be able to travel to the investment property itself if it’s a turn-key deal, but you can look into the operator’s track record, Wrenn said. Check with the Better Business Bureau, and don’t be shy about directly asking the operator for references. Tell them you want contact information for at least three people who have been investing with them for a few years, Wrenn said. Ask those people about their experience. Second, learn how your rental property’s insurance works. Understand what will and won’t be covered. And be prepared to absorb expenses that pop up—deductibles, for example. For rental properties, it’s rare to see a deductible below $2,500. One claim could be enough to eat up most or all of the annual profit on a deal. If a pro forma has no line item for non-covered property damage costs, then you’re only kidding yourself on returns expected from this property. In low-income, high-crime areas, it’s not unwise to assume property losses of $3,000 a year over the term of a five-year ownership. To manage this risk, get and verify tenants insurance.

le!

countab Hold them ac

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37


MANAGEMENT

The Never-Ending Search for Great Tenants HAVING A THOROUGH SCREENING PROCESS AND SOLID MARKETING WILL GO A LONG WAY. by John R. Bradford III

D

emand for rental properties is as high as it has ever been, but that doesn’t mean that finding great tenants is a complete breeze now. Property owners and managers still have to use solid judgment and do the things that attract responsible, reliable renters.

Usually, you can paint a pretty good picture, because those are all points on a scorecard.

THE 3:1 RULE Get third-party verification of the applicant’s income to make sure they can afford the monthly payments. Our company uses a 3:1 ratio, meaning the tenant needs to bring home at least three LOOKING AT THE times what the monthly rent costs. Often, SCORECARD the price point of a property is a kind of You want tenants screening tool itself. An $1,800 rental is who will pay on going to attract a different kind of tenant time, get along than a $600-a-month property. with their What if an applicant has a good neighbors and income and a stable work history— treat the propbut a blemished credit record? erty well. Unless you happen to be In some cases, you might consider working with them anyway. Maybe that YOU WANT TENANTS WHO WILL person is getting PAY ON TIME, GET ALONG WITH over a foreclosure or THEIR NEIGHBORS AND TREAT survived a War of the Roses-style divorce. THE PROPERTY WELL. He or she could still end up being a very psychic, you’re going to need to look at reliable tenant. You may be able to proan applicant’s track record. tect yourself by requiring a larger security You’ve got to make sure you have as deposit than normal. Different states have thorough a method of advance screening their own rules on this, so make sure as possible. Find out applicants’ crimiyou’re in line with the regulations where nal history and whether they appear on you operate. sex-offender registries. Learn their credit CAN YOU PICTURE IT? score, how long they’ve been in their job When you advertise a property, picand what their references say about them. tures can be one of your best tools. Just (Assuming you can reach those referthink about the example of two people ences, which can be a clue itself.)

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Community Investor jan/feb 2014

selling the same used car on Craigslist. If one of them posts eight pictures with their ad, and the other only has one, the person with eight photos is going to generate more calls and emails. While more pictures are better, be careful about quality. Don’t include anything that’s out of focus. Leave out photos where your thumb or the camera’s strap accidentally covered part of the lens. You’ll obviously include basic information about the property itself—number of bedrooms and baths, square footage, laundry facilities—but don’t forget to tout nearby amenities that might attract tenants, such as swimming pools, parks and hiking trails. And unless neighborhood rules forbid it, be sure to put a “For Rent” sign in the property’s front yard. That’s a free opportunity to advertise your property. REMEMBER THE BASICS Finally, remember the basic “blocking and tackling” of property management. If a potential renter calls with questions about a property, get back to them into a timely fashion, before they move on to a different company. Having a smoothrunning operation can be a big help as you attract—and, with any luck, retain— great tenants.

John R. Bradford III is the CEO and founder of Park Avenue Properties, a residential property management firm that handles thousands of units in North Carolina, South Carolina and Tennessee. 1-888-372-7528 :: www.parkaveproperties.com


PROBLEM SOLVERS

Dog Gone WHAT’S THE BEST WAY TO FIGHT PET ODORS IN YOUR PROPERTIES?

BIRMINGHAM

by James Hart

O

ne of my rentals smells like the former tenant was hiding a small herd of dogs. How am I ever going to get rid of this smell? The good news is that removing odors isn’t impossible— if you know what you’re doing, Deb McMillan says. McMillan is the president of OdorXit, an Ohio-based company that sells a line of odor neutralizers. The OdorXit products can exorcise the smells of mold, mildew, spoiled fish, diesel fuel, dead rodents, cat urine and more— including dog smells. McMillan completely understands how frustrating those kinds of problems can be. Her first rental property was a smelly house, and her search for a solution ultimately led her to start OdorXit, which is a Community Buying Group supplier. Her advice? Identify the source of the odor first. The carpet is a likely suspect, but odors can also get into drywall, paneling and other surfaces. A black-light flashlight can greatly increase your odds of finding exactly where the trouble is. If the carpet is the source, you should ask yourself if it’s worth saving, McMillan said. You can use a carpet syringe to inject an odor neutralizer deep into a carpet, but in cases where the flooring has been well and truly soiled, it might be easier to simply tear it out. That way, you can apply an odor neutralizer directly to the floor. “Unless you get it to the source, you’re not going to get rid of the smell,” McMillan said. When you do apply an odor neutralizer like OdorXit, remember to read the directions first—you might be surprised how many people skip this step.

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IN DEPTH

CRIME PREVENTION

Spotting the Signs of Meth HOW CAN YOU TELL IF YOUR PROPERTY IS BEING USED TO PRODUCE METHAMPHETAMINE? by Brian McTavish

T

here are numerous warning signs that an apartment or house is being used to produce methamphetamine. Yet following one simple piece of advice from law enforcement can be the most effective way for landlords to entirely avoid or immediately halt the

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dangerous, clandestine activity, which poses a threat not only to property but to human life. “Managers need to inspect their properties at least once a month,” said Crime Prevention Officer Gary Starks with the Independence, Mo., Police Department. Starks has taught a crime-free multihousing class for landlords since 1999. All

too often, he said, property owners and managers make the mistake of thinking that no news is good news. “They assume if they’re getting their rent, everything’s OK, and they’re happy,” he said. “And if they don’t hear from the police, everything’s good. But the bottom line is that a lot of this stuff goes undetected. And if they would inspect their


properties on a regular basis, they could stop a lot of this before it ever happens.” What could happen? “We’ve found meth labs through house fires,” Starks said, “because places were blowing up and the fire department was responding.”

“An odor is always going to raise suspicion,” Starks said. “But when we get there and investigate, it’s not always meth. It can be the smell of natural gas or trash or real cat urine." Trash itself can be a tipoff, including plastic soda bottles with puncture holes, rubber hoses, cold tablets and other tools and ingredients associated with meth production. “Be looking for empty blister packs of (the cold medication) Sudafed,” Starks said. “They’ll steal those, punch out all of the pills and throw away the packs—there could be dozens or hundreds of packs. We’ve seen at apartment complexes where they’ll leave trash bags full of them in Dumpsters. And you might see coffee filters with a red stain, because they use red iodine.” Meth manufacturers also might install outdoor security cameras to protect against discovery or theft. “When we see cameras, we give it a little more special attention,” Starks said. “But I’ve got cameras on my house, so having cameras doesn’t mean it’s a meth house.” Nor do covered windows necessarily translate to meth-making: “I’ve seen cardboard boxes and aluminum over windows, but that’s not always drug activity,” Starks said. “It can be a sign.” Most often, though, it’s an accumulation of different clues that raises a reasonable suspicion that meth is being produced on a property.

HOW BIG IS THE METH PROBLEM? Meth costs the U.S. economy $23.4 BILLION, according to a 2009

study from the RAND Corporation. U.S. authorities responded to 11,210 meth lab and dumpsite incidents in 2012.

“You could see consistent heavy traffic in and out,” Starks said. “You could see paranoid behavior, where they’re out looking around their house constantly, or on the phone, or tweaking (twitching)—where they literally can’t stand still. They’re just constantly moving and looking around and scratching sores—they’ll scratch at their hands and make sores. “Most times, people who are into meth are filthy. They’re dirty. So the outside of the apartment or the house is probably going to be just as dirty as the inside. Whenever you get inside, 99 percent of the time, they’ve destroyed the apartment. It’s trashed. There are holes in the walls. They’ve ruined the electrical. They devastate apartments, and it’s because they have no ownership there. They can just move along.”

The Sights and Smells Fortunately, there are other ways to possibly detect a poisonous and potentially explosive meth lab in operation, starting with a strong and unpleasant odor that is often described as smelling like ammonia or cat urine.

ALL TOO OFTEN, PROPERTY OWNERS AND MANAGERS MAKE THE MISTAKE OF THINKING THAT NO NEWS IS GOOD NEWS.

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IN DEPTH

CRIME PREVENTION

How to Respond Still, Starks said, some property managers make the error of not wanting to deal with the police, because of legally imposed cleanup and decontamination costs after a meth lab is found on a property. “I know of a maintenance man who went into an apartment and found a meth lab,” Starks said. “He called his property manager, and the property manager said, ‘Don’t call the police, because if they come out, it’ll cost thousands of dollars to clean up.’” Starks said the property manager told his maintenance man to go into the apartment upstairs and turn on the water, so that the apartment with the meth lab would be flooded, and that way the manager “could just clean everything out, put

it in the Dumpster and he wouldn’t have the police to deal with.” Instead of following his boss’s orders, the maintenance man called the police and wound up speaking with Starks. “I said to him, ‘No, don’t do that,’” Starks said. “And then I called the drug task force, and they went out there and found the meth lab. The manager got fired. In fact, the police drug task force took the manager in on a 24-hour hold.” It just doesn’t make sense—ethically or financially—for a landlord to not do the right thing, whether before or after a meth lab is found, Starks said. “Owning rental property is a business,” Starks said. “It’s what you’re making money on. If you’re not going to responsibly run it like any other business, you shouldn’t be doing it.

FEWER PEOPLE USING METH? In a 2012 study, 1.2 MILLION Americans reported using meth in the past 12 months. That represents about 0.4 percent of the population. About 440,000 (or 0.2 percent) had used meth in the past month. That's an improvement compared to 2006, when 731,000 people reported priormonth use. Meth led to 103,000 emergency-room visits in 2011, down from 132,000 visits in 2004. Source :: National Institute on Drug Abuse, RAND Corporation, U.S. Drug Enforcement Agency.

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“It costs you more money to deal with cleaning up meth labs or the destruction of property because of drug abusers, than it does to drive to that house or apartment once a month and look at it.” If a landlord does discover a meth lab, what’s the best course of action? “First off, don’t touch anything,” Starks said. “It’s very toxic. If you’ve got a cell phone, walk outside, stay right at the door and call the police. “It’s all very common-sense stuff. It’s just that a lot of property owners, all they’re worried about is occupancy rates and getting their rent—and not what’s going to occur if they don’t deal with this. And, if they don’t, then they’re going to deal with us.” Brian McTavish is the senior writer of Community Investor magazine.

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p U n e t s i L

WITH COMMUNITY INVESTOR RADIO Join host Larry Muck every Friday for Community Investor Radio, an online show dedicated to the world of residential real estate investment. Every week, we talk to the industry’s leaders and offer up information that you can use to grow your business. Discover the behind-the-scenes stories of successful investors. Learn from national business experts. Get the knowledge you need to succeed. YOUR HOST Larry Muck is the chair of the American Association of Private Lenders and possesses more than 30 years of banking and lending expertise.

Past shows can be downloaded at any time. www.blogtalkradio.com/smartcompaniesthinkingbigger

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IN DEPTH

CRIME PREVENTION

The Keys to Locking Down Vacant Properties WANT TO STOP VANDALS AND COPPER THIEVES? CHOOSE A LAYERED APPROACH.

by James Hart

W

hen a property is vacant, you’re not just losing out on rental income. You also face a higher risk of damage from vandals, copper thieves, squatters and other bad guys. And the costs can be astronomical. After all, there's no tenant there to warn you about the break-in, so the intruders

could have hours or even days to tear into the building itself. What’s the most effective—and cost-effective—way for a property owner to safeguard a vacant house? “Security is all about layers of protection,” said nationally known security expert and author Robert Siciliano of BestHomeSecurityCompanys.com. “The

FOR PENNIES ON THE DOLLAR, THE BEST-CASE SCENARIO IS TO INVEST IN TECHNOLOGY THAT WILL MONITOR BOTH THE INTERIOR AND EXTERIOR. 44

Community Investor jan/feb 2014

more layers you have, the better off you're going to be.” PUT SOME ELECTRONIC EYES ON THE PROPERTY

The most effective way to stop break-

ins is to hire a security guard who’s responsible for patrolling your properties, but that’s not going to be cost-effective for most investors, Siciliano said. The next best solution is to buy a security system. “For pennies on the dollar, the bestcase scenario is to invest in technology that will monitor both the interior and exterior,” he said. Today, you can get a portable, do-ityourself system that can be installed quickly and, once the property is occu-


pied again, moved to another building. These systems often have cameras that can be installed with two-sided tape. Many of them can detect motion in the property and will send either a text message or email to your mobile device. You can then use your smartphone or computer to pull up the live feed from the system’s cameras. “No matter where you are, as long as you have some kind of connection to the Internet, you can peek in on activity,” Siciliano said. The cost of these systems varies, from a few hundred dollars to several thousand. Most property owners will be able to buy a pretty complete system with a couple of cameras for less than $1,500, Siciliano said. There’s often a charge for a monitoring service associated with the system. That's usually around $15 to $30 per month. “A buck a day is nothing compared to the amount of damage that can go on in one evening,” Siciliano said. PROTECTING THE POINTS OF ENTRY

If someone decides to break down

your property's front door, the weak point is going to be the door jamb. At a lot of houses, the jamb is only a half-inch of pine—not much of a barrier to a few strong kicks from an average-size adult. That’s why Siciliano recommends steel reinforcement kits, which can be purchased at most hardware stores. As for the doors themselves, upgrade from hollow-core doors to solid core as soon as possible. If you happen to have an exterior door that has a bunch of embedded windowpanes, Siciliano said, you're basically inviting burglars to smash the glass so they can reach inside and unlock the door.

In some houses, there are windows built right alongside a door, and in those cases, you should look into shatter-resistant window film, Siciliano said. In fact, you might consider putting the film on all of your windows, but that might not be cost-effective for everyone. Remember to secure any windows on upper stories, too, especially if there’s a porch that intruders can use to climb to the second floor. If you keep a ladder on the premises, don’t just stow it under the porch or lean it against the property. At the very least, drag it indoors. And don’t forget basement doors and windows. They also need to be rigged with alarms and reinforced. In some cases, you might be able to board them up entirely with plywood on the interior, Siciliano said.

DEFENSE FOR YOUR HVAC UNITS

HVAC units are magnets for copper thieves, especially ones that are at ground level. If you’ve got a security system, you could leave one of its motion-sensing cameras trained on the unit, so that you would be alerted if a lot of activity showed up around the unit. “In some cases, it might be worth it to locate those condensers to upper levels or even on the roof,” Siciliano said.

THE WATER DAMAGE WILL DO MORE DAMAGE THAN ANYTHING ELSE.

PREVENTING WATER DAMAGE

If possible, you should also consider shutting off the property's water at the meter, Siciliano said. He lays out the nightmare scenario: The bad guys get into your property, which doesn’t have an alarm system, and then they decide to start cutting into the building’s pipes. “The water damage will do more damage than anything else,” he said. And even if the bad guys don’t rip out your pipes, they might not close the door behind themselves. If that happens in the dead of winter, you’re going to be at risk for frozen pipes and associated damage. So, once the building’s water is off, be sure to open up all the faucets and showerheads to help clear out any water that might still be in the pipes. A lot of property owners also ask their plumber or handyman to use compressed air to “blow out” anything left in the system.

And if a condenser unit is on the ground, it should be on a real concrete pad. If vibration isn’t a concern, you could have the unit bolted to the pad from the inside, Siciliano said. CREATE AN UNAPPEALING TARGET

Thieves, vandals and squatters aren’t going to strike a property if they think it's occupied, so do what you can to make the place look like someone's at home. That might mean putting your interior lights on timers and keeping the blinds down. “The idea is to give it that lived-in look so that people who are paying attention continued to page 48 > James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

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IN DEPTH

CRIME PREVENTION

The Cedar Rapids Solution HOW ONE COMMUNITY IS FIGHTING NUISANCE PROPERTIES AND SAVING POLICE RESOURCES—BY WORKING WITH PROPERTY OWNERS AND MANAGERS. by James Hart

N

46

uisance” properties can actually be a serious problem for communities that want to improve their quality of life. For example, police officers and firefighters in Cedar Rapids, Iowa, were spending too much of their time repeatedly responding to the same set of nuisance properties. Not only were these locations making life miserable for neighbors, they were wasting taxpayer dollars every time someone dialed 911.

Community Investor jan/feb 2014

That’s why the city unveiled SAFE-CR, a program that tries to bring nuisance properties back into compliance. Unlike a lot of cities, though, Cedar Rapids wants to build healthy working relationships with landlords and property owners. So, yes, scofflaws do face fees if they don’t get right. But first, they’re offered access to city help and resources that help prevent a building from becoming a nuisance. Landlords, for example, qualify for a low-cost, city-backed tenant screening service.

“The idea for this program came about because the city saw a need to control costs of taxpayer-funded services,” said Amanda Grieder, one of the police department’s nuisance property abatement coordinators.

A Focus on Correction, Not Punishment Here’s how it works: The city sends a letter anytime a property is reported for a nuisance as identified in the city's regulations. Those incidents can come in a variety of forms—serious crimes like


assault or drug dealing, or just the stuff that drives neighbors crazy, such as tall grass and dogs that never stop barking. Not all violations are treated the same. Having a meth lab on the premises automatically qualifies a house as a nuisance property. It takes three animal-noise violations within a rolling 12-month period to earn the nuisance property designation. If a property is officially deemed a problem, the city—usually in the person of Grieder—will offer assistance first, not fines, to help the owner bring it back into compliance. Property owners who work with the city also get some extra time to remedy problems. The majority of people come back into compliance, Grieder said. While SAFE-

WHILE LANDLORDS WILL BE LEGALLY REQUIRED TO RUN A BACKGROUND CHECK, THEY STILL HAVE THE RIGHT TO ACCEPT TENANTS WHO HAVE CRIMINAL HISTORIES. CR’s rules apply to both rentals and owner-occupied residences, more of the nuisance properties have been rentals. If problems continue at a property, the city will bill the owner every time a police officer or other city employee is called to the property for a problem over the next 12 months. The cost is $94 per police officer per hour, with a half-hour minimum. So far, since SAFE-CR debuted, the city has had to bill only one property owner.

More Information, Better Choices It’s true: Landlords do face new responsibilities under SAFE-CR. Every landlord is now required to perform a background check on each new tenant. (Existing renters were grandfathered in.) Each owner or property manager also has to take a city-sponsored training session that runs about four hours, or they lose their landlord license. But they also get access to that low-cost tenant screening program. Typically, most screening companies charge $30 to $50 for such checks, or more, depending on the location. Cedar Rapids negotiated special pricing for its landlords with RentPrep, starting at $8 per search. Property owners can access national criminal reports as well as local police records providing information on arrests and criminal activity that would not be

available through any screening company. Not only does this create an incredibly comprehensive background check, users have unlimited access to speak directly with the FCRA-certified screeners who compiled their reports if they have questions, a service that many companies don’t offer. While landlords will be legally required to run a background check, they still have the right to accept tenants who have criminal histories. It’s not clear yet if the checks are affecting rental decisions. “We don’t tell them if they should rent to people or not rent to people based on their criminal history,” Grieder said. A lot of apartment complexes already performed checks, but the program makes it possible for smaller landlords, who might only operate a handful of properties, to do similar research, Grieder said. “Their intentions are truly based on building a better community by empowering landlords with the right tools and training,” said Steve White, the owner of RentPrep. “After countless conference calls and planning meetings, I think I spoke to every member of the city's team who designed this from the ground up, and the focus was always on creating something that worked for landlords.” James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

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What’s Holding Back Wall Street? > continued from page 21

which is what entices Wall Street. However, Wall Street’s desired loan size and structural requirements can only be satisfied by larger funds that are operating in primary markets—SoCal, Vegas, Florida, Atlanta—where cap rates are 5 to 7 percent and where investors can’t afford to pay 6 to 7 percent for their debt. WHAT’S NEXT? It will be interesting to see over the coming year how Wall Street reconciles these issues with Main Street. There is a huge and underserved market, and tons of money to be made making good loans. Certainly, the opening of these floodgates is what we believe will be the catalyst for the national housing market to truly rebound and stabilize. In the meantime, there is tremendous opportunity for private individuals and balance sheet lenders happy with a 6 to 8 percent return secured by real estate and with a loan amount below replacement cost.

The Key to Locking Down Vacant Properties > continued from page 45

see lights going on and off,” Siciliano said. You also need to make sure there aren't any external visual cues that a unit is empty. A lot of that might involve chores you're already tackling, such as mowing the lawn on a regular basis and clearing away any fliers or free newspapers that have been left on the porch or lawn. “At a minimum, there should be someone who, every four to six days, goes by the property,” Siciliano said.

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Dog Gone > continued from page 39

A lot of people like to use Kilz or a similar product to paint over a problem house, without trying to address the odor problem first, but that’s a mistake, McMillan said. More often than not, that ugly smell is eventually going to seep through the seal created by the paint. Finally, remember that Rome wasn’t built in a day. Neither is a smelly house. Your old tenant’s army of Shih Tzus could have had months or years to stink up the place. You might very well need to follow up with multiple treatments of odor neutralizer. “These odors weren’t developed overnight, so to think you can get rid of them overnight is a big misconception,” McMillan said. For more information about OdorXit, visit www.odorxit.com.

ADVERTISMENTS Affinity Group Management www.affinitygm.com – P. 14 American Association of Private Lenders (AAPL) www.aaplonline.com – P. 26 B2R Finance www.b2rfinance.com – P. 52 BargainLocks www.bargainlocks.com – P. 2 Coast to Coast Real Estate Investment Association www.c2creia.com – P. 20 Fairway America www.fairwayamerica.com – P. 5 FCI Exchange www.fciexchange.com – P. 24 HomeVestors www.TimmHerriage.com – P. 7 Ignite Expo www.igniteexpo.com – P. 39 Loan MLS www.loanmls.com – P. 31 Lowe’s www.lowes.com – P. 15 The Mortgage Office www.themortgageoffice.com – P. 8 National Real Estate Insurance Group (NREIG) www.nreinsurance.com – P. 35 NoteSchool www.noteschool.com – P. 37 Pacific Private Money Fund www.pacificmoneyfund.com – P. 25 Pride of Austin Capital Partners www.prideofaustin.com – P. 9 Professional Real Estate Investors and Managers Alliance (PREIMA) www.preimaonline.com – P. 27 Rate Tenants www.ratetenants.com – P. 37 REI Expo www.reiexpo.com – P. 3 RentFax www.rentfaxpro.com – P. 29 US Mortgage Resolution www.usmresolution.com – P. 5


PHOTO PAGE

AAPL Takes a Bite Out of Vegas THE AMERICAN ASSOCIATION OF PRIVATE LENDERS HELD ITS ANNUAL CONFERENCE NOV. 10-12 AT CAESARS PALACE IN LAS VEGAS. 1

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1 Up to Speed Eddie Speed, founder of NoteSchool, was one of the featured speakers at AAPL’s annual conference.

2 Gemini Capital Managers The team from Gemini Capital Managers was among the conference exhibitors.

3 Keynote Speaker David Lang, Larry Muck and Matt Benson of AAPL welcomed the conference’s keynote speaker, Christopher Thornberg, founding partner of Beacon Economics.

4 Understanding Dodd-Frank Bob Cox, founder of Pacific Capital Solutions, talked about the law’s impact on private lending.

5 Equity Trust John Bowens and Kent Kinzer represented Equity Trust at this year’s conference.

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6 B2R Finance Steve Denker, Matt Kushy and John Beacham talked with convention guests about B2R Finance. 6

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FREE & CLEAR

Turning a Good Deal into a Great Deal YOU’VE GOT TO UNDERSTAND WHAT YOUR SELLER REALLY NEEDS.

T

his was a lesson that I learned 25 years ago. I was out in the streets, always trying to sniff out deals, like every real estate investor has to do to find deals at good prices. There was one property in a very nice suburban neighborhood that came up, and it smelled like it could have potential. The guy who owned it wanted to sell. He had gone through a divorce, and he was the only one living in the property. At the time, the price had by Mark Nagy dropped from $150,000 to $130,000, and that caught my eye. But he still wasn’t negotiable enough to sell. I left him my card and said, you know, if circumstances change, just give me a call. A few months later, I get a phone call from him. “Mark, can we discuss my property? I want to see if you’re interested in it.” So I reviewed the property with him again, and I made him an offer of $90,000. The next day he accepted. I would put $15,000 down, and he would hold the seller financing of $75,000 for a period of five years. I thought I had gotten a good deal. THEN THE PHONE RANG But a few days later, I get a phone call from someone inquiring about myself and this seller-financed note I was going to be creating. 50

Community Investor jan/feb 2014

Afterwards, I called the homeowner back and I asked, “What’s going on?” It turns out that he was going to sell the note. He had a business that was starting to go bad, and he needed to sell the property for cash quickly. And he was going to take a $20,000 discount on the note. I said, “Well, if I’m able to come up with cash, can you just discount the sale price by $20,000?” He said sure. It ended up that I paid about $70,000 on a property originally offered at $150,000. I put about $12,000 into cosmetic repairs and other upgrades. Within six months, I sold it for $175,000. THREE LESSONS There were three real lessons I learned out of this transaction. Starting out, I was

was a real lesson: Take the time, have a conversation. Create an opening where there’s trust and an authentic conversation where they feel safe. The second aspect that I learned was not to ask how much they want for the property. I ask how much they need. Many times, they’ll come out and say they need X number of dollars to solve their problem. Which is totally different from “I want this much money, but I only need this much.” Once you know the real facts of the situation, it’s a lot easier to come up with a solution. And finally, I learned that even if I can’t solve their problem at that particular time—and I’ve built up that trust—

ONCE YOU KNOW THE REAL FACTS OF THE SITUATION, IT'S A LOT EASIER TO COME UP WITH A SOLUTION. always about finding deals and making offers. This deal taught me to get into a conversation with the seller to ask why they’re selling the property. As a real estate investor, especially as a businessperson, my sole purpose is to solve other people’s problems. Until I know what that problem is, though, I’m just trying to solve my own unique situational need to find a property rather than solve the client’s problem. So that

I always leave my card, my name and my number with the statement, “If your situation changes, and you’d like to have another conversation on this, feel free to call me.” And many times, one, two, three, six months down the road, I’ll receive a phone call. Mark Nagy is the principal at Metro Street Capital and has nearly three decades of experience in the world of real estate investment. mnagy@metrostreetcapital.com


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Community Investor JanFeb 2014