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INSIDE

Finance 2014 Could Be

Equity Crowdfunding’s Year

Investment Strategy Is the

Recovery as Solid as They Say?

MAY JUN

2014

Recycling Your Remodel PlanetReuse’s NATHAN BENJAMIN wants to help you save money— and make a difference.

www.communityinvestor.com

In Depth Making

the Government Listen


TABLE OF CONTENTS 12

PROTECTING YOUR INVESTMENT

21 Damage Control How to reduce your risk of deliberate damage by tenants.

INVESTMENT STRATEGY

Behind the Headlines

DEAL

Why you need to take a second look at recent economic news.

28 Sweet and Low A simple strategy for negotiating lower prices from your sellers.

By Eddie Speed and Kevin Shortle

MANAGEMENT

34 In Pursuit of PEXcellence PEX tubing can be a lifesaver, if you get the right kind.

22

TIME TO JOIN

THE CROWD?

INSURANCE

36 Drowning in

Higher Premiums Congress tries to fix the National Flood Insurance Program … again.

This could be the year that equity crowdfunding becomes real for smaller real estate investors. By Julius A. Karash

IN DEPTH

42 Campaigning for

Better Government

30

Your elected officials might be more open to your ideas than you realize.

LAW

Up in Smoke

COMMUNITY HERO

If your state’s marijuana laws

50 The Godfather of

change, will you be ready?

Special Olympics

By Nancy J. Burke

Chuck Watson brought Special Olympics to Kansas, making life better for thousands of disabled athletes.

INSIDE

Finance 2014 Could Be Equity Crowdfunding’s Year

Investment Strategy Is the Recovery as Solid as They Say?

MAY JUN

2014

Nathan Benjamin PlanetReuse Kanas City, MO

4

Community Investor may/jun 2014

Recycling Your Remodel PlanetReuse’s NATHAN BENJAMIN wants to help you save money— and make a difference.

www.communityinvestor.com

In Depth Making

the Government Listen

ON THE COVER

DEPARTMENTS

PlanetReuse’s Revolution

06 From the Publisher

Nathan Benjamin helps contractors save and reuse building materials.

08 News Briefs 1 1 At a Glance 49 Photo Page


Discover Top Investors’ #1 Preferred Way to Generate Passive Income Each and Every Month PUBLISHER R. Michael Wrenn ADVERTISING & SALES Chris Zinn National Vice President of Advertising Sales ACCOUNTING Becky Cole Vice President/Controller

If you are already a real estate investor, repair and rehab houses for resale or are a busy professional or entrepreneur looking to maximize your return on investments, peer-to-peer lending can be the answer you are looking for to find that new source of income.

Get Free Access to The Banker’s Code Training Webinar and…

Generate Passive Income More Efficiently – and With Less Risk!

Register for Free Today at www.TheBankersCode.com/CIM

EDITORIAL Susan Anderson Supervising Editor James Hart Managing Editor Brian McTavish Senior Writer PRODUCTION Carolyn Addington Production and Traffic Manager Jen Ross Graphic Designer Kevin Fullerton Design Consultant Alistair Tutton Photographer

DISCOVER HOW TO BECOME THE BANK TO GROW YOUR WEALTH

“The key is it’s not just the idea and the strategies, it’s the actual implementation and support that they can provide, and that’s really what makes it happen. And it can save you a tremendous amount of time, and you don’t have to go figure it out yourself. They’ve done it for you.” George Antone, Founder of MPactWealth (formerly WealthClasses) & Best-Selling Author of “The Banker’s Code”

-John Barbee, Atlanta, GA

RADIO Larry Muck Host, Community Investor Radio Mary McKenna Executive Producer GUEST WRITERS Nancy J. Burke, Julius A. Karash, Mark Nagy, Jason Nash, Kevin Shortle, Eddie Speed, Jason Windholz 7509 N.W. Tiffany Springs Parkway, Suite 200 Kansas City, MO 64153 (816) 398-4070 editor@communityinvestormedia.com sales@communityinvestormedia.com www.communityinvestor.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.

le!

countab Hold them ac

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5


FROM THE PUBLISHER

S

ome people like to start their day with a bracing cup of coffee. Me, I prefer a Brutally Honest Conversation with myself. If you’re going to succeed in real estate investing—or in any arena, really—there are certain unavoidable, universal rules that you must follow. Follow the rules, and nine times out of 10, you’re going to be successful. When things aren’t going well, that’s often an indication you— you, not society, not your Mom and Dad—have screwed up somewhere along the way. Having a Brutally Honest Conversation with yourself is a good way to get back on track. Tape this to your bathroom mirror, so every morning, before you leave the house, you can remind yourself of some essential truths.

YOU ACTUALLY HAVE TO CARE ABOUT OTHER PEOPLE You have to put a priority on what’s best for your customers. That doesn’t mean letting others walk all over you. It does mean going the extra mile and staying late at work if it means solving a client’s problem.

TALK ALL YOU LIKE—IT’S WHAT YOU DO

You can’t “God bless” someone, and then turn around and trash them. You’re not being consistent or credible, and people won’t trust you. In this business, trust is everything.

THAT MATTERS

DON’T WHINE ABOUT THE WORK-

You won’t get exceptional results without exceptional effort, and that means working hard every day, even Saturdays. So get up early, go to work and think and plan and motivate your associates. Show them you are committed to the company’s success and theirs, too.

LOAD

YOU OWE YOUR TEAM MORE THAN A PAYCHECK If you have employees, it’s completely fine to hold them to a high standard and make sure they earn their money. But you also need to let them know you care about their well-being, and you need to provide them a path to further successes in your company. It’s your obligation as a business owner. YOU MUST BE CONSISTENT IN YOUR DECISIONS Your employees are

always watching. If you aren’t consistent, then they wonder

who you really are and what your values are. If you decide it’s okay for Sally to come to work 15 minutes late every day, but you try to reinforce fairness at the next meeting, you’re toast. DON’T TAKE YOURSELF TOO SERI-

Life is never as serious as we’d like to make it.

OUSLY

BUT WHAT PEOPLE THINK ABOUT

You must provide via your reputation a sense of “safety” for your associates and customers—that you can be counted on to be who they know you to be. We all earn our reputations. If you’re conservative in your fiscal activities, if you hire competent people, if you’re building for the future, you’re going to be someone worthy of their respect and trust.

YOU REALLY DOES MATTER

THIS IS A MARATHON, NOT A DASH It’s

easy to get overwhelmed by unrealistic, short-term goals. Instead, strive for continuous improvement, and fix what you can today.

KEEP 90 DAYS OF CASH ON HAND OR YOU’RE PLAYING WITH FIRE If you don’t have decent reserves, you could be in big trouble at the first blip in your cash flow.

R. MICHAEL WRENN Publisher

@CommInvestorMag 6

Community Investor may/jun 2014

facebook.com/CommunityInvestorMagazine


Orlando, Florida • September 3rd - 7th, 2014 Ron LeGrand and Global Publishing Inc. proudly present “The Great American Real Estate Summit 2014” coming this September 3rd- 7th in beautiful Orlando, Florida! This intense 4-day event with a bonus day on the 7th called “How the Millionaires Do It” will absolutely be a game changer for all attendees. Attendees can plan on being immersed in the most comprehensive, in-depth, hands-on, LIVE training available anywhere in North America!

The Place To Be in Septemeber Ron’s Classes

Deal Room

Bonus Day!

Several special classes delivered by Ron LeGrand you’ll only hear at this event. Come let the master show you how he’s making so many millionares and changing lives all over America with the latest technique to buy and sell houses with no money or credit.

Students will bring leads and work with one of our highly trained mentors and call the sellers to make offers. Some will leave with contracts!

This entire day will be devoted to four real estate businesses that net over $1,000,000 annually. These students started with nothing and quickly built seven-figure incomes using the same training and systems you’ll learn!

We are giving away $100,000 in CASH and Prizes! Including a NEW Truck!

Students Spill The Beans You’ll hear from dozens of successful students from all over the US and Canada on what they’re doing that’s working, obstacles they overcame and deals done.

Young Entrepreneurs Seminar (Y.E.S. Day)

Charity Auction

Ron has decided to bring back this special session specifically designed for young entrepreneurs between the ages of 10 and 21. This all-day Saturday (Sept 6th) session is being offered at no additional charge.

There will be a charity auction benefiting The Fisher House Foundation, which is dedicated to providing support to America’s military families in their time of need.

Y.E.S.

Banquet and Roast

Networking Banquet

There will be a very special Banquet and Roast Celebration. We’ll also be graduating our Masters with a cap and gown ceremony!

Opening Night In addition to our big prize drawing, we’ll have a special show for you by James Rogers.

www.RES2014.com/CI

...or call Michael Smith at 800-567-6128


NEWS BRIEFS

HOME PRICES FORECAST TO GROW AT 2.1% Housing prices are expected to increase between 2015 and 2018, a new study shows, but at a slower rate—2.1 percent annually, on average. The Demand Institute, a joint project of the Conference Board and Nielsen, studied 2,200 U.S. cities and towns and interviewed more than 10,000 people to get a clearer picture of the housing market. The study confirmed what many property investors already knew: the growth in home prices has been driven by larger investors buying up rental properties, and that won’t be sustainable over the long term.

EXPECT GOOD—BUT MODERATE—GROWTH IN MULTIFAMILY HOUSING Growth in multifamily housing will be moderate during 2014, but it’s still expected to be a good investment for the next few years, Freddie Mac reported. National vacancy rates are expected to increase from 4.1 percent to 4.7 percent, but they’ll still be below historical averages in some of the largest cities. “Revenue growth in the industry will continue to perform near or above historical averages, but at lower rates than the previous two years,” said David Brickman, executive vice president of Freddie Mac Multifamily.

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Community Investor may/jun 2014

SURVEY

RENTERS, LANDLORDS MISUNDERSTAND LAW U.S. renters’ understanding of their rights and responsibilities has some big holes—and landlords’ might be slightly worse, a new report from Zillow.com states. The website asked each group a series of questions, and on average, renters got about 47 percent of them wrong, compared to 50 percent for landlords. For example, about 82 percent of renters and 76 percent of landlords agreed that landlords have 60 days to refund a security deposit. For the majority of states, though, the timeframe is actually between 14 and 30 days.

SURVEY

HIGH-NET-WORTH PEOPLE STILL PICK REAL ESTATE For Americans with the highest net worths, real estate is still one of the most popular alternative asset classes, according to the Morgan Stanley Wealth Management Investor Pulse Poll. About 77 percent of surveyed millionaire investors said they own real estate, and 35 percent reported having money in a real estate investment trust (REIT). About 33 percent planned to buy more real estate in 2014; 23 percent say they’ll invest more in REITs.

DODD-FRANK RAISES COSTS FOR SMALL BANKS The vast majority of small banks— 82 percent—say their compliance costs

have increased by more than 5 percent because of Dodd-Frank. A new survey from George Mason University’s Mercatus Center shows the law is having other adverse effects on small lenders. About 6 percent no longer offer residential mortgages as a result of Dodd-Frank. Another 30.5 percent will no longer make any loans unless they meet the exact definition of a “qualified mortgage,” and 32.3 percent aren’t sure what their policy will be going forward.

OLDER HOUSEHOLDS’ WEALTH BOUNCED BACK FASTER AFTER CRISIS Younger Americans have regained only one-third of the wealth lost during the economic crisis while middle-aged and older households are about where they were before things went south, the Federal Reserve Bank of St. Louis reports. Home ownership was a big reason why. “The main reason young families’ balance-sheet recovery lags is the recent housing crash and its lingering effects,” researchers said. “The house-price gains that have helped mainly older families to rebuild homeowners’ equity have been overshadowed among younger families by the ongoing retreat from homeownership.”

EXTREMELY POOR RENTERS HAVE HARDER TIME FINDING HOMES Finding decent housing is becoming more and more difficult for “extremely


low-income” renters, the Urban Institute reports. There are only 29 affordable, available units per 100 extremely low-income (ELI) households, researchers Graham MacDonald and Erika Poething found. (An ELI family is one that brings in 30 percent or less of their community’s median income.) The institute estimates that, nationally, there’s a need for 8.1 million affordable housing units. “With a few exceptions, the economics do not pencil out,” the researchers wrote. “Without subsidy, private developers cannot build or operate a new unit of rental housing at a cost ELI households can afford to pay.”

RENTS INCREASE AT A FASTER RATE In the first quarter, effective rents for new leases were up 3.3 percent on a year-overyear basis in the 100 biggest apartment markets, MPF Research found. Oakland, San Francisco, Denver and other Western cities saw gains of 7 to 9 percent. Researchers were surprised by the rate of growth; they had guessed that new construction would reduce landlords’ pricing power. Rentals in middle-market communities built in the ’90s, ’80s and ’70s were doing particularly well.

BIG BUYERS PULL BACK, SLOWING HOME SALES Sales of residential properties were down 0.2 percent in February, the fourth month in a row to see a decline, Realty-

Trac reported. (Sales were, however, up 7 percent on a year-to-year basis.) The decline could be due to institutional investors pulling back. According to Daren Blomquist, vice president at RealtyTrac, “the supply of distressed properties— which buyers and investors have come to rely on over the past few years—is evaporating quickly in most markets, but that dwindling supply is not being adequately replenished by non-distressed homeowners listing their homes or by new homes being built.”

INVESTORS DIALED BACK PURCHASES IN 2013 Sales of investment properties declined by 8.5 percent in 2013, dropping from 1.21 million in 2012 to 1.10 million last year, the National Association of Realtors reports. “In 2011 and 2012, investment property was a no-brainer because home prices had sharply overcorrected during the downturn in many areas, creating great bargains that could be quickly turned into profitable rentals,” said Lawrence Yun, NAR’s chief economist. “With a return to more normal market conditions, investors now have to evaluate their purchases more carefully and do their homework.”

said. Low-E windows, a dedicated laundry room and a great room were also features that builders were most likely to include in new projects, an NAHB survey discovered.

SELLING TO HIPSTERS MIGHT BE THE NEXT BIG OPPORTUNITY The next big thing in real estate? According to RealtyTrac, it could be selling to those ages 25 to 34— the so-called “hipster” demographic. In 2012, only 41 percent of people in that age group owned a house, compared to the historical average of 46 percent. RealtyTrac estimates there are nearly 2 million hipsters who would be homeowners right now if the economy hadn’t tanked, and as their fortunes improve, they might finally be ready to buy. “Real estate investors who

WHAT ARE THE MOST POPULAR FEATURES IN NEW HOMES? A walk-in closet in the master bedroom is one of the most popular features in new single-family homes this spring, the National Association of Home Builders

want to tap into that trend should start with location: finding homes in communities with a heavy hipster demographic, and that are affordable for that demographic,” RealtyTrac reports.

www.communityinvestor.com

9


MOVERS & SHAKERS

SAVE THE DATE

SCHNUR PRAISED FOR WORK WITH FAMILIES Alan Schnur, co-founder of property management firm Hot Ocean Properties, was recognized by the mayor of Houston for helping nine families relocate from an apartment complex that was at risk of condemnation.

AFFINITY EYES REI EXPO Affinity Enterprise Group is pleased to announce that a letter of intent has been signed to acquire majority ownership of the REI Expo. REI Expo is an educational and networking conference that strives to create synergy for growth within the real estate investor community. The next REI Expo will take place on May 17-18 in Washington, D.C.

B2R EXPANDS TO NORTH CAROLINA B2R Finance has opened a new office in Charlotte, joining its location in New York City.

WOEDL TO SERVE AS VP AT NREIG Shawn Woedl has been named vice president of the National Real Estate Insurance Group.

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Community Investor may/jun 2014

PREIMA MAKES PLANS FOR 2016 CONFERENCE IN HAWAII Make plans now to attend PONO 2016, the Professional Real Estate Investors and Managers Alliance’s conference in sunny Hawaii. Pono is a Hawaiian word that means “do the right thing,” and it’s a belief that can bring together people from different walks of life. The concept is imperative to remember as we build the real estate investment industry by incorporating the values of relationships, integrity, character, transparency and success in everything we do. Keep checking www.PONO2016.com for more information about the conference as it becomes available.

A.J.T.M. FINANCIAL PARTICIPATES IN DALLAS-FORT WORTH DEAL A.J.T.M. Financial Group, Inc. has

provided a $300,000 stated cash–out loan for the Oak Leaf Mobile Home Park, located just outside Dallas-Fort Worth.

FOUNDERS CIRCLE, SPRINGBOARD CAPITAL DEBUT Larry Muck, in his role of chairman of the American Association of Private Lenders, has organized the Founders Circle to bring high-level lenders together in a mutually supportive group. He also has established Springboard Capital Resources to source deals and funding in the industry in support of the Circle, which could offer services to these Circle members.

AGM ANNOUNCES SLATE OF NEW HIRES Affinity Group Management (AGM) has several new hires: Joseph Adame, coverage consultant; Danielle Agee, sales liaison; Jessica Brockman, receptionist; Steven Huckaby, coverage consultant; Marie O’Dell, client service representative; China Reynard, client service representative; Jess Standley, team support; Kristin Stead, team support; and Precious Williams, client service representative.

LITTLEJOHN’S NEW ROLE AT AFFINITY Kent Littlejohn has been named executive vice president of Affinity Group Marketing. 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

DATEBOOK

FIELD NOTES

Zillow.com’s top five “buyer’s markets” for the spring home-buying season.

1

Cleveland

2

Philadelphia

3

Tampa

4

Chicago

5

Pittsburgh

’14 Conferences Meetings to make you sharper May 13-15 IMN Spring Single Family Aggregations: The REOto-Rental Forum, Boca Raton, FL. www.imn.org May 17-18 REI Expo, Washington, D.C. www.reiexpo.com

FAMOUS LOST WORDS

“ The best minds are not in government. If any were, business would steal them away.”

–Ronald Reagan

May 22-24 National MrLandlord.com Convention, Nashville. landlordconvention.word press.com July 25-27 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.

THE FIX

If you’re stymied by smudges and stains on your property’s interior walls, you might try rubbing them away with a piece of white bread. It sounds crazy, but a piece of Wonder Bread, crust removed and rolled into a ball, can often wipe out stubborn marks.

25.4% of Americans volunteer—the lowest rate since the U.S. started keeping track in 2002

30.6% of those ages 35 to 44 volunteer, the most active age group

www.communityinvestor.com

11


Are We Being Told the Truth About the Real Estate Recovery? THINGS AREN’T AS ROSY AS THE HEADLINES INDICATE. by Eddie Speed and Kevin Shortle

I

f you read the headlines, the real estate market seems to be in full recovery.

• Mortgage delinquencies are down. • Government programs are allowing

millions to refinance. • Foreclosure rates are down. • Home prices are up. • Fewer homes have negative equity. • Lending rates are still below 5 percent.

These same media outlets are also touting an economic recovery. After all, according to them: • Employment is getting better. • The recovery is in place. • Banks are making profits. • The stock market is up. 12

Community Investor may/jun 2014

We could go on, but we’re sure that you get the picture. Our purpose in this article, by the way, is not to go on a rant about media coverage, but rather to take you behind the curtain so that we can expose you to what is really going on and show you what is possibly the greatest investment opportunity of your lifetime. The real picture of this “recovery” is not so rosy. In fact, it is downright frightening in some areas. As investors, we need to be able to make decisions based upon facts not headlines, so let’s take a closer look at the bullet points above. MORTGAGE DELINQUENCIES AND FORECLOSURE

It’s true that mortgage delinquencies are down from their peak in 2010, but there is more to the story. The first issue with the “lower delinquencies” report is that once paperwork has been filed for a refinanced loan, such as through the Home Affordable

RATES ARE DOWN

Refinance Program (HARP), a delinquent loan is recategorized as a “re-fi” and no longer included as a delinquent loan. The applicant, mind you, has not been refinanced yet and has just simply applied to refinance. Secondly, the shadow inventories of mortgages outside the Fannie Mae and Freddie Mac system are not included in these counts. These numbers are not required to be reported, therefore most lenders don’t report them. This could be a significant number. Now, don’t get us wrong. This inventory will decrease over time. It has to do so, or this country will be in even bigger trouble than it is right now. It will go down as small businesses and investors continue to buy up this inventory of nonperforming assets and work to get them reperforming again. There is a tremendous opportunity to buy these


INVESTMENT STRATEGY

nonperforming real estate notes at massive discounts. In fact, in our 32 years in this industry, we have never seen an opportunity to buy these assets at such a low price. There is a significant opportunity to invest in this industry at these prices for the next five to seven years. Those who get in early will do exceptionally well. GOVERNMENT PROGRAMS LIKE HARP ARE ENABLING MILLIONS OF HOMEOWNERS TO

HARP has gone through a number of revisions since its initial failures, and several million homeowners have been able to get a HARP loan modification. The original version of HARP simply didn’t work as most people didn’t meet the qualifications. HARP 2.0 made things easier for homeowners to qualify, and the number of HARP loans soared in 2012 and continues to grow in 2013. But again, you have to look past the rosy headlines. According to credit reporting agency TransUnion, more than 60 percent of all loan modifications end up in a re-default within 18 months. One reason why: These HARP loans are modifying homeowners who are upsidedown in their mortgage! There is no debt forgiveness, just a lowering of their interest rate to 3 to 5 percent. Beyond saving $100 to $200 a month and delaying losing the property to foreclosure, where is the long-term incentive for the upside-down homeowner to continue to pay? Most of these homeowners will no longer need to get an appraisal or have their loan underwritten. Fees will be lower for “certain borrowers,” and borrowers will now be able to refinance regardless of how far their homes have fallen in value!

REFINANCE

the 28th consecutive month with a year-over-year decrease in inventory. So who is buying up all of these singlefamily homes? Cash buyers and large priFORECLOSURE RATES ARE DOWN, HOME PRICES vate equity firms and hedge funds jumped ARE UP AND FEWER HOMES HAVE NEGATIVE into the single-family home rental market EQUITY According to RealtyTrac, because they saw the opportunity. In this pre-foreclosure filings are down 38.9 economy, it is inconceivable to think that percent from the prior year. The same most of these property buyers bought study shows bank-owned REO filings these homes to live in. down 25 percent. The CoreLogic Home With inventory this low, it’s no wonPrice Index reports that home prices der property prices are going up. What nationwide, including distressed sales, would happen if some banks or hedge increased 12.4 percent on a year-overfunds dumped a lot of property? You have a tremendous number of speculators who do not have any “emotional equity.” WAIT, WHAT? YES, THAT DOES Rather, it is a pure numbers SOUND VERY SIMILAR TO WHAT game to them. HAPPENED BEFORE THE LAST These factors are artificially inflating property values. You REAL ESTATE FINANCING CRASH. do not have a true recovery until first-time homebuyers enter the market in large numbers and year basis. That is the 17th monthly new home construction returns. year-over-year increase. CoreLogic Artificial property values have also also reports that 1.7 million borrowers “erased” negative equity for millions regained positive equity during the past of people. The fact is, 9.7 million resiyear. Certainly this is all good news? dential properties with mortgages Well again, let’s look deeper. The fore(19.8 percent) still have negative equity. closure rates are not down because more That number will not change overnight, people are paying their mortgages, they especially without a real recovery. Expect are down because: to see property values fall again in the very near future. 1 Banks are slowly leaking REO Wait, what? Yes, that does sound very similar to what happened before the last real estate financing crash.

inventory so as not to hurt their own sale prices.

2

Rather than go through the cost and time of foreclosure, they are selling the mortgage notes.

3

HARP and other loan modifications are temporarily keeping foreclosures lower.

Home prices are up due to lack of inventory. According to the National Association of Realtors, there is about a five-month supply of new homes. This is

LENDING RATES ARE STILL BELOW 5 PERCENT

Potential homeowners are very sensitive to interest rates today. A very small 1 percent rise in interest rates from 3.5 percent to 4.5 percent dropped home sales by about 100,000 units. How long can interest rates stay this low? Interest rates are artificially low because of the quantitative easing (QE) by the Fed. As soon as the Fed indicated that it might stop buying $85 billion in mortgage-backed securities and bonds, the stock market dropped and banks www.communityinvestor.com

13


INVESTMENT STRATEGY

started increasing interest rates. It only eased after the Fed indicated that it wouldn’t be adjusting too soon after all. The uncertainty of fiscal plans, new laws and a new health care act are making people very hesitant, and we don’t expect that to change very soon. Alternative financing will continue to increase. ECONOMIC RECOVERY? Employment is not getting better; we still have a long way to go. Banks and Wall Street are enjoying profits as government bailouts and pumping have helped them tremendously. Unfortunately, the banks haven’t loosened their lending criteria as the Fed had hoped. Most people don’t even understand how the unemployment rate is calculated. This example should make it clear: Let’s say that we have a workforce of 100

14

Community Investor may/jun 2014

people. If we have 10 people who are unemployed, we have a 10 percent unemployment rate. Next month, three of our unemployed people stop looking for work or their benefits expire. As far as the government is concerned, they leave the workforce. Now we have a workforce of 97 people of whom 7 are unemployed. Our unemployment rate magically dropped to 7.22 percent. How many new jobs were created? None. CONCLUSION Because we deal in uncertain times, the best investment is going to be one that has a low investment-to-value ratio, monthly cash flow and flexibility. This is why we believe so strongly in mortgage note investments. In today’s market, a note investor can buy a nonperforming note for around

30 to 40 percent of the underlying property value. A reperforming note will cost about 70 to 80 percent of the underlying property value. These are outstanding investment-to-value ratios. Mortgage notes provide monthly cash flow without the hassles of being a landlord. We work with investors who are making double-digit returns while enjoying the passivity of a fully managed loan. These managed loans are serviced in a fashion that money is simply wired into the investors’ account. Since mortgages can always be bought and sold, note owners have a fairly continued to page 48 > Eddie Speed is the founder of NoteSchool and a leading educator on the note industry. Kevin Shortle is the director of curriculum and research for NoteSchool. To learn about attending a NoteSchool presentation near you, visit www.noteschool.com.


WASHINGTON, D.C. MAY 17th-18th

AMERICA’S PREMIER REAL ESTATE EXPO

OPPORTUNITY NETWORKING EDUCATION 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:

B2R

Finance

“It was great. Not a lot of hard VDOHVZLWKWKHERRNV VWXÍż like that. We are fairly seasoned investors & got a lot of ideas we will put them into use.â€? – Emily

“The event was awesome. Well planned. The speakers were well informed, very educational. I highly advise people to come next year.� – Patty L.

“There was a lot of great people here, it’s a fantastic opportunity WRQHWZRUNPHHWLQYHVWRUVĂ€QG deals, a myriad of vendors...& just awesome resources.â€? – Shane E.

Washington, D.C. – May 17th-18th at the Gaylord National Resort & Convention Center

WWW .REIEXPO.COM


THE INDUSTRY NEEDS A LEADER IN A LOT OF WAYS窶年OT THAT I AM IT, BUT OUR COMPANY IS.


COVER STORY

NATHAN BENJAMIN PlanetReuse Kansas City, Mo.

Entrepreneur Nathan Benjamin and PlanetReuse help find new homes for old, but reusable building materials. Learn how they’re making a difference—and a profit.

Turning Trash into

Treasure O The PlanetReuse leadership team includes material broker Brian Alferman, CEO Nathan Benjamin and project manager Ryan LeCluyse.

ne building contractor’s trash is another building contractor’s treasure, but only if it can be saved from being chucked in the dumpster. Enter Nathan Benjamin, founder and CEO of PlanetReuse, to the reuse rescue. The 40-year-old entrepreneur’s pioneering company offers the first online marketplace and mobile app to help contractors and others buy and sell used building materials that can be incorporated into new constructions and remodels throughout North America. Whether it’s salvageable doors, windows, cabinetry, flooring, sinks,

carpet tile, toilet partitions or almost any other remnant of a deconstructed or demolished structure—an elevator, anyone?—Benjamin wants to keep it out of a landfill and find a sustainable fit for it in a commercial or residential dwelling. His message to contractors is as straightforward as his desire to tap the $14 billion industry in reclaimable construction materials. “I want to know about your junk coming out of your project,” Benjamin said from PlanetReuse headquarters in downtown Kansas City. “We find a home for your reusable materials.” Because it’s not really rubbish, until it’s thrown away: About 40 percent of

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

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materials that go into landfills come from the construction industry. And it’s estimated that 80 percent of that material could be reused at a cost of 40 to 60 percent less than new materials. “Reuse of building materials is in the infancy where recycling was 25 years ago,” Benjamin said. “We see reuse on the same trajectory, just lagging behind. “Our goal is to be a facilitator, where we can actually know the people that have this material in storage,” he said. “We sell it and incorporate into a job, and then let them load it onto a truck and it goes right to the job site.” Benjamin’s effort to get the reuse industry up to speed has made him a thought leader in green building. He publishes a newsletter reaching 16,000

Benjamin appreciates the attention, but views it as a reciprocal duty. “The industry needs a leader in a lot of ways—not that I am it, but our company is,” he said. “And I feel that with the professionalism and the level

ager with engineering and design fi rm Burns & McDonnell in Kansas City; next as a general contractor with McCownGordon Construction in Kansas City, which in 2007 assigned him to oversee the rebuilding of the destroyed

SO IT WAS A PERSONAL REALIZATION IN MY OWN CONSTRUCTION THAT ALLOWED ME TO REALLY BUY INTO THIS AND GET PASSIONATE ABOUT IT, BECAUSE THERE ARE SO MANY OPPORTUNITIES. national contacts and is an in-demand speaker at industry events, such as Greenbuild, the world’s largest conference devoted to eco-friendly construction that annually attracts 35,000 attendees. Last year, The Wall Street Journal recognized PlanetReuse as one of 24 companies featured in the “WSJ Startup of the Year” documentary video series. 18

Community Investor may/jun 2014

of expertise that we bring, we are really making an impact.” MATERIAL ISSUES Benjamin had no experience with reusable materials when he graduated with a degree in architectural engineering from the University of Kansas in 1997. He just wanted to build “cool things”— fi rst as a construction man-

high school in tornado-ravaged Greensburg, Kan. As the project’s senior manager, Benjamin collaborated with the innovative architectural firm BNIM in Kansas City, which favored reusing construction materials to achieve Leadership in Energy and Environmental Design (LEED) Platinum Certification, the highest rating given in the

design and construction of a building’s green status. So the project team located a warehouse in California with 80,000 board feet of material that was re-milled into wood paneling for hallways and classrooms in the rebuilt high school. Another find came in Louisiana, where trees blown over in Hurricane Katrina— rather than being chopped into mulch—were turned into the school’s exterior siding. Benjamin’s appreciation for utilizing reused materials was growing thanks to his experience in Greensburg. But it didn’t strike him as an entrepreneurial business opportunity until the day he got an anxious phone call from the superintendent of an office remodeling project back in Kansas City who was looking for way to unload materials (aka “junk”) coming out of his job. “He was calling and asking, ‘Where do I put this material?’” Benjamin said. “He said, ‘I don’t want to throw it away, because it


counts against us on our LEED scorecard and project goals. What do I do with it? I can’t recycle it. What do I do?’” Seeing that need, PlanetReuse was started in 2008 to make the connections between the trash dumpers and the treasure seekers. Still, it took the personal remodeling of his own home in Kansas City’s historic Union Hill neighborhood for Benjamin to totally connect with his green side. “It really got me thinking, as I was taking things out of the house,” he said. “It was like, ‘How can I make sure as many of my items as possible don’t end up in the dumpster?’ So it was a personal realization in my own construction that allowed me to really buy into this and get passionate about it, because there are so many opportunities.” ‘WE WANT TO BE THE SOLUTION’ Six years after it began— |including what Benjamin calls “grinding through” the reces-

sion’s negative impact on the construction trade— PlanetReuse has become a thriving yet shifting business. “The number one customers are architects and contractors,” Benjamin said. “The point of entry is the architects, because they can design the project, and then ultimately we work for the contractors to provide the materials for them while they do the job.” But with PlanetReuse’s online marketplace, and especially its groundbreaking iOS and Android mobile app (developed by its sister company, InvenQuery), which feeds the marketplace in real-time, the company wants to move toward a much higher volume of business. “Yeah, it’s great if we did 200 projects,” Benjamin said. “But what if we allowed 2,000 or 200,000 projects to get done, and we got a really small piece of that, but we brought the processes and the ability to make the connections? Making the buying reused materials as easy as buying new is our goal. “You look at AutoTrader with cars, and you look at Amazon when they originally started off with books—what did they do? They brought technology and a viewing of the items online to an industry that lacked it. So what we have is this very similar opportunity for bringing materials into the marketplace and showing them to people to allow them to connect and buy them. That’s the shift.” The process is further enhanced by PlanetReuse’s strategy of coordinating donations

of material from contractors to thousands of reuse and salvage centers throughout the country. That includes the company’s relationship with 850-plus Habitat for Humanity ReStores that can accept massive amounts of, say, used carpet tile still in good condition from a contractor wanting to get rid of it without harming the environment. “A contractor or a homeowner or anybody can contact us and say, ‘I have these materials,’” Benjamin said. “And they can access our form and take photos with their smartphone or tablet and submit them immediately. It’s allowing a contractor on a job—whether on a multifamily project, a commercial project, a total deconstruction or a tenant finish where they’re gutting an office space—to use this form and say, ‘I’m taking these cabinets out’ or ‘I’m taking down this light fixture,’ and when they hit ‘send’ it goes right into our system.

“So if there are materials coming out of San Diego or Columbus, Ohio, we can either go to this network of over 850-plus stores, or we can go through our other channels that we have relationships with. But the main thing is when that contractor calls, he doesn’t care which one it goes through. He just wants to get rid of that problem. And we want to provide the solution.” And the foundation of that solution, Benjamin said, is being able to reach more customers with fewer touch points. “You want to be able to scale this thing out,” he said. “And, to be honest, brokering materials has a lot of touch points. I have to touch a project for a year sometimes to get a product into it—and that’s a lot of time. “With a scalable opportunity, I want to sell a million sinks next year. And I never want to see one of them, except maybe on the website. I

The Omega Center for Sustainable Living in Rhinebeck, N.Y., incorporates reclaimed lumber, doors and other materials that PlanetReuse helped source.

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For UMB’s bank building in Prairie Village, Kan., PlanetReuse provided 3,700 square feet of reclaimed redwood from deconstructed pickle tanks.

want somebody else to do that, because if you provide the tools to enable that to happen, that’s really where the success is.” A FATHER’S LEGACY Before PlanetReuse, there was no online space dedicated to buying and selling reclaimable building materials that would otherwise end up in landfills. But despite technical advances and new efficiencies to ease the problem,

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are there materials that still can’t be reused? “Anything with asbestos or lead paint,” Benjamin said. “Gypsum board, like drywall, actually cannot be reused because it breaks. And structural steel is challenging, because of red tape and it’s hard to find. But there are opportunities with just about every material. It’s just a matter of finding the people that are interested in using them.”

Increasingly, Benjamin’s interest reaches well beyond commerce. He worries about the future of the planet, and how the 8,000 landfills that were available in 1998 are now down to fewer than 1,500. “They have been reducing over the years, because they just fill up—they’re full,” he said. “And as the number of landfills continues to dwindle, I think about my 4-month-old son, Lucas. When he’s 20 years old, he won’t have any landfills to put stuff into. What’s going to happen? Where are they going to put this stuff?”

As much as possible will go back into buildings, if PlanetReuse has anything to say about it. “There’s not one person who doesn’t live or work in a building,” Benjamin said. “Whether or not you’re spiritually or emotionally attached to doing good for the world, landfills are filling up. We all have this problem. “And, if my son, looking back, can say that we helped to shape the efforts to divert all this material from the landfills, that’s a huge legacy I’d love to leave.” Brian McTavish is a senior writer for Community Investor magazine.


PROTECTING YOUR INVESTMENT

Damage Control YOUR POLICY WON’T COVER A TENANT WHO DELIBERATELY TEARS UP A UNIT. BUT THERE ARE STEPS YOU CAN TAKE. by James Hart

T

oo many property investors mistakenly believe their insurance policy will cover any and all damage caused by a tenant. In cases of intentional destruction, that couldn’t be further from the truth. As a rule, insurance companies won’t pay when a renter deliberately ruins a unit. And that can leave property owners on the hook for some very pricey repairs, said Rick Abell, vice president of Affinity Enterprise Group. “I think there’s a big misconception about what types of tenant damage would be covered by policies today,” said BreAnn

Stephenson, a coverage consultant with the National Real Estate Insurance Group. An accidental grease fire would usually be covered, but an intentionally set fire would definitely not, Stephenson said. How bad can it get? An evictee could return and turn on every faucet in the property, Abell said. That actually happened to one policyholder, who arrived to find water was gushing out the basement windows. The cost of damage was $40,000— none of it covered by his insurance. Or maybe the ex-tenant will carry off the water heater, the furnace and some of the plumbing as souvenirs—another real-life story, Abell said. The loss there was “only” $20,000. Abell has seen claims where the departing renter literally tried to steal the kitchen sink. Stripping the copper wiring from a house is also popular. Luckily, there are steps that property owners can take that should reduce their risk of malicious damage. You should run every applicant through a background check that includes their credit history and their criminal record. “Do what you can on the front end to make sure your tenant is a good tenant,” Abell said. He also recommends RateTenant.com, which allows property managers to see what a tenant’s previous landlords had to say about them. The service creates a “permanent record” for tenants. Notify your tenants that you use the service, too, and will be noting if they’re a good or bad renter. For some people, that might be enough to encourage better behavior. “Is that going to take care of everybody?” Abell said. “Unfortunately not.”

SCREEN YOUR TENANTS

ASK FOR AN APPROPRIATE SECURITY DEPOSIT

If a tenant lives in an apartment for any amount of time, there will always be some kind of damage, whether it’s a ding in the doorframe or something more serious. A larger security deposit gives you more resources to fix what’s wrong, and it encourages renters to treat the property well. INSTITUTE A CASH-FOR-KEYS PROGRAM

Offer a few hundred dollars to evictees if they agree to move out by a certain date and hand you all the keys when they leave. Renters in this situation obviously need money, and that cash might help them start fresh somewhere else. Again, it’s all about providing an incentive to behave well. “That $500 prevents $10,000 worth of damage from being done to a house,” Abell said. SECURE THE PROPERTY IMMEDIATELY AFTER TENANTS MOVE OUT Go to the property, do a walk-through and get the locks changed as soon as humanly possible. Otherwise, you leave an opening for a bad tenant to say, “Well, it was locked when I left. Somebody else must have broken in and started that fire.” SET A GOOD EXAMPLE Stephenson once rented from a landlord who did an outstanding job maintaining the property. When she moved in, her apartment had been recarpeted, and there was a fresh coat of paint on the kitchen cabinets. She regularly saw him making other upgrades to the property. That made Stephenson and other tenants want to keep the place looking nice. DO YOUR BEST TO HAVE A GOOD WORKING RELATIONSHIP If a tenant reports a problem with their water heater, for example, respond as quickly as possible. “Try not to give them a reason to want to damage the property,” Abell said. www.communityinvestor.com

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SPECIAL FOCUS

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TIME TO JOIN THE CROWD? NEW SEC RULES ON EQUITY CROWDFUNDING COULD CREATE OPPORTUNITIES FOR REAL ESTATE ENTREPRENEURS AND SMALLER INVESTORS—BUT THE NEED FOR DUE DILIGENCE WILL REMAIN.

A

by Julius A. Karash

“I think it’s going to be great for the industry,” said Jillian new law could make it easier for average Sidoti, a California-based attorney who specializes in matters property investors to team up and buy such as public offerings. “This is such a great opportunity to apartment complexes, office buildings and create more real estate entrepreneurs, those people who other large assets that previously would don’t have their own money to invest in real estate but have been out of their reach. Those kinds of deals have often been limited to investors have the time and the knowledge to get going.” with outsize bank accounts and the right connections. But BEYOND KICKSTARTER that is expected to change in the near future, thanks to the Online crowdfunding took off during the first decade of this Jumpstart Our Business Startups (JOBS) Act of 2012. This century with platforms such as Kickstarter, which raises monis the year that the Securities and Exchange Commission ey to bring creative projects is expected to adopt new to life. Musicians, inventors rules under the JOBS Act and others use Kickstarter’s that will open up online EQUITY CROWDFUNDING IS website to solicit huge equity crowdfunding to FUNDAMENTALLY DIFFERENT. numbers of relatively small smaller investors. donations from an online According to the proJilliene Helman, CEO, Realty Mogul “crowd.” Those who give to posed rules, which comprise Kickstarter projects often what is known as Title III, receive small incentives, those seeking funding for such as T-shirts or posters—but receive no ownership stake. real estate ventures will be allowed to raise up to $1 million But online equity crowdfunding involves the purchase within a 12-month period without triggering expensive, time-consuming SEC registration requirements, as long as of securities and puts investors’ money at risk, and that’s the deals are transacted through an SEC-approved broker or why it requires government regulation. The JOBS Act is online funding portal. designed to allow entrepreneurs to sell equity in their There would be limits on how much an individual could ventures through online crowdfunding portals, but with a invest. For those with a net worth or an annual income of reduced regulatory burden. $100,000 or more, the limit would be 10 percent of their “Equity crowdfunding is fundamentally different,” said annual income or net worth, capped at $100,000. Jilliene Helman, CEO of the Realty Mogul, an online

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IF YOU HAVE A SMALL AMOUNT OF MONEY AND YOU WANT TO GET INTO A REAL ESTATE DEAL, THEN YOU ARE GOING TO BE ABLE TO GET INTO A REAL ESTATE DEAL. Jillian Sidoti, attorney

marketplace for real estate investment. “Investors are buying securities, most often for a financial return. Realty Mogul does crowdfunding for real estate where we’re selling investment interests in different real estate projects, whether it’s an apartment building, an office building, a retail shopping center.” Helman noted that real estate traditionally has constituted a “very decentralized asset class. It’s been very hard to get access to. … The beauty of bringing technology into the mix is that we can start to centralize a lot of that deal flow.”

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Indeed, Helman said crowdfunding democratizes access to deal flow. “The deal flow is the harder piece of the puzzle, not capital,” she said. “And in that respect, we’re giving an investor in New York access to a deal in California. We’re giving an investor in California access to a deal in Texas. That’s important, based on where we’re at in the real estate cycle. I don’t think this business would have worked in 2007-08, when the entire real estate world was crumbling. There’s now a lot more appetite to go back into the real estate market. That, coupled with what’s going on

with the JOBS Act in the political arena, is helping to fuel this industry forward.” Realty Mogul, which did its first transaction in 2013, was born “at the confluence of an economic opportunity and a political opportunity,” Helman said. “From an economic perspective, you have a lot of investors who are yield-starved; they’re cash flow hungry. And they can’t get that cash flow out of the banks, because banks are paying less than 1 percent on CDs and checking accounts. We saw this opportunity to open up real estate investing, and specifically cash-flowing real estate investing, to a broader scope of investors.” Realty Mogul operates under Title II of the JOBS Act. Title II created SEC rule 506(C), which took effect in September 2013. The rule permits “general solicitations” for securities, meaning they can be marketed via the Internet, TV and other general media. However, such offerings are limited to “accredited investors,” which are defined as individuals who earn at least $200,000 a year; married couples who earn at least $300,000 a year; or individuals or married couples with a net worth of $1 million exclusive of their primary residences. The SEC’s proposed equity crowdfunding rules, which have not been finalized, would open the door to unaccredited investors, subject to the previously mentioned caps for individuals. Equity crowdfunding projects also would be limited to $1 million within a rolling 12-month period. That cap is disconcerting to Helman. “In real estate, $1 million isn’t a whole lot of money,” Helman said. “That’s quite limiting. We might be doing $10 million, $20 million, $30 million transactions.” In January, Realty Mogul surpassed $10 million in crowdfunded real estate transactions, and it has returned $1 million to its early investors. Recent transactions include the acquisition of the Greystone Shopping Center in Lenexa, Kan., a suburb of Kansas City. In that transaction, a group of nearly


two dozen investors accessed Realty Mogul to buy the center from Block Real Estate Services LLC for slightly less than $4 million. “Crowdfunding is still in its infancy,” Helman said. “But what’s shocking to people is that hundreds of millions of dollars in real estate have already been impacted by crowdfunding. We have investors in almost every state in the country. For a company that’s been around for less than a year, we’re already operating a national platform.” WIDENING THE PORTAL But while crowdfunding may still be in its infancy, the forthcoming Title III rules that are expected soon could lead to a metamorphosis in terms of small investor participation. “It’s kind of ridiculous that it hasn’t been done already,” Sidoti said. “If you do have a small amount of money and you want to get into a real estate deal, then you’re going to be able to get into a real estate deal. It’s going to offer a lot of opportunity for a lot of different people, not just the people trying to raise the money, but the people who want to invest.” But Helman foresees potential problems in the new scenario. “Another factor in the proposed rules that I think is going to make it challenging for this to be a viable option for smaller investors, is there’s an audited financial requirement for investments over a half a million dollars. At the end of the day, real estate companies aren’t going to pay that. The $20,000 to $30,000 cost that’s going to go to the accountant is going to be directly charged to the investor. That’s concerning.” In addition, Helman voiced concerns about a stipulation in the proposed new rules that calls for a 21-day cooling-off period between an offer being posted and the first sale.

“That’s going to prohibit investments in some of those major MSAs where investors might want to get exposure,” she said. BEWARE OF FRAUDSTERS Regardless of where the new rules take the industry, the need for an informed approach to real estate investing will continue—even if the investment is a small one. “Do your due diligence,” Sidoti said. “Go and check out the property on Zillow or check the property records in the county. Don’t just necessarily rely on what’s been thrown up there on the Internet.” Sidoti said she has been told that a more open crowdfunding landscape could lead to “boiler rooms” where scam artists get together and convince people to invest in crowdfunding projects—and then the money disappears. “These are things that the Securities and Exchange Commission is truly nervous about.”

Other problems could arise from unsophisticated investors taking cash advances from their credit cards to invest in crowdfunding portal deals, Sidoti said. “Part of why this is taking so long is the SEC wants to make sure these crowdfunding portals that are going to be profiting from this are taking some responsibility for what’s up on their website,” Sidoti said. ANTICIPATING THE NEXT PHASE Whatever their point of view, interested parties are anxious to see how the new rules will impact online equity crowdfunding for real estate. continued to page 48 > Julius A. Karash is a freelance writer and editor in Kansas City, Mo. (913) 208-3640 :: julius.karash@gmail.com :: www.juliuskarash.com

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DEAL

How Low Can You Go? HELP SELLERS UNDERSTAND YOUR COSTS, AND THEY’LL BE MORE LIKELY TO NEGOTIATE ON PRICE. by Mark Nagy

S

ometimes my friends are amazed by some of the deals I’ve put together. “How did you get that property so cheap?” they ask. “Easy,” I reply, “I just asked if they would sell it at that price.” Real estate investors are always inclined to test sellers on the price. But do sellers actually know why investors need to purchase properties at a discount? Turning a profit on real estate takes much time, work and money—and most sellers are often surprised by how big of an investment I plan to make in their property. (I would posit that this would surprise most new real estate investors as well.) Once they understand my situation, sellers are usually more willing to agree to a lower price. THE 4-STEP FORMULA There are probably as many tips and techniques on how to negotiate as there are real estate investors. At one end of the spectrum are those who will send out large numbers of offers for pennies on the dollar to determine if there are motivated sellers. At the other end are the methodical investors who research the properties to determine if there are signs of distress that will lead the property owner to sell. Then, there are others who invite property owners, through advertising, to call the investor when they are ready to sell. In the end, it comes down to the investor finding an avenue to communicate

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with the property owner to negotiate on the price and terms. One of my favorite methods is to talk with the seller to determine their situation. I in turn educate the seller on the time and expense involved in the purchase, fix-up and maintenance process. Most sellers quickly realize that there is not a large, get-rich-quick profit in the transaction. At that point, it is much easier to have a conversation about a fair price for the property. The formula that works for me is: 1

Identify sellers with properties that show signs of distress.

2

Engage them in a conversation to learn more about the property and their situation.

3

Educate them on what is involved in the entire process and what has to happen in order for a profit to be made. There must be a rate of return on money invested, and the investor must get paid for the work, time and expertise invested in the property.

4

Have a conversation around the price and find terms that solve both parties’ needs.

The outcome will generally be a favorable win-win situation where neither party feels taken advantage of. If both parties are aware of the constraints that each side has, assumptions are no longer a factor. The seller typically is much more negotiable once they know my constraints. FINDING A WAY TO WIN-WIN Case in point, some property owners contacted me regarding a property that

they wanted to sell. It needed work, but was on a very nice lot. The sellers had lived in the property for 12 years and moved out of it due to a work transfer. They had rented it out for two years to tenants who eventually moved without paying the last several months’ rent and, as a bonus, left the house in a mess. The sellers were asking $72,900 for the property that they were trying to market as a “For Sale by Owner.” I explained the process that I would go through after I purchased the property. I estimated my rehab costs would be $25,000 to get it in condition to resell on a retail basis. The rehab would involve updating the property, performing a clean-out and making repairs. I told them about my holding costs and the time I would spend dealing with city inspections and permits. I further discussed how I would update the roof, windows and siding over time, using workers that I have developed a relationship over the years, thus getting


TURNING A PROFIT ON REAL ESTATE TAKES MUCH TIME, WORK AND MONEY—AND MOST SELLERS ARE OFTEN SURPRISED BY HOW BIG OF AN INVESTMENT I PLAN TO MAKE IN THEIR PROPERTY. better pricing. I planned to make my money over time by renting the property out and dealing with the potential problems in that arena. After the conversation, they understood that I would not be getting rich on their property. Whatever money was made would be earned through work and a business system that was developed over the years. In the end, I was able to solve their problem by purchasing the property at a price of $45,000. They came to the closing with a

good-sized check to pay off the balance of the mortgage that my purchase price did not cover. They thanked me many times as they walked out of the closing. It was not a property that would justify a big profit by flipping it. I rented the property for eight years and then sold it for $145,000. It turned out to be a good investment—with the work and time that were invested into it. 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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LAW

Up in Smoke? MARIJUANA LAWS ARE CHANGING, BUT LANDLORDS AREN’T POWERLESS. by Nancy J. Burke

M

arijuana legalization is sweeping the nation. Twenty states and the District of Columbia have legalized medical marijuana, 17 states have decriminalized marijuana possession and two states have legalized the sale and possession of recreational marijuana. Colorado and Washington approved ballot initiatives to “regulate marijuana like alcohol,” and Alaska is poised to do the same. Twelve states including Arizona, California, Maine, Massachusetts, Montana, Nevada and Oregon are seeking legalization through ballot measures. Hawaii,

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Maryland, New Hampshire, Rhode Island and Vermont are seeking legislative action. State governments are “smoking this pipe” primarily because proponents point to an additional revenue stream that makes state budgeters instant backers. Colorado, for example, anticipates $65 million in tax revenues from marijuana sales in the first year. These additional funds will assist the state with school funding and other enhancements. If marijuana reform is not yet in your state, don’t think it won’t be soon. State laws do not make marijuana legal under federal law. Marijuana remains a

Class I Controlled Substance, and therefore is still illegal under federal law. In 2013, the Obama administration said it would not challenge state laws that legalized marijuana as long as the states maintain strict rules on the sale and distribution. Over 50 percent of Americans support marijuana reform, and over half of our nation’s population resides in states pursuing it. More than one third of Americans are choosing to rent for their housing need, so this equates to a significant number of marijuana proponents who may be seeking rental housing. The time has come for landlords to understand how marijuana laws could affect them.


Here are some questions to consider: AS A LANDLORD, DO I HAVE TO ALLOW MARIJUANA SMOKING ON MY PROPERTY?

Because marijuana is still illegal under federal law, landlords may prohibit tenants from possessing marijuana. Although state laws may differ, smokefree properties can remain smoke-free. Add to that zero tolerance for drug possession through a crime-free lease addendum to solidify the prohibition. DO I NEED TO ADOPT A POLICY TO ADDRESS MARIJUANA USE ON MY PROPERTY?

Ultimately, landlords may either allow or disallow marijuana use. In states where both medical and recreational mari-

sometimes replace breakers on electrical panels to allow higher amps, which can overload the electrical system and possibly cause a fire. Excessive use of electricity increases utility costs, which could disproportionately impact other tenants under utility billing allocation formulas. Growing marijuana also produces high heat and humidity conditions, and that can cause the growth of mold and mildew if not properly vented. Additionally, leaves of marijuana plants produce oil, which can permeate walls and carpet. Lastly, people who grow marijuana are more likely to sell marijuana; your property could face a higher level of undesirable traffic.

GROWING MARIJUANA REQUIRES SUBSTANTIAL AMOUNTS OF ELECTRICITY, AND AMATEURS WILL SOMETIMES REPLACE BREAKERS ON ELECTRICAL PANELS, WHICH CAN OVERLOAD THE ELECTRICAL SYSTEM AND POSSIBLY CAUSE A FIRE.

dums should state that you have the right to terminate marijuana violators without a right to cure. IS IT LEGAL TO EVICT A TENANT WHO IS DISTURBING OTHER TENANTS WITH MARIJUANA SMOKE?

If you prohibit marijuana, a landlord can demand the tenant to stop smoking marijuana and disturbing others. If you don’t prohibit marijuana, then you can demand the tenant stop disturbing other tenants. Regardless of your policy, tenants are never allowed to disturb other tenants. If the behavior persists, you can begin eviction proceedings. IF MY PROPERTY IS FEDERALLY SUBSIDIZED, CAN I RENT TO MARIJUANA CONSUMERS?

HUD regulations prohibit marijuana use. If your property or tenants receive federal subsidies and you are subject to federal regulations banning the use of marijuana, you must adopt a policy that prohibits the use of recreational or medical marijuana to avoid violation of federal regulations that could potentially lead to a loss of subsidies. A DISABLED TENANT REQUESTED AN EXCEPTION TO OUR DRUG-FREE POLICY,

juana exists, landlords should consider adopting a medical marijuana policy and a recreational marijuana policy. Landlords may prohibit the use of recreational marijuana but allow the use of medical marijuana as a reasonable accommodation. Landlords may also choose to adopt a policy that prohibits both or, lastly, none. The medical marijuana and recreational marijuana policies don’t need to align, but that could lead to confusion. SHOULD I ALLOW TENANTS TO GROW MARIJUANA PLANTS?

Growing marijuana requires substantial amounts of electricity, and amateurs will

STATING HE HAS A MARIJUANA LICENSE AND CAN I PROHIBIT MY TENANTS

IS LEGALLY ALLOWED TO USE MARIJUANA.

FROM GROWING MARIJUANA PLANTS?

HOW SHOULD WE HANDLE THIS?

Yes. Despite the allowance of growing plants under some state laws, marijuana is still illegal under federal law. DO I NEED TO REVISE MY LEASE DOCUMENTS TO PROHIBIT MARIJUANA USE?

Marijuana is legal in some states now, but federal law and some state laws allow landlords to prohibit it. If you choose to prohibit marijuana, stating this up front will avoid the numerous “marijuana is legal” arguments from tenants. For stronger enforcement, your lease or adden-

Disabled tenants are entitled to make reasonable accommodation requests. To be entitled to a reasonable accommodation under federal law, the tenant must be disabled. Just because a tenant has a marijuana license doesn’t necessarily mean the tenant is disabled under fair housing laws and entitled to a reasonable accommodation. Only disabled tenants are entitled to reasonable accommodations. You do not have to accommodate nondisabled tenants. While you may deny the www.communityinvestor.com

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LANDLORDS SHOULD REVIEW RENTAL CRITERIA, LEASE DOCUMENTS AND CRIME-FREE ADDENDUMS, AND CONSIDER ADOPTING MARIJUANA POLICIES.

request under federal law, a disabled tenant could argue or possibly file a fair housing complaint stating that medical use should be allowed as a disability accommodation because it is legal under state law. Denying is not risk-free. It is advisable to have a policy in place to cover these requests. Landlords should review rental criteria, lease documents and crime-free adden-

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Community Investor may/jun 2014

dums, and consider adopting marijuana policies. If your policy prohibits marijuana use, possession or grows, lease documents should clearly state that. Your lease should also state that marijuana use will not be allowed to disturb other tenants’ rights, comforts and quiet enjoyment. Training employees on the marijuana policies will help to ensure operational consistency and provide a stronger understanding of the policies. Landlords may want to consider publishing the poli-

cies to share with tenants and prospective tenants. By addressing the issue up front, applicants and tenants will have a better understanding of expectations. This article is not to be construed as legal advice. If you have questions regarding marijuana use on your properties, please consult with an attorney in your state.

Nancy J. Burke is vice president of government affairs for the Colorado Apartment Association.


NREIG TIPS

BURN NOTICE You’d never set fire to your money, but that’s basically what many property investors are doing when it comes to their insurance. Here are five tips from Mike Wrenn of National Real Estate Insurance Group for preventing losses—and saving money.

TIP NO. 2

Did you know that 30 percent of vandalism claims are caused by angry tenants? Losses from negligent tenants aren’t normally covered under insurance policies, so it’s a good idea to keep your renters happy. If that’s not possible, make sure you’re present at every eviction. (A cash-for-keys program can be a great solution in those situations. See page 21 for more details.) TIP NO. 3

TIP NO. 1

If your lease requires the tenant to buy renter’s insurance, enforce that rule. Otherwise, you could be on the hook for losses that aren’t covered.

PL membership ad.indd 1

If a rental property is vacant for longer than 60 days, you likely have basic coverage in place and water damage will not be a covered peril. That’s why you need to turn off the water at all vacant locations.

TIP NO. 4

If you don’t turn off the water, then you need to make sure the heat stays on. Don’t think you’re safe just because it’s May. A freak cold snap can happen when you least expect it. When that happens—and your property’s pipes freeze and burst as a result—there will be no coverage under your policy. TIP NO. 5

Unfortunately, theft and vandalism at vacant homes are still huge issues for property investors. Make sure your units are very, very hard to enter. Good locks, steel-reinforced door frames and regular visits from you or your property manager—they’re all part of “encouraging” the bad guys to go pick on someone else.

4/4/2014 10:44:22 AM www.communityinvestor.com

33


MANAGEMENT

Piping Up PEX CAN BE A GREAT SOLUTION FOR YOUR PROPERTIES—IF YOU GET THE RIGHT KIND. by Jason Windholz

P

EX tubing or piping has been around for decades, although it’s fairly new to the United States. While American stores have carried it for about 20 years, PEX has been used in

Europe since the early to mid 1900s. For a real estate investor, PEX can be a great plumbing solution. There are many advantages of PEX tubing. For starters, it expands up to three times its size when the water inside it

freezes. That means it is less likely to bust apart and then leak when the ice thaws out. If you have vacant properties in cold climates, PEX can be a life-saver. And PEX is very flexible, which means it requires far fewer connections during installation. Using PEX, my cousin and I were able to replace all the hot and cold water plumbing in a house in three to four hours. The only downside of PEX is that direct sunlight ruins it. Since most plumbing is located under the house, in the walls, or in the attic, that is usually not an issue, but if you run a pipe that is exposed to

IF YOU HAVE VACANT PROPERTIES IN COLD CLIMATES, PEX CAN BE A LIFE-SAVER. sunlight (even through a window) then make sure and cover it up. Using sleeves of foam pipe insulation is an easy way to do that. THREE TYPES OF PEX This past winter, freezing temperatures caused pipes to burst all over Tulsa, my hometown. To my surprise, some of them were PEX pipes. How could this be? PEX is supposed to expand! After talking to several other landlords and property managers, I realized that not all PEX is really the original PEX. There are three types of PEX tubing—A, B and C—and they each have different qualities. The original PEX is Type A. It offers the greatest flexibility when expanding and returning back to its original shape, so it can withstand a hard freeze the best. It also costs more. Type B is a slightly different version designed to handle American water systems, which contain more chlorine. There are a few other minor differences. 34

Community Investor may/jun 2014


For example, its tubing can hold higher pressures. PEX-B is the most typical and affordable type of PEX tubing in the United States. Due to an extensive performance history and compatibility with a large number of connection systems, it’s very popular both among DIYers and professional contractors. The newest kind of PEX is Type C. It’s cheaper to manufacture and therefore cheaper to buy. The problem with Type C PEX is that it is basically just plastic pipe, and it lacks many of the qualities of actual PEX—including the ability to stretch and return to normal. That means when the water freezes in it, the pipe is more likely to burst instead of stretch out. Most of the busted pipes that I saw in Tulsa were Type C. A LITTLE ADVICE If you install PEX piping in cities like Houston, where there is less chance of a hard freeze, then Type C might be all right to use. But in cities farther north, like Tulsa, which can have hard freezes, Type C PEX is not that great of a choice. If you’ve got a vacant property with Type C PEX, make sure the heat is on and working in that house, and keep the pipes completely drained. You have to treat it like a house plumbed with copper, galvanized steel or even PVC or CPVC pipes. When shopping for PEX piping, confirm what type you’re getting before you buy it. And don’t rely on older articles you find online. Your favorite big-box store might have changed its line-up of products since that piece was written. If you choose Type C, be prepared to prevent frozen pipes. That does not mean you can completely ignore freezing with PEX A or B. It just means that just that, if you do get a hard freeze, you are less likely to have busted pipes. Jason Windholz is the president of the Tulsa Real Estate Investors Association. Jason@TulsaREIA.com :: www.TulsaREIA.com

The Attorney for Real Estate Investors, Property Management Companies and Private Lenders Condominium Conversions • Clearing Title Asset Protection Strategies • Entity Formations Joint Venture Agreements • Leases Investor Financing and Investor Agreements Representing Your Best Interests – Not Ours.

WWW.GER ACIL AWFIRM.COM www.communityinvestor.com

35


INSURANCE

Fixing a Flood of Complaints NEW LEGISLATION WILL ROLL BACK A 2012 LAW THAT LEFT SOME PAYING MUCH HIGHER PRICES FOR FLOOD INSURANCE. by James Hart

N

ew legislation should provide relief to some property owners who were facing sharp increases in their National Flood Insurance Program premiums. Signed into law in March, the Flood Insurance Affordability Act will prevent premiums from increasing more than 18 percent per year for most property owners.

• Refunds will be given to property

owners who have paid premiums with rate increases in excess of 18 percent.

• The flood insurance program will

now have an “affordability target” that will try to keep premiums at no more than 1 percent of the total value of a policy’s coverage.

SIGNED INTO LAW IN MARCH, THE FLOOD INSURANCE AFFORDABILITY ACT WILL PREVENT PREMIUMS FROM INCREASING MORE THAN 18 PERCENT PER YEAR FOR MOST PROPERTY OWNERS. Congress rushed to act after homeowners in Louisiana, New Jersey and other areas of high flood risk reported huge, unaffordable increases in their premiums. Among the act’s other provisions: • If new flooding maps show that a prop-

erty is at a higher risk of flooding, the homeowner’s premium won’t be immediately slapped with a huge increase.

• Premiums won’t immediately increase

to actuarial levels when a home is sold or changes hands.

• When it puts together a new flood

map, FEMA will be required to consider local flood protection, not just federal levees, as it determines whether an area has a higher flooding risk and should pay more in premiums.

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Community Investor may/jun 2014

RESPONDING TO BIGGERT-WATERS The new law is a reaction to the Biggert-Waters Act of 2012. That law was designed to shore up the flood insurance program, which is more than $24 billion in debt after major events such as Hurricane Katrina and Superstorm Sandy. Part of Biggert-Waters’ solution was to raise prices for many policyholders who weren’t paying premiums that reflected the true risk of their coverage. FEMA estimates that 20 percent of policyholders have been paying subsidized rates. Under Biggert-Waters, certain properties—non-primary residences, businesses, those with severe and repetitive losses—would see their rates increase by 25 percent per year until their premiums

reflected “full risk.” Roughly 5 percent of the government flood program’s policyholders fall into this category. Average homeowners would be allowed to continue paying a subsidized rate, but only as long as they owned that property. If the house was sold, the new owner would immediately be forced to pay full-risk rates. And that, understandably, made it much more difficult to sell those homes. WHAT DOES THIS MEAN FOR PROPERTY INVESTORS? Thanks to the Flood Insurance Affordability Act, premium increases will be capped at 18 percent annually for most properties built after 1975, no matter if they’re a primary residence, a business or a secondary home, such as an investment property. Of course, that’s still a fairly sizable increase. And some properties could still see their rates increase by 25 percent per year. That includes commercial and non-primary homes that were generally built before 1975, before modern flood insurance maps were in common use. They previously qualified for subsidized coverage, but that’s going away.


Insurance for

Real Estate Investors

Renovation The new law also institutes an annual surcharge of $25 for primary homes— and $250 per year for each secondary home and commercial property. That fee, which will be paid into the flood program’s reserve fund, is supposed to go away after all policyholders are paying full-risk rates. The major upside for property investors is the rule that prevents premiums from jumping to full-risk prices when a house is sold. Not everyone is convinced the decision to roll back Biggert-Waters was the right thing to do. Until the flood insurance program is reformed, all taxpayers are going to be on the hook for these losses, even if they don’t happen to live in floodprone areas. One important thing to note: FEMA will have eight to 16 months to put the Flood Insurance Affordability Act’s provisions into effect. “Most property owners will not see these changes reflected in rate quotes and insurance renewal notices right away,” the National Association of Realtors warned. James Hart is the managing editor of Community Investor magazine.

Vacant

Occupied

The Right Coverage At The Right Time

nreinsurance.com 888-741-8454

(913) 432-6690 :: editor@communityinvestormedia.com www.communityinvestor.com

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PROBLEM SOLVERS

Diving into Pool Safety WHAT’S THE BEST WAY TO SECURE A SWIMMING POOL AT MY PROPERTY? by Jason Nash

I

t doesn’t matter if you’re purchasing one house or 100—the return on investment is the ultimate concern for most property investors. And if a property has a swimming pool, or even just a koi pond, that “attractive nuisance” could present a liability, whether the home is vacant or occupied. Fortunately, with a little effort, it’s possible to not only keep your pool secure, but to keep it looking great in the process. NO MORE CHICKEN WIRE AND PLYWOOD Too many people go with the old stand-by when they’re trying to cover a pool at a vacant property. They place plywood and chicken wire over it, and then drape a plastic tarp over that. Maybe that appears safe. Anyone who has been in the industry for even the shortest amount of time, though, has seen what the weather does to these types of “homemade security devices.” The weight of one snowstorm will completely collapse a makeshift cover. In the more tropical climates, the punishing sun and rain will disintegrate the plastic and make the pool look like some sort of nuclear wasteland. It’s pretty hard to sell a property that is unsafe and looks horrible, too. A pool safety cover is a much better choice. It should be ASTM-certified, have a UV inhibitor and be drum-tight. The material itself will allow water to pass through so there is no pooling (no pun intended) on the top of the cover. The result is a safe pool that also provides aesthetic value. Potential buyers will appreciate it, especially if they have children. A pool safety cover, installed properly, will reduce days on the market as well as make security compliance a non-issue. KEEPING KIDS SAFE Occupied properties that have swimming pools present a different set of

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Community Investor may/jun 2014


A POOL SAFETY COVER, INSTALLED PROPERLY, WILL REDUCE DAYS ON THE MARKET AS WELL AS MAKE SECURITY COMPLIANCE A NON-ISSUE. concerns, and they require a different solution from a vacant property. Pool safety covers are cumbersome to take off and put on frequently, and that’s a problem if residents want to use the pool on a regular basis. While you want your properties’ pools to be safe for everyone, most of your security measures are there for children. The vast majority of pool drownings involve kids who either live on the premises or who are visiting friends and family there. Adults should always be present when children are using a pool, but there have

been situations where kids, especially very young boys and girls, will sneak into the pool on their own. A simple solution is to install a removable safety fence around the pool, and combine that with a self-closing, selflatching and lockable gate. That way, adults can rest assured the pool’s gate has been shut every time after someone has used it. Pool safety fences come in array of colors and two standard heights of 4 feet tall and 5 feet tall. The fence should be placed a minimum of two feet from the water’s

edge so pool service personnel will have enough room to move around without falling in. Investing in pool safety is the right thing to do, but it can pay other dividends. Two years ago, our company started doing pool preparation and cleaning for one of the Big 3 asset management companies. As part of that, we installed pool safety covers at their properties. Today, our client has seen a tremendous reduction in noncompliance issues with inspectors, and their properties have fewer days on the market due to a solid aesthetic appearance. Jason Nash is vice president of sales for Pool Guard, the industry leader in pool safety for more than 25 years. The company makes and sells a complete line of swimming pool fences, gates and covers. www.poolguardusa.com

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39


IN DEPTH

GOVERNMENT

Selling Congress on Seller Financing A COALITION OF LENDERS AND NOTE TRADERS IS TRYING TO REVERSE OVERREGULATION BY EDUCATING ELECTED OFFICIALS. by James Hart

‘WE DON’T HAVE ANY

hen Congress passed the Dodd-Frank Act and the SAFE Act, the stated goal was to protect the average homebuyer and rein in the bad actors who helped cause the financial crisis of 2008. Unfortunately, those regulations have had a major impact on private lenders, note traders and others who work with seller-financed mortgage notes—people who didn’t have anything to do with the economic meltdown. “We just got kind of sucked up into the vacuum,” said Bob Repass, managing director at Colonial Funding Group in Dallas. “We’re following the same rules that some of the big banks are having to follow, and we’re not part of that world.” Under the SAFE Act, for example, seller-financiers must now pass a difficult national licensing test if they want to do more than a few deals per year. The test covers Fannie Mae, Freddie Mac, VA and similar loans, which people in this sector don’t originate. Frustration over the new rules—and a growing concern that overregulation could force them out of business—has led Repass and several colleagues to form the Seller Finance Coalition. The organization is working to educate elected officials about the industry and push for legislation that could reform or eliminate burdensome rules.

FALSE IMPRESSIONS’

W

Bob Repass :: managing director, Colonial Funding Group

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Community Investor may/jun 2014

In addition to Repass, the other founding members of the Seller Finance Coalition include Scot Campbell of SR Campbell Properties, Glenn Lee of Texas Funding and Eddie Speed of Colonial Funding Group and NoteSchool. The coalition formed in early 2014 and hired the Keelen Group, a Washington, D.C.-based firm, to serve as its lobbyist. In February, coalition members traveled to Capitol Hill and met with 16 different representatives or their staffers, including both Republicans and Democrats. Those conversations served a dual purpose, Repass said. Obviously, coalition members wanted Congress to know how Dodd-Frank and SAFE had hurt their operations. But Repass and his colleagues also explained that, if the rules drive sellerfinanciers out of business, the public is ultimately going to suffer. The coalition’s members provide financing that most banks won’t touch, usually less than $100,000, for people in inner cities and rural areas that are traditionally underserved by institutional lenders. “I think the light went on for a lot of people,” Repass said. The coalition is working on legislation to reverse some of the worst new regulations—in fact, by the time you read this, their first bill might have already been introduced in Congress.


Despite the early positive feedback from elected leaders, Repass is realistic about the path forward. They’re not going to be able to repeal entire laws; chipping away at them is more likely. Even that can take time, especially during an election year. “I think it will be relatively easy to get bills introduced,” Repass said, “but we don’t have any false impressions on how hard it is to get bills passed through both houses of Congress and signed by the president.”

ACROSS THE AISLE, ACROSS THE COUNTRY

Besides pushing for regulatory changes, the coalition’s other immediate job is to add more members. So far, about a dozen people from across the country are part of the group, and more are joining all the time, Repass said. That can only help the coalition as it tries to convince Congress to pursue policies that don’t hurt seller-financiers. One

SOMEBODY NEEDS TO BE AROUND TO REPRESENT THE INDUSTRY’S INTERESTS AND FIGHT THE NEXT WRONG-HEADED REGULATION WAITING AROUND THE CORNER.

of the first things that elected officials ask is whether the organization has any members in their state. “We’re going to take this thing across the aisle and across the country,” Repass said. Even if Dodd-Frank and SAFE magically disappeared tomorrow, there would still be a need for the Seller Finance Coalition to exist. Somebody needs to be around to represent the industry’s interests and fight the wrong-headed regulation waiting around the corner. “You’ve got to have a coalition or an association in place to handle whatever regulations come down the pike,” Repass said. For more information about the Seller Finance Coalition, visit www.sellerfinancecoalition.org.

www.communityinvestor.com

41


IN DEPTH

GOVERNMENT

Campaigning for Better Government SHARING YOUR STORY WITH ELECTED LEADERS COULD HELP STOP BAD BILLS FROM BECOMING LAW. by James Hart

S

ometimes, it feels like Congress passes laws without any idea their legislation actually affects people in the real world. Every year, there’s another law that makes it harder for property investors, private lenders and other entrepreneurs to turn a profit. Part of the problem is that many of our elected leaders don’t have any direct experience running their own businesses. “Some members of Congress have a little bit of business experience, but I think most people would be shocked at how little they understand,” said Eric Reller, the National Federation of Independent Business’ senior media manager for tax, regulatory, energy, labor and health care. The NFIB is an advocacy association representing more than 350,000 small and independent business owners. While the

them do respect it. To help shape public policy, more entrepreneurs need to contact their elected officials, whether that’s through phone calls, email or an in-person visit, and campaign for better policies. You might just have more influence over your congressman than you realize. “When a small business owner comes to them, more often than not, they’ll at least hear them out,” Reller said.

‘Tell a Story’ When Congress or state legislatures are developing a new law, it’s easy for elected officials to get lost in abstractions. Hearing from a real-life entrepreneur brings them back to reality. If a piece of legislation would have an adverse impact on your operations, tell your congressman exactly how much it will cost you or how it will change your hiring and spending.

YOU’D BE AMAZED AT HOW BIG OF AN IMPACT MAKING A PHONE CALL, SENDING AN EMAIL OR SITTING DOWN WITH YOUR CONGRESSMAN CAN MAKE. NFIB has a team of professional lobbyists that campaigns for pro-business policies, entrepreneurs have the ability to be highly effective spokespeople for themselves. That’s because, even if our leaders don’t always understand small business, most of 42

Community Investor may/jun 2014

“Tell a story,” Reller said. “Tell why this is important.” He always reminds business owners that they’re the expert in their field, not the elected official or their staff members. You will have insights that smart congressmen

are going to respect, and they’re going to view your opinion as a valuable resource when they decide how to vote. “You are the expert, you are the resource,” Reller said. “Let the member of Congress know that.” Politicians are very skilled at diverting conversations to what they want to talk about, so do your best to stay on point.


Reller also recommends limiting how many topics you bring up. “Three issues tends to be the max that you can talk about,” he said. And no matter how frustrated a bill makes you, always remember your manners. Otherwise, they’ll tune you out. “I would say it’s always better to be polite,” Reller said.

They Really Are Listening

Another idea for building a relationship with your elected leader: invite them for a “back-of-the-house” tour of your operations. It’s a good way for them to learn more about what it takes to run a business—and it could serve as a great photo opportunity for your guest. “You make a good, lasting contact,” Reller said. “And they’re much more willing to take your phone call in the future.” Does it take time to follow the issues, stay connected and speak up when bad ideas threaten to become law? Yes, but the time you spend could end up making an enormous difference. “You’d be amazed at how big of an impact making a phone call, sending an email or sitting down with your congressman can make,” Reller said. “By reaching out and sharing that information, you’re doing a world of good.”

In-person meetings tend to make more of an impression, and they might be easier to arrange than you expect. Most members of Congress, for example, spend a good deal of time in their home districts. Setting up a meeting could be as simple as calling their local office. Don’t underestimate the value of a phone call, email or letter, though. Your representative’s staffers keep tabs on how many responses they receive regarding a particular issue. “They definitely do take those into account when they’re developing their positions on things,” Reller said. Staying active with an industry association can help you learn about potentially troublesome bills early in the process, allowing you and others in your line of work to campaign against them before they gain momentum.

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You, Inc. Three Ways to Be a Better Entrepreneur

The Next Big Thing How

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2014

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43


IN DEPTH

GOVERNMENT

How to Fight City Hall TO DEFEND YOUR RIGHTS, YOU HAVE TO SPEAK UP. by James Hart

A

ctually, you can fight City Hall. Just ask Stanley Diaz. Diaz is a longtime landlord in Columbia, Mo., where the city council passed an “occupancy disclosure” ordinance in January 2013. Like a lot of communities, the college town already had a policy against overoccupancy in rental units, but a group of homeowners—upset about large numbers of students sharing a single house— pushed for something stricter. Under the new ordinance, real estate agents, brokers and property managers were required to explicitly

to any police officer or city inspector investigating any code violation. Set aside the paperwork headaches or the requirement to “immediately” provide information to city workers investigating “any” code violation. The new ordinance ordered landlords to turn over a huge amount of personal, private information about their tenants that, as far as Diaz and his colleagues were concerned, the city didn’t have any right to ask for. So they decided to put up a fight.

Working for a Better Resolution Diaz understands why homeowners pushed for action on overoccupancy.

TOO MANY TIMES, LANDLORDS DON’T SPEAK UP UNTIL THEIR CITY COUNCIL IS READY TO VOTE ON AN ISSUE.

inform renters and buyers about a property’s occupancy limits. (Depending on a neighborhood’s zoning, that’s usually either three or four unrelated adults per unit.) “It was an ordinance to tell people there was an ordinance,” said Diaz, who serves as president of the Columbia Apartment Association. More seriously, the ordinance required property managers or owners to provide “all lease, rental payment (and) tenant information” immediately 44

Community Investor may/jun 2014

“They had a right to,” he said. “Nobody wants a dozen people living in the house next to them.” But there are approximately 26,000 rental units in Columbia. About 50,000 people—roughly half of the city’s population—are renters. In 2012, the year before the new overoccupancy ordinance took effect, Columbia had only 14 complaints about crowding in rental units. Instead of enforcing its existing rules against overoccupancy, the city created

a whole new policy that placed a burden on all landlords, even ones who were already following the rules. Property managers and investors weren’t the only ones affected. The city’s realtors were upset about their new legal obligation to inform buyers of occupancy limits. The Board of Realtors threatened a lawsuit if the ordinance wasn’t changed. The Columbia Apartment Association, meanwhile, was doing everything it could to inform the larger public about the ordinance’s privacy implications. Diaz went on three local radio stations and wrote a series of articles pointing out the problems. All of that helped build public opinion so that, when the city council finally took up the ordinance again last fall, the mayor acknowledged that a lot of people were upset about the original policy.

Half a Victory In the end, the ordinance was amended … but not overturned.


Today, real estate agents in Columbia aren’t responsible for informing buyers about occupancy limits, but a building’s owner must still disclose that information to buyers and renters. Property owners and property managers aren’t required to turn over all tenant information to the city, but they still have to produce a certificate of compliance and notice of occupancy limitations signed by all lessees or sublessees within 10 business days. (Police and city inspectors can ask for that document when they’re investigating overoccupancy, not any old code violation.) Columbia’s landlords aren’t completely satisfied with the resolution. They don’t think the city has a right to know the name of who lives in a rental unit. In fact, in cases of domestic violence, where a victim is trying to stay hidden, any kind of paper trail could be dangerous to a tenant. But Diaz and his colleagues are slightly more content now that most of their tenants’ private information can stay private.

They’ll continue to bring up the issue with elected leaders, but the campaign to overturn the ordinance has “pretty much run its course,” Diaz said. Diaz and his colleagues respect the city council’s efforts. They really do want to work with landlords. “Because of our actions on this story, the city has been more inclusive of our organization on upcoming issues, and other organizations have been notifying us of proposals that affect our members,” Diaz said.

‘Get in on the Ground Floor’

How can you stop your city council from instituting bad policies? Get involved early, Diaz said. Naturally, that takes time and effort. And landlords, who tend to be pretty independent, aren’t always the best at showing up for meetings. A few months ago, Diaz said, Columbia held a meeting to determine how it should spend a large federal grant, and the city’s fair and affordable hous-

ing programs were going to be part of the discussion. About 100 people attended. How many landlords were there? One, Diaz. Too many times, landlords don’t speak up until their city council is ready to vote on an issue. By that point, though, city staffers might have spent weeks—or even months—holding meetings and developing their recommendations. City councilmembers usually serve on a part-time basis, and they often don’t have the time to thoroughly research an issue. So they rely on what city staffers tell them. That’s why Diaz and other property investors and landlords have become much more proactive about tracking ordinances long before they ever come to the full city council. They try to attend smaller committee meetings and make their case directly to staffers. “In other words,” Diaz said, “get in on the ground floor before it goes to the city council.” www.communityinvestor.com

45


IN DEPTH

GOVERNMENT

Strange Bedfellows NEW HAMPSHIRE IS FIGHTING BED BUGS WITH LEGISLATION THAT EVERYONE CAN LIVE WITH. by James Hart

B

ed bugs—Cimex lectularius—only grow to be about a fifth of an inch long. But don’t let their small size fool you. They have become a growing problem across the country. That includes New Hampshire, where elected officials passed bed-bug legislation last year. The law, which took effect on Jan. 1 of this year, details the responsibilities of both landlords and tenants, which stakeholders from all sides of the issue helped write. “The group of people had one goal in mind, and me as well,” said Chris Schleyer, chief operating officer for the Elm Grove Companies, which has more than 1,000 units in the Granite State. “We wanted to solve the bed bug problem in New Hampshire, period.” The state needed a bed bug law. As the pests appeared in more communities, New Hampshire Legal Assistance found

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Community Investor may/jun 2014

itself defending an increasing number of tenants who had been evicted or billed for remediation costs. When they got to court, attorneys found the state didn’t have any statutes dealing with bed bugs, so judges lacked clear guidelines for deciding cases. Generally speaking, landlords are never happy with new regulations, said Nick Norman, a Derry, N.H., landlord and the director of legislative affairs for the New Hampshire Rental Property Owners Association. Too often, the rules are written without their input. In this case, landlords had some voice in the discussion. The end result has been something that both sides could live with. “There was going to be something, and this piece of legislation is pretty well balanced,” Norman said. THE NEW RULES A bed bug infestation can get out of hand quickly, so New Hamp-

shire designed its law to encourage a speedy response. If bed bugs are found in a property, landlords have seven days to take reasonable steps toward remediation. They also bear all the up-front costs of those remediation efforts. “On both the landlord and tenant sides, there are cases where people do not respond quickly, and bed bugs will reproduce very, very fast,” Norman said. “So if you don’t get it right away, it can become a very big problem.” Renters, meanwhile, must allow emergency entry to their unit if a report of bed bugs has been made. And a landlord can bill a tenant for remediation costs if the tenant is found to be responsible—that is, if there have been no other bed bug sightings in that unit or neighboring apartments in the six months prior. If tenants refuse repayment on a reasonable schedule, they can be evicted.


HAS YOUR COMPANY BEEN FEATURED IN COMMUNITY INVESTOR MAGAZINE? LESSONS LEARNED The legislation didn’t materialize out of thin air. It took the New Hampshire Bed Bug Action Committee, a working group of landlords, tenant advocates, pestcontrol companies and other stakeholders, time to write the bill, Schleyer said. That effort paid off. “There was almost no drama with putting this bill together and getting it through the system,” he said. Having everyone at the table was a crucial factor. Landlords, by nature, are entrepreneurs and problem-solvers, but advocacy groups often put together legislation that affects them without getting their perspectives, Norman said. That didn’t happen here. The committee had more people who were coming at the bed bug issue from the tenants’ perspective, but they were open-minded about landlords’ ideas, Schleyer said. “Had we not been at the table, it would’ve been a very different bill.” Everybody had to make concessions, said Rick Castillo, the coordinator for the New Hampshire Bed Bug Action Committee and a housing counselor with The Way Home, a nonprofit that helps lowincome families find affordable housing. For the landlords, that meant assuming the up-front costs of remediation, Castillo said. And tenants groups had to accept that, if renters were found responsible, they would have to pay for that work. And finally, everybody was motivated to get something done because of the frightening nature of bed bugs’ resurgence, Castillo said.

GET REPRINTS OF YOUR COMMUNITY INVESTOR MAGAZINE COVERAGE TO USE AS A MARKETING TOOL. ReprintPros, a full-service custom reprint supplier, is Community Investor magazine’s authorized reprint service. In addition to high-quality printed reprints, ReprintPros provides related products, including digital reprints and commemorative plaques. Choose the product you are interested in and get a free, no-obligation quote from ReprintPros.

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Listen Up 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 at www.smartcompaniesradio.com.

continued to page 48 >

James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com www.communityinvestor.com

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RESOURCES

ADVERTISERS

Are We Being Told the Truth About the Real Estate Recovery? > continued from page 14

liquid asset, should they ever need or want to cash out of it. In fact, since mortgage notes represent long-term income streams, we also show investors how to sell just a portion of their note, a strategy we call buying long and selling short. If a mortgage note becomes delinquent, the note owner can get a Deed in Lieu or foreclose on the property so they have a secured investment.

Time to Join the Crowd? > continued from page 25

Crowdfundinsider.com stated on Feb. 3 that “there is a certain level of expectation that if the SEC misses an opportunity to allow retail crowdfunding to thrive, congressional leaders will redress the issue in future legislation. Having the entire process bounced back to both the House of Representatives and the Senate is probably an unpalatable choice for securities regulators.” Helman thinks the final rules will come out in July or August. “We’re waiting on the final rules. I can’t make a business decision without knowing all the factors. We’re waiting to see what happens at the Securities and Exchange Commission in regards to Title III before we make a business decision.” In the meantime, Helman said, Realty Mogul will keep going with its current business model. “We’re going to continue down the path that we’ve been on, which is working with accredited investors to invest in real estate across the country.”

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Community Investor may/jun 2014

As for the overall future of online equity crowdfunding for the real estate sector, Helman says, “I think it will only grow. I think crowdfunding will touch billions of dollars of real estate. That’s really exciting to me.”

Strange Bedfellows > continued from page 47

Bed bugs have never been shown to transmit disease. If you happen to have bed bugs in your home, though, the experience can be sheer misery. Insomnia and anxiety are often a side effect of infestations. “This bug has a creep factor that’s greater than anything I’ve faced as a property owner,” Schleyer said. He can remember what it was like a few years ago, when bed bugs started popping up more frequently. Tenants would flip out when they called to report the problem, and some would quickly move out—and drag their infested furniture into another landlord’s building. Most property managers didn’t have any experience dealing with the pests, and pest-control companies were often at a loss, too. “It was disruptive and extremely expensive,” he said. Today, landlords are better educated, and they’ve worked hard to educate tenants about bed bugs, so they’re more likely to react calmly and work with property managers. Landlords also know more about the most effective ways to fight bed bugs, thanks in part to the workshops the Bed Bug Action Committee has held across the state. “In my office, I don’t hear about bed bugs anymore,” Schleyer said. “I just don’t hear about them like I used to.”

Affinity Group Management www.nreinsurance.com – P. 14 American Association of Private Lenders www.aaplonline.com – P. 33, P. 39 B2R Finance www.b2rfinance.com – P. 52 First Key Lending www.firstkeylending.com - P. 51 Geraci Law Firm www.geracilawfirm.com – P. 35 Global Publishing Inc. www.globalpublishinginc.com – P. 7 Investing Coast 2 Coast www.gomakesomethinghappen.com – P. 20 LoanMLS www.loanmls.com – P. 35 Lowe’s ProServices / Community Buying Group www.lowes-cbg.com – P. 3 MPactWealth www.thebankerscode.com/CIM – P. 5 The Mortgage Office www.themortgageoffice.com – P. 2 National Real Estate Insurance Group www.nreinsurance.com – P. 37 NoteSchool www.noteschool.com – P. 25 Platinum Investment Properties Group www.pipgrouptaxliens.com – P. 32 Pool Guard www.poolguardusa.com – P. 41 Professional Real Estate Investors and Managers Alliance www.pono2016.com – P. 26 Professional Real Estate Investors and Managers Alliance www.preimaonline.com – P. 27 RateTenants www.ratetenants.com – P. 5 RealtyJoin www.realtyjoin.com – P. 24 REI Expo www.reiexpo.com – P. 15 RentFax www.rentfaxpro.com – P. 29


PHOTO PAGE

Raising the Roof 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

Premier Issue

Join the Conversation Page 6

Investing in Families River of Refuge’s JOHN WILEY

wants to help working families find decent places to live.

1

Community Investor jan/feb 2014

www.communityinvestor.com

MEMBERS OF THE KANSAS CITY BLUES RUGBY CLUB RAISED NEARLY $30,000 FOR RIVER OF REFUGE, A TRANSITIONAL LIVING CENTER FOUNDED BY PROPERTY INVESTOR JOHN WILEY (COMMUNITY INVESTOR COVER STORY, JANUARY 2014).

1

1

Stuck on the Roof Blues players vowed to camp out on the roof of River of Refuge’s transitional living center until they received more than $25,000 in donations through their website. The money will help River of Refuge open its first 11 apartments to working families.

2 Quick Work The team went on the roof on March 6—and were down by 6:30 p.m. March 8. 2

3

3 Freezin’ for a Reason The team huddled around a brazier for warmth.

4 The Man with the Plan John Wiley, River of Refuge’s founder, helps working families get out of pay-by-the-day motels and into safe, affordable rental housing.

4

www.communityinvestor.com

49


COMMUNITY HERO

Helping Everybody Win CHUCK WATSON HELPED BRING SPECIAL OLYMPICS TO KANSAS, ENRICHING THE LIVES OF THOUSANDS OF ATHLETES. by James Hart

W

hen they say Chuck Watson goes way back with Special Olympics, they aren’t kidding. He was at the very first Special Olympics Summer Games. It was 1968, and Watson was the activities director at the Winfield State Hospital in Winfield, Kan., a facility for people with mental and physical disabilities. Watson was part of a group from Wichita’s Holy Family Center that took six students to the games at Chicago’s Soldier Field. He was amazed by what he saw. Founded by Eunice Kennedy Shriver, the first games gave about 1,000 people with intellectual disabilities a chance to not only be athletes—in one of the nation’s most famous stadiums—but to feel included and celebrated, too. “When we came back,” Watson said, “we said we want to do this in Kansas.”

Chuck Watson

THE GODFATHER Today, Special Olympics is one of the world’s best-known athletic organizations. In Kansas alone, more than 5,400 people with intellectual disabilities participate in Special Olympics programs, which include everything from alpine skiing to volleyball. Jim Burgess, a longtime Special Olympics Kansas board member, calls Watson the “godfather of Special Olympics in Kansas.” For decades, Watson tirelessly volunteered at events across the state. “Chuck was involved in the first basketball tournament in Kansas, and then Chuck started a softball tournament in Winfield,” said Chris Hahn, the president and CEO of Special Olympics Kansas. “Chuck ran that tournament for years.”

HE WAS THE PERSON THAT MRS. SHRIVER REACHED OUT TO, AND HE REALLY WAS THE INSTRUMENTAL GUY IN STARTING THE SPECIAL OLYMPICS IN KANSAS.

Two years later, he chaired the firstever Special Olympics Kansas games, which brought more than 300 athletes to Parsons, Kan. “He was the person that Mrs. Shriver reached out to, and he was really the 50

instrumental guy in starting Special Olympics in Kansas,” said Kirk Miles, president of Wrenn Charitable Resources LLC and a former chapter director of Special Olympics Kansas.

Community Investor may/jun 2014

In fact, the tourney now bears his name. The Charles E. Watson Softball and Golf Tournament is scheduled for Aug. 1-3. The games are more than just an athletic event, Watson said. They’re also a key social outlet for the partici-

pants and often include a dance or dinner. “We just don’t run track and field like a school program does,” he said. ‘CHUCK JUST BRINGS US RIGHT BACK’ Watson is retired now; he spent 30 years working at the Winfield facility. He continues to sit on Special Olympics Kansas’ board as a charter member. His gift, Hahn said, is a persistent focus on what is best for the athletes and their families. Case in point: During the summer games’ opening ceremonies, all of the athletes are part of a processional into the stadium. A few years ago, organizers were mulling over ways to speed up the parade, as a way to save time. “Chuck is like, no, that’s the one time that each athlete is really in the limelight, and we can’t be cutting that out,” Hahn said. “And you think about it, and he’s right.” Burgess agreed. “If we ever wander too far from what’s best for the athletes,” he said, “Chuck just brings us right back there.” For more about Chuck Watson and his impact, visit our blog at www.communityinvestor.com. Community Hero is a new column in Community Investor, and it will spotlight the women and men who work to make our cities and towns better places to live.


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Community Investor MayJun 2014