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How To Find Off Market Deals From Tax Delinquent Properties

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In many markets right now, it can be really difficult to find quality deals through the standard real estate agent / MLS channel.

In fact, it’s so difficult that many investors have moved away from the MLS entirely for now.

There are a hundred ways to find deals off-market, but the easiest ways are through a real estate investor website, and direct mail marketing.

Today, we’re going to focus on direct mail marketing to tax delinquent properties.

Before we dive into how to find tax-delinquent property lists, let’s chat real quick about the basics of direct mail marketing.

The Basics of Direct Mail Marketing

In general, you want to find two or three channels where you source deals, then perfect them.

That advice is nothing new, but it’s also amazingly broad. For example, there are dozens of different types of direct mail options available. So, within this category, it’s best to niche down to a couple.

Here are a few that come to mind:

  1. High equity owners
  2. Absentee owners
  3. Properties with building/health code violations
  4. Tax delinquent properties (the topic of today)
  5. Probate properties
  6. Divorce

You get the idea.

Once you’ve chosen your niche, it’s time to build your mailers.

Creating Your Mailer

This is probably the easiest part but also the hardest.

It’s easy, because it doesn’t matter as much as you think. It’s hard because you think it matters more than it does!

It’s best to be professional, polite, put a picture of you on it, and give your contact information.

Be succinct and let the person know what you do.

It’s really that simple.

Sure, you can tweak it over time to see if different versions of a letter get a better response rate. But, the key for now is to just send something!

Consistency is Key

The biggest problem new investors face is lack of consistency.

Many people will send out a big blast, get disappointing with a 1% or 2% response rate (which is good actually), and stop mailing. But, the best deals won’t come until you’ve built up some kind of rapport with the potential seller.

That’s why you need to mail them over and over again, so your name becomes synonymous with a quick sell!

So, send a follow up letter or postcard, and don’t forget to reference the first letter. Tell them “I sent you a postcard about a month ago and I’m still looking to buy. I’d love to look at yours so give me a call.”

If you get no response, mail them again!

Commit to sending between 5 and 7 mailers to each address over 1 year. That is roughly one every other month.

How to Find Tax-Delinquent Properties

Most cities or counties will have a tax sale from time to time. Some do it monthly, quarterly, bi-annually, or even annually. The key is to learn how your city/county works with their tax sales, and adjust your strategy accordingly.

The next step is to get access to the list of tax delinquent properties. In some places it is available publicly from the city or county. In other places you’ll have to mine the information from online records.

In general, though, there are list providers in every state that do the legwork for you to find properties that are delinquent on taxes, and you can just buy the addresses. These can cost anywhere from 20 to 50 cents each in most cases depending on how much information you can get.

Once you have the addresses in hand, it’s time to send them your first letter.

Mailing to Delinquent Tax Lists

Remember, the owner could potentially lose their home to the tax sale, depending on how the state runs it. They should have been getting notices about it too, so they should be aware of the situation.

If someone like you comes in and gives them the opportunity to earn a little money rather than just lose their house, they’ll probably give you a call.

Letters should be straight forward and to the point. Tell them you are looking to buy and you want to buy now.

Postcards pretty much always get read, so you should convey a sense of urgency to them. Let them know you only have enough money to buy one property, and you want to close fast.

Humans are hardwired to take action when there is a sense of urgency, so you’ll get more calls if you convey that sense of urgency.

Talking to Delinquent Tax List Property Owners

When a delinquent tax owner calls you, it’s important to ask them about their situation and not their property.

Then, let them talk.

DO NOT INTERRUPT!

You should simply say things like “mmhmm” or “and then?” to keep the conversation going. It’s a sales trick. Most people will talk if there is a pause in a conversation. So, by being quiet you are forcing them to do the talking.

As you’re learning how to talk to tax-delinquent property owners, or any other seller for that matter, silence is key. You want them to tell you the problem and give away what exactly they are looking for. So, just stay quiet and take notes.

Once they’ve given up all their secrets about their motivations, it’s time to ask about the property. Ask them:

  • What is the property worth in perfect condition?
  • What price are you hoping to get?

These two questions will help you know their motivation level.

If the property is potentially worth $200,000 and they want $185,000, then they probably aren’t that motivated.

On the other hand, if their tax-delinquent property is worth $200,000 but they are willing to take $110,000, you should follow up by asking when you can go take a look.

While it may or may not be a good deal, at least you know the owner is motivated enough to give a big discount. If the price, amount of work, and after repair value all work out, then you might have a deal on your hands!

Following Up Is Important

Most of the time it won’t work out, and that’s ok! Often, the seller just isn’t ready mentally to part with their property.

I remember once I made an offer on a 10 unit property for $500,000. The seller said no way.

4 or 5 months later I found a wholesaler advertising the property for $520,000. You know that wholesaler was taking $20,000+ on a deal of that size, so the seller was getting $500k or less for it.

I thought it was kind of crazy, because I had just offered that amount. The reality is the wholesaler followed up and I didn’t.

The seller wasn’t ready to sell at that price at that point. But, after a few months they were and I wasn’t there to get it.

So, make sure you are the one to follow up!

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Real Estate Investing

How To Put That Extra Space In Your Property To Good Use

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A lot of investment properties have something we call bonus space.

It’s space that isn’t quite a bedroom, maybe not really living space, but doesn’t have any one specific use.

So, how do you use this space to create value for your investment property?

Well, that depends…

Can It Become A Bedroom?

A bedroom is almost always going to be the highest value use of any bonus area, so let’s try that first. So, it’s time to look up your local health/building codes to determine the requirements for a bedroom.

The International Residential Code, which most states follow, has several requirements to be considered a bedroom. States and municipalities are free to add on top of this, and some areas don’t use the IRC as their code.

Most places have a square footage requirement and also require a window and a closet. But, different states/municipalities may have different requirements so look them up.

Note About Egresses

Basements and Attics are notoriously bad places to be during a fire. There may be requirements for additional egresses for any living space that is in these two areas. Make sure you know all of the requirements before trying to make a bedroom.

Once you know the requirements, you can determine if a simple project can convert this random bonus space can be used as a bedroom.

For example, if it just needs a larger window, simply hire someone to install it. If you need a closet, get one put in.

It becomes more challenging if you need another egress added to a basement though.

It Can’t Be A Bedroom, Now What?

Most bonus space can’t be used as a bedroom, so don’t feel bad about that. The next thing is to figure out exactly what you can do with the space.

Determine What Kind Of Space You Have

The first step is to figure out exactly what you’re working with and what it can look like when you’re finished.

Regardless if it’s in an attic, basement, porch area, or whatever, it’ll need to be finished with drywall, paint, floors, lights, and heat/ac. Your bonus space probably has some of these already, but often not all.

Keep in Mind The Location

Basements are usually cool and damp, so you may need extra heat during the winter and a dehumidifier in the summer.

Attics are really hot, so you’ll need to add extra air conditioner. Also, you need to make sure your roof is ventilated properly before completely finishing an attic so take that into consideration before adding drywall to the rafters.

Every area will have it’s own unique considerations before starting the project.

Figure Out Its Highest and Best Use

This is really open to interpretation, but you need to figure out it’s best use for other people.

The best thing to do is to look at comparable sales in your market area. Look at what most other people are putting into their properties, then just copy them.

Here are a few common ways people use their bonus space

Den Or Media Room

The most common way people use their extra space is by using it as a second living room, den, or media room. These are all different words for similar things.

Basically, one living room will be a bit more formal for having guests over. The den or media room will be for watching TV or movies mostly.

If you are outfitting a room for this use, it might be beneficial to install speaker wires around the room (this is very cheap), and make sure there is cable and internet hookups.

Game Room

If your investment property already has an area dedicated as a den, you might want to consider outfitting it as a game room.

A Game Room is a room in the house for relaxing or socializing. It is typically furnished with a Pool TablePing Pong TableDart Area, or other recreational amenities.

Storage

A lot of people just need extra space for storage. Having a clean and dry area to toss junk is the lowest value use, but still important. Having this finished space will most likely make it more valuable anyhow.

Advertising Bonus Space

The next step is to advertise your bonus space. You’re either listing this property for sale, or listing it for rent (it’s an investment property, right?).

It’s important to bring attention to the bonus space, especially if it’s not listed in the square footage or other information about the property. This is really common for basements and attics.

In this situation, bring attention to it and make people image what they could use it for, but don’t specifically say it can be used for things that it shouldn’t be used as (such as a bedroom). People will often use the space however they want, including as a bedroom, but you should not encourage this if it’s not a legal bedroom.

So, you’d could potentially say something like:

There is an extra 400 square feet of finished bonus space in the attic that could be a game room for you and your friends, media room for late night movies, or whatever else you can imagine! It is heated, cooled, and has everything you need to enjoy it day and night all year long.

But you’d never want to say something like

There is an extra 300 square feet of finish bonus space in the basement that could be used as a media room, den, game room, or even an extra bedroom when friends come visit.

…assuming the bedroom is not legally a bedroom in your jurisdiction.

Charging For The Space

It’s hard to say what bonus space is worth, but it’s worth something.

The only way to figure it out is to try to sell it or rent it out, and see what the market will give you.

This article originally appeared on IdealREI.  Follow them on FacebookInstagram and Twitter.

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10 Mistakes Homebuyers Must Avoid At All Costs

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Buying your home can be quite daunting, and if done wrong, it can bring with it enough financial regrets for the homebuyer. Here are 10 mistakes to avoid when buying your home.

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How To Make Real Estate Syndication A Success Without Using Your Money

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Have you ever driven around your city and seen all these apartment complexes, shopping plazas, or even office buildings? I always used to think they were all owned by rich billionaires.

…some of them are, but not all.

The reality is that a lot of these large properties are actually owned by regular people like you and me to generate passive income.

But how?

The answer: with real estate syndication.

It’s what I used to recently close a 192 unit deal in San Antonio with my partners.

But what exactly is real estate syndication?

Syndication is a way which multiple real estate investors pool their funds together in order to purchase a property that is more expensive than any of them could have afforded on their own.

Generally, there are two types of partners in these deals: 1) General Partners (GPs) who accept additional risk, put the deal together, and operate the asset 2) Limited Partners (LPs) who have limited risk and invest more passively.

Real estate syndications are an effective way to spread risk. Since each investor can allocate a smaller sum to each deal, they can effectively spread their risk across multiple property types and diversify by geographic region.

Real Estate Syndication Structure

Syndications in real estate are amazingly diverse in their structure so it’s impossible to cover everything. In general, there are four components:

  • Return of investor capital – Limited partners should always get paid back first, and this ensures they get paid first
  • The preferred return – Not all deals have a preferred return, but when they do this is where it pays out. Investors get the first portion of the deal before the general partners.
  • The catch-up – Many deals don’t have a catch-up tier but this is where the sponsor will get 100% of the profits after the preferred return until the predetermined split is met.
  • Carried interest – profits are split based on the agreed amount (such as 80/20 or 70/30)

Let’s break it down further…

Real Estate Syndication

What Is A Preferred Return In A Real Estate Syndicate?

According to Mark Kenney over at ThinkMultifamily, a preferred return is “a return that investors received BEFORE the general partners receive a return.” In essence, after the investors receive their initial capital back, they received a preferred rate of return before the general partners get any payout at all.

Mark, an investor and real estate coach who owns over 2,000 doors in Tennessee, Georgia, and Texas, says that he doesn’t like to use a preferred return but has in the past on deals that didn’t expect any distributions for 12 or 18 months.

The preferred return would accrue and give incentive for people to invest in the deal.

Andrew Campbell, the co-founder of Wildhorn Capital, a multifamily operator based in Austin, Texas has a different opinion. He said he likes to have an 8% preferred return for the majority of his 450 door portfolio.

It “gives some certainty to investors about their overall returns. Plus, 8% also happens to beat the historical stock market return of 7%.”

What Is A Waterfall In A Real Estate Syndication?

The waterfall refers to the overall distribution of funds and tiers that were mentioned above, but it is often referred to as how profits are split after the preferred return is met. Andrew Campbell explains it perfectly:

Profits generated above any preferred returns are generally split between investors (Limited Partners) and deal sponsors (General Partners). In our case, above the 8% pref we split profits 70% to Limited Partners and 30% to General Partners.

Some deals and sponsors will have additional “waterfalls” where at 18% IRR (for example) the split would go to 50/50. The general idea is that the higher the returns are to investors, the more the sponsors make, and everyone is happy.

The downside of multiple waterfalls is that sponsors can sometimes be incentivized to return investor capital early (to boost the IRR) and trigger these waterfalls.That can sometimes put unnecessary risk on the asset if they are being to aggressive.”

Kenny Wolfe, the founder of Wolfe Investments who has been involved in over $91M in real estate transactions doesn’t like the complexity of the waterfall structure many syndicators use.

“We have steered clear of preferred returns mostly because those are usually accompanied with up-front fees charged to investors. Our investment structures are tied to the performance of the investment, and not just closing deals like the typical preferred return strategy.”

He continues,

“If we make our investors money, then we’re rewarded. If we don’t then we aren’t rewarded.”

I originally didn’t plan to dive into the fee structure at all, but since Kenny brought up some great points, I think I’ll dive into the fees and how some different structures affect the incentives and performance of deals.

The Fees When Syndicating Real Estate

There are a lot of different types of fees used in syndication. Some are more common than others but all have their pros/cons. Here are the most common ones

Acquisition Fee

I’ve seen this anywhere from 0 to 5 points with 2 being the most common. Acquisition fees in a syndication are really common and most have them, but not all.

Syndicators are running a business and that has costs. Acquisition fees help pay for the operating costs, staff, flights, hotels, diligence, and other costs that are needed to run the business.

On the other hand, acquisition fees can be enormous on large deals and can drive some deal sponsors to be short-sighted and focus on closing deals rather than operating deals profitably.

Think about it, a $10M deal with 2 point acquisition fee is $200,000. That adds up fast! You can see how some sponsors will lose track of buying good deals and focus on just closing deals, regardless of how good they are.

Asset Management Fee

This generally ranges from 1-3% of gross rent revenue. This may or may not go to the deal sponsor and it goes to cover the cost of managing the asset and management team that was hired.

Construction Fee

Since the syndicator only gets paid when the asset is cash flowing, there isn’t much incentive to take on difficult projects. That’s where the construction fee comes in. If there is a major rehab project a fee can be imposed to compensate the project manager while the asset isn’t producing income.

It can vary but is often 1-2% of the construction cost.

Aligning Interests

There are a lot of competing interests in a deal and it’s difficult to align everyone 100% of the time – that’s why trust must be built with anyone that you’re investing with.

But, a few major points to consider are how all the fees and the preferred return and waterfall all fit together.

Deals with high preferred returns and high fees create incentives for the sponsor to find and close deals, but not a lot of incentive to maximize cash flow. As Andrew pointed out, deals with huge benefits to the sponsor at certain levels can cause them to sell early to bump the IRR artificially and trigger that waterfall distribution.

But, deals that compensate the sponsor more will create more incentive to produce high returns.

That’s why there are so many different ways to structure deals! Every sponsor and investor pool is different so they can create deals that work for everyone.

Structuring a Syndication Deal – Example

Similar to how Andrew structures deals, let’s say that in this deal there will be an 8% preferred return, 70/30 split thereafter, and have a 2 point acquisition fee and 2 point asset management fee.

The limited partners will get 70% of the returns after the 8% pref and the sponsor will get the other 30%. The sponsor will get 2 points up front and 2 percent of the gross revenue.

Example 2 – Syndication Structure

Kenny, on the other hand, keeps it simple. He might charge an 80/20 split with no acquisition fee, no waterfall, and no preferred return. The asset management fee is 2% as well in this example.

So, the limited partners get 80% of all the profits and the general partner gets 20%. If it does well everyone does well and if it does poorly everyone does poorly. There are very limited fees except for the asset management fee.

Example 3 – Hybrid Structure

Mark kind of does it a third way. He said he generally does the 80/20 split, but he does charge an acquisition fee and asset management fee but rarely does a preferred return.

The acquisition fee is more similar to Andrew but his split is more similar to Kenny.

It’s interesting to see how 3 different real estate syndicators have three entirely different ways to structure their deals.

How To Find Real Estate Deals to Syndicate?

These are large deals and you don’t typically see them on the MLS, so how exactly do you find deals for a syndication?

Well, three different deal sponsors had three different answers:

“Now that we’re established as a solid buyer we get off-market deals across the US.  We look at the on-market deals as well. These days the off-market deals have been much more attractive.”– Kenny Wolfe

Andrew Campbell appears to have a more holistic view for finding deals.

“It’s a full-time job, and it all comes back to relationships. Meeting and networking with brokers, talking to owners, title agents, insurance providers, property managers. Leads can come from anywhere, and in this market, you want to make sure you can see as many properties as possible, and the earlier and more off-market/limited market they are the better.”

Mark Kenney has seemed to be extremely successful working directly with commercial real estate brokers.

“We generally work through brokers to finds deals.”

What About LoopNet for Commercial Real Estate Syndication?

I’ve known about LoopNet for a while, so I was curious about it. Kenney put it simply though:

“Loopnet is where deals go to die.”

But, David Eldridge of NAI Glickman Kovago & Jacobs, a commercial brokerage firm in Worcester, Massachusetts, said,

“Loopnet is far from dead. We do a ton of volume on it and use it almost exclusively for smaller listings.”

How Do You Find Commercial Brokers and Get Them to Take You Seriously?

Commercial brokers are dealing with a lot of big players in the market, and it can be difficult to get them to take you seriously if you are a new player.

Mark pointed out that “a market generally only has a few major names. The top 2 or 3 people have access to virtually all the deals, so you just need to identify them.”

He continued, “it’s not hard to get yourself onto their email list, but it can be more difficult to get people to take your offers seriously. It’s important to have some experience in the field and if you don’t, then partner up with someone who does have the experience.”

In the end, money talks and the highest offer usually wins. So, you can make up for experience with higher offers.

The Cost To Syndicate A Real Estate Deal

Now that we’ve got past the “what is a syndication in real estate” and the “how to syndicate in real estate” part of the article, we can get into the costs and money aspect.

The first logical question is about the cost of a syndication.

There are several major fixed cost items that every syndication requires, including – SEC attorney, earnest money deposit, diligence, private placement memorandum, loan application fees, and more.

So, let’s break them down. As some fees are percentage based, I’m going to create a hypothetical $2,000,000 deal.

  • Attorney for Contract – $3,000
  • SEC Attorney for PPM – $12,000
  • EMD – 1% – $40,000
  • Diligence – $25-$50 per door – $2,000
  • Loan Application – 1% – $20,000
  • Other Financing Costs – 0.5% – 1% – $20,000

Total Costs – $97,000 to get the deal done, of which $40,000 goes toward the purchase.

So the total fixed costs are $57,000 or 2.85% of the total deal price. As you can see, this is not cheap!

The syndicator has to front all the money and if the deal doesn’t close most of that money can be lost. So, you can see one reason why syndicators are compensated pretty well.

How Big Do Syndication Deals Need To Be?

We are talking some pretty big numbers here overall. Realistically though, how big or small does the syndication deal need to be in order for it to make sense?

Universally, all of the deal sponsors wanted to do larger rather than smaller deals. Both Mark and Kenny said they want deals over 80 units which allows for full-time on-site property management. Andrew prefers to look at it as a dollar figure and prefers to do deals over $8 million to keep the fixed costs as a small percent of the total costs.

How Do You Find Investors?

Most people reading this are probably wondering how you can find people to invest so much money. Most people can save up $50-100k, but you are talking about raising hundreds of thousands, or even millions of dollars for a deal. How?

Andrew says it’s a “second full-time job” which comes back to relationships and marketing. He does at least 5 sit-down meetings a week to grow those relationships.

Kenny is so well established that most of his new investors come from referrals though he also does a meetup, podcasts, and general outreach.

Example Syndication Deal

You might be wondering how much a syndicator can actually earn from one of these deals. So, I put together this example based on the knowledge I gained.

Let’s assume we found a property somewhere in Texas with a 6.5% capitalization rate. It’s about 70 units and is selling for $60,000 per unit. That’s $4.2M total.

A 6.5 cap rate means the property has a net operating income of about $273,000 per year before finance costs.

With about $875,000 as a down payment, that’s about $190,000/year in finance costs (I’m rounding).

So the cash flow is about $83,000/year.

Of course some of that goes toward principal, and eventually, the deal will be sold and that will get distributed back to the investors. For now, though, let’s just focus on cash flow and not the entire return.

What The General And Limited Partners Earn In A Syndication

I’m going to keep the numbers super simple so I can do it all in my head. Let’s take the 1% asset management fee out of the gross rents. We don’t have a number for gross rent (only NOI). Let’s say it’s $8,000. If you were the asset manager, great you get to pocket that. If not, someone else does.

The rental income is now $75,000.

Of that cash flow, let’s say the syndicator is doing a 90/10 split and will earn 10%.

And let’s say he also put in about $100,000 into the deal, they would have a total equity of 21.4% and would get about $16,050 in cash flow. That’s about a 16% cash on cash return for the principal (excluding the asset management fee). Don’t forget, they earn the same returns as other LPs on the cash they invest, and then get their split just for doing the deal.

Realistically, this example doesn’t include any growth in value and is a very simple example.

Now You Know The Basics

…and it’s time to download your deal calculator to help you start analyzing your next deal.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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