COMMERCIAL REAL ESTATE INVESTMENT GUIDE

Investing in commercial real estate is defined as investing in any type of real estate transaction that is not a single family home. Generally this term is used when it refers to real estate such as apartment complexes, office buildings, educational buildings, retail properties, manufacturing facilities, and warehouses. There are a wide variety of real estate properties that are considered commercial and this may include a piece of vacant land where a commercial building could be built or a piece of land with a functioning business already on it.

Most people choose to make this type of investment because it will allow them to build equity, provide rental income, or even to use for their own business. Each of these goals is specific and has different methods of managing the investment and property.

The following is an example of an addendum to a purchase and sale agreement that is similar to the one used by many of the clients that have successfully financed. You can staple this addendum to your purchase and sale agreement when making an offer.

Does the offer always have to look like this? Of course not. This is simply a helpful example for you.

The following document in this example uses these numbers:
$100,000 purchase price.
$60,000 cash paid to the seller from the proceeds of a new loan.
$40,000 second mortgage with monthly payments to be made to the seller of the property.

Notice that the loan to value on the offer is less than 65%. Even if the price is low, make an offer where the seller is carrying back a second mortgage.

What if the seller doesn’t accept it? Never be afraid to be a tough negotiator and ask for what you want. You will only know if you ask. It doesn’t hurt to ask. You will be surprised how many people say, “Yes”. As the old saying goes, “Ask and you shall receive.”

We don’t like bank-owned property. Homeowners under pressure tend to be much more flexible. A banker, on the other hand, is getting his/her paycheck every other Friday, whether you buy the property or not. And banks are very unlikely to take back the second mortgage shown in the following example that makes financing a whole lot easier.

So, we contact the one who is being foreclosed upon directly by knocking on their door. Postcards don’t work. They get thrown away. You need to knock on the door with a purchase and sale agreement and addendum in hand. It is a very low cost to subscribe to a site such as, www.foreclosure.com to see the foreclosures in your area.

Alternatively, look for vacant property… not boarded up property, simply property where no one is living. That usually means that someone is paying at least two mortgages. Again, we don’t buy many properties where anyone is living. This usually makes for a motivated seller.

One more thing. Make offers on properties that are well above $100,000. The smaller loans tend to get put on the back burner because there is not much profit for the lender (or you for that matter). If it takes six hours to prepare a loan, a lender is going to be a lot more excited to fund your transaction if it is a $250,000 loan rather than a $25,000 loan. This is because the lender will make more money on the larger loan. You and I would do it too. It’s just human nature.

So, use the previously mentioned addendum and tailor the numbers to your offer. Make lots of offers and remember that it is often easier to fund properties where the purchase price is well over $100,000.

Here are three BIG secrets to making the most in real estate investing:

  1. Target motivated sellers
  2. Make lots of offers
  3. Structure the offer so it is easy to get financed.

Targeting Motivated Sellers
Some people say, “In my area, most homes sell for full asking price or higher.” The big differences between us and a discouraged new investor are these: We focus on sellers who are most likely to be motivated to sell for less than full price and we make a lot of offers.

Where do you focus to find these motivated sellers?
Individuals who have VACANT houses needing repair. (This is the #1 money-maker for the single-family-home investor.)

Why “Vacant” houses?

  • Vacant properties cost their owners money (mortgage payments, insurance, taxes); therefore, sellers are more likely to be motivated.
  • Results – We and other successful investors who we know have our greatest financial success on vacant homes.

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Handling Rejection

We focus on the most likely motivated group of sellers. But, most of them aren’t motivated enough to accept our offers. Out of 30 offers, you might get one of three accepted. We’re not concerned about all of the “No’s.” We know that if we make enough offers to motivated sellers someone will say, “Yes”. Make a Lot of Offers to Keep Your Pipeline Full

  • Keep your funnel full. How? By constantly making offers.
  • We often hear new investors tell us that they look at homes yet haven’t purchased an investment property. They say they find motivated sellers, but none of their deals ever go through.
  • Our next question to them is, “How many times have you put an offer on paper?” They are usually able to count their answer on one hand.

How Many Offers?

  • In certain months, we might even make 50-100 offers per month.
  • However, we would rarely, if ever, buy anything if we only made one or two offers a month.
  • We make our initial offers (with escape clauses) by using our “Letter of Intent” (see the last section of this guide).
  • The odds are excellent, several of the sellers will be motivated enough to seriously consider our offer.

Don’t “Guess” Who is Motivated

  • We don’t try to guess who those 1-3 sellers out of 30 may be.
  • The chances of us picking the right ones are small.
  • We make a lot of low offers and the motivated sellers bubble up to the top. Then, we know where to invest our time.

We Make Offers on Every House that Interest Us. Some we Inspect, Some we Do Not. Some are priced high; others are priced low. Great areas, bad areas. Regardless of location, condition or price, there is a number that works for us and that is how much we offer.

Structure the Offer for Easy Financing
The lower the loan to value, the easier it is to get financed. Make an offer the bank can’t refuse to finance.

The following are some examples of investments that are easier and more difficult to finance:

Structure the Offer for Easy Financing

Investor says: It’s worth $200,000. I’m buying it for $100,000 so lend me $100,000 which is 50% loan to value.
Lender says: Okay, but now we will have a new comparable in the market of $100,000 that will be used if we have to sell the property later (which is correct). So many lenders call this arrangement 100% loan to value.
We are not saying that these deals cannot be financed. We’re just saying they are more difficult to get approved. So take the argument off the table and structure a deal the bank cannot refuse, as in story #2.

The following is another BIG Secret:
How do you get a seller to carry back financing? Easy. Fax letters of intent and let the cream rise to the top.
So, instead of getting in and out of your car looking at properties, do this instead:

  1. Call the seller or agent and tell them you are faxing a letter of intent.
  2. Tell them if the terms look good to them then you will write up an offer.

A letter of intent looks like this:

(Click image to view letter)

The interested parties will bubble up to the top, saving you time and making you money.

In conclusion, to make the most money in real estate investing first, target motivated sellers; second, make lots of offers, and third, structure the offer so it is easy to get financed. This document is meant to give you some helpful tips that can increase your profits.

If you are considering purchasing a commercial property, you may contact Blue Chip International, L.L.C. for a free consultation by clicking here.

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