Anyways….

One of the biggest lessons I have learned in my limited time in real estate investing is that the people to learn from are those with real experience.  As with many of you, I started with books and “boot camps”….and in some cases that works well with residential investing.  But with commercial real estate, the stakes are much bigger and the learning curve is much steeper.  But the “gurus” don’t tell you that.

My biggest mistake was I did not research the people I was learning from.  Learning how to invest from a “guru” that had limited experience with commercial real estate was a big mistake.  Even more of a mistake was learning from gurus who were using other people’s experiences and successes as their own to sell their program.  Yes…this happens a lot more than we think.

Luckily, I was so hardheaded and ignorant, that I took the information with confidence and pushed through.  Sometimes you can push so hard that you take down a wall.  Fortunately, at the time, it was the right wall.  But, with that said, there were a lot of mistakes that only guidance from experience professionals could have helped me avoid.

Now…what I am NOT saying is…”it takes years of experience to start investing in commercial real estate.”  That is not what I am saying at all.  But….what it does take is the correct education and guidance.  Honestly….this is the best way and your success can be realized much faster than you think or what others tell you.

So…you are probably expecting a sales pitch here….but on the contrary, here are some tips on how to get started on your own….that is right…. how to get started without a flashy package and a smooth talking guru….

Rob’s thoughts are ideas on getting started in commercial real estate:

1)  Keep your money for now. Thinking about spending 2K, 5K, 10K on a good looking”how to invest in ……” package where the marketing says “20K in value…but for a limited time….only $4,999.00 you can have the plan to wealth…and my personal phone number.”  When you hear that….tighten up…have a cup of joe….and remember my words here…KEEP YOUR MONEY.

2) Buy a good book on commercial real estate. Don’t buy a book from a “guru” where all the information in the book is to push you to a boot camp.  Now…there are good books out there that are trying to sell you something, but they give you a lot of value too.  One of my favorites is Investing in Commercial Real Estate for Dummies by Harris and Conti.  A great book in explaining the basics.  Another of my favorites but will bore you to tears is The Handbook of Commercial Real Estate Investing by John McHan.  The importance of reading up on commercial real estate is to see if you even have a true interest.  If the books above get you excited, you may have commercial real estate in your blood.

3) Take a Real Estate Licensing class. I recommend Kaplan based on my experience.  The licensing class does not mean you have to get a license.  It is a good course to get you familiar with the laws, codes, etc., in your area for not only real estate but property management as well.  I learned a lot in my licensing class.  More than I thought I would.  But I also learned that one of my instructors had no clue about commercial real estate….just residential 

4) Take the Certified Commercial Investment Member (CCIM) courses. This is the boot camp you want to attend.  Yes…it is somewhat expensive and time consuming.  There are four classes and each class lasts five days.  But, if commercial investing is where you want to be, this is the course you want to take.  This will help you analyze projects at depths you had no idea existed.  You will also learn how to do demographic studies, leases, etc.  Plus the networking at these courses are invaluable.  When you finish all the courses, you will have an opportunity to get certifed but you will have to meet some strict and demanding guidelines just to qualify to take the final test.   But…I digress.

5) Find a friend, make a friend. Find someone in your local area that is successful at doing what you want to be doing and follow their lead (also known as modeling).  This is by far the best advice I can give you.  If you have a great interest in commercial real estate, finding someone who is a success at it is the best thing you can do for yourself.  This may take some time and it is uncomfortable at first….but well worth it.  Chances are this person/mentor will be a real estate agent/broker/CCIM investor.

If you do all the above and still want to go to a smooth talking guru…..by all means….but I definitely went full circle starting out with gurus and ending up with the “right way.”  Real experience from real investor is by far the best way to find success in commercial real estate.

Until next time…..rob

Hope all of you had a great Thanksgiving.  I ate more than my share of heart-stopping food…then ate some more.  I am in bad shape to say the least.

Also….on my way to the Big EP (El Paso, TX), my car broke down.  I bought this lemon not too long ago and it has been the worst vehicle I have ever owned.  I was warned too!  But I ignored wisdom and bought a piece of crap.  This vehicle was touted as the “safest SUV on the road.”  I think it was the salesman who said that.  Anyway….he proved to be correct….problem was that is was safe because it spent most of it’s life in the auto shop.  I left that junker in Las Cruces, NM.  Good-bye…good riddance.   If you want to know what kind of car it was….send me an email and I will tell you.  Hint…they are known for their safety…..but now I know why.

I still have my dependable 2001 Toyota Forerunner….the best car I have ever owned.

Anyway….

As an investor, knowing the “Real Estate Language” is key to early success.  To be able to “talk turkey” with your agent, your lender, your investors, etc., knowing what the heck you are talking about will keep you in the game.

Here are a few terms regarding Trust Accounts to get you started….(these terms come straight out of a real estate law license manual):

1) Trust Account: A bank account set up by a broker (not agent) for the purpose of holding money specific to a real estate transaction i.e., earnest money.

2) Land Title Trust Acccounts: a pooled interest-bearing account subject to the land title trust fund act

3) Special Trust Account: a trust account bearing interest payable to a named party in the transaction

4) Property Management Trust Account: a trust account containing money of others derived from the management of leased or rental properties

Until next time……rob

Level 1

Financial

• Current rent rolls

• Operating and capital budget

• Operating statements YTD or 12 months running (certified)

• Discrepancies between rent roll and actual occupancy

• Unit mix or certified square footage

o Respective rents

• Existing financing or liens on property

• Check of value

o Cap rate

o Cost/Unit

o Cost/Sq Foot

o Gross Rent Multiplier

o Replacement Cost

• Understand staffing costs

o All current employees

• Name

• Job title and description

• Pay rate

o Benefits

General

• Physical confirmation of property conditions through site walkthrough

• View all vacant spaces to determine what capital would be required to induce a

new tenant

• View all common areas and base building areas

• Interview management team, leasing personnel, handyman (scope of work,

employee or contract labor, rate)

• Machinery/Equipment

o Office Equipment

o Maintenance Equipment

o Tools

o Vehicles

o Other

• Supplies

Physical

• Physical confirmation of property conditions through site walk through

• Property zoning classification

• View all base building areas, all floors, central plant, roof, exterior wall

• View all areas of building exterior and interior common areas

• Walk property line, photographs

• Night Inspection

o Security and lighting

• Review all architectural and engineering documents related to property

• Street size, congestion, condition, accessibility into property

• Biggest recurring maintenance problem

• Vacant sites on property (potential to expand existing property)

Level 2

Financial

• Add: Rent rolls, Operating Statements (certified), Capital Expenditures past 3

years

o Operating Income statements for past 3 years

o Balance sheet statements for past 3 years

o Tax returns for past 3 years

o Chart of accounts

o Accounts Receivable:

• Rents (Rate, due dates, history)

• Misc. Income sources

• Home sales, leases, rent/lease option, notes, contracts

• Bank accounts, deposits, other financial assets

o Accounts payable:

• Purchase orders

• Open/credit accounts

• Petty cash

• Notes payable

o Approved vendors

o Contracts

• Copies of every lease on rent roll

o Include names, addresses, current amount, deposits, rent history, estoppel

certificates, late fees, NSF, collection)

• Schedule for rent increases

• Estoppels from no less than 75% of tenants in commercial building, including

ALL tenants expiring or renewing in next 3 years and ALL tenants leasing over

10% of the building area

• Determine if any change in property taxes (Do taxes break out cost of land?)

• Pull original land purchase price on project

• Understand all transaction costs

o Real estate commission, if any

o Legal fees pursuant to transaction

o Accounting fees relative to financial statement review and pro forma

preparation

o Possible acquisition fee if an advisor’s services are utilized

o Title-related costs (insurance)

o Mortgage costs (points and closing fees)

o Appraisal

o Inspection

o Engineering reports/survey

o Environmental study

• Recalculate:

o Cap rate

o Cost/unit

o Cost/sq ft

o 1st year cash-on-cash

o 1st year total ROI

• Investigate financing possibilities

General

• Thorough understanding of the workings of the property under current setup

o Policies/procedures Manual

o Move in & move out procedures

o Existent files for residents, vendors, etc

o Emergency notebook

o Leases (written or verbal)

o Deposits/administrative fees

o Software used including maintenance and support

o Office supplies

o Forms/letterheads

• Interview all tenants on estoppel list to confirm information provided by seller

o Ask about problem areas—Management, physical property/structure, etc

• Delinquent units

• Confirm all information received against information developed through

investigation

• Develop a trust quotient with Seller

• Name and contact info for existing Insurance agent and coverage

o Copy of existing policy

o Workmen’s comp, liability, bond, hazard

• Local commercial agent

o What do apts sell for

o What are current rents

o What would comparable structure sell for

o Sales info for other groups in same area

o Average per capita of storage square footage

• Local residential agent

• Look into local advertising

o Current yellow pages cost

o Yellow book

• What percentage of competitors are in Yellow book

o Other avenues

• Local transactional real estate attorney

• Local Industry contacts i.e. Applicable associations

• Location of local:

o Post office

o Bank

o Schools

o Stores

o Employers

o Public Transportation

• Local rent survey, average rates for standard units

o Last 2 completed by Seller

o Over last 5-10 years if possible

o Check local newspapers for ads, etc.

o Local telephone directory and Yellow book for ads

o List of local competing retailers

o Evaluation Seller’s currently used ads, signage, brochures, etc.

o Chamber of Commerce packet

o Verify occupancy, rates fees charged, security systems

o Phone call and physical visit to each competing property (See

supplemental “Market Study” form)

• Pictures if permissible

• Interview managers

• Name of off-site management company

• Need copies of permits:

o All city and county permits

o Storm water management permit

o Consumption use permit

o Water supply permits

o Pool, Jacuzzi, etc.

• Learn about local laws

o Leases

o Evictions

o Regulation

o Licenses

Regulatory Agencies

• Board of health

o Copy of license

o Property records

o Pool and Jacuzzi reports

o Violation notices, if any

• Building department

o Talk with inspector

o Planning for other similar projects

o Ease of permitting

o Name of good roofer

o Name of good inspection company

o Building costs

o Name of good appraiser

o Certificates of occupancy

o Permits in force

o Local codes

o Known violations and records thereof

• Engineering Department

o Drainage information

o Local soil maps

o Proposed area improvements and related assessments

o Impact fees

o Utilities concerns

• Sewer, water, electrical and gas

• DER-EPA (Dept of Environmental regulation and environmental protection

agency)

o Wastewater treatment plant discharge permit

o Effluent testing results

o Flow records

o Treatment plant violations

o Domestic water supply permit

o Domestic water test results,

o Domestic water violations

o Domestic water flow records.

• City Planning—talk to senior planner

o Current new building permits for projects under development

o Path of development

o Floodplain maps

o Impact fees?

o Barriers to entry

o Ease of permitting

o Zoning in 4 mile radius

o Zoning in our area

o Special zoning?

• Map

o Thoughts of over-building of ________(student housing, self storage, etc)

• Tax assessors

o How much will property taxes be after sale

o How often do they reassess

o Name of good appraiser

• Better business bureau

• Chamber of commerce

o Growth statistics

o Boom bust economy

o Typical job types

o Projected growth areas

o Path of development

• Register of Deeds (or possibly a title company)

o Property ownership

o Eases and Encumbrances

o Legal description and acreage

Utilities

• Copies of meter record for both treatment plant and water supply wells

o Sewage treatment plant and water supply records

• Approvals for water sanitary collection system

• Approvals for domestic water distribution system

• Utilities Department

o Sewer and water rates

o Tap-in fees

o Impact fees

o Sewer and water capacity requirements

• Utilities commission

o Rules, regulation and status of utility

• Drainage district

• Name and contact info for gas and electric utility company

o Types of approved units

o Who owns and maintains

• Name and Contact info for telephone company

• Trash collection

• Name and contact info Cable television

o Who owns system

o Who maintains system

o Who invoices users

o Existence of a formal agreement between property and cable company

• Can it be renegotiated

Physical

• Professional contractor inspection

• Maintenance

o Evaluation

o Deferred maintenance items

o Obsolescence (how/why)

• Night Inspection

o Security and lighting

• Street plans with utilities identified

• Roof condition

• Boundary survey including all easements and encumberances

• Retrieve air quality samples

• Drainage type and adequacy

• Sewerage handling and adequacy

• Irrigation system

• Floodplain presence

• Vegetation and maintenance

• Environmental issues

• Inspect all maintenance records and interview supervisors in charge of critical

areas

• Receive copies of all documents related to mandatory inspections ADA/TDLR

compliance, ACM inspections, etc.

• Develop 5-10 year Capital plan for property, price projects, schedule out

o 2 Bids on cost of major improvements

o Cost for installing security, alarms, video

• Research any problems with elevators, other equipment

Fire/Life safety system status

• Type of building structure, any below grade levels, soil type

• Type of building cooling and heating systems

• Vertical transportation systems

• Type, age, and condition of roof (warranty)

• General assessment of leaks and exterior wall condition

• Elevators up to ASME A17.3 standards (Texas)

Red Flags

• Seller balks at providing records or access as committed in contract

• Stained ceiling tiles around the perimeter of the building (or shrinking

gaskets/joint failure)

• Dirty mechanical and electrical closets

• Poor maintenance and inspection records

• Financial records or estoppels not available

• Significant error in process or accounting

This is Colt Powell #77....has nothing to do with commercial lease options

Greetings from the lush green grass of a football practice field…..

I am sitting here watching my oldest son (Colt) at football practice. Colt is only ten years old and he has practice four times a week and a game every Saturday. And…he loves it….and I love it too.  But for some reason I find myself complaining about it….hmmm.

Anyway…..

Today’s topic is all about lease options. I love using lease options to purchase commercial real estate. Not because it is ideal, but because it is a great way to leverage yourself into a deal with “pseudo” owner financing if the “ideal” does not work. Not having to deal with a bank for a loan just makes life easier…especially the way banks are today.

One of my early commercial deals was a lease option on a 108 unit mobile home park that I still have today. The seller was not willing to sell the property with “true” seller financing. But also knew I would not be able to buy it cash or find a lender to loan on it (39% occupancy). So the seller and I settled on a lease option…and the rest is history. Well…there is a lot more to that which I will write about later on but if it were not for the lease option….I probably would not have the deal. It was and still is a great deal.

I started using lease option when I first started investing in residential real estate. I never thought that knowledge would help me leverage into commercial real estate. The lease option is a great tool to have in your tool belt.

So……

The Commercial Lease Option: Making Deals Work in Rough Real Estate Waters

Not too many people know about the commercial lease option as a means to make a deal happen. The real estate market is a dynamic entity that demands you constantly be on your toes and has a wide array of weapons in your arsenal to deal with whatever comes up. By having a firm grasp on the many different ways to skin the proverbial cat you will be able to work deals out that others simply give up on.

If real estate in general requires that you be willing to find creative solutions, then commercial real estate hammers that point home. By not knowing the ins and outs of commercial real estate you are ignoring a huge part of the market and a potential windfall. Knowing how to negotiate these difficult waters can make the difference between success and failure. The commercial lease option is a great example of this.

A commercial lease option gives the tenant the right to buy the property at the end of the lease if they like, for an additional fee. By buying the option the buyer/tenant has the right but not the obligation to buy the property at the end of the lease. The lease normally lasts one to three years and during that time if the market or the buyer’s circumstances change then they can choose not to buy. In addition to paying the monthly rents and fees agreed upon, the buyer usually pays extra which goes towards the purchase price. This forced savings plan makes it so the tenant has a vested interest in the property and has a reason to make the deal work. If they choose to not exercise the option then the money they spent on the option and the money towards the purchase price all goes away.

If done appropriately and with non-predatory intentions the commercial lease option can be a win-win situation. The seller gets a tenant to cover the expenses of the property plus passive income in the form of the option premium. Usually the purchase price negotiated is higher than current market conditions to compensate for not selling the property to another. These deals are usually done when a traditional deal can’t be reached due to market conditions so having an interested buyer with “skin in the game” could be a godsend for a motivated seller.

Of course a commercial lease option or other advanced real estate deals should not be done without consulting a professional or two. Make sure you know the lease option laws in your state and the market conditions. If you’re new to this game we suggest you check out more on this blog about real estate investing and our awesome investing courses, of course!

So….

There you have a “quick and dirty” explanation of the commercial lease option.”  Please feel free to contact us if you are interested in commercial real estate mentoring.

Until next time……rob

Birds, trees, streams, and freaking Bears!

Greetings from somewhere in New Mexico….

I spent the early morning out in the forest and enjoyed the wild abandonment of the animals, the incredible sound of the flowing creeks….and the nasty smell of bears.  I did not see any bears….but….I could smell them….needless to say….my walk turned into a jog to leave the area.

Anyway…..

Today’s topic is a post of definitions of those professionals that work in real estate.  A basic overview especially for those of you who are new to real estate investing.  Be sure to check out all the other posts on real estate definitions by skimming the archive post list on the right.

Also…….

For those of you on Facebook, you can connect with me @ www.facebook.com/robpowell  as well as those of you on Twitter, I invite you to follow me at www.twitter.com/RobAPowell

So….

The real estate investment arena is filled with its own language and often features terms from property law, banking concepts and feudal times. As a continued segment to help you navigate the real estate investment lingo, we will be periodically posting commonly used real estate investment terms and definitions provided by many sources including www.investorwords.com and www.creonline.com.

This posting will focus on real estate professionals and their duties.

Agent

An agent is a firm or individual that has been expressly authorized to act on behalf of a principal in certain transactions. This can include completing a financial transaction, acquiring property or selling and servicing insurance policies. Agents do not assume personal liability for actions on behalf of the principal unless that agent is acting beyond the scope of agency.

Certified Mortgage Consultant

A certified mortgage consultant is a certified mortgage broker who has been awarded the highest designation by the National Association of Mortgage Brokers. To achieve certification, brokers must have five years experience, complete a program and pass an exam.

Certified Residential Mortgage Specialist

A certified residential mortgage specialist is a mid-level certified mortgage broker as designated by the National Association of Mortgage Brokers. To achieve certification, the broker must have two years experience, complete a program and pass an exam.

Closing Agent

A closing agent represents the buyer in a real property transaction by handling the closing and legal transfer of title and ownership from seller to buyer.

Evaluator

An evaluator, or appraiser, is a person qualified by training, experience or education to provide property appraisals.

Listing Broker

A listing broker is a licensed real estate agent that contractually secures the right to sell a property on behalf of the owner. Listing brokers differ from selling brokers but may be entitled to share in the same commission.

Mortgage Banker

A mortgage banker originates, sells and services mortgages in the secondary mortgage market.

Mortgage Broker

A mortgage broker matches borrowers and lenders to originate loans. A broker does not originate loans or service mortgages. Brokers may negotiate with lenders for the best possible rates or products for the buyer.

Mortgage Originator

A mortgage originator helps borrowers complete all necessary steps to complete a mortgage transaction. Originators can be brokers or bankers that represent the original lender.

Principal

A principal is the party whom assumes financial and personal responsibility for the acts his or her agent performs on her behalf and under his or her direction.

Title Company

A title company is involved in examining and insuring title claims for its customers.

TheRealWealthBlog.com does not assume responsibility for the content or accuracy of the terms or definitions included. The information is meant for general reference only. As with any transaction, it is important to make sure you do the proper research.

Until next time……rob