They’re often called recession-proof – steady investments that are inexpensive and easy to maintain with consistent profit margins.
Not to mention, they’re one area of real estate that seems mostly unaffected, if not helped, by current rough market conditions.
They’re storage units and people always need them. And in the Flathead Valley, with a growing population that provides a constant supply of people in transit and in need of storage, they’re shooting up everywhere. Storage facilities require relatively low building and management costs.
“It’s a pretty lucrative business actually,” said Tina Wiant, co-manager of CJ’s Storage just north of Glacier Park International Airport.
Storage facility operators are capitalizing on a constant of modern culture: Americans own a lot of stuff. According to the Self Storage Association (SSA), self storage has been the fastest-growing sector of the U.S. commercial real estate market for the last 30 years, growing into a $220 billion industry. The rate of growth, however, has slowed somewhat over the past two years.
A slow housing market can actually help storage facilities, according to industry analysts and local facility operators. As the housing market slumps, people downsize their house sizes and some are even foreclosed upon. People like to hold on to their possessions, and with the same amount of things but less space to put them, they look to storage facilities. Also, hesitant homebuyers store their possessions as they watch what happens to the housing market.
By looking at demographic and growth trends, it’s clear why the Flathead is a popular spot for storage units. Population is growing and while people wait for their homes to be built or are searching for homes, they store away their belongings. Also, people with second homes here often store their large possessions like snowmobiles and RVs in units while they’re away. Lastly, while people from all demographics use storage units, in the Flathead a noteworthy portion of storage renters are wealthy, Wiant said.
Wealthier people have more belongings and often rent out more spaces. Wiant said one customer at CJ’s has up to 15 heated units consistently rented out. CJ’s has 699 units in total, some just the basic concrete and metal sheds and others with climate-controlled heating systems. The climate-controlled units maintain a constant temperature of 58 degrees and are used for items vulnerable to the elements like wood and antiques.
The customer with the 15 heated units pays around $2,500 a month to rent them all out, which is more than $25,000 per year coming from one customer, with only minimal maintenance and heating costs.
Also, Wiant said, high fuel prices and economic slowdowns don’t generally deter wealthy people from coming to the Flathead to enjoy their recreation and second homes.
“The rich still want to come here and they still make it happen and that’s a bonus for the Flathead Valley,” Wiant said.
Down the road from CJ’s at Windmill Business Park and Storage, which offers storage units, offices and warehouse facilities, whenever owners Clarice and Wayne Peeler build more units, they fill up right away. Fourteen years ago they started with 150 units and a doublewide trailer that served as their home and office. Today they have a cozy office and more than 700 units.
Clarice Peeler said the days of the mom-and-pop storage units out in the middle of nowhere are over. Today operators need to spruce up their facilities and try to be right in the middle of things to compete in an increasingly competitive storage market. Also, more and more people are jumping into the storage market just for long enough to make some cash and get out, the Peelers said.
“They do it for a five, 10-year investment and then sell it,” Wayne said.
Businesses use storage units too. Wiant said companies like the Old World Cabinet Company use the spaces as warehouses. With the high price of real estate in the Flathead, sometimes it’s more economical to rent storage units than to buy up more space. Altogether, there are at least 70 storage facilities in Flathead County, with more going up regularly.
“It’s unreal,” Wiant said. “And most people are already full.”
One concern for storage operators, though, is the potential for a flooded market. Overbuilding has been a problem for storage facilities across the nation, but the Flathead has so far avoided this trend.
Mark Lister, who opens up Glacier RV and Mini Storage later this month with his wife, said the possibility of overbuilding is definitely on his mind.
“I’ve had as many people tell me I’m crazy that say it’s a good idea,” Lister said. “Whether it’s the right timing or the wrong timing, I’m just going with the plan.”
Self Storage Association Definition:Self Storage facilities are real property designed and used for the purpose of renting or leasing individual storage spaces to tenants who are to have access to such space for the purpose of storing and removing personal property.They offer rental on a month-to-month basis of individual spaces where customers provide their own lock and have sole access to their space. Today’s typical storage facility may comprise several one or two-story buildings on two to 6 acres of land, or a multiple-story building, containing a carefully designed unit mix of spaces. The units typically range in size from 5X5 to 10X30 feet with 30,000 to 120,000 total rentable square feet of space. Self storage facilities frequently feature large roll-up doors and drive up access to outside spaces and offer outside parking for storage of boats and recreational vehicles, which often can’t be stored in residential communities. Today’s facilities normally have the following features:
Contain 10,000 to over 100,000 rentable sq. ft.
Offer a wide range of unit sizes
Are well lighted
Are paved vs. graveled
Have storage units divided by steel, movable panels
May have some or all of their spaces climate controlled
Contain high-tech security systems, including electronic access, cameras, and digital video recording.
Have perimeters that are walled or fenced with Security Gates
May or may not have a resident manager
Have single or multi-story buildings
Provide carts and Dollies for use by its customers
May contain movable storage modules
Sell storage and moving related supplies
Provide ancillary retail services and products.
From the real estate perspective, self storage:
Meets the needs of several consumer groups (residential & commercial)
Uses simplified structures
Makes efficient use of land, especially odd shaped parcels in less desirable locations
Has short construction time, thereby providing little traffic disruption
Uses very little energy!
HISTORY
The conventional concept of personal storage began in England when British banks were asked to safeguard valuables for clients embarking on extended voyages. Overcrowded vaults quickly forced them to seek storage lofts from drayage companies (the first moving companies). The first mini-warehouses for household and personal items were built. The two story structures were built with packing on the lower floor and private storage rooms on the second. Except for expansion into multi-story buildings, things remained the same for decades, until the 1950’s when costs rose. This led to construction of palletized warehouses which were designed to handle crated customer goods that could be stacked three levels high.
Access to household/personal goods was restricted and it was expensive, since customers had to make appointments to obtain items and pay each time for the service (stored property could only be reached by forklifts which were operated by staff) and business hours were limited and normally did not include weekends.
Initial development of self storage facilities in the US occurred primarily in the Western United States and the Sunbelt states. Contributing factors were: a transient population moving to new jobs and better climate, retirement condominiums, apartment and townhouse residences, slab construction, etc.
Many facilities were developed prior to 1979, with 1978 generally acknowledged as one of the greatest growth years in the industry. As the decade of the 1980’s began, increased self storage construction activity occurred along the Eastern coast of the United States, with increased interest in Canada, Europe, Australia and other countries of the free world.
SELF STORAGE TENANTS
It’s been said that self storage is used by people and businesses in transition, but that’s only part of the picture. Self storage is used by a wide range of consumers with different needs that may include:
Homeowners and businesses in need of temporary space for overflow of property or inventory
Those in the process of relocating
Property stored in relation to an estate in transition due to death, litigation, restoration, etc.
Businesses in need of space for general control of inventory, records, supplies and equipment
Businesses that are expanding or contracting
Businesses storing seasonal displays
College students storing books, desks, etc. during summer
Military personnel in need of low cost space or are on temporary duty
Seasonal visitors with household items and sports equipment
The advantage of using rental storage space is increased flexibility, low cost, convenience, and value.
Self storage space is generally rented on a month-to-month basis and does not commit customers to long term leases. Tenants may typically leave whenever they want and rent only the space they need. A recent study shows that the average length of tenancy for a typical customer is 11 months, and 24 months for the average commercial tenant. The cost of self storage space is lower than office or retail space, saving users money. On average, self storage is roughly 60% less than the cost of most office on a per square foot basis. Self storage users can often find facilities in their local area and they receive additional service value because self storage managers are trained to counsel consumers on how to store items more efficiently in less space, thereby reducing the cost.
Self storage is a useful management resource for small businesses, since businesses can easily obtain more space as they grow without committing to expensive long term leases. Furthermore, it provides businesses with a means to cut costs, should they need to downsize. Self storage is also useful for college students and seasonal visitors who may rent space for a season, and for military personnel who go on temporary tours of duty, but intend to return to the area, and for those who can’t afford to rent more living space.
TODAY’S MARKET
Estimates of the overall number of self storage facilities operating in the United States varies greatly but most industry veterans estimate that there are somewhere between 45,000 and 50,000 facilities as of the date this home study course went to press.
As the population becomes more familiar with self storage, the demand for off-site storage has expanded to accommodate the growing needs of the business community by storing files, medical records, excess inventory, equipment, etc. In some areas business storage accounts for 30% or more of the total tenancy of a facility. Easy access, convenient office hours, short term rental agreements, and no long term commitment to pay for space which may not be needed in the future, make the self storage facility extremely attractive to the retail customer, contractor, home based businesses, manufacturer’s, and pharmaceutical representatives, etc.
The industry still remains relatively unsophisticated and highly fragmented. Today, roughly 75-80% of all self-storage facilities are owned by small independent “mom and pop” operators. In addition, there is a considerable amount of medium to large players undergoing consolidation, although it is becoming more difficult for the larger buyers to accomplish since most owners realize what a great low maintenance high-cash business it is, and therefore are reluctant to sell. As a result, the top 50 companies control approximately 25 percent of the square footage in the industry.
As demand for space has grown and the self storage industry has evolved, consumers have become more familiar with the property type (92% of the households in the U.S. were familiar with the concept, according to a survey sponsored by the Self Storage Association in 1989). Inasmuch, local and regional competition ranges from a handful of properties to scores in a given trade area. Accordingly, customers may choose where they will store and from many different options, with unit size and the choice of climate or non-climate controlled space being the base options. Today consumers have the ability to compare and choose from among a variety of self storage property styles and customer services to meet specific storage needs.
Competition in the self storage market is increasing. Maximum success for investors/operators depends on the ability to meet customer needs with convenience and value.
To satisfy customers, today’s self storage must look to locate in retail corridors, light commercial or even high density residential neighborhoods, in addition to traditional industrial and heavy commercial areas. Newer facilities emphasize architectural aesthetics in construction and are designed to blend in with the retail or residential nature of the areas they serve. Landscaping has also become a prime consideration, as well as the interaction of storage development with adjacent planned tracts of offices, retail stores and business parks, in order that incubator space is available to support public planning. All of this is done with the aim of creating a clean, stable, secure upscale image that supports the perception, and the reality of trust among current and prospective customers.
Myths and Investment Opportunities in Self Storage
Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties. Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation. However, self storage offers a number of benefits that I feel make it such an attractive investment. Those include the following:
We are becoming a more transient society, moving around more and creating a greater need to store our stuff, thus the demand for self storage is increasing.
Americans tend to accumulate a great deal of possessions, and we don’t want to “weed out” those things we don’t use or are sentimental or have nostalgic value, which in turn, creates more demand.
Most new communities will not allow us to store our boats, jet skis, RV’s, or even multiple cars on the street or in front of our homes.
Many retirees downsize their homes which require additional storage space that their smaller homes don’t provide.
More and more Americans are buying second homes which increase the demand for storage space.
College students utilize storage space when moving back home for the summer.
Many businesses are downsizing and operating out of smaller offices that necessitate a need for storage space.
Many small distributors will utilize self storage to operate their business from.
Pharmaceutical reps will use climate controlled storage for samples and inventory.
The eBay® phenomenon has created a huge demand for space.
Other home based businesses are also creating demand for off-site storage.
Lower Development costs – self-storage facilities development costs are often 30 to 50 percent less than office, retail, and apartment buildings.
Lower Operating Costs – Operating costs for self-storage facilities are substantially less than office, retail, and apartment buildings. As a result, self storage owners are more isolated from large increases in utility and other variable costs that occur in the open market.
Lower development and operating costs make break-even occupancy ranges lower than other forms of real estate.
Occupancy is generally more stable and therefore predictable as there are typically a greater number of units in which to “spread the risk” than in other forms of real estate.
Month-to-month leases mean that rental rates can be adjusted easily. When occupancy increases, I will adjust rates to compensate for the demand.
Demand for self-storage is not dependent upon the economy. When the economy is good, people buy more and store more. When the economy slows, people downsize, and require a cheaper alternative to store their extra belongings.
Low management overhead as customers typically only need the manager to move in or move out, compared to office or apartment complexes that requires a high number of customer contacts and constant and ongoing interaction.
A well-run, stabilized self storage in a good location is very desirable to other investors and institutions, making self storage a very liquid investment.
It’s No Wonder Self Storage has the lowest loan default rate of all commercial real estate property types!
DEBUNKING THE MYTHS
Now that we’ve discussed all the reasons that make self storage a fantastic investment, we should take some time to break down a few of the myths that have been floating around with regard to the industry. Like many other industries, self storage has been evolving for several decades now, and many of the general assumptions by outsiders surrounding this business simply do not apply. Some of the common myths are as follows:
“If you build it, they will come”.
In the early years, this was somewhat true. But in today’s competitive landscape an owner/investor must perform very careful analysis and/or feasibility studies to determine whether a potential development site or an existing facility is a wise investment. In addition, there are many areas that are, or are becoming overbuilt, which drastically changes the projected lease up and overall occupancy potential for a facility.
“Self-storage is an easy business”.
This may have been somewhat true in the past as well, but like any business, if it were easy, everybody would be doing it. Far too many real estate investors treat their business as a hobby rather than what it truly is; an asset with many moving parts that must be managed from day to day as opposed to a stock or a mutual fund that you purchase and only infrequently check on its performance. Today’s self storage arena is very competitive, and successful owners are always thinking of ways to increase income, decrease expenses, and strive for operational efficiencies across all facets of their operation.
“All self storage properties are cash cows”
As we discussed earlier, self storage facilities have the lowest default rate of all property types, but it doesn’t mean that owners don’t default and that many others are struggling. Generally this is due to poor planning before acquiring or developing a facility. An owner/investor must perform thorough due diligence when it comes to competition, population growth, land costs, construction costs, market rental rates, and the management of the facility before purchasing or developing a facility. If you do not have the time nor the expertise, a feasibility study should be conducted by an experienced individual within the industry to avoid buyers or developers remorse.
“this is a cheap business to get into”
Again, this may have been somewhat true in the past, but not any longer. Today’s customer is demanding a higher quality facility than what the industry provided in the beginning. Today’s facilities possess a higher quality construction, are fully paved, fully fenced with security gates, typically have state of the art digital video surveillance and recording systems, and are considerably larger than in the past, which necessitates an office with a part-time or full-time manager. Land costs are higher as most developers prefer to locate in high traffic locations as opposed to the hard to find or industrial park sites of yesteryear. In addition, construction materials have been on the rise recently due to fast developing foreign nations which affect development costs, and good existing facilities are being sold at record high prices as the word is out on what a great investment self storage has become.
Year after year, home remodeling fraud costs consumers thousands of dollars and considerable stress and aggravation. Contractor fraud is a criminal activity pulled by scam artists on consumers. They tend to prey on senior citizens and singles, taking advantage of their willingness to trust others who sound believable.
In addition to the obvious tactics, here are some things to watch out for:
A person soliciting door to door for repair work. Though they may seem quite knowledgeable and appear friendly, this is not a common tactic of a professional contractor. Door to door soliciting leaves very little evidence to track down scammers.
They claim to be working in your neighborhood and just happened to notice some sort of repair needed on your house, such as roofing, painting, or cracked portions in your driveway.
They offer a special price or discount claiming they are in the area and will knock off a portion of the cost due to excess materials from other contracts.
You may be told you must act right away to get this special discount pricing, and you may be asked to give them money up front before starting the work.
They offer you a discount price if you allow them to use your home to advertise their work. This makes it sound as if they are doing you a favor for a favor.
Some scammers offer a "free inspection" that always turns up a major repair job.
More times than not, after receiving a substantial amount of money, these so-called contractors just disappear with the cash. By the time you figure out that they are not showing up, they are long gone, and so is your money.
On the other hand, sometimes a contractor will start some of the work and then continuously try to raise the cost of the job causing consumers to be grossly overcharged. See, most people think that since they already signed a contract, they are at the mercy of the contractor. This is why it is so important to screen contractors before you hire them.
Here are some guidelines for avoiding a disreputable contractor:
Be cautious when someone offers you a lifetime warranty, or long-term promises.
Never fork over a large down payment for materials--1/3 down is the max.
Always insist on a properly written contract, typed, not hand written and signed.
Avoid any suspicious contractor whose address is listed as a post office box.
The two most important steps are 1.) to make sure to check out each contractor thoroughly, and 2.) to get a contract in writing that spells out even the smallest details. You can never do too much background checking before making a decision.
Some scam artists posing as contractors prey on victims of disasters. People who have damaged property and are struggling to get their homes repaired and are at great risk of contractor fraud.
Workers from all over the country flood disaster areas hoping for desperate people to let their guard down. After all, a contractor at your door may seem better than waiting weeks to get a contractor to help stop further damage. When you are vulnerable and desperate, that's when the scammers are most likely to come in for the kill.
Time to "Cowboy Up" to scammers!
Follow the techniques I stress in my Rehab 101 system to "Cowboy Up" to scammers. Always get the contractor's full name, address, business phone, and cell phone number. I recommend you to ask for five references from each bidder.
First, get the usual three references that most people ask for. Plus, the fourth is the contractor's material supplier. If the contractor told me he had been in business for ten years, and his supplier says he has only been buying from him for three months, this indicates a problem.
The fifth reference is a project they had to return to in order to fix something. And if the workers say they have never had to go back to a job, don't believe them. Ask the reference how the workers handled themselves as they had to come back after the job was finished.
Never hire the first person that shows up until you have compared pricing and references. You should always get at least three estimates to compare. Call your local Better Business Bureau and inquire about the person or business.
Make sure that they have enough insurance and liability coverage. If you use people without it, make sure to get liability waivers and lien waivers to protect yourself.
I never pay more than 1/3 down for a material deposit. This amount should be enough to get the job going. Asking for more is a red flag and should be avoided.
Here are some more clues that should launch huge red flags when dealing with contractors:
The person does not have a number listed in the phone book
The person goes door to door looking for on the spot work requiring money right away
Special prices or discounts are offered but you "must act fast"
They offer you a good deal, so they can advertise our work using your home as part of their advertising
The worker asks you to pull any permits required for the job
And my favorite--if you pay me in cash, I can give you a great discount
Remember the part about having leftover materials from another job and passing the savings on to you?
More red flags are low-ball offers, sub-standard materials, and any funny sounding payment plans. Stick to using contractors whose references check out and remember--if it sounds too good to be true...
Now don't get me wrong; I am not saying that all contractors are crooked. I was a reputable contractor for 20 years and most contractors are honest, hard working ladies and gentlemen. But there are thousands all over the country giving good contractors a bad name.
But, you can get information on how to protect yourself from scams by contacting your local police, and there is a great deal of information on the Internet.
Rehab 101 Course
Increase the value of your rehab properties for maximum profit! Pete Youngs teaches his students how to save money on unnecessary inspections and contractors and put thousands of dollars into their pockets.
About the author...
Pete Youngs is a successful investor, business owner, author, and lecturer dedicated to helping others become successful real estate entrepreneurs. His expertise is teaching people how to rehabilitate properties for a fraction of the normal cost.
His knowledge and ability to get the highest quality results for the lowest possible price earned his companies prestigious renovation contracts, such as the living quarters at the 1996 Atlanta Summer Games, Courtyard By Marriott Hotels, and hundreds of single and multi-family homes nationwide.
Pete shares his contractor knowledge with investors and homeowners alike, teaching them how to put THOUSANDS OF DOLLARS into their own pockets, instead of spending it on unnecessary inspections and contractors.
Pete teaches 101 valuable techniques, which range from minor cosmetics to major rehabs in his home study course:
Title: Someone recently asked about finding money to fund your deals.
Someone recently asked about finding money to fund your deals. Banks, well as someone once said “there are no intelligent life forms inside those four walls”. True hard money lenders are well, EXPENSIVE and in some cases cost prohibitive. So where do you turn?
How about to your circle of influence? A circle of influence is a group of people that know and/or love you, your friends and family. A lot of them have money sitting in CD’s earning in the 2% neighborhood. Why not approach them and find out if they would be interesting in earning 9% interest, paid monthly on a 5 year note (amortized over 30 years) which would be secured by a 1st position mortgage on a piece of real estate where that notes loan to value of the property is no more than 75%?
What if I don’t have any friends or family like that?
How about advertising in the local "free" senior and or weekly publications? None of the papers in our area are free, unless you are talking about the circulation. Our most successful ads have appeared in our local penny saver. It is mailed to every home in the area.
Your ad might say something like,
Earn 9% interest, paid monthly. 5 year note.
$50,000. Secured. Details, call John Doe, 999-9999.
Our paper sells a block of 16-word ads at a reduced price, so we always try to keep within that size.
Another asked about our investors participating in other areas of the country. I can easily answer that for them ... they would all say, "No."
Again, let me paint a picture for you. These are not sophisticated investors. They are folks (and I use that word purposely) like your mother or dad and mine. They have worked hard all their lives and saved some money for retirement. They saved it in CD's, savings accounts, etc..., some even in US Savings Bonds. Some of the worst returns you can imagine. BUT, THEY CONSIDER THEM TO BE SAFE!!!
If you want to tap into that money, show them the same safety. These folks aren't stupid ... naive perhaps ... but not stupid. Confuse them and they will say "NO!" Make your offer sound, sensible, and perfectly safe ... they will listen. This is not a fast talking scam or con deal ... so please don’t make it sound like one or you might get reported to the attorney general.
Our investors "bought" us. They don't know you in another part of the country. They might take my word for it ... but, even I don't know you well enough to recommend you. And, we certainly don't want to end up with a property in California or Florida. We buy only within a 30-minute drive from our home.
Making Hard Cash in A Soft Real Estate Market (copy)
Title: Making Hard Cash in a Soft Real Estate Market Using Lease Options & Subject Tos
On May 20th Discover How To Boost Your Real Estate Profits in By At Least Ten Thousand Dollars. . .
One of the Very Best — and Least Known—Techniques,
Revealed By the Foremost Expert
Today's real estate is different! Techniques that work in Miami may not work in LA! That’s why—in order to be super successful in real estate investing—you need to know what’s working for real estate investors...
...in our town, right now, in this crazy economy
No one’s better suited to tell you that than Wendy Patton. Wendy is the nation’s foremost expert on how to uncover real estate profits where other investors see only problems, shake their heads, and walk away!
For instance, Wendy will show you how to take a deal that looks mediocre, and get FOUR different profit streams into your pocket...with little or no money down on your part!
How could Wendy have perfected a technique that others don’t even know about? Wendy’s done more than 653 deals...she’s not only an investor, but a real estate broker, and a licensed contractor. Plus, she knows the nation’s markets inside-out!
Wendy will be sharing her secrets in a closed-door briefing on [insert date]. If you want to make your financial resolutions come true, clear your calendar for this event!
Here’s some of what Wendy will reveal:
• She’ll hand you a technique that works like gangbusters even in all markets, where appreciation is sometimes flat or declining. She’ll show you how to profit from properties that both Realtors and investors avoid. You’ll be handing your impressed bank teller fat checks from these deals!
• How to get Realtors to put you on their “speed dial” list as a favorite person to send deals to.
• Tested and proven newspaper & Internet ads—word for word—that attract sellers like a scrap yard magnet.
• When Realtors and other investors throw up their hands at obstacles in a deal, you’ll be clapping your hands at the money you know you can make on that deal.
• Five reasons why homebuyers will gladly pay more than the retail value of a home...IF you know Wendy’s secrets.
• Why your ethics and reputation are everything in this business, and how Wendy’s techniques are truly a “win win” for you and your customers.
“...in June I made $20,000, in July I made $18,000 and so far in August I have made $14,000...I currently have under contract two new properties that will net me at least $25,000 per deal. I used Wendy’s techniques in all but one of these deals. Wendy THANKYOU for all that you have done and the knowledge you’ve shared with us.” —-Scott Teerink, Phoenix AZ
“...I can honestly say that whether in person or in print, Wendy is one of the
finest investment mentors you could hope to have. She’s clear in her wisdom,
honest in her approach, and absolutely down-to-earth and enjoyable.”
—Jay Papasan, Co-Author of Best-Selling Books
The Millionaire Real Estate Investor and The Millionaire Real Estate Agent
Title: Making Hard Cash in a Soft Real Estate Market Using Lease Options & Subject Tos
On May 20th Discover How To Boost Your Real Estate Profits in By At Least Ten Thousand Dollars. . .
One of the Very Best — and Least Known—Techniques,
Revealed By the Foremost Expert
Today's real estate is different! Techniques that work in Miami may not work in LA! That’s why—in order to be super successful in real estate investing—you need to know what’s working for real estate investors...
...in our town, right now, in this crazy economy
No one’s better suited to tell you that than Wendy Patton. Wendy is the nation’s foremost expert on how to uncover real estate profits where other investors see only problems, shake their heads, and walk away!
For instance, Wendy will show you how to take a deal that looks mediocre, and get FOUR different profit streams into your pocket...with little or no money down on your part!
How could Wendy have perfected a technique that others don’t even know about? Wendy’s done more than 653 deals...she’s not only an investor, but a real estate broker, and a licensed contractor. Plus, she knows the nation’s markets inside-out!
Wendy will be sharing her secrets in a closed-door briefing on [insert date]. If you want to make your financial resolutions come true, clear your calendar for this event!
Here’s some of what Wendy will reveal:
• She’ll hand you a technique that works like gangbusters even in all markets, where appreciation is sometimes flat or declining. She’ll show you how to profit from properties that both Realtors and investors avoid. You’ll be handing your impressed bank teller fat checks from these deals!
• How to get Realtors to put you on their “speed dial” list as a favorite person to send deals to.
• Tested and proven newspaper & Internet ads—word for word—that attract sellers like a scrap yard magnet.
• When Realtors and other investors throw up their hands at obstacles in a deal, you’ll be clapping your hands at the money you know you can make on that deal.
• Five reasons why homebuyers will gladly pay more than the retail value of a home...IF you know Wendy’s secrets.
• Why your ethics and reputation are everything in this business, and how Wendy’s techniques are truly a “win win” for you and your customers.
“...in June I made $20,000, in July I made $18,000 and so far in August I have made $14,000...I currently have under contract two new properties that will net me at least $25,000 per deal. I used Wendy’s techniques in all but one of these deals. Wendy THANKYOU for all that you have done and the knowledge you’ve shared with us.” —-Scott Teerink, Phoenix AZ
“...I can honestly say that whether in person or in print, Wendy is one of the
finest investment mentors you could hope to have. She’s clear in her wisdom,
honest in her approach, and absolutely down-to-earth and enjoyable.”
—Jay Papasan, Co-Author of Best-Selling Books
The Millionaire Real Estate Investor and The Millionaire Real Estate Agent
Lease Options and Subject Tos, aka “Getting the Deed” are two very popular ways to purchase real estate with little or no money down. Acquiring investment real estate can be handled with many different approaches, but these two techniques can be implemented with little or no money down in most incidences.
A lease option is a technique which involves gaining ‘control’ of a property, but not owning it. It is the right to possess a property now and purchase that property at some future date with terms you define when you buy it.
A “Subject To” is getting the deed to a property without getting a mortgage for the home. Instead, the seller signs over the deed to his home ‘subject to’ the existing mortgage. The buyer in this case makes the mortgage payments on the old loan, but does not need to get a mortgage themselves to acquire this home.
Both of these techniques usually require little or no money down. In both of these techniques it is possible for the buyer to get money from the seller or the purchaser (or both!) in the beginning of the transaction. These techniques, when used properly, will provide for huge profits. They are both awesome, and when used hand-in-hand by investors are almost an unbeatable pair!
This short article is not meant to give details of each technique, but rather to show when you could consider either of them. If you don’t understand how to document and protect yourself in each kind of technique, then purchase a home study course or my book called ‘Investing in Real Estate with Lease Options and Subject Tos’. It can be found on my website – www.WendyPatton.com.
Why Knowing Both Techniques Means More Great Deals For You!
Unfortunately there are many people that are teaching that you should only do the Subject To – technique. They recommend never buying on an option. I can’t tell you how many times I have heard, “If I don’t get the deed, I don’t do the deal”. With over 20 year’s of experience (since 1985) doing both types of deals, I have to disagree with that statement. The more tools and techniques and ways you have to purchase property or to structure a deal, the more likely you will be able to work with a motivated seller to come to a potential solution. If you only buy “Subject To”, you’ll walk away from a LOT of great deals in your real estate career, but you must know when each technique is appropriate to use.
Finding a motivated seller is the first step to any good real estate deal. There are many types of motivated sellers, but we tend to think of motivated sellers as the ones that are financially distressed. I like to look at motivation from a much wider range. Let me explain. I like to divide motivated sellers into two groups:
SituationSituation
Sellers that have Sellers that have
Bad Debt VS. Good Debt
SolutionSolution
Get the Deed – NO Lease Option! Lease Option or Get the Deed!
Sellers that have “Bad Debt” are those in financial trouble. They might be behind on a mortgage, have lost their job, acquired an illness, going through a divorce, etc. In these situations, you need to get the deed either with a Subject To or an outright purchase. Your main concern is that this type of seller will continue to have financial problems that could affect the title to “your” property if the deed is still in their name. For example, if this seller gets judgments from creditors, they can attach to any real estate the seller owns - they will have to be paid off before you can exercise your option to buy. That’s why you want to get this type of seller off of the title.
Sellers that have “Good Debt” are those NOT “in trouble” in the traditional sense, but they do have a reason motivating them to sell. Their problem is not one of financial desperation—it is usually just a change in their life. They might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned out landlords, etc.
Example #1: Here is an example when you MUST get the deed:
A seller calls you on the phone and says he is 2 months behind on payments. Do NOT option this home! This seller is in trouble financially and is not a good risk for an option. Anyone that is in a bad financial situation is not a good seller for an option. This is the type of seller that you must get off of the deed so that his financial situation will not affect the title to the property in the future.
Not every seller who is in financial trouble will tell you so, which is why you ALWAYS need to do research on the title before you get the deed or do an option. In this case, you will need to bring the seller’s mortgage current. Before you do, you want to make sure that he is owner of the property and there are no other liens on the property.
Example #2: Here is an example when you COULD get the deed:
A seller calls you who owes $135,000 on his home—which is worth $145,000. Since there is not much equity in this property, this type of seller might very well be willing to give you the deed. If there is high appreciation in the area, or a very low payment, you might be able to make a profit even though there’s no equity. However, be careful that you have evaluated the numbers correctly before you take the deed.
On the other hand, if the seller’s payment is too high or the market is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: if this seller sells conventionally—that is, though a Realtor, he would have to pay up to $10,000 in commission to sell his home. Plus, he’ll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he’s willing to pay all this money to an agent to sell the property and wait 90-120 days to sell, why shouldn’t he just pay you to take over his payments NOW?
If the seller didn’t have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period. This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you normally can’t do this.
Example #3: Here is an example where you SHOULD lease option or lease purchase:
A doctor has a new home built for himself. His old home is worth $200,000 and he owes $125,000. He has $75,000 of equity. He is not behind on payments, and he did not need the $75,000 of his equity to buy the new home. His old home is sitting vacant and the realtor has not sold it yet. He qualified for both house payments at the bank and he can technically afford both, but who wants to make an extra house payment?
Although he is motivated to sell because he’s coming out of pocket every month to own a vacant property, this type of seller is NOT going to simply give you the deed and let you take over the mortgage. There is no way is he going to give up all of his $75,000 in equity, and no way are you going to pay that much cash out of pocket.
When you lease option this house, he gets most of his equity back—although it won’t happen until YOU sell the property. The deal might work like this: you option the property for $185,000, and make payments to the seller that equal his total mortgage payments. You SELL the property on an 18 month lease option for $218,000 with payments to match. You get cash flow + $33,000 in profit when your tenant/buyer buys the property; the seller gets his payments taken care of for a few years, then gets the bulk of his equity out. And in the meantime, he doesn’t have to worry about management, vandals, frozen pipes, and all of the other things that owners of vacant houses have to deal with.
Example #4: Here is an example where you COULD lease option or lease purchase:
A seller just inherited a property worth $120,000 from their parent’s estate. It is owned free and clear and they don’t want to be paid off. They don’t need the cash, but they would love some cash flow on this asset. This seller is not going to give you the deed. Let’s say you can lease option this property for $700 per month with $300 per month going to the purchase – or the option credit. Your real payment in this case is only $400. You can compare these numbers with doing a seller financed type of arrangement. See what works the best and make that offer first.
Let’s examine a seller financing deal:
A seller financed deal means that the seller will finance a mortgage for the buyer and the buyer pays their mortgage payment/interest to the seller versus a bank. This is primarily done when the seller owns a home free and clear and they do not have a mortgage on it themselves. It can be called a land contract, contract for deed, or private money mortgage. It will depend on how the offer is made and accepted. Let’s say you negotiate a deal with the seller for a sales price of $110,000 – if you want your payment to be $700.00 as in the above lease option example, let’s see what that really means to a seller for a seller financed deal. First in a seller financing or mortgage your payment includes taxes and insurance (unless the buyer pays them themselves). This must be subtracted from the $700. Each part of the country fluctuates, so I will use an estimate of $250 per month for taxes and insurance. This leaves $450 for the seller. Now we must subtract our principal we negotiated above the $300 per month credit. This now leaves the seller with $150 per month. If this were to be all that is left this would essentially mean the seller is receiving 1.6-1.7% interest on their money. The interest rate has to be disclosed on the loan document or seller financed deal. A very low interest rate is much harder for a seller to accept then a lease option payment of $700 per month. It is the same thing to the seller, but it is spelled out differently. They don’t do the subtraction themselves to calculate the real rate of return. If you do a seller financing deal, you must calculate and show it in writing. Compare the two and see what works the best.
Let’s examine the pros and cons of Subject To vs. Lease Options:
Subject To Pros:
Subject To Cons:
Title is in your name – full ownership
You own it and have ethical responsibility to the seller even if the market changes or you can’t sell the home. You own it! No changing your mind on this one.
Some sellers will pay you to take the deed.
You will need to get new insurance policy naming you or your company on the policy. In some instances this might trigger the ‘due on sale’ clause. You must insure it based on the title (who is the owner) or you will have no coverage.
Easier to prove ‘seasoning of title’ – when you are the title holder. Easier to refinance.
;)
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