FLIP AND GROW RICH VERSION 1.0 FIND

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1 FLIP AND GROW RICH VERSION 1.0 FIND The contents of this program have been prepared for use in a broad-based educational and instructional program. Because real estate laws and regulations vary from state to state, all course participants should first consult with his/her own local legal, financial, real-estate, and other professional advisors before implementing any specific strategy and/or technique. Neither the author nor his agents make any warranties or guarantees, express or implied, about results. Individual results may and will vary. All rights reserved. No part of the manual may be reproduced in any form, by any means, photocopying, electronic or otherwise, without written permission from the publisher. Armando Montelongo, President - Armando Montelongo World Wide, Inc ı FIND

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3 FIND How to Build A Finding Machine Everything you need to generate leads and make deals on rehab investments, so you can make your profit when you buy. Preview You will learn: Concepts: How to find deals in any market Four reasons for motivated sellers Eight ways to find motivated sellers How much to pay for properties Methods: How to negotiate and make deals How many offers to make How to focus on finding deals Tools: Streamlining the system You will be able to: Generate leads on a regular basis Assess a good deal Close on deals 3 ı FIND

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5 CONTENTS Contents Chapter 1 Overview...7 Chapter 2 Find Deals in Any Market...8 Chapter 3 Four Reasons for Motivated Sellers...9 The Four Ds...9 Chapter 4 Eight Ways to Find Motivated Sellers...13 Real estate agents...13 Wholesalers...16 Lawyers...18 Bail bondsmen...21 Pre-foreclosures...22 Foreclosures...23 Foundation repair companies...23 Sheriff sales...24 Chapter 5 How to Determine After-Repair Value...30 Pull comps...30 Determine value...31 Bedrooms and baths...31 Other features...32 Agent s remarks...32 Days on market...32 Market knowledge...33 REO listings...33 Chapter 6 How Much to Pay...34 The 70% Rule...34 Profit...35 Closing and overhead costs...35 Repair costs...37 Loan points...38 The maximum price...38 Budget overruns...39 Exceptions...39 Chapter 7 The Art of Negotiation ı FIND

6 Chapter 8 How to Negotiate with Subcontractors...41 Target prices...41 Start low...42 Chapter 9 How to Negotiate with Banks...43 Written negotiations...43 Bank offer packages...44 Counter offers...48 Re-submittals...49 Chapter 10 How to Negotiate with Homeowners...50 Solve their problem...50 Know their why...51 Initial phone call...52 Do your homework...52 At their house...53 Empathize...54 Talking numbers...54 Closing the deal...56 Chapter 11 How Many Offers to Make...64 Make 100 offers for 30 deals...64 Focus on qualified leads...64 Have a finders team...65 Work from home...65 Chapter 12 Focus on Finding Deals...66 Chapter 13 Streamlining the System...67 Letter confirming receipt of offer...67 Affidavit of contract...68 What to take...69 Forms and documents...71 Summary Review ı FIND

7 OVERVIEW Chapter 1 Overview If you can t find it, you can t flip it. And you can t grow rich. The number one question I am asked is: How do you find so many deals? The answer is: There ar more deals out there than I can actually handle. I have honed in on the most productive strategies for finding deals. This allows my Finding Machine to crank out deals, which means it s almost printing money. I will lay out all of my strategies for you. You can switch them around or try all of them, but the key is to quickly identify which are your top three ways to get deals. I myself prefer not to reinvent the wheel, so I do what works time and time again. Remember, this is a system. You can t drive the car unless you start the engine. The fact is that if you can find the deals, the money is easy to find. So for now, stay focused on the system that I am teaching, in the order that i am teaching it to you. Remember, I flip 25 to 30 houses a month. I know how to get money, and I know that money follows the deal. Do not get ahead of yourself and start worrying about where to find the money. It s easy to buy properties once you find the deals, even if you don t have money or credit. The truth is that the money follows the deal. If you find the deal, the money will come to you. Why? When it comes to flipping houses, the person giving you the money is going to make their decision based on the deal, not on you. You may not have money, good credit, or experience in real estate. In fact, you may lack all three. Flipping lenders are not going to base their decisions on you. They base their decisions on the deal. They want to know that it is solid. That s why it doesn t matter if you ve failed in the past at everything else you ve done. A good real estate deal is the forgiver of all past business errors. 7 ı FIND

8 FIND DEALS IN ANY MARKET Finding the property entails four things: 1) Identifying a good deal 2) Knowing how much to pay 3) Landing the deal 4) Finding more deals at high rates of speed Deals, deals and more deals is the key to starting your Flipping Machine. Enjoy this section of the system, because this is where I put my day-to-day focus on making money! Your eyes will be opened to a whole new world of possibility. Chapter 2 Find Deals in Any Market Focus on the deal, not the market. At the same time, you need to understand what you can find in your market. If you are living in a depressed market, the type of deal you are looking for is extremely below market value. Because so many more properties are being sold below market value, you don t have to jump at lukewarm deals. You get to cherry pick the best of the bunch. In a cold or depressed market, you will find deals so greatly undervalued, you can fix them up, sell them at a discount, be the lowest-priced house on the market and still turn a profit. In a flat market, you can also get phenomenal deals below market value, because there is less competition. Most investors don t know how to flip in a flat market, which makes doing business easier for you. It s fun when you re the only kid on the playground, because you have all the toys to yourself. In a hot market, the profits margins may not be as big, but the deals come fast and sell fast! This means you make lots of money by getting lots of deals. The beauty is that you don t need to work harder; you just need an effective system. When you know how the real estate markets really work, your fortune is at your fingertips. 8 ı FIND

9 The Four D s FOUR REASONS FOR MOTIVATED SELLERS Chapter 3 Four Reasons for Motivated Sellers The Four Ds Death Disease Divorce Disaster Who s selling? And why are they selling so cheap? They are people who are facing what I call the Four D s death, disease, divorce and disaster. They are the motivated sellers trying to unload the kinds of deals you re looking for. This is the reason you can find deals in any kind of market. Regardless of whether a market is up or down, you will always find people who are facing death, disease, divorce or disaster. These motivated sellers need to sell their houses to move past their problems. I ve taken some heat for talking about the Four D s. However, they are a fact of life. If we could cure people s problems, so they didn t have to face the Four D s, I would be the first one on board. I hate to see people suffer any kind of emotional distress, as I have had plenty in my own life. My heart goes out to people who are going through any one of the Four D s. What I have found is that as a real estate investor, you can help people with their problems. There is only one reason why people will sell you a property under value because you are solving their problem. My business exploded when I realized I was not in the real estate business, but I was in the people business. If you want to be successful in real estate, you must solve the seller s problem first. Then, and only then, will get you a good real estate deal. If you look for your own financial gain and only your own financial gain, with no regard to the seller, you will not make it in this game called real estate investing. Isn t that beautiful? Helping people while you help yourself, that is what creates true wealth. Flipping Machine Tip: There is only one reason why people would sell you an undervalued property. It s because you are solving their problem. 9 ı FIND

10 FOUR REASONS FOR MOTIVATED SELLERS The Four D s Below are the reasons that people sell their property below market. Later in the book, you will learn how to find the deals. For now, it is important to learn the reason why people are selling. If you don t know their why, you won t make a deal. Flipping Machine Tip: Helping a Couple Through Surgery I helped a couple in need several years ago by buying their apartment complex. I got the property at a phenomenal price and at the same time solved the sellers problem. I purchased the property for $100,000, and it was worth $200,000. The man s wife had to undergo a very serious surgery for cancer. The man had no medical insurance and needed cash to pay for the operation. It was going to cost him $100,000 to pay the entire medical bill. He wanted to sell the property quickly and didn t care about getting full price. He needed cash to solve his problem. I purchased the property for 50 cents on the dollar. I saw the man two years later. His wife had the surgery. His wife was better. They did not have any regrets. He said: Thank you so much for helping us out. You really helped us in a time of need by buying our property. Death Death often results in estate sales. Many times the heirs to these estates do not want the property that was passed on to them. Many times these properties are behind on mortgage payments, property taxes or in need of lots of repair. The people who inherit these properties usually don t have the money to make up the back payments or have the capital to fix up these properties. These people usually want to unload the property, because it actually helps them in the healing process. In the next section on Eight Ways to Find Motivated Sellers, I will show you how to find these properties without having to talk to grieving relatives. ESTATE LETTER (see Chapter13 - section Forms and Documents, p.71) Disease I have found a lot of people who have been in situations where they or a loved one are sick. They have overwhelming medical bills. People with medical challenges undergo huge financial and emotional strain. Because of mounting medical bills, it s hard for them to make their mortgage payments. When people are extremely sick, their financial matters tend to suffer as well. When you buy properties from individuals who are sick or have loved ones who are sick, you are relieving them of one of their greatest stresses. This can allow them to free up money to take care of their medical bills, as well as give them peace of mind. Divorce When men and women go through divorce, they want to get rid of two things: the other person and their commonly-shared property. Divorce creates very motivated sellers. Divorce is an unfortunate time in people s lives, and these individuals should be treated with compassion. We cannot salvage their relationship, but we can help resolve their financial differences. In many divorce situations, when we buy the property, we solve one of their largest problems. DIVORCE LETTER (see Chapter13 - section Forms and Documents, p.72) 10 ı FIND

11 The Four D s FOUR REASONS FOR MOTIVATED SELLERS Disaster Bankruptcy Fire Disasters also cause people to want to sell their houses. These disasters include: fire, tornadoes, floods and other natural catastrophes. Disasters also include: bankruptcy, unpaid insurance claims, lawsuits against insurance companies, lawsuits against the city for damage caused by broken water and sewer lines; personal legal troubles and debt, to name a few. All of these situations create problems, which creates sellers. When you solve the seller s problem by purchasing the property, it creates opportunity for you. Bankruptcy A lot of people are going bankrupt these days. With bankruptcy, a lot of people have an urgent need to unload their property. Often, they have tens of thousands in credit card debt, or a mortgage they can t meet. How do you find bankruptcies? There are websites you can find via Google that allow you to search county court records to see whether a bankrupt person owns real estate. You can also find out about 941 meetings. These are bankruptcy meetings, where the creditors come to discuss and negotiate what is owed to them. It s public domain. You can sit there, and they will ask you who you are. You say that you are a real estate investor and if they need to sell a house, you can help them. The attorneys or trustees representing the bankrupt party want to help their clients. They also want the quickest solution to their problems. The attorneys problems include helping their clients unload personal property. Here s how you approach the trustee: you hand the trustee your business card, explaining that you re willing to buy the property so that it doesn t go into foreclosure. A bankruptcy on a person s credit record is bad enough; foreclosure makes it worse. Once the property has been discharged from bankruptcy, you can do a deal to purchase the property. You can even make a deal with the bank, doing what s called a short sale (we ll talk more about that later in this book), and buy it for 40 cents to 50 cents on the dollar. 11 ı FIND

12 FOUR REASONS FOR MOTIVATED SELLERS The Four D s Fire One source of leads that I m particularly fond of is fire houses that is, houses that have been badly damaged by fires. What you do is Google fire and the name of your city. Go to your local fire department s main website and the fire department lists all the burned houses. Next, you send the homeowners a letter offering to buy the house. Fire deals don t usually come through right away. It usually takes four to five months because the homeowner is settling up with the insurance company. However, these are great deals and even if it takes four to five months for them to sell you the house. These houses build and add to your cash reserves and Flipping Machine. (When I started out, I sometimes chased fire trucks. When one would pass by, I d flip a U-turn and follow it to the scene. I found out that it was a really bad time to be handing out your business card. I don t recommend it.) FIRE LETTER (see Chapter13 - section Forms and Documents, p.74) 12 ı FIND

13 Real estate agents 8 WAYS TO FIND MOTIVATED SELLERS Chapter 4 Eight Ways to Find Motivated Sellers 1. Real estate agents 2. Wholesalers 3. Lawyers 4. Bail bondsmen 5. Pre-foreclosures 6. Foreclosures 7. Foundation repair companies 8. Sheriff sales These are my top eight techniques for finding motivated sellers. They are listed in the order of importance to me. I will be giving you my opinion on what I most like and least like to use. The simple truth is that I use all of them to some degree or in combination. For instance, I have wholesalers scout for pre-foreclosure properties, and then I buy them. However, I find most success by using them in the order that I have listed them here 1. Real estate agents Educating agents Accessing listings REO agents Pocket deals Educating agents Believe it or not, real estate agents are my number one source of deals. That s probably 70% of my business. Well, you say, that s easy. I could do that. However, there are two challenges when dealing with agents. Real estate agents want to make as much money as they can, and that is not necessarily beneficial to you as an investor. If an agent does not know your strategies, they can convince you to pay too much for a property. 13 ı FIND

14 8 WAYS TO FIND MOTIVATED SELLERS Real estate agents Also, a lot of real estate agents don t want to deal with investors, because so many investors don t know what they are doing. Some investors unwittingly waste agents time by having them run around, looking at deals, and then the investor doesn t make any offers. I guess you could say that some agents have been snake bitten. Flipping Machine Tip: Building Trust with an Agent Once an agent trusts you, he or she may give you direct access to the Multiple-Listing Service, or MLS, so you can run comparables on deals yourself. They will do this in return for a fee or for using them as your realtor. This is a big help to you, because it saves you time when you can check comps yourself. Agents won t give you MLS access until they trust you and have a relationship with you. This is why relationships are important. You can build trust by selling the properties through them. I don t always use agents when I sell a property, as you will find in the Flip It section. But when I do, I choose an agent who I already have a relationship with. When you re dealing with real estate agents, you have to condition them. You have to solve their problem. They want to make lots of money, and their time truly is their money. Here is how you properly introduce yourself to a real estate agent. Mr. or Ms. Real Estate Agent, I have $500,000 burning a hole in my pocket, and I need to spend it in the next 45 days. I need you to help me find a deals fast. You might be thinking, But I don t actually have half a million dollars. Remember, you don t have to have half a million dollars; you just have to have access to half a million dollars. I m going to show you how and where to get your money later. The fact is you do have half a million dollars in your pocket; you just don t know how to access it yet. Another possibility is to tell the agent you re going to buy 10 to 20 houses this year. Yeah, but Armando, you ll say, I haven t even made a deal yet. I m not going to be dishonest. You re not. You re telling them what you re going to be doing. If they ask how many deals you ve closed, you can tell them, Well, all I m going to say is that business is booming. There are ways of explaining things without being dishonest and yet without revealing that you re new to investing. In effect, you re telling them the truth in advance. In any case, these words are music to a real estate agent s ears. Will this cause the agent to perk up and listen to you? Are they going to be more likely to send you deals? Absolutely! Will you have to go through several real estate agents to find a good one who will work with you and continue to send deals? Most likely. Even after you close a few deals, your real estate agent may not be sending you potential deals as frequently as you need. You may have to follow up to remind him or her that you are always looking for new deals. But once you find those agents that take care of you by sending you deals, repay them with your loyalty and use them regularly to sell your flips when you want to list a property with an agent. Now, do real estate agents have deals sitting at their fingertips, waiting to give you big profits? Yes and no. Remember, just like you have to be educated in order to be successful, you must educate your agent without being condescending as to what you are looking for. They have access to deals that they may not even know are deals. 14 ı FIND

15 Real estate agents 8 WAYS TO FIND MOTIVATED SELLERS You need to take the time to build a relationship with real estate agents, once you start doing business with them. Eventually, they will see you re not an emotional buyer; you re a buying machine. It doesn t matter to you that the house is ugly or unwanted. These real estate agents will see that you use them to make offers and sell the fixed-up houses. This will cut the time you spend finding deals by half or more. Accessing listings Agents use a system called the Multiple Listing Service, or MLS. They can input keywords into this service to look for specific types of houses. What you want to communicate to your new real estate agent is that you would like key words typed in such as hand-me-down special, fixer-upper, sell fast, estate sale, handyman special, pre-foreclosure, short sale, and foreclosure. These are the key words that an agent types into the system to identify sellers motivated by the Four D s. Real estate agents can put your search criteria on automatic generation and have the leads forwarded to your . You still need to compare the value of these properties to others that have sold, in order to determine the market value the after-repair value, or ARV of these properties. I will show you how to check comps and determine ARV later in this book. For now, we are creating a deal-finding machine for you to have lots of deals to look at quickly, without any hard work involved. REO agents I buy lots of bank-owned properties through my real estate agents. These are homes that people have foreclosed on, mostly because of some reason related to the Four D s. The bank takes the house back as a real-estate owned, or REO property. The bank then puts the house back on the market, hoping to recoup what it lost on the defaulted loan. REO agents specifically list properties just for banks. The agent doesn t own the property, the bank does. However, they will usually list properties for several banks. Depending on the size of the city you live in, there might be 10 to 30 REO agents. As you build a relationship with these individuals, they will start to tell you about deals before the deals hit the market. 15 ı FIND

16 8 WAYS TO FIND MOTIVATED SELLERS Wholesalers Pocket deals A pocket deal is a property that the listing agent tells you about before it gets on the MLS, where the general public sees it. Pocket deals are a great source of income, because you get to look at the property before they reach the mass market. You can make offers on these properties the first day they are listed. Don t use the term pocket deal with your REO agent. Just understand they are out there, and pocket deals are another gear in your deal-finding machine. 2. Wholesalers You find wholesalers by finding what are called bandit signs. These are signs you see hanging from telephone poles or lamp posts, saying: I Buy Houses, I Buy Houses Cash, or I Buy Ugly Houses. In principle, you could put up bandit signs yourself. (If my company puts up bandits signs, I prefer to hire someone to do it.) However, I believe in taking advantage of the resources around me. I turn the people whose phone numbers are on these signs from being competitors to allies. The guys out there scouting to buy the same distressed properties as me actually become part of my finding machine. Who are wholesalers? Wholesalers are people who don t have the money or don t know where to get money -- to buy distressed properties. They are looking to find a distressed owner and sell the property to someone like you and me. Some of them want to be doing what you and I are doing, but they simply don t know how. They sell the property to us rehabbers and make a quick $2,000 to $5,000 dollars. They get a quick payday, and we get a great deal. I used to do something very knuckle-headed. I can be very competitive in a lot of areas, sometimes to my own disadvantage. I used to go around town looking for bandit signs. Usually these people are offering to buy houses for cash, and I mistakenly believed that most of them actually had cash. So I would drive around town in my pick-up truck, take down their signs, and stuff them in my garage. I ended up with half a garage full of bandit signs, but made no money for all my efforts. In the end, I decided to stop swimming upstream, so I started placing calls to the numbers listed on the signs. Now, the conversation usually goes something like this. I introduce myself and ask them if they generally fix up the houses they buy, or if they resell them. 16 ı FIND

17 Wholesalers 8 WAYS TO FIND MOTIVATED SELLERS The lingo is ask if they are wholesalers or rehabbers. Typically, the answer is: I fix most of them up, but I resell some, too. What that really means in most cases is that they wholesale most of the properties to other investors, and they re trying to accumulate the money to start rehabbing properties themselves. The fact is that people making the big money don t have time to go around hanging up signs and answering the phones. So, most of these bandit-sign individuals are trying to generate capital by wholesaling deals to someone like you and me, who are going to make the big dollars. Depending on the deal, they ll typically charge you $2,000 to $5,000. I ve been charged as little as $500, but also as much as $15,000. If it s a good enough deal, I m fine with that. The trick is that you don t negotiate them on the fee, if the numbers fit the 70% Rule (I will teach you the 70% Rule shortly). If the numbers work, keep these scouts happy and don t fight them, because they re a great source for deals. They re actually pounding the pavement, going to the neighborhoods and talking to people, pulling ladders out of their trucks and nailing signs to the telephone poles, and in general doing the stuff that you don t want to or need to do. You re not going to make money hanging up signs; you make money when you buy. In any event, if they tell you they wholesale some of their houses, explain that you re a rehabber, and you re looking to buy a bunch of houses. Or you can say that you ve got a bunch of money burning a hole in your pocket, and you need some deals right now. Go on by saying, I believe in doing business the right way. I m not going to screw you or let you down by not closing the deal. If I tell you I m going to close, I m going to close. If you send me a lead on a deal, I ll give you an answer and we ll put together the deal in 48 hours. Continue with, I m not going to negotiate you on your fees. I m going to do what I say I ll do. I ve got cash, and we re going to build a relationship and work together. That s music to their ears. Then, program their number into your phone. I have a whole list of wholesalers on my phone. I started calling the phone numbers on these signs, and got a lead on a deal within a week that netted me $250,000. You better believe I stopped tearing down signs and started calling more of them. I effectively turned my competitors into one of my marketing arms. Now, some of them bring me six or seven deals a month. 17 ı FIND

18 8 WAYS TO FIND MOTIVATED SELLERS LAWYERS Understand that most of these guys want to be where you re at. This is a relationship business. Build the relationship and use it to your mutual advantage. Give them tips, help them out. If they move up the chain and become rehabbers, don t worry, because there will be a whole new group of wholesalers to come along and replace them. But frankly, if you remind these scouts what they stand to make doing business with you, they may realize they re doing well enough as it is. Ask them how many deals they do a month. Usually it s two or three. Tell them to make you their first call. That phrase is the key: Make me your first call before you call any other rehabbers in town. Give me a shot first and see what I can do for you. Then follow up with another call a few days later to remind them who you are and let them know you re serious. They ll quickly become a very good resource for you. Treat them right, take them out to lunch now and again. Make them your friends, and they ll call you for deals. 3. Lawyers Insurance and divorce lawyers Meeting the homeowner Become an expert witness Flipping Machine Tip: Target Insurance and Divorce Lawyers I recommend that you target two types of lawyers: lawyers who sue insurance companies and divorce lawyers. The advantage of working with these lawyers is that they have already done the negotiation for you. Insurance and divorce lawyers Lawyers are a great source of leads for your Flipping Machine. After chasing fire trucks, I kick-started my career by contacting lawyers who specialized in suing insurance companies on behalf of homeowners. These homeowners felt the insurance companies did not follow their own contracts and did not pay out the insurance money the homeowner deserved when their house was damaged. When a house suffers fire, water, wind, hail or foundation damage, and a homeowner is underinsured or not covered for certain type of loss, the homeowner is trapped in a bad situation. Many times the homeowner will contact an attorney who reads the homeowner s insurance contract and finds something that the insurance company has defaulted on their obligations. The attorney then sees an opportunity to sue the insurance company on behalf of the homeowner for big dollars. This litigation process usually takes about two years. 18 ı FIND

19 LAWYERS 8 WAYS TO FIND MOTIVATED SELLERS There are two types of lawyers who I recommend you target: lawyers who sue insurance companies and divorce lawyers. The advantage of working with these lawyers is that they have already done the negotiation for you. By this time, litigation has gone on -- or will go on -- for about two years. Their clients are worn out and usually ready to be rid of the property involved in the case. Here s how you introduce yourself to lawyers, by phone or letter: I m (your name), and I invest in real estate. I buy several houses a year and I can help you, because I only buy properties that are in damaged condition. If you have clients who are suing insurance companies and their properties are damaged, I am happy to act as an expert witness on your behalf at no charge to prove the property is devalued. I can give you a written estimate, or a real estate contract, showing you the current value of the property with all its damages. Any time that you need me, I ll go and assess a property at no charge to you and send you a letter describing its actual value, because of the extensive damage the property has suffered. You may be thinking, How am I an expert? The answer is because no one else but an investor will purchase this property. Remember, the average homeowner does not want a property in bad condition. This leaves investors as an only choice to purchase a property like this. Since you are an investor, you are now an expert. Tell the lawyers you ll send them your information and your card. Don t call them every day. Don t call them 48 hours later. Call them once every two weeks to remind them of who you are and how you can help them. When you speak to the attorney, explain that what you re asking in return for your expert opinion is simply the opportunity to meet the client whose property you re assessing. Tell the lawyer that once you meet the client, you would like to offer to purchase their client s property, once the insurance claim is settled. Remind the lawyer that you are willing to assess the property at no charge. Meeting the homeowner When you meet the homeowner, introduce yourself as someone whom their lawyer referred. This creates an automatic bond of trust. 19 ı FIND

20 8 WAYS TO FIND MOTIVATED SELLERS LAWYERS Explain that you re there to assess the property, on the lawyer s behalf, for the purposes of the litigation. When the litigation is settled, you d be willing to buy the house. Also explain that although you will be assessing the house at a low value, you may be willing to pay a little more for the property, once their claim is settled. This lets the homeowners know you are on their side during the litigation, but you have some leeway to perhaps pay more for the property if they need your help. In many cases, the person has already vacated the property and will be more than happy to sell it when the insurance problem is settled. After all, the litigation may have been going on for years, and the emotional attachment to the home is usually severed. Worse, from their standpoint, if they ve moved out, they re probably still making mortgage payments on the damaged home so that they don t ruin their credit. For the homeowner, it s a very emotionally stressful process. We are a very litigious society. You don t have to be right to win a lawsuit, you just have to provide evidence that you would be right. So people sue all the time. Most insurance companies know it s a long, legal battle. The insurance company will try to delay the process, but eventually they try to settle. Every person who I have bought houses from has won by settling or won in court. All of them have received a payment from the insurance company. What this means to you is that with the proceeds from the lawsuit, they usually get enough money to pay off their existing mortgage or to pay it down substantially. This means you get a better deal, since you re buying a house with good equity and the homeowner believes that the house is trouble ridden. This, combined with the fact that they have been through a long litigation process and their lawyer referred you to them, means you have to do very little negotiating to get great deals. Become an expert witness I have done countless deals resulting from attorneys introducing me to their clients. Is it difficult to become an expert witness? Not at all. I have only done it three times in my entire career and it is very simple. Remember, it s not up to you to win the case. You just have to explain why the property is undervalued. This simply means showing the current poor condition of the property versus the rest of the property values in the neighborhood. You can do this by pulling comparables. 20 ı FIND

21 Bail bondsmen Pre-foreclosures 8 WAYS TO FIND MOTIVATED SELLERS Remember, if you are a real estate investor, even a beginner, you are an expert since you know more about evaluating a property in poor condition than the average citizen. DIVORCE LETTER (see Chapter13 - section Forms and Documents, p.72) 4. Bail bondsmen This technique is rarely used, but it s a pot of gold: bail bondsmen. When someone goes to jail and has to post bail of, say, $50,000 to $100,000, how likely are they to have that kind of money sitting around in their bank account? So they go to a bail bondsman, lay down 10% of the bail amount and the bail bondsman pays the rest. This 10% is the down payment on the bond, but what secures the other 90% of the loan that the bail bondsman is paying? That s right. Property. Flipping Machine Tip: How to Get a Bail Bondsman s Attention: Send your letter in a pink envelope Have a woman address the envelope with feminine handwriting Spray women s perfume on it But the people going to jail usually don t have large amounts of equity in their homes. Guess whose home they use? Unfortunately, it s usually Mom and Dad s property. The tragic fact is that poor people go to jail far more often than the rich not because they re worse people, but because they have fewer choices in life. However, Mom and Dad are usually older and have a home that they ve paid off. Now, after posting bail, they have a huge lien on their house placed by their child s bail bondsman. Frequently, the lien on the house sits and sits for five, ten, fifteen years. What does a bail bondsman care about? Does he want the property? No, he needs cash. So bail bondsmen have a problem one that you can solve for them. They have properties that, first of all, they don t want, and secondly, are usually run down. Bail bondsmen are hard to reach. You ll want to introduce yourself by phone if possible, but if you can t speak with them by phone, write a letter. Here are some tips for getting a bail bondsman s attention with letters: 1) to send a letter in a pink envelope, 2) have a woman address the envelope with feminine handwriting, and 3) spray women s perfume on it. Flipping Machine Tip: Think About People You will be much more successful if you think about people, not numbers. If you re not solving people s problems, you will never make a deal. This is just to get the bondsman to open the envelope. The letter itself can be a computer-printed page. LETTER TO BAIL BONDSMAN (see Chapter13 - section Forms and Documents, p.76) 21 ı FIND

22 8 WAYS TO FIND MOTIVATED SELLERS Pre-foreclosures Foreclosures 5. Pre-Foreclosures This is a great way to buy properties. You can find out about pre-foreclosures from the Notice of Default Lists, which are available from the county records office. These are posted once a homeowner has missed between two and three payments on their mortgage. The mortgage company alerts the county office, in case there is a public auction of the house, and the county posts the lists. The challenge is that a lot of people are learning how to check for Notice of Default Lists, so sometimes homeowners in pre-foreclosure have four or five investors contacting them at the same time. How do you stand out among the crowd? Once again, you use the pink envelope technique. When you have women s handwriting on the outside of the pink envelope with women s perfume you will reach your target audience. The man of the house will open it out of curiosity, if he gets the letter first. If the woman of the house gets the letter first, you are guaranteed that the letter will be opened. For some reason, the woman of the house tends to find these letters first. This is an advantage. In foreclosure situations, the woman of the house tends to think more logically about selling the property and preparing to move her family to another safe nest. The man of the house tends to think he can save the family from foreclosure even at the 11th hour. Either way, you accomplish your goal, which is to get your letter read! If you want to make your time more productive, work with wholesalers. Wholesalers like to send letters out and follow up with homeowners in pre-foreclosure. It can take time to send letters and wait for responses. Since this is a Flipping Machine, you can leverage your time by working with wholesalers. Forge relationships with wholesalers. Teach them the pink letter technique. Pay their $2,000 to $5,000 finders fee and let them send the letters and follow up with homeowners. While the wholesaler is doing this, you can be working with real estate agents, attorneys and other wholesalers. PRE-FORECLOSURE LETTER (see Chapter13 - section Forms and Documents, p.77) 22 ı FIND

23 Foundation repair companies 8 WAYS TO FIND MOTIVATED SELLERS 6. Foreclosures Foreclosures are properties that have been through the pre-foreclosure period and have already been fully foreclosed on. In a hot market, people often protest that they can t find good deals. My question is What happens when the market goes up? Property values skyrocket, and so do property taxes. Once property taxes go up, a lot of homeowners can t afford the higher taxes. When people can t afford higher taxes, tax foreclosures go up. This means opportunity goes up. One great source of finding tax foreclosure lists is to simply call the tax office. Every property tax office has an attorney that they use for foreclosing on tax sale properties. Simply ask the tax office s attorney for the list. For as little as a dollar they will send you the list of tax foreclosures in your area. Mortgage foreclosures also go up in a hot market. Interest rates go up, and a lot of people are invested in interest-only adjustable-rate mortgages, or ARMS. Even if the market goes up just a few half-points, suddenly they can t afford their mortgage payments. Flipping Machine Tip: Foreclosures at Every Level I once flipped a property owned by a famous basketball player. The bank sold the property for $1.2 million dollars below market value. The more a property is worth, the bigger the opportunity for big profits. You will have few competitors for properties worth more than $1 million. These larger investments can be your homeruns. There are foreclosures at every income level. Keep your eyes open for opportunities in every income bracket. You typically want to find foreclosures through your REO real estate agent. They have contacts with the banks who want to get rid of these properties. When you build a relationship with your REO real estate agent, you will have a valuable asset. TAX DELINQUENCY LETTER (see Chapter13 - section Forms and Documents, p.79) VACANT PROPERTY LETTER (see Chapter13 - section Forms and Documents, p.80) 7. Foundation repair companies An interesting way of adding to your deal-finding machine is to send letters to foundation repair companies. Have you ever heard ads for foundation companies on the radio? If your foundation is moving, call ABC Foundation Company! In many cases, when the foundation repair people go out to the house, the homeowner turns out to be uninsured. This means they don t have the right type of coverage or they don t have enough insurance coverage to fix the foundation. 23 ı FIND

24 8 WAYS TO FIND MOTIVATED SELLERS Sheriff sales Is the homeowner going to pay $20,000 to $40,000 out of their pocket to fix the foundation? In many cases they simply can t afford the cost of foundation repair if their insurance company is not going pay for it. You now have a homeowner who becomes a seller with a problem. This leads to opportunity for you. You can send a letter to the foundation repair companies asking them to hand out your business card to people who are uninsured and do not have the money to repair their foundation. They can let the homeowner know that if they don t have the money to repair the foundation, they know someone you who will buy the house as - is from them. Flipping Machine Tip: Keep Going! Don t get discouraged if you can t make deals at first. Every deal that does not come through is one deal that brings you closer to making it happen. Thomas Edison famously tried hundreds of ways to invent a filament to make a light bulb. His attitude was that each failure brought him one step closer to the right solution. Let the foundation company know that if you purchase one of these houses, you ll use their company to do the repairs. You will be amazed at how many leads you ll get. This is a very efficient way of marketing. You re basically partnering with someone who is doing your marketing for you. FOUNDATION REPAIR LETTER (see Chapter13 - section Forms and Documents, p.82) 8. Sheriff sales You can also go to sheriff sales. But I find these less productive or too laborintensive to be worth pursuing in flipping houses. People like to acquire tax sale houses and foreclosures on the steps of the county courthouse. I don t do that. For one thing, sheriff sales require cash in hand. I prefer not to invest my personal cash in a property, especially in a sheriff sale. In Texas and many other states, the county does not guarantee title. This means that when you buy the house, someone else might have a right to own that property. When you don t have clear title, you have problems. This is why I always go through a title company, escrow company or real estate lawyer to close my deals. I am looking for title insurance. If I don t get clear title to the property and I have title insurance, I file a claim and get my money back. The result is that in some cases you can t sell a sheriff sale property for two or three years and you re stuck with it. I always want clear title and I use experts, such as title companies, escrow companies and real estate attorneys to guarantee my title. Secondly, if the house is being sold on the county courthouse steps, you probably haven t gone inside the house. Why not? Because the owners of the property 24 ı FIND

25 Solve People s Problems 8 WAYS TO FIND MOTIVATED SELLERS don t usually vacate the property until after foreclosure, and most of these are not listed on the MLS. This means that even if the house is vacant, you can t go inside. If you can t go inside, you can t assess the damage. You don t know what you re getting. I don t recommend buying something you haven t seen first, until you have lots of experience under your belt. Even then, proceed with caution. A final problem is that you re competing with dozens of other people in a bidding war. It s like going to an auction they create a sense of scarcity. This fosters a hurry-it-up mentality that makes it hard to stick to the numbers that work. Even worse, this becomes an emotional investment property. Emotional Flipping Machine Tip: Know the Seller s Why You must always know why a person is selling a property, before you can get a good deal on it. Solve People s Problems Janice and Mike s Water-damaged Dream House I met a man and woman, Mike and Janice, who were involved in a lawsuit with their insurance company over a leakage in their dream home. They had lived in the house for almost 20 years and raised their two kids there. The litigation lasted four years, before I came along. They were suing their insurance company, because their dream home had suffered water damage, and their insurance company was not paying their claim. I met them through their attorney, who asked me to assess the house. While assessing the damage on their house, they informed me that they were tired of the litigation. I let them know that when they were ready, I would be willing to purchase the property. They called me back a month later to look at buying the property. I made an offer on the property for $160,000. It was worth $330,000 in good condition. They took my offer with very little negotiating. Why? Because, first I listened, then I solved their problem. When I met Janice and Mike, the first thing I did was to listen to them talk about all the problems they were having with the property. They talked about how wonderful it had been to raise their kids there, how the leaks got started, how the insurance company wouldn t pay, how the attorneys had gotten involved, how it had dragged on and how now they just wanted to unload it. I listened for over an hour and a half. What was the key I needed to make the deal? I listened to their problems. By listening, I found out what they ultimately wanted. Yes, I understood they wanted a good price for their house, but there were other things they wanted as well. They wanted someone to validate their story. I did this by listening. They were upset about the fact that they had raised their kids to adulthood in this house and the house had many memories. I explained that I would make sure the house went to a loving family. When it came down to price, I had met their needs in so many other areas that it was easy to agree on price. The results I got all came down to listening to their story. 25 ı FIND

26 8 WAYS TO FIND MOTIVATED SELLERS Sally s Pre-Foreclosure Short Sale Story Sally s Pre-Foreclosure Short Sale Story Mold is Gold Here s an example of a short sale I did on a pre-foreclosure property. A short sale is when the bank is willing to accept less money than what is owed on the mortgage. This is a great technique to use when wholesalers bring you pre-foreclosure properties. A wholesaler who posts bandit signs told me about a woman named Sally. She had a property that she felt was worth $105,000 to $110,000. She had bought the property the previous year for $105,000. The wholesaler said he had tried selling this property to several other rehabbers, but no one could get the deal done. He explained that the house had mold. I told him I love mold. Mold is gold to me, I explained. I had him take me to the woman that night. We went to the house, which the woman didn t live in, late in the evening. I listened to Sally s story. She told us how the weekend she was moving in, the nextdoor neighbor came to her, saying, Oh, I see you bought the mold house. The neighbor explained that the city s water main had broken and flooded the place. Sally was stunned. No one had informed her before that there was a mold problem. She left her things in her house and moved out that same day. Yes, Sally moved out of the house the same weekend she was moving in. Next, she filed a lawsuit against the previous owner, the insurance company, and the real estate agent for failing to disclose the mold problem. She walked me through the house and pointed out all the places where mold had infested it. I ve been in thousands of mold houses over the years. I know mold when I see it. In fact, I prefer to see mold, because it helps me get good deals. Let me tell you, there wasn t a single speck of mold in that house. The problem was that Sally believed it. She had been told there was a serious mold problem by her attorney, by her neighbor and she was fixated on it for over a year. It had become an obsession and a huge psychological burden for her. I was wise enough to know that if I tried to tell her the truth that there was no mold in the house she would have thrown me out for being disrespectful to her. So many people had come in and told her there was mold in her house that she knew there was mold in there. I was not about to tell her otherwise. It quickly occurred to me why no one had been able to make the deal before. They were so emotionally vested in her story, they didn t take the time to see the facts. The fact was that there was no mold. But she would never believe there was no mold if an army of scientists told her this. The other fact was she had a real problem. She had moved into another house, and as a single mom, she was now making two house payments. Her daughter was getting ready to graduate high school and she couldn t pay for both houses and her daughter s college tuition. She had to make a decision: either her daughter would not go to college or she allowed the house to be foreclosed on, so she could help her daughter. I asked Sally: Ma am, what can I do to help you? 26 ı FIND

27 Sally s Pre-Foreclosure Short Sale Story 8 WAYS TO FIND MOTIVATED SELLERS She started to cry. Get me out of this. Sally was stretched, living on a teacher s salary with a child about to start college, paying $1,000 a month mortgage for an empty house, plus another $1,000 per month rent for the place where she was actually living. Her credit was still good, but her time was running out. If I can get you out of this, I asked, will you give me the opportunity to purchase the property? She replied, Absolutely. I explained to Sally that I was going to contact the bank and see if the bank would forgive part of the mortgage she owed on the house. Next, I explained that I would request the bank to not let this short sale transaction reflect negatively on her credit. I would also request the bank to not charge her taxes on the debt. You see, banks have the right to take their losses on a mortgage -- whether it is by short sale or foreclosure and use it as a tax write off by charging it back to the borrower. When they use these losses as a write off, the bank will send a 1099 Form to the IRS, which taxes the borrower on the amount of difference between the real mortgage balance and the amount of the short sale price. I was upfront with Sally about what I was doing and how I was going to protect her. I believe in building a strong relationship between myself as a buyer and the seller. Because I forge great relationships, I tend to get referrals. Remember, birds of a feather Many people who are in foreclosure have friends who are in foreclosure as well. I wrote the bank a letter, explaining that Sally had an engineer s report indicating there was a possibility of mold in the house. The engineer s report was not by a micro-biologist who specializes in mold. It was performed by a structural engineer who stated in his report that the property had possible mold damage based on the homeowners statement of events. I also asked a general contractor to bid a price for fixing the house, based on if the house had mold in it. I sent both the engineer s report and the contractors bid to the bank. I also explained to the bank that this woman had never missed a payment, but if they didn t discount the mortgage so she could sell the property, she was not only risking missing payments, but if she was foreclosed, the bank would possibly be stuck with a mold-infested house that couldn t be sold. The bank replied that they would not sell the house. I submitted the letter a second time. I don t know what changed, but a week later, they accepted my offer of $45,000. The bank discounted the mortgage from $105,000 to $45,000. This is where I made my profit. The woman could barely believe me when I told her they d accepted the offer. I put about $2,200 into it to clean the carpet and touch up the paint. Two months later, I sold the house for $128,000. Sally no longer had a $1,000-a-month debt she couldn t afford. She cried when I called and told her she could now send her daughter to college with no more worries about the property. First I solved the seller s problem. Then I made a profit. 27 ı FIND