Shoestring to Millions

Mark’s Experience- Methods of Analysis; His Marketing Launch Off– Part III

Posted on: July 2, 2009

Mark continues his job as an IT specialist. His hours at work have increased from 9am to 7pm due to the layoffs of fellow colleagues in his firm, as the economy is getting worse with housing under contract activity (this means that less contracts are being signed up by prospective buyers which translates into higher inventory and this has a depressing effect on real estate prices—This is a Good Indicator to Watch for an Investor).  After taking the assessment, Mark realized that he was lacking in the areas of Analysis, Negotiation and Structuring and has decided that before he embarked on the purchasing or investment into a project; he decided to improve his skills in property analysis.

TIP: Concepts that are important for Analysis:

a.     Cash on Cash Return: this is basically how much money you will make if you were to buy the property for all cash.

Formula: (Net Profit /Cash Investment)

b.     Loan to Value: this basically the amount of debt you take on to the present or future value of the property.

Formula:  Amount of Debt/ Value of the Property

c. Debt Service Ratio: this is the ratio where a lot of lenders look to see how much of their debt is being satisfied with the net income being produced by the property.

Formula: (Net Operating Income/ Annual Total Debt Service Payments)

**Typically aim to have the ratio at 1.20 and higher this means that for every $1.00 dollar of debt there is $1.20 of income. **

d. Debt to Income: this is the concept that comes into play where in the individual’s debts (including new housing mortgage payments and all other payments as seen on their credit report) divided by gross monthly income. Here in the lender is looking for a ratio of no more than 40-45% but with an Federal Housing Administration insured loan you can have the ratio as high as 50%.

e. Gross Rent Multiplier: this is the concept that the value of an income producing property is the gross rental income of a property multiplied by a multiplier (this multiplier is determined by old closed comps).

f. CMA: Comparative Market Analysis. This is the analysis put together by a Realtor wherein they compare the condition, size, lot size and type of property against other sold properties to help ascertain a market value for the property you as an investor will be buying.

http://www.realdata.com/calculator/index.htm (free calculator that you can use to easily input your figures and get the results for the various concepts)

Mark has finally started to put together his knowledge base for Analysis aspect of the Real Estate Process. He now knows and is better equipped to handle the deals that will be coming at him during the course of real estate investing career.

TIP: It is really important to have a sound foundation base of knowledge, as it is much easier and cheaper to learn in the privacy of your own self rather than messing up on a deal where in $10,000 or $100,000 of dollars on the line.

Mark while learning up on his analysis has decided to start putting together a marketing strategy and plan on how to get deals coming to him as he has learned from the Introduction Chapter of his Carleton Sheets Course. As a part of the marketing strategy, Mark has decided to enter the world of the pre-foreclosure market (this is a where all the investors starts up). Mark is excited to embark on the world of the distressed asset properties naïve to the world of sellers and buyers and emotions he is about to face.

Concept: Pre-foreclosure this is term wherein a seller who has been behind on their mortgage payment for the last few months. The lender has now filed a Notice of Intent to Foreclosure through their attorney. Once this notice is field and is uncontested, the property is now in the pre-foreclosure stage. In the state of New Jersey, a lender has to go through the judicial process wherein seller has between 6 to 12 months before the lender can officially foreclosure on the property.

Mark has decided to use $2,500 out of cash reserves to market to the preforeclosure market. Mark first and foremost signs up for a lead providing source and he decides on Realtytrac.com (the author of this blog does not endorse the service of Relatytrac.com and only refers to this website for the simplicity of the blog entry) from where in he can get access to information of homeowners against whom the default notice has been filed as this is a public notice filed in the court house of the county where the homeowner lives.

After getting his first list, Mark set ups a marketing plan of 5 points of contact marketing pieces (utilizing yellow letter, postcard and door knocking).

TIP: Remember it always takes about 5 to 7 points of contact before a customer or seller will reach back out to your marketing pieces

How successful is Mark’s first effort and does he get into his first deal. Tune in next week to find out.

MARKS NET WORTH as of July 2nd, 2009:  $74,500

Equity in home: $60,000

Savings: $2,500

401K: $12,000

Written by Ankit Duggal

Investment Director: www.rernj.com

RER is a boutique real estate investment company based in Clifton, NJ

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  • 2: Great City Mortgage Literature Sources ... Our foreclosure listin [...]...
  • Dennis's mortgage market guide: Great tips and info. namely on tax assessments.
  • krishna: Hey thanks a lot for posing this topic. I was preparing a paper presentation about this topic and i got many points about a real estate investor.

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