Appraisals – Find, Negotiate and Fund Better Deals

Beauty is in the eye of the beholder … and in real estate, an appraisal is what gives you the unbiased, third party opinion on a property.

Appraisals happen whenever a lender is involved in a transaction, but that’s not the only time you’ll need or want an appraisal.

We’ll examine the three ways appraisers can evaluate a property, why you shouldn’t accept an appraisal as gospel truth, and how you can use an appraisal to SAVE money on your next deal

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your valuable host, Robert Helms
  • His admiring co-host, Russell Gray

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Understand what an appraisal is

Nearly everyone who has purchased a property has dealt with an appraiser. In most all cases involving a lender, an appraiser is involved.

A lender is one of several parties interested in the value of a property. The seller, buyer, and lender all have an interest in knowing about value for different reasons.

But, an appraiser has no vested interest in a property’s value, making them the neutral third party. However, even though they are neutral, it’s good to keep in mind that their appraisal is an opinion of value.

While lenders are often interested in an appraisal to check out the value of the home versus the loan, it’s a FANTASTIC tool for investors, too.

Appraisers can determine the value of a property based on future use. Depending on what improvements or changes an investor plans to make, the value of a property changes.

So, why would you need to understand valuation?

  • To secure a loan
  • To evaluate a deal
  • To understand your portfolio’s value

An appraisal doesn’t only happen when evaluating or completing a real estate deal. It’s a way to understand your portfolio and properties at any point along the way.

Decode the jargon

An appraisal has a very specific purpose. Its job is to solve a problem: what is the highest and best use for this? That’s the challenge.

Appraisers in many countries use the same methods and standards to solve this problem. The Appraisal Standards Board (ASB) develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP).

The appraisal report is created using a combination of three methods:

  1. Sales comparison method. Look at similar properties and what they’ve sold for recently.
  2. Capitalization approach (income approach). This is the value the property based on the income it generates. What are people renting for right now? Where else could they go locally? In some cases, there aren’t many comps to look at, so the income a property is currently generating might be more appropriate.
  3. Summation approach (Cost segregation approach). Look at the income from the property and ask: What would it cost today for the land, construction, and development? This is a way to appraise a large, one-off or unique building.

The appraisers job is to look at the value based on these approaches and to weigh them properly.

How to use an appraisal report

Since appraisal reports are a third-party opinion of value, they aren’t set in stone, and shouldn’t be taken as the gospel truth.

Once you know what goes into an appraisal report, you can think critically about them and extract the parts that are useful.

And, it can be a valuable tool for negotiation.

In some cases, if an appraisal comes back LOWER than the offered price, it’s appropriate to go to the seller and start with that valuation in the negotiations.

Or, if you’re planning to go in on a deal with someone else and need to split the property value later, an appraisal is that neutral party that provides the numbers.

As with any expert, appraisers have a WEALTH of knowledge, and it’s worth learning a little about their craft. Some appraisers have some impressive niches, including airports, commercial buildings, and even haunted properties!

If possible, try to be on-site for an appraisal and learn what the appraiser is looking for. All of this information feeds into your education and foundation on how to improve properties to get the best bang for your buck … especially in a refinance or a sale.

Appraisals are a valuable tool for an investor. Whenever possible, be sure to spend the money on an experienced, well-respected appraiser. Then, when you get your report, understand the value AND the limitations of a report as you make your important investment decisions!


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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Preparing for a New Year with Zero-Based Thinking

At the beginning of a new year, we invite you to take a look at where you’ve been, where you’re at now, and where you’re going.

Whether you’ve never bought a property or you have a full portfolio, NOW is the time to reflect and make sure you’re on the right path with your goals and your business.

After all, “If you don’t change anything, nothing changes.”

In this show, we’ll walk you through how to apply success strategist Brian Tracy’s concept of zero-based thinking to the real estate business, starting with two important questions:

  1. Knowing what you know now, would you make the decisions of the past year again?
  2. Why or why not?

Perhaps you just need to do some fine-tuning … or perhaps you need a major course correction! Either way, we want to help YOU make better decisions going forward.

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your host, team player Robert Helms
  • His doesn’t-always-play-well-with-others co-host, Russell Gray

Listen



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Evaluate yourself … and your team

Your evaluation should start with yourself. Begin the process by applying the question, “Knowing what I know now, would I make that decision again?” to the properties in your portfolio.

Then, ask yourself why you would or would not make that decision again. You can divide your answer into three categories … the property, the people involved, and the marketplace.

Answering this question about your decisions will help you avoid making the same mistakes going forward and make more targeted decisions.

After your self-evaluation, look at your team.

Every real estate investor has a team. As an investor, you’re a borrower, a buyer, a client, and a customer … and on the other side of these relationships sit your team members.

As you evaluate your team, start by asking some essential questions:

  1. Do I have everyone I need to run my business?
  2. Where is each person on a scale of 1 to 10? Why?
  3. How could I change or augment this relationship to get this team member up to a 9 or 10?
  4. Ultimately, ask yourself, can I salvage this relationship or do I need to start over?

You can’t always change the people on your team, but you can change your relationship with them. So, figure out what you can do to get to where you want … or whether you need to replace a low performer entirely.

Also ask yourself, “What makes a good team member for ME?” Figure out why your high performers are 8s, 9s, and 10s, then look to them to coach other members of your team and offer referrals.

You want the people on your team to be better, smarter, harder-working, and more committed than most people out there … even if it means they’re better than you.

Your TEAM has helped you get to where you are … so build them up. Serve your team members, and put them in a position to win, so YOU can win too.

And, if you’re looking for more feedback on yourself, ask your team to evaluate how YOU can become a better client. This will strengthen the relationship on both ends.

Review and fine-tune your financial situation

As an investor, you should have a basic idea of where you’re at and where you want to go … in other words, your personal investment philosophy.

If you haven’t yet fleshed out your personal investment philosophy, we highly encourage you to take that step before digging deeper.

Got your investment philosophy written out, revised, and ready to go? Now is a GREAT time of year to take a look at your financial situation … and evaluate where you can minimize spending.

There are three major expenses that can be leveraged against your equity to free up some investable money:

  1. Interest
  2. Insurance
  3. Taxes

Guess what all three have in common? They’re an expense everyone pays for, but no one wants to.

You could brown-bag it every day to save money … OR you could work on minimizing the costs you really don’t want to be spending money on in the first place.

Your responsibility as an investor is to manage debt, equity, and cash flow. It’s key that you have a strategy to manage your money so you can accelerate equity growth.

Your first step in making a financial change is to seek out experts on your team who can help you get to where you want to go. Your second step is to ask yourself what’s missing in your own portfolio of knowledge … and then seek out education and training to address gaps.

Below are tools for evaluating each of these three major areas of expense.

Interest

The basic question you want to ask when it comes to interest is, “Are there places I can change my loan so it makes more sense?”

As with any financial decision, step carefully and rely upon knowledgeable team members.

Look at the big picture to see where you might make changes. You want to manage your mortgage for maximum net worth.

Check to see whether your lender will bundle properties to free up your borrowing power. Look at your current interest rates and loan terms.

Consider refinancing, but realize that refinancing means kicking a big can down the road. So, consider the long run, and not just your monthly cash flow.

Insurance

For each insurance policy you hold, evaluate the policy itself as well as the carrier.

Make sure your policies will actually pay the risks you’re exposed to.

We recommend meeting with your insurance company to evaluate the company and your policy and find ways to optimize your premium.

There’s a steep learning curve here, so make sure you have a knowledgeable team member by your side or available for questions.

Taxes

No one wants to pay taxes. Ideally, we would all pay as little as legally possible.

To do so, you need to know the tax law and, most importantly, have a good tax team … your financial advisor and your accountant.

We recommend meeting with your tax advisor to reassess cost segregation, property tax mitigation, your depreciation schedules, cost acceleration, expensing business costs, and structuring your business.

Real estate is one of the best assets when it comes to tax benefits, so invest some time to educate yourself.

And be proactive … come to your CPA with ideas and questions. Ask, “How can I do this?” instead of “Is this possible?”

Assess how you spend your time

Time is also an asset … perhaps your most valuable one.

By choice, we spend less time on real estate investing now because our priorities have changed. That doesn’t mean our profits have suffered, however.

Look at your calendar, relationships, health, and satisfaction level and ask yourself, “Do I own this business, or does it own me?”

To make a change, start by keeping a detailed calendar of how you spend your time.

Look at easily delegated tasks first and find ways to offload them.

Then look at the critical tasks on your list and figure out what the key performance indicators are for each task. Set up processes so you can delegate these tasks as well.

Refashion yourself … from a one-band man, to a well-oiled team.

We encourage you to find clarity about the things that absolutely require your time and effort, and the things that can be delegated and even done better by others.

The shift from self-employed to team manager requires a lot of fortitude, devotion, and skill, but it’s absolutely worth it.

Ultimately, your business should be fashioned in a way that it could be a model for 1,000 more just like it … a smooth-functioning machine.

Ask yourself, “If I didn’t own this business, would I buy it?” Because you are buying it with your blood, sweat, and tears on a daily basis.

Check your mission, vision, and values

You don’t want to spend your whole life trying to get from Point A to Point B if Point B isn’t really where you want to be.

Don’t get so caught up in the doing that you forget your destination.

All your strength as a real estate investor will come from your mission, vision, and values … so make sure you sit down and really fine-tune those three core beliefs.

Interested in having us coach you through the process of finding your mission, vision, and values? Check our Create Your Future Goals Retreat and get on the advanced waiting list now.

At the beginning of a new year, take stock. Congratulate yourself for what you’ve achieved … and get excited about where real estate can take you. There really are no limits!


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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

The future of growth …

Put on your thinking cap.  This one’s going to use some brainpower.  But if your investment plans involve money and the future, it’s probably worth the effort.

During our 2017 Investor Summit at Sea™, Chris Martenson warned that a financial system dependent on perpetual growth is unsustainable in a world of finite resources.

We’ll forego discussing “finite resources”, though there’s probably a lot of opportunity there.  The New Orleans Investment Conference is a great place to learn more.

For now, let’s consider “a financial system dependent on perpetual growth” … one of the most important, yet least understood, concepts about the eco-system we all operate in.

It’s simple, yet confusing.  Here it is in two sentences …

When dollars are borrowed into existence, the only way to service the debt is to issue more debt.  If the debt is paid off, the economy ends.

Imagine playing Monopoly and each player starts with $1,500.  With four players, the “economy” of the game is $6,000.  This “start” money comes from the banker.

New money is introduced two ways:

When a player passes Go and collects $200 from the banker … or when a player mortgages a property by borrowing from the banker.

Notice all the money to play comes from the banker.

So let’s MODIFY the game ever-so-slightly …

Let’s have the banker LOAN the start and payday money to each player at 10% interest per turn.

We still have four players starting with $1,500 each for an “economy” of $6,000.  But at the end of the first round, each player now owes the bank $150 of interest.

(We’ll forget about the additional payday loans … it just complicates the math and isn’t necessary to make the point)

But borrowing money into circulation creates three (hopefully) obvious problems …

First, there’s only $6,000 in circulation.  With total debt of $6,000 borrowed plus $600 of interest owed, it’s now IMPOSSIBLE to pay off the debt using only the money in the game so far.

And if the only way players get NEW money is borrowing, this creates a cycle of perpetually expanding debt.

Second, if each player paid ONLY the interest out of their $1,500 start money, after ten turns, they’ll have no money left at all.  But they still owe the original $1,500!

So you MUST GROW your asset base by more than the interest expense or you’re consumed by the debt.

Third, if all players try to free themselves from debt, they would take ALL the money in the game and give it to the banker, the game would end, and each player would still be in debt.

In this system, it’s physically impossible to extinguish the debt without extinguishing the economy and ending the game. 

Naturally, to keep the game going, the banker continually extends credit to the players.

It’s basically the way the global money system works and why people way smarter than us say it’s unsustainable.

It’s also like a Venus fly trap because any attempt to reduce overall systemic debt is deflationary, making existing debt even more burdensome.

Deflation means borrowers pay debt down with dollars worth more than those they originally borrowed.

Worse, any assets borrowed against have dropped in value.

Think of 2008 when the credit bubble deflated.  Property values fell, while the outstanding debt remained fixed.  Property owners were “underwater” (negative equity).

Meanwhile, the dollar was STRONG.  It took a whole lot LESS dollars to buy anything.

Everything was on sale and cash was king.  Lots of people got rich buying things with cash when others couldn’t borrow to buy.

Deflation is awesome when you’re sitting on cash.

You’d think lenders are happy to be paid back with better dollars.  And they are … IF they actually get paid.

But underwater borrowers often decide to default on the loan so they can keep their dollars.

So bankers HATE deflation.  No wonder the system they set up in 1913 demands perpetual expansion of debt and prices.

In fact, the Federal Reserve overtly targets 2% per year INFLATION:

“… inflation at the rate of 2 percent … is most consistent over the longer run with the Federal Reserve’s statutory mandate.”

Here’s the problem with perpetually expanding debt … it weakens an economy.

Sure, it drives inflation, but inflation weakens consumption.  When things cost more, people buy less.

Debt also requires interest.  Even at minimal rates, HUGE balances require big payments.

Interest on public and private debt take money away from production and consumption … causing both to shrink.  Just not at the beginning.

When first injected into an economy, debt gooses activity and provides a temporary high.

And as in our modified Monopoly game, once deployed, more NEW money is required just to keep the interest from consuming the economy. There’s a point where new injections produce diminishing returns.

Whew!  Thanks for staying with us.  Tape an aspirin to your forehead.

With that backdrop, consider this headline from Investor’s Business Daily

Here’s Why China’s Latest Growth Scare Should Worry You – May 30, 2017

Credit has been growing twice as fast as nominal GDP for years. The diminishing returns suggest that many loans are going to unprofitable ventures. They also signal that sustainable economic growth is far less than current growth rates. Such a rapid deceleration from the world’s No. 2 economy would sap demand and prices for raw materials such as copper, exacerbate overcapacity issues and act as a drag on an already-sluggish worldwide economy.”

Uh oh.  “Diminishing returns” and “deceleration” in the face of rapid credit growth.

When a junkie can’t get high, they either increase the dosage to the point of toxicity … or they wean themselves from the drug.

China is getting serious about weaning its economy off torrid credit growth, and data and financial markets already are showing early withdrawal symptoms.

Hmmm… sounds like they’re leaning towards weaning.  We like the addiction metaphor.

China and the United States are the two biggest economies.  What either does affects the world.

Right now, headlines say China is slowing its use of debt, which in turns slows its economic growth, with a ripple effect on other economies.

Meanwhile, the Trump Administration is talking bigly about reducing the deficit and debt. Will he do it? Can he do it?

Who knows? But if the global economic system sustains itself on ever-increasing debt. and the two biggest borrowers are going on debt diets … who’s willing and able to take on a bigger share of global debt?

And if no one does, then what happens to asset values?  Is deflation on the horizon?

Last question … then you can take a nap …

Would the Fed and other central banks allow deflation … or do they roll out QE4ever (quantitative easing) in an attempt to stop it?

Meanwhile, now seems like a good time to consider repositioning equity from properties and stocks with high asset values into properties with sober valuations and strong cash-flows.

After all, stocks and even real estate values might be a roller-coaster ride, but rents are more of a merry-go-round. Boring, but a nice place to hide when feeling queasy.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

8/22/10: What is Your Risk Paradigm? A Life or Debt Decision

Protecting your money in today’s highly uncertain economy is surely very challenging. Remember when real estate equity and bank accounts were considered among the SAFEST places to keep your savings?  Today, real estate equity has disappeared – and for many people even getting access to whatever equity they still have is next to impossible.  Boy, do we miss those equity lines of credit with their checkbooks and debit cards!

And even though you can still write checks on your cash deposits at a bank, with record bank failures even that old saying “sure as money in the bank” seems a little outdated.  Add horribly low interest rates and, to compound the injury, taxes on your meager interest earnings, it’s enough to make you wonder what this financial world is coming to.

Well, we have good news. There’s a new way to look at an old product – one that is time tested and has survived its fair share of economic turmoil.  And we got such a positive response to our first foray into this topic, we decided to re-visit it with a new guest.

In the radio lifeboat for another voyage into broadcasting brilliance:

  • Host and head lifeguard, Robert Helms
  • Co-host and lifeboat inflater, Russell Gray
  • Seasoned sailer of stormy economic seas, the Godfather of Real Estate, Bob Helms
  • Special guest, “infinite banking” expert, Patrick Donohoe

Right out of the gate we need to set the table, which is no small task with the lifeboat bobbing on the waves:  what does life insurance have to do with real estate investing?

Think about what a bank account has to do with real estate investing and you’re on the right track.  But unlike a bank account, our guest explains that certain types of life insurance – thought greatly misunderstood – offer far greater flexibility than bank accounts.  And though they aren’t FDIC insured, insurance companies are arguably more stable and conservatively run.  Unlike banks right now, you don’t hear a lot about record number of life insurance companies failing.

We also address why so many CONSUMER financial gurus are down on cash value life insurance, yet corporations like Wells Fargo and Wal-Mart buy tons of it.  Could it be there are BUSINESS purposes that make it very useful for BUSINESS people?  We say all the time that real estate investing is a business, so it makes good sense to see how businesses are using this financial tool.

For example, how’d you like you to take a tax deduction for making a deposit in your bank account?  Hmmm….that’s an interesting concept!  What about getting a loan against your equity without having to qualify?  Try doing that with a property!  And unlike property, the value isn’t determined by market forces, so your equity doesn’t disappear in a market downturn.

The point of this episode is that insurance can do a lot more than manage risk and pay a benefit. Our job is to expose you to some of the possibilities.  Your mission, should you choose to accept it, is to explore those possibilities, learn how to use this powerful tool, and decide when and where to use it to advance your real estate investing program.  It seems the economic storm isn’t over yet, so it might be a good idea to know how to operate the lifeboat.  It’s a matter of life and debt.

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.