Real Estate Finance and Investment Manual

REAL ESTATE

FINANCE &

INVESTMENT

MANUAL

NINTH EDITION

JACK CUMMINGS

John Wiley & Sons, Inc.

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REAL ESTATE

FINANCE & INVESTMENT

MANUAL

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Works by Jack Cummings

The Complete Handbook of How to Farm Real Estate Listings and Sales, published by

Prentice Hall, 1973.

The Venture, a novel published by Charterhouse, 1976.

The Ultimate Game, a novel published by Major Books, 1978.

The Complete Guide to Real Estate Financing, published by Prentice Hall, 1978.

Lauderdale Run, a novel published by Manor Books, 1979.

Building Your Wealth through Creative Real Estate Investing, published by Pierce, 1980.

Successful Real Estate Investing for the Single Person, published by Playboy Press, 1981.

Cashless Investing in Real Estate, published by Playboy Press, 1982.

$1,000 Down Can Make You Rich, published by Simon & Schuster, 1985.

The Real Estate Financing Manual, published by Simon & Schuster, 1987.

The Business Traveler’s Survival Guide, published by John Wiley & Sons, 1991.

The Guide to Real Estate Exchanging, published by John Wiley & Sons, 1991.

The Real Estate Investing and Financing Manual, published by Simon & Schuster, 1993.

The McGraw-Hill 36-Hour Real Estate Investing Course, published by McGraw-Hill, 1993.

The Real Estate Investor’s Answer Book, published by McGraw-Hill, 1994, second revised

edition published in 2005.

The Real Estate Finance and Investment Manual, published by Simon & Schuster, 1997.

Investing in Real Estate with Other People’s Money, published by McGraw-Hill, 2004.

Commercial Real Estate Investing 12 Easy Steps, published by John Wiley & Sons, 2004.

The Tax-Free Exchange Loophole, published by John Wiley & Sons, 2005.

The Real Estate Investor’s Guide to Cash Flow and Equity Management, published by John

Wiley & Sons, 2006.

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REAL ESTATE

FINANCE &

INVESTMENT

MANUAL

NINTH EDITION

JACK CUMMINGS

John Wiley & Sons, Inc.

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This book is printed on acid-free paper. ∞

Copyright © 2008 by Jack Cummings. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,

electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108

of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization

through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers,

MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for per￾mission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken,

NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this

book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book

and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be

created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not

be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author

shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental,

consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer

Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax

(317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in

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Library of Congress Cataloging-in-Publication Data:

Cummings, Jack, 1940-

Real estate fi nance & investment manual Jack Cummings.—9th ed.

p. cm.

ISBN 978-0-470-26040-1 (pbk.)

1. Real estate business—Finance—Handbooks, manuals, etc. 2. Real estate investment—Finance—Handbooks,

manuals, etc. 3. Mortgage loans—Handbooks, manuals, etc. 4. Mortgages—Handbooks, manuals, etc. I. Title.

II. Title: Real estate fi nance and investment manual.

HD1375.C854 2008

332.7'20973—dc22

2008002757

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

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This book is dedicated

to the many thousands of real estate investors

who have already had the opportunity

to read earlier editions and who,

by their messages to me,

have attested that much of their

success is due to my showing them

the elements of successful real estate investing.

In addition, to the many new investors

who will become true and successful “insiders”

to this fi eld because of this book.

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vii

TABLE OF CONTENTS

Introduction—xxxv

Chapter 1

How Real Estate Investing Goals Help You Formulate

Effective Financing Strategies —1

Goal of This Chapter ....................................................................................................... 1

The goal of this chapter is to impress upon you the importance of establishing worthy and

measurable goals to which you can direct your investment efforts.

To Be Effective, Focus on Results ..................................................................................... 2

Have Clear Goals ..................................................................................................... 2

Essence of Accomplishment ............................................................................................. 3

Don’t Stray from the Right Path .......................................................................... 3

Location, Location, Location Is Not the Answer .............................................................. 3

Real Estate Is Not Universal ..................................................................................... 4

Your Secret Weapon Is the Local Building and Zoning Department ........................ 4

Be at the Right Place at the Right Time ............................................................................ 4

Without Action, the Best Time and Place Are Lost .................................................. 5

Get the Other Party to Commit First .................................................................. 5

Who Is More Motivated? ......................................................................................... 5

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viii TABLE OF CONTENTS

Know What Is Important ........................................................................................ 5

Carefully Investigate Existing Leases .................................................................... 6

Buyers Need a City Code Violation Inspection. .................................................. 6

Due Diligence Checklists .................................................................................... 6

Begin with Your Goals ...................................................................................................... 7

Enhance the Value of a Property .............................................................................. 8

Consolidate Existing Debt into More Manageable Debt .......................................... 9

Attract More Buyers to a Property for Sale ............................................................. 12

Increase the Market Potential of a Property ............................................................ 13

Meet the Tax-Free Exchange .................................................................................. 14

Increase the Return on Cash Invested in Income Properties ................................... 15

Generate Immediate Cash That Is Tax-Free ........................................................... 17

Maximize Equity Build Up of a Long-Term Investment ........................................ 18

Help Solve Tax Problems ....................................................................................... 18

Create Tax-Deferred Transactions .......................................................................... 19

Open New Doors for the Investor to Expand an Investment Portfolio ................... 20

Provide the Professional Touch to a Good Marketing Plan ..................................... 21

Know the Limitations of the Tools of Financing ............................................................. 21

Six Tips to Solving Real Estate Financing Needs or Problems ................................ 22

Chapter 2

How to Set Effective Goals for Successful Real

Estate Investing—23

Goal of This Chapter ..................................................................................................... 23

This chapter walks you through the goal setting process.

Word of Caution about Goal Setting ..................................................................... 23

The Chicken or the Egg? ................................................................................................ 24

Before You Can Get to Your Destination, You Must Decide

Where You Want to Go ..................................................................................... 25

Develop a Vision of the Future .............................................................................. 25

Learning to Visualize Your Goals ....................................................................... 25

Visualizing the Future Is Essential to Sound Goals ................................................. 26

Are Your Goals Realistic? ................................................................................................ 27

Is What You See What You Want? ......................................................................... 27

Your Goals Will Help You Properly Finance Your Real Estate Investments ............. 29

Take Stock of the Assets at Your Disposal .............................................................. 29

Examine All of Your Abilities and Liabilities. ..................................................... 29

Examine All of Your Wants................................................................................ 30

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Table of Contents ix

Set Intermediate Goals........................................................................................... 31

Who Do You Share Your Goals With? ................................................................... 31

Develop an Advancement Team ........................................................................ 31

Get Your Goals, Team Members, and Your Abilities and Put

Them to Work .................................................................................................. 32

Profi t in Real Estate through Your Comfort Zone .......................................................... 32

Why Is a Comfort Zone Important? ...................................................................... 32

The Comfort Zone Will Make You Successful ....................................................... 33

Building Your Comfort Zone................................................................................. 35

How to Get Started with Your Comfort Zone ....................................................... 35

This Concept Works Well for Investors and Real Estate Salespeople ...................... 36

We Live in a World of Nameless, Faceless Neighbors ............................................. 36

Make Your Comfort Zone Work with Creative Tools ............................................. 36

Chapter 3

The Power and Art of Effective Negotiating —40

Goal of This Chapter ..................................................................................................... 40

This chapter shows you how a win/win strategy begins with your goals fi rmly in focus and

ends with helping the other party to the transaction move closer to their goals.

Decision Time—Yours or Theirs? ................................................................................... 40

Darts-on-a-Map Time Is Over ........................................................................................ 41

Steps to Successful Negotiating ....................................................................................... 43

Basis of the Transaction ......................................................................................... 43

Review the Alternatives .......................................................................................... 44

Doing Effective Homework ................................................................................... 45

Blind ................................................................................................................. 45

Open ................................................................................................................. 46

Factors That Make Deals Come Together ....................................................................... 47

Why Does the Other Party Want to Buy or Sell? ................................................... 47

Who Is He or She Trying to Impress? .................................................................... 49

Know the Timing of the Transaction Better Than the Other Party Does ................ 49

Verify the Facts ...................................................................................................... 50

Tips for the Buyer .......................................................................................................... 50

Price ...................................................................................................................... 50

Legal Description .................................................................................................. 51

Mortgages .............................................................................................................. 52

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x TABLE OF CONTENTS

What Is Included with the Property? ..................................................................... 53

Are There Environmental Problems? ...................................................................... 53

Are There Code Violations? ................................................................................... 53

Tips for the Seller ........................................................................................................... 54

When Will the Closing of the Transaction Occur? ................................................. 54

How Is the Price Determined, and Exactly How Much Is It? ................................. 54

How Are the Mortgages to Be Paid? ....................................................................... 54

Get Started on the Right Foot ............................................................................... 55

Getting Started ............................................................................................................... 55

Understand the Essence of Negotiation ................................................................. 56

Confrontation Before Negotiation ......................................................................... 57

Carpet Merchant Style Negotiation ................................................................... 57

Win by Knowing the Other Player’s Weaknesses and Goals ................................... 58

Building Trust Is Building a Network for Success ........................................................... 59

How Sweet It Is .............................................................................................................. 59

Chapter 4

How Leverage Affects Risk and the Value of Real Estate—61

Goal of This Chapter ..................................................................................................... 61

This chapter illustrates the mechanics of leverage and shows you how its magic can gen￾erate enormous increases of investment yield and property value when used wisely and

correctly.

Defi nition ...................................................................................................................... 61

Positive Leverage .................................................................................................... 61

Negative Leverage .................................................................................................. 62

Role of Risk in Leverage ................................................................................................. 63

Relativity of Risk ................................................................................................... 64

Example 1 ......................................................................................................... 64

Example 2 ......................................................................................................... 64

Example 1: Review ............................................................................................ 64

Example 2: Review. ........................................................................................... 65

Introduce Leverage into the Equation .................................................................... 65

Example 3 ......................................................................................................... 66

Effect of Constant Rate on Cash Flow ............................................................................ 68

Learn the Effect of Constant Rate Financing ......................................................... 68

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Table of Contents xi

Value and Risk in Leverage: The Bottom Line Can Be the Most Important

Criteria to Determine Both Value and Risk ....................................................... 69

Key Factors in Real Estate Leverage ................................................................................ 69

Structure of Financing Affects the Amount of Leverage You Receive ...................... 69

Leverage Calculations Are Merely a Comparison of the Yield Changes .................. 70

Maximum Leverage May Not Be Possible in All Situations .................................... 70

Appreciation...................................................................................................... 70

Equity Buildup .................................................................................................. 70

Cash Flow ......................................................................................................... 71

Tax Credits ........................................................................................................ 71

Use of Funds Available ...................................................................................... 71

Amount of Leverage Generated Is Not the Final Criteria ....................................... 71

Investment Leverage Available to Real Estate Investors Is Maximum ..................... 72

Leverage Is a Function of Financing and Can Be Seen as a Gauge of How One

Investment Strategy Compares with Another .................................................... 72

Pitfall of Leverage: Overextension .......................................................................... 73

Final Element: How Leverage Affects the Increase of Value in Real Estate.............. 74

Infl ation ............................................................................................................ 74

Example 4: How Infl ation and Leverage Create Value. ...................................... 75

Improved Infrastructure .................................................................................... 76

Government Control and Regulation Changes .................................................. 77

Neighborhood Sizzle ......................................................................................... 77

Economic Conversion ....................................................................................... 78

Increased Bottom Line ...................................................................................... 78

Steps Necessary to Increase Cash Flow .............................................................. 78

Capital Improvements ....................................................................................... 80

Supply and Demand ......................................................................................... 80

Chapter 5

Conventional Financing:

Where to Find It and How to Negotiate the Best Terms—83

Goal of This Chapter ..................................................................................................... 83

This chapter introduces you to conventional forms of real estate fi nancing.

The Neighborhood Lender Is as Close as Your Computer .............................................. 83

Unveiling the Mortgage .................................................................................................. 84

Conventional Financing ................................................................................................. 84

Institutional Lenders ...................................................................................................... 84

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xii TABLE OF CONTENTS

Different Types of Institutional Financing ............................................................. 85

When Is a First Mortgage a First Mortgage? ........................................................... 85

Steps to Obtaining a Mortgage ....................................................................................... 86

Loan Origination Costs and Fees ........................................................................... 86

Construction and Development Loan .................................................................... 87

Take-Out or Permanent Loan ................................................................................ 87

Mortgage and Mortgage Notes .............................................................................. 87

Title Retained by the Borrower .............................................................................. 88

Contract for Deed ................................................................................................. 88

Mortgage Satisfaction ............................................................................................ 89

Grace Period .......................................................................................................... 89

Loan Position—Right to Lien ................................................................................ 90

Secondary Position ............................................................................................ 90

Recording Mortgage Documents ........................................................................... 91

Review of Lien Position Is Essential ....................................................................... 91

Who Is the Mortgagor and Who Is the Mortgagee? ........................................................ 91

Standards That Make a Loan Conventional .................................................................... 92

Policy, Risk, and Credit History......................................................................... 93

Example: 100 Percent Financing Using Regulations against Policy. ................... 94

Make Contacts with Loan Offi cers and Mortgage Brokers .............................................. 95

Interest, Points, and Cost ............................................................................................... 97

Negotiate Interest and Term of Repayment ............................................................ 99

Interest and Principal Payments Combined ........................................................... 99

Points and Closing Costs ..................................................................................... 101

Out-of-Pocket Expenses....................................................................................... 102

Where Do Conventional Loans Come From? ............................................................... 103

How to Determine Which Source to Approach ................................................... 104

The Best Source Will Be the One That Likes You Most ................................... 104

The Person You Talk to Is Not Loaning You His or Her Money ...................... 104

Dealing with the Local Lenders—Savings and Commercial Banks ....................... 105

Dealing with the Mortgage Broker ...................................................................... 116

Prime Sources for Conventional Loans ......................................................................... 116

Insurance Companies .......................................................................................... 116

Real Estate Investment Trusts .............................................................................. 117

Pension Funds and Credit Unions ....................................................................... 118

Wall Street and International Security Markets .................................................... 118

General Comments about Institutional Lenders .................................................. 118

If You Are a Big Borrower, the Pension Fund May Be the Only Way to Go ......... 119

The Seller Is Often the Best (and Most Motivated) Source ........................................... 120

Private Money: Where It Is and How to Find It ................................................... 120

Put Together a Loan Information Package .................................................................... 121

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