17. Framing the Offer

To frame our offer is simple. Let us say this is a typical Aunt Toby, a fine first-try example. Here are its facts. It is a wooden three-decker. (But the tests and results work out just as clearly and simply if it is a four-apartment duplex in California or a five-unit row of singles in Philadelphia.)

Good location
Self heat by tenants
Rents modest—$75 per flat per month
Taxes are $400 per year (typical proportionate Norm in U.S.)

It takes but a few minutes to apply the Value Formula. We need only use those lines in the Formula that apply here. Value Formula for 38 X St.

Value Formula for 38 X St.

Step 1.  Find the Annual Working Income:
Gross Yearly Rents $2,700.00
Less Taxes $400.00
Annual Working Income (AWI) $2,300.00

Step 2.  List Above-Normal Expenses and Loss Factors:
Mortgage Interest above 6% (none)
Wood Exterior (it is) 10% of AWI $230.00
Deduction for Location Good—5% of AWI $115.00

Step 3.  Add items in Step 2 and enter here $345.00

Step 4.  Deduct Total from AWI Balance  is  Primary Adjusted  Income enter in Box PAI
Section 11 Addition of Extra Profit Factors  Box PAI $1,955.00

Step 5.   List Extra Profit Factors
Any mortgage saving under 6% (None)
Parking, if available 5% of AWI $115.00
If all electric bills are paid by tenants 2% of AWI $46.00

Step 6.  Add extra profit factors to PAI.
This is FINAL Adjusted Income enter here $2,116.00

Step 7.  Multiply Final Adjusted Income by 6%.
This is Gross Value-enter here $14,106.66

Step 8.  Deduct cost of needed repairs (none)

Step 9. Fair Market Value of Property $14,106.66

This Value Formula has shown that our general limit is $14,106.66. There is a present mortgage of $10,000 at 6 per cent for a 20-year term. The payments for interest and principal are $859.80 per year ($71.65 per month), plus taxes of $400 which are commonly deposited in the bank by installments together with the monthly mortgage payment, in preparation for the payment of the bill, when it is rendered by the city. Here is the MIF we would live with if we offered $11,500 with $1500 down, and buyer to assume the old mortgage.

Total yearly rents $2700.00
Payouts:
Taxes $400.00
Mortgage Payments $859.80
Water $50.00
Insurance $40.00
Total Payouts (including principal) $1349.80
Leaving Net-in-Hand for vacancies and repairs $1350.20

If we made this offer, and it was accepted, we would have a generous margin in hand each year, over and above the 331/3% per cent return in hand of our cash investment, with which to bear temporary losses such as repairs and vacancies. And we will learn later in this book how to hold those down to a tiny minimum. If we extracted our 33& per cent of invested amount —$500—we would have $850 besides with which to cover these occasional expenditures, an amount far exceeding any normal or even rare loss.

Let us take the same example, for purposes of variety, with an existing $7000 mortgage that was written at 5 per cent on a 20-year basis. This is a set of facts you will encounter more frequently than the first example. Naturally, we would like to enjoy the 5 per cent interest rate for the years to come. So we try to buy it with the same $1,500 down and we pay the bal­ance by:

Assuming the old mortgage of $8000

Giving a new second mortgage at 6% (and even 7%) for $2000 on a 10 year basis.

Let us see what the MIF would be:

Total Yearly Rents $2700.00
Payouts:
Taxes $400.00
1st mortgage payments $52.80 per mo. or ..  $633.60
2nd mortgage payments $22.21 per mo. or . $266.52
Water $50.00
Insurance $40.00     $1390.12
Net-in-Hand for vacancies and repairs MIF $1309.88

Still not bad, is it? Particularly when you take into account that under this plan you (out of the tenants' pockets) are pay­ing off mortgages and enriching yourself thereby $600 per year in addition.

Let us see how our MIF would stand up if we paid the limit, $14,000. This we would not do unless we could get attractive financing. You will find two typical situations as to financing, old financing and new financing. We will consider the results under both of them.

Suppose there exists a $9000, 6 per cent mortgage for 20 years. You wish to know how your MIF would look if you paid $14,000, with $1500 down, assumed the existing 1st mortgage and gave a new second mortgage to the seller at 6 per cent, 10 years for $3500.

Total Yearly Rents $2700.00
Payouts:
Taxes $400.00
1st mortgage payments, $64.48 per mo. or  $773.76
2nd mortgage payments, $38.86 per mo. or . $466.32
Water $50.00
Insurance $40.00
Total payouts $1730.08
Leaving Net-in-Hand (MIF) for vacancies and repairs  $969.92

Observe that we have an MIF that leaves us our 33M per cent of our investment in hand plus a fat safe amount for mar­gin, plus the annual gain we enjoy thru principal payments of $800 per year, average.

Note that in this extreme example we have taken the posi­tion that rents will not stand increase and that we are paying top price for the property. As a final variation, let us do the MIF on this parcel under the conditions called "new financing." This means that the seller has little or no mortgage outstanding for us to take over and we must completely refinance. In gen­eral, you will find that the local Building-and-Loan, Co-opera­tive bank, or Federal Savings and Loan will quote terms to you thus:

Bank will lend 80 per cent of the purchase price, providing you do not have a bad credit background (no bank wants troublesome collection headaches) and you will have to pay the remaining 20 per cent of the purchase price in cash, pro­viding you cannot convince the seller to take part of that 20 per cent by way of 2nd mortgage. Often you will be able to ar­range this.

Later in this book, when you learn the tax benefits that the seller gains by selling for low down payments and taking the mortgage himself, you will be able to show him why it is far more to his advantage to finance it for you. But for our extreme case, let us assume the seller has another need for his money, or for any other reason, you must buy it with completely new financing.

You will find it very effective and helpful in proposing the loan, to have with you a typed, neat copy of the MIF sheet, and leave it with the Mortgage Officer. Also, if you wish, a copy of the Value Formula may impress him and show that you have authoritatively arrived at the offer figure, rather than just guessed at it. Here is how your MIF will look under these ex­treme conditions:

Total Yearly Rents $2700.00
Payouts:
Taxes  $400.00
1st Mortgage payts at 6%, 20 years $11,200   $963.00
Water $50.00
Insurance $40.00
Total Payouts $1453.00
Leaving, on $2800 investment, in hand for vacancies and repairs $1247.00

Note that in this "top-price, worst-terms" example, you still have 33/3 per cent of your investment in hand, or $900 plus $350 extra to care for vacancies and repairs. However, if you were forced to pay a prohibitive tax on the property, say $800 in­stead of $400, your MIF would be seriously slashed. Of course the Value Formula would never permit you to pay $14,000 for it if the taxes were $800, anyway.

In keeping with our objective, which is to acquire as much property as possible with our limited bankroll, and let the property (or tenants) pay for itself, rather than have it come out of our pockets, we try hard for low down payments. This will result in our getting our investment out in two, three or four years and we are enabled to buy more. Pursuant to this, it is helpful to point out to the seller that the cash he receives does not grow by itself. It must be invested. And where could he invest it and get 6 per cent true interest with perfect safety? Or 7 per cent?

If your circumstances are like most, and you need to stretch your savings over as many properties as possible, you will need to point out these advantages to convince the seller who has placed his property on the market with the intention of getting his cash. We will discuss the other arguments you can use in the chapter on Taxes, but one idea to stress is, "With the 2nd mortgage, you have no further headaches. Your money, inter­est and principal, comes to you in the mail regularly and de­pendably. You are the bank. You do not have to concern your­self with renting, repairs, complaints—nothing. You just get a steady annuity with no bother or risk."

Then he may protest, "But I still remain liable on the old first mortgage. If you don't pay it, I'm responsible." Your comeback is, "I know you don't want the property back, but what chance is there of that? After all you have my down payment of $1500. Then you will have the payments I make to you from this point on. In addition you have the benefit of the amounts I will have paid off on the first mortgage. If I should die or go broke, you will gain! You get the property back, you are several thousand dollars to the good, and you can sell it again. You are in a solid position either way." Sometimes I have found a seller still concerned and have overcome his fears by this one.

"You are worried as to whether I will keep up the payments on the first mortgage? OK, here's what we'll do. I will give you a note stating that I will send you, each month, besides the payment on the second mortgage, a check made out to the first mortgagee-bank for that payment. I will enclose the payment book and an envelope to the bank, and you can check for your­self that it has been paid by forwarding it yourself. This will continue for five years. After that, I know you will not be worried."

In extreme cases, I have found this one effective.

"You say you are concerned with the possibility that I will not keep up the payments and that you may have to foreclose, at some expense to you. Here is what I will do. We will make a contract and I will agree to place a signed, sealed and acknowl­edged deed in your lawyer's hands, in escrow (in trust, as a stakeholder), and I will sign that I will not deed nor mortgage the property to anyone else for the five years. If I should fail to make a payment, you can wipe me out without any expense or bother. You just record the deed and you have my down payment, my payments to you and the bank, and the property."

Another seemingly minor point you should remember about making your offer concerns the amount to be posted with the offer. Of course, no offer is worth the paper it is written on, in the eyes of the seller, unless it is accompanied by cash or a check, preferably certified. Strangely enough, this point has been ignored by most people in my experience, and in many cases, as I have seen repeatedly demonstrated, it meant the dif­ference between success and failure, acceptance or rejection. I suppose it is because people naturally tend to part with as little money as possible and then postpone parting with as much of it as possible, as long as possible.

You should remember that the seller, too, is subject to this habit. Use his aversion to parting with money, to your advan­tage. That is why I always recommend placing a deposit of $1000, by bank cashier's check, with every offer, as a minimum, and where convenient, more. The seller has certain weaknesses and we should use them in making our offer. One of them is the natural unwillingness to part with $1000. If he contem­plates returning the deposit, he (or his wife) will recall the old "bird-in-the-hand" bit. It is my experience and conviction that NO seller ever returns a deposit without at least wondering whether he is doing the right thing, and whether he may one day regret it.

We have all been told as children that if we "throw away bread" we will "one day hunger for it." Nobody can read the future. "Sure," the seller may ponder, "I think I will get more, but who knows? What went up can come down. The property cost me much less and I've had a fine profit out of it—up to now. This offer gives me a good selling profit. I might use that money to buy much bigger parcels. What might happen in the future-no one knows. But this, this $1000 is positive!"

There is no danger in attaching the cashier's check for $1000 to your offer, provided you word it as you should. Every contingency that I have ever seen or heard of, has been covered so that you cannot lose it. Either the deal goes through as you set it out, or the deposit must be returned within three days. The only exception to this three-day deadline occurs where the seller is out of the state or country, or where the property is owned by an estate. But even here, your money will only be tied up for a week or two at most, if the offer is rejected.

Here is the form of offer that has been used for almost all the transactions in which I or my clients and students have bought. Not all offers were accepted, but in no case did the making of the offer cause complications, court action or difficulty in get­ting the deposit back if it was rejected.

When you make your offer relying upon obtaining a new mortgage, you use the term contained in (1) and strike out (2).

Where your offer is on the basis that you are going to assume the old first mortgage, fill in (2) and strike out (1). This pro­tects you if it should transpire that the bank, for any reason, will not give the loan and provides that if so, you are to receive a refund of the deposit and be relieved of further obligation in the matter.

If you are going to pay all cash, you should strike out both (1) and (2).

Most of the examples cited here and certainly some 90 per cent of the purchases that my graduates have made in past years, required $1500 or less in cash. As you progress in the business your cash reserves will accumulate as mine did. Then, of course, you will have a broader field of acquisition because you will be able to muster the cash needed. Until then, I assume you are the average beginner with a small amount of capital.

OFFER

date: __________________ 19________
The undersigned buyer offers to buy the Real Estate Situated at
No____ St., ________________________ State ____________________
Total Price _________________________ $ _______________________
Deposit herewith ____________________ $ _______________________
Balance due seller at passing of papers   $ ________________________
Cash to be paid by buyer at passing of papers (over and above mortgage loan if any) $ __________________________________________           
(1)        This Agreement is subject to the buyer obtaining a new first
mortgage for $______  ________at_________________% for____ years.
(2)        The balance of the purchase price to be paid by assuming the present first mortgage of $ ___to be adjusted to the balance at the time of passing.
Papers and the deed to be passed on __________________________19__
The seller to give the buyer possession of__________________ _________________________________on____________________19__
The seller to pay a regular commission of_________________% as per
__________________rates to____________________________ , Broker.
seller to give a good and marketable title by quitclaim deed, subject to easements and restrictions of record, and may use part of the purchase money to pay existing encumbrances. Should the property be damaged by fire before the passing of papers, the buyer has the option to withdraw and receive his deposit. If buyer defaults he waives claim to the deposit above which becomes the property of the seller and broker, equally, as liquidated damages. Interest, Rents, Fuel, Taxes, to be ad­justed as of the date of passing. All regular fixtures to pass with sale.

This offer to be accepted within ______days of date or deposit returned and offerer discharged.
Buyer:_______________________________(Seal)
Buyer's wife: (husband)_________________(Seal)
accepted:____________________19___
Seller: _______________________________(Seal)
Sellers wife: (husband)__________________(Seal)
(Broker)(Seal)
Order these forms direct from:
(c) REALFORMS Box 1, Brookline, Mass. 02146 Form #0
USE IN TRIPLICATE WITH BALL POINT PEN

To familiarize ourselves with the process of making the offer, let us fill one out for a model Aunt Toby, the one we set out the facts for at the beginning of this chapter. (Page 96 top).March
The terms of our offer will use (2) for the balance so that we can omit (1).

OFFER

date: March 5 _______ 19 60________
The undersigned buyer offers to buy the Real Estate Situated at
No 38 Oak St., Brookline_____________ State  Mass________________
Total Price _________________________ $ 11,500.00_______________
Deposit herewith ____________________ $  1,000.00_______________
Balance due seller at passing of papers   $ 500.00________________
Cash to be paid by buyer at passing of papers (over and above mortgage loan if any) $      500.00____
(1)        This Agreement is subject to the buyer obtaining a new first
mortgage for $______  ________at_________________% for____ years.
(2)        The balance of the purchase price to be paid by assuming the present first mortgage of $ 10,000.00 to be adjusted to the balance at the time of passing.
Papers and the deed to be passed on April 7______________1960
The seller to give the buyer possession of__________________ ____________on______19__
The seller to pay a regular commission of_________________% as per
_________rates to______________ , Broker.
seller to give a good and marketable title by quitclaim deed, subject to easements and restrictions of record, and may use part of the purchase money to pay existing encumbrances. Should the property be damaged by fire before the passing of papers, the buyer has the option to withdraw and receive his deposit. If buyer defaults he waives claim to the deposit above which becomes the property of the seller and broker, equally, as liquidated damages. Interest, Rents, Fuel, Taxes, to be ad­justed as of the date of passing. All regular fixtures to pass with sale.

This offer to be accepted within three days of date or deposit returned and offerer discharged.
Buyer:___Bill Buyer___________________(Seal)
Buyer's wife: (husband)_________________(Seal)
accepted:____________________19___
Seller: _______________________________(Seal)
Sellers wife: (husband)__________________(Seal)
(Broker)(Seal)
Order these forms direct from:
(c) REALFORMS Box 1, Brookline, Mass. 02146 Form #0
USE IN TRIPLICATE WITH BALL POINT PEN

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