SMART Real Estate Investing System

SMART Real Estate Investing Partners

Getting Started With Clients: Step-By-Step

1. Introduce Your Clients to SMART Investing:
Contact Your Clients
Reasons for Investing
The Opportunity
Opportunity Ex 1: Long Beach
Opportunity Ex 2: Average GRM by City
Opportunity Ex 3: Price Appreciation
Our Focus
Time-Saving Example: Client Requirements
Time-Saving Example: Search/Offer/Close
Note on Pre-qualification
Alternate Funding

2. Identify Client Investment Criteria:
Determine Client Investment Requirements
Things To Be Sure to Review with Clients

3. Property Search:
Starting the Search
Candidate Properties
Talk To Listing Agents
Candidate Property Package
Client Property Review
Preview/View Selected Properties
Information Accuracy

4. Making An Offer:
Subject To
Existing Tenants

5. Escrow/Information Refinement:
Opening Escrow
Estoppels/Lease Agreements
Security deposits
Decisions To Finalize
Property Management

6. Close/Keys:

Be There
Professional Organizations
Transaction Documents

7. Repeat:

What's Next?

1. Introduce Your Clients to SMART Investing

Contact Your Clients
The first step is to contact your clients and ask if they are interested in making money in real estate. "Who isn't?" you might say. Maybe not surprisingly, many people have to be coached into realizing what the power of leverage can do for them.

See if your clients have invested previous experience with real estate investing. That will make your job much easier. The SMART Real Estate Investing System has many innovative features that even experienced investors will be impressed with.

Reasons for Investing
Review the major reasons why it's a good idea to consider getting into income properties. Click here for the detail page on SMART Reasons for Investing in Real Estate.

We cover these and other points about what we do for investors in our client-centric site, You'll probably want to sit with your clients and go over the information covered in that site with them plus the marketing materials we provide in person. There's nothing like that personal touch to build your reputation as a trusted advisor.

The Opportunity
What sells the idea of investing better than "opportunity"? And what's the opportunity in real estate? We could go on-and-on with facts and figures about residential income property investing in Los Angeles and Orange Counties, but meaningful stats speak much louder:

Opportunity Example 1: Long Beach (CRMLS 1/14/17)
  1. # 2-4 Properties Available: 59
  2. Average price: $989,000
  3. Average Annual Rents: $56,100
  4. # with Positive Cash Flow: 27 (44%)
  5. # with Cash Flow > $500/mo: 11 (18%)

Opportunity Example 2: Average GRM by City (CRMLS 1/14/18)

In this graphic, you can find the best place to leverage your investment dollars (the lower the GRM the better for buyers)...very useful information!

Opportunity Example 3: Price Appreciation By Zip Over Time (Zillow Appreciation Index 1/18)

(provided for each income property searched)

Does that catch your attention?
We make the SMART Investor Opportunity Dashboard© available to our Partner Agents. It breaks down all the information you and your clients need to see the state of the market, by County and City. Let us know if you would like to have access to this information and more.

Our Focus
Our main focus is helping our partners make money for their clients. The SMART Real Estate Investing System advantage is saving you time during the property search phase.

Time-Saving Example: Client Requirements
  1. 2-4 in L.A., Orange or Riverside County
  2. $530,000 - $675,000
  3. 25% Down
  4. Good area (for appreciation & client quality)
  5. Positive Cash Flow
  6. Added complication: 1031 Exchange

Time-Saving Example: Search
  1. 1,900 Active Listings
  2. Entered above Search Criteria
  3. 5 Top Candidates emerged
  4. (took 10 minutes to find those 5 candidates!)

Time-Saving Example: Offers
  1. 4 made
  2. 1 accepted

Time-Saving Example: Close
  1. Successful
  2. On-Time
  3. Mailbox Money Flowing In
  4. Tenants Happy
  5. Landlord Happy!

Note on Pre-qualification
It is especially important to get your investor clients prequalified. Experienced investors already understand this, but newbies may be less prepared. Many income property listing agents and sellers don't want to bother tenants any more than absolutely necessary during the sale process. Many income properties are listed as "Drive-By Only" and "Subject To Inspection". It's a very competitive market and you have to be ready to move. So pre- or post-offer showings need to be as solid as possible. No lookie-loos with investments!

Alternate Funding
Make sure you investigate the possibility of FHA or VA funding with your investor clients. There are various programs offered for owner occupied income properties. They typically are the same minimum down payment requirements, and there are different considerations for how much the rents can contribute towards qualifying. Talk to a trusted lender about these programs.

2. Identify Client Investment Criteria

Determine Client Investment Requirements
Starting with the SMART Investor Search Criteria, the most important of which are generally:
  1. Area
  2. Price Range
  3. Down Payment
  4. Total Amount To Invest
  5. Return on Investment Goals
  6. Number of Units
  7. Owner Occupied
  8. Self-Manage or Professional Property Management

(click on this link for our complete Detailed Client Questionnaire)

Things To Be Sure to Review with Clients
  1. Area: Convenience, Appreciation, Safety
  2. Price Range: It's not really about what you can afford in terms of purchase price; it's really more important to look at Total amount to invest...
  3. 25% Down or Other: many are hung up on only wanting to put down the minimum amount reqired, generally 25% on residential income properties. Sometimes you can make more money by looking at a larger investment or putting down more than 25%; we have tools that allow you to help your client easily review the options by playing with the numbers; we do all the calculations for you!
  4. Total Amount To Invest (including Down Payment, Closing Costs, Up Front Repair)
  5. # Units: typically, about half of the 2-4s are duplexes in any given area
  6. Owner Occupied:
    1. Occupy now or later: sometimes a new owner wants to live in one unit right away, and sometimes they want to live in it after a few years
    2. Different set of calculations; standard Cash Flow considerations don't apply when Owner Occupied
  7. Property Management: Self-Manage or Professional
  8. CF or Appreciation, or both; what is their objective?

Starting the Search
Working together with you and your client's identified search criteria, we will start the property search using our SMART Residential Income Property Search Engine© and SMART Opportunity Analyzer©. Other neat things we show you: Comparative rents for area Heat Map Enter Total Investment Amount etc. Check out this complete description of How It Works

Candidate Properties
We will come up with candidates, analyze them, refine them, throw many out, and identify those you may want to present to your client. Then, you can review the Candidate Property Package (see below), and present to your client. Next are a few things you should expect.

Talk To Listing Agents
Here are several things we recommend you go over with the listing agent on these candidate properties:
  1. Drive-by Only?
  2. Subject to:
    1. Offer presentation?
    2. Offer acceptance?
  3. Property condition?
  4. How long have tenants been in there?
  5. Good tenants?
  6. Paying on-time?
  7. Complaints?
  8. How accurate are the rents?
    1. Current
    2. Pro Forma (we will know the answer to this question in advance! by doing rent comps; it will give you an opportunity to gauge the knowledge and forthrightness of the listing agent)
  9. Optional:
    1. Condo: known restrictions?
    2. Why has it been on the market so long?

Candidate Property Package
We provide the following information property package for each search:
  1. List of Candidate Properties with Investment Decision Points Highlighted
  2. Map of Property Locations
  3. Each Property:
    1. MLS Listing
    2. SMART Opportunity Analysis Report
    3. Price Comps
    4. Rent Comps
    5. Recommendation
    6. Market Conditions

Client Review of Candidate Properties
After you present the Candidate Property Package, your client will likely review, question, explain, argue, discard, select, go back to the drawing board.

They will refine their search criteria along the way, and hopefully select one or more candidate properties to view and/or make an offer on. Here's what you can help them expect:

Preview/View Selected Properties
Since many income properties are "drive-by only", you may have to reassure your client at this point that they are under no permanent obligation when they submit an offer "subject to buyer inspection", and can back out of the offer with no penalty if they are not satisfied with the property after they see the interior.

If you can get into one or all units before submitting the offer, great. If not, you and your client will have plenty of opportunity once the offer is either presented or accepted (usually the latter). When you do get in, get a feel for the property, the tenants (if you should meet them), the neighbors and the area. Assure your client that some things that a single family buyer may be unwilling to overlook (such as proximity to commercial areas) may be more acceptable in a rental situation.

Some specifics to look for during the buyer viewing:
  1. Meters (usually gas meters are separate per unit; rarely electric; water virtually never)
  2. Common areas
  3. Unit separation/privacy

Information Accuracy
Assure your client: "The closer you get to completion, the better and more accurate the information will be."

Here's what you and they may or may not know before the offer or COE (more on these coming up):
  1. Tenant lease terms/rents (or even if they have leases)
  2. Expenses
  3. Meters
  4. Property condition

4. Making An Offer

You can use either the standard C.A.R. Residential Purchase Agreement (RPA), or the Residential Income Property Purchase Agreement (RIPA). We recommend using the RIPA. It has additional language specifically designed for income properties, and helps to clarify and remind all parties of the special considerations, especially regarding estoppels (see below).

Subject To
As mentioned above, many income properties listings are drive-by only, for all or some of the units. Offers are often written "Subject to satisfactory buyer inspection of subject property" or similar language.

Existing Tenants
Does your buyer want existing tenants to stay in the property after close of escrow, or delivered empty? Keeping tenants that pay well and on-time is a big plus for a new landlord. However, if there is a lot of repair work to be done, or if the current owner has indicated poor tenant performance in the past, it may be desired to have existing tenants removed prior to or shortly after COE.

Care must be taken to understand current lease agreements before these decisions are finalized and incorporated into the purchase offer. See Estoppels/Lease Agreements, below, for more on these considerations.

Your clients should be aware that many HOAs restrict the number and/or percentage of non-owner occupied units in a complex. The information should be easily obtainable. Getting an answer before submitting an offer helps all parties.

Lenders and FHA/VA may have restrictions on the number of allowable income units in a condo complex. Check with your buyer's lender to see what those may be.

5. Escrow/Information Refinement

Remember "The closer you get, the better the information"? Here is where you and your client get very close to knowing all you need to know about the property before removing contingencies.

Opening Escrow
Once escrow is open, that's when the real fun begins. You and your client will finally be able to get answers to all their questions:
  1. What is the true condition of the property?
  2. What are the current rents?
  3. Are all tenants on formal lease agreement?
  4. What are the lease terms?
  5. What are the existing expenses?
  6. And more

Client inspection: If the property was "drive-by only" and the offer written "subject to buyer inspection", this may be the first time your client has seen inside part or all of the property.

Physical inspections are more extensive than most single family residences. And you should advise your client that the inspection will cost more than for an SFR.

Termite inspections also typically cost more than SFR, and remediation is often an issue, due to the problem of needing to ask tenants to move out during tenting, spraying, repair, etc. Compensation is usually provided by the landlord for that inconvenience, such as offering to pay for temporary housing for a few nights until the work is finished.

Estoppels/Lease Agreements
Current lease agreements may or may not be up to date, or even exist! The prospective buyer is entitled to (by contract) statements by current tenants as to the existing lease terms, including amount, duration and security deposit. These are called estoppels, and a standard C.A.R. form is used. We always also ask for copies of current lease agreements and security deposit accounting.

Your buyer should be aware that if a tenant has been in a property less than a 1-year lease, for example, and no other lease agreement has been signed since the expiration of that lease, the tenant is automatically considered to be on a month-to-month lease agreement.

Expenses are important to know for an income property. They heavily impact the bottom line cash flow. There are two general sources of expense information for a property:
  1. We always ask for a copy of the seller's property expense records. They may or may not have them, organized or at all. However, they are required by contract (see "RIPA", above) to provide whatever accounting they do have
  2. Sched E is especially valuable to see for an income property. The seller may or may not be willing to share that, but if asked to redact the SSN, many are willing; try to get it

Security Deposits
Security deposit accounting is required to be given to the new buyer by contract (see "RIPA") before COE. The buyer takes over security deposit funds at COE.

Landlords should keep their security deposits in a separate bank account, called a "Trust Account". Security deposits do not belong to the landlord. They are basically insurance in case a tenant leaves a unit with excessive cleaning or damage, and refuses to compensate the landlord. Security deposits should not be used to collect unpaid rent, either during or after tenant occupancy. In practice, that's often what security deposits are actually used for.

The landlord has 21 days after a tenant vacates to provide an accounting of excessive cleaning and repair funds taken out of a tenant's security deposit. Actual return of unused deposits should take place soon after that. Remember: security deposits are not your funds. And, as a result, they are not dischargable in the unfortunate event of landlord bankruptcy.

Keep The Tenants?
When taking over an income property, you are required to honor the terms of the existing leases.

However, a tenant on month-to-month can be removed, if desired, with either a 30-day (former lease 1 year or less) or a 60-day notice (former lease over 1 year).

Property Management
As part of your Cash Flow Analysis during the Property Search phase, your client should have determined whether they want to manage the property themselves, or work with a reliable professional property management company.

Typical property management fees run from about 7-10% of monthly rents. Professional property management can alleviate the headaches of investment property ownership, including tenant search and screening, along with the joy of midnight plumbing repairs, especially for the new landlord.

Your client can always try it out, and then work towards self-management over time. Or vice versa.

It is often necessary to make repairs to an income property immediately after purchase. Long-term landlords may have allowed deferred maintenance to build up, or the new owner may want to leverage his or her new acquisition and maximize the rent by making it into something special.

Some repairs may be requested prior to COE. That way, any ill feelings a tenant may have enduring the inconvenience of in-place repairs would likely be toward the exiting landlord. Either way, part of the process after inspections and re-analysis should be moving toward the decision about when to effect repairs.

6. Close/Keys

You made it! Escrow has closed successfully and your client is ready to take possession. Once you give them the keys, they likely realize they are taking on a big responsibility, and it could be intimidating, especially for the first time investor.

Be There
Take this opportunity to reassure them that you will be with them after COE to answer any of their real estate or investment-related questions. Unless you have a broker's license, you cannot manage the property for them, but you can give them advice. Investing is a process, and several things will happen: your client will change their views on some things, and they will get ideas for change and improvement. Be available to help them through this phase, and then on to the next (see "Repeat", below).

Professional Organizations
Something you may want to consider is advising your clients to join a reputable residential real estate investors organization. Two well-respected Long Beach local organizations that we are familiar with include:
  1. Apartment Association of California Southern Cities (AACSC)
  2. For Investors By Investors Meetup Group

AACSC is mostly geared for apartment owners (5+), but they are very helpful for 1-4 rentals as well. They give free legal advice, and have recommended referral resources for almost everything you can think of related to investment properties. Their headquarters in Long Beach.

The FIBI Meetup Group meets monthly, generally at the Grand Hotel on Willow in Long Beach. Meetings currently run about $25, and are well worth it. They have excellent guest speakers on all types of real estate investing topics, including taxes, property management, portfolios and many others.

Transaction Documents
And finally, you should encourage your landlord clients to use professional forms for lease agreements and other transaction documents. AACSC provides excellent forms for all parts of the investment life cycle, and you might consider helping them with the C.A.R. forms. For their own protection, it is important that they use transaction forms that have been reviewed by legal professionals who specialize in real estate.

7. Repeat

What's Next?
We could suggest you encourage your clients to expand their real estate empire right away. Wouldn't that be lovely?

The truth of the matter is that your investor clients need time to absorb all that has just happened. They will ask themselves (and you!) lots of questions, and probably second-guess the situation. It's a time for reflection, or as seasoned investors call it, "analysis".

Once they have worked with tenants, deposits, collections, clogged drains and bed bugs, landlords usually settle down and get into a business routine. Mailbox money is rolling in, and they have to roll with the punches.

Then they get an idea: "Maybe I could make more money if I had another rental!"

That's when they call you.


We hope you've found our SMART eGuide To Working With Investor Clients valuable.

It may seem like a lot of information to go through, but it's pretty straightforward. We're sure you'll get hang of it once you do it. Each step is generally an extension of the SFR process, sometimes with a few additional considerations because you are dealing with third parties (tenants). And the rewards are there!