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Excessive Profits. How much is too much?

26 posts by 12 users

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Daniel A.

Real Estate Investor from los angeles, California

Nov 15 '10, 10:04 AM


I am starting this topic to open a dialogue regarding acceptable investor returns. What I mean by acceptable investor returns is as follows:

THE TOPIC:

At what point is the investor being greedy?

I will use the example of a $250k dollar After Repair Value sale price, for the sake of simplicity.

$250k ARV
-$40k Rehab
-$20k Closing Cost (8%Total CCt, including commission).
________
$190k Available Gross Profit

Bellow $150k Purchase Price (PP) = $40k+ Net profits
$150k PP= $40k net profits
$160k PP=$30k
$170k PP=$20k
$180k PP=$10k

THE CONFLICT:

Many REO brokers are incentivized by their inventory source (the Banks) to sell at the highest and best price. Investors want to buy at the lowest possible price.

An agent told me "..I don't want to represent greedy investors who try to put in low ball offers" "I don't want them as clients"

THE DIALOGUE:

Whatever your background, please feel free to weigh in on this topic. Please be as open, and as detailed as possible with your reply.



Telephone: 2132904449


Bryan A. Donor

Real Estate Investor from Charlotte, North Carolina

Nov 15 '10, 10:41 AM


Greed is a dirty word. Try switching it with ambition. Is it greedy to ask a boss for a raise, or ambitious?? I value my time. That being said, if I could make a million dollars in a day, then that would not be greedy in my eyes. Of course, after you make so much money, it's great to give back or send me some of your profits, if that helps with the guilt of success. :mrgreen:



Bryan A., Carolinas Revitalization, LLC
E-Mail: [email protected]
Telephone: 704-905-6510
Website: http://www.facebook.com/carolinasrevitalization
Check out our recent projects on Facebook!!


Bill Gulley

Real Estate Investor from Springfield, Missouri

Nov 15 '10, 10:44 AM
2 votes


How much you can get away with may have to do with how good your legal department is and what politicians you know. Oh, sorry, you don't have a legal department and you don't know any congressmen, well....

20% is kind of a limit set by lenders, any more and they will want to make that dollar. You can make a little more without being gross and no one squaks, it depends on what you do and how long you hold it, IMO...go for what you think is reasonable for the deal. An old school of thought is an honest day's work for an honest days pay, but if you're younger, it seems it's more like grab all you can before you get caught! What ever you think.....good luck



Dan Koch

Real Estate Investor from

Nov 15 '10, 10:46 AM
5 votes


We as investors are taking all of the risk. It is not greedy to want enough profit in the deal to cover unforseeable expenses with a property.

It is easy for the agent to say that about you when they are not the ones with their necks on the line.

He/she just doesn't want to write a bunch of offers so I would call them LAZY.

Just my 2 cents.



Bryan A. Donor

Real Estate Investor from Charlotte, North Carolina

Nov 15 '10, 10:47 AM
2 votes


bill,

you seem to go off on a soapbox issue of yours in just about every post i've seen you write, whether it's the younger generation, or predatory lending, etc. it's always a story with you. there's plenty of hardworking young guys in business and on this forum, so give some of us a break, will ya? you have plenty of experience, and i'd love to talk real estate with you as you're very knowledgable, but i know when i ask you questions, you'll probably shift the topic to one of your tangents.



Bryan A., Carolinas Revitalization, LLC
E-Mail: [email protected]
Telephone: 704-905-6510
Website: http://www.facebook.com/carolinasrevitalization
Check out our recent projects on Facebook!!


Charles Perkins

Landlord from Seattle, Washington

Nov 15 '10, 11:06 AM
4 votes


There are other costs that are not showing up in your limited example. If you are in the business of flipping there are admin costs, costs of financing the original deal, the cost of holding the property until it sells and other costs. Sometimes people think the profits are far greater than they actually are simply because they do not understand all of the costs involved.

There is risk in this kind of investment as well. I can't imagine paying more than 150K in this situation.

There is a problem in my opinion though when you work backwards on a deal. What was this property really worth before the repairs were done? It is quite possible that paying150K would be paying to much for the property as it is.

I see no reason to feel guilty about paying a fair price for what exists. If I take that property and create much more value then I see no reason to also sell it at a fair value. Not all invests lead to huge profits. If an investment leads to a healthy profit because of my creative input, I will not feel bad.



Daniel A.

Real Estate Investor from los angeles, California

Nov 15 '10, 11:49 AM


All good input guys. Thank you everyone.

Financialexaminer began to scratch the surface a bit more though, with his comment about "20% being kind of the limit set by many lenders". That Psychological barrier seems to be all too common when buying REO's.

How can we help them see things in a more investor friendly way?

Also, investors really don't have an active lobby to affect laws that could benefit us as a whole. This often leads to silly rules, like the 90 day hold before flip.

BACK TO OUR EXAMPLE:

Consider the total agent commission on both sides of the transaction.

approximately $9k on the purchase and $15k on the sell. Is it excessive to set a minimum return of no lower than 2 X the commissions ($48k)?

As Dan Koch said "they are not the ones with their necks on the line."

Please weigh in......



Telephone: 2132904449


Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Nov 15 '10, 12:02 PM
3 votes


If you buy at a price that puts purchase plus rehab at 70% of ARV, you use hard money to do the deal, you hold for six months, you stay on budget for the rehab and manage to actually get ARV as the selling price then you profit will be around 15% of ARV. If you've over budget on the rehab, have to cut the price to sell and end up holding longer than six months, your profit goes down dollar for dollar as those amounts go up. Doesn't take much before that 15% perfect world profit turns into 5%.

I have house right now that I have under contract at 25% LESS than the ARV, as determined by a licensed appraised one year ago. Ya think I'm making a PENNY on that house?

So, with your example of a $250k ARV and $40K in rehab, you need to purchase at $135K if you want to manage a 15% profit. That's $37K profit. OTOH, if say you actually sell it for 95% of ARV, you give 3% in seller concessions, your rehab is $50K and it takes nine months rather than six costing you an extra $6000 in interest, your profit drops from $37K to $1,500. Care to bet you won't get hit by at least one of those items?

Paying $150K for that house is hardly greedy. In fact, I'd say its dumb because you're paying too much.



Jon Holdman, Flying Phoenix LLC


Daniel A.

Real Estate Investor from los angeles, California

Nov 15 '10, 12:15 PM


Thanks Jon H.

The deal I use in this post is just an example, but I tend to buy $250k ARV homes for $125k and under.

That being said, many REO agents/brokers would consider $125k a low ball offer.

BACK TO THE CONFLICT AND QUESTION:

How do we get the thinking between the Banks, Brokers, and Investors more aligned, so that no one party must loose for the other to win, or exisT?

Remember, we are all needed in the process.



Telephone: 2132904449


Jeffrey K.

Real Estate Investor from Milwaukee, Wisconsin

Nov 15 '10, 12:28 PM
4 votes


It has nothing to do with thinking. We are all trying to make a profit. The banks wants the most money they can get, the agent just wants to get paid, and we want it as cheap as we can get it. Makes lots of offers and stick to your guns. Who cares what an agent thinks. Most of them are scum and they are a dime a dozen. Find a few decent ones that you can work with and make some offers.



James Hiddle

Wholesaler from Altus, Oklahoma

Nov 15 '10, 12:57 PM


The big picture shouldn't be greed but realistic expectations. What do you really expect your profits to be realistically?

If you expect to rehab a property to pull in $150K in profits after all costs are calculated then you aren't being realistic. Some people are lucky to pull in $35K-$50K in profits from a flip.

You may get greedy but in reality you need to be realistic and expect a decent profit. Nothing wrong with wanting more but don't expect more when certain situations come up.



Bryan A. Donor

Real Estate Investor from Charlotte, North Carolina

Nov 15 '10, 01:01 PM


35-50k?? ha, i wish....my goal for starter homes is a 20-25k profit. higher riced homes will dictate a better profit of course.



Bryan A., Carolinas Revitalization, LLC
E-Mail: [email protected]
Telephone: 704-905-6510
Website: http://www.facebook.com/carolinasrevitalization
Check out our recent projects on Facebook!!


Loc R. Donor

Note Investor from Pasadena, California

Nov 15 '10, 10:02 PM
1 vote


I may be missing something here, but what I've found to be very persuasive with the agents is to let them represent me; this way they get to double end it, and will do their best to try to push the offer through.

Of course, I've come across agents that were so dense I had to follow up with them in 24 point bold font that "6% of X was better than 3% of Y."



Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Nov 15 '10, 10:17 PM
2 votes


The point of my post is that I'm missing the "excessive profits" that seem to be the source of the conflict. If one agent won't submit your offers, find another one who will. If the agent who's balking is open to a discussion, give them the REAL breakdown of the expenses rather than the "Flip This House" math from your first post.

Its easy to look at any business and say "you're selling these shoes (say) for $100 and I'll be you're paying $50 for them. That's too much profit." Yet you have to pay for a lot more than just the shoes to be in a position to sell them.



Jon Holdman, Flying Phoenix LLC


Bill Gulley

Real Estate Investor from Springfield, Missouri

Nov 15 '10, 10:44 PM
2 votes


Originally posted by Bryan Alenky:
bill,

you seem to go off on a soapbox issue of yours in just about every post i've seen you write, whether it's the younger generation, or predatory lending, etc. it's always a story with you. there's plenty of hardworking young guys in business and on this forum, so give some of us a break, will ya? you have plenty of experience, and i'd love to talk real estate with you as you're very knowledgable, but i know when i ask you questions, you'll probably shift the topic to one of your tangents.

Hi Bryan, I know, thanks for the reminder, I'm getting to be a cranky old man! It happens to alot of us especially after you try to hammer away at ethical issues and it seems it doesn't sink in. I've noticed your attitude is very forthright and enjoy your communications and questions, even in your replies I've noticed a higher level of professionalism, so it's not just the younger generation so much as a few that seem to lack the business ethics necessary to be successful in this business. And, we certainly have older investors that have been shisters for years, but then you'll notice that they are not really what I would call successful either....money alone does not make one a success in my book.

Looking at a reasonable profit, you might consider the cap rate as we use that as our expected return and in the valuation of properties. The cap rate reflects the risk assumed, as pointed out above, and the return on our investment as well as the return of our invetment.

If you go to an attorney who has been in the business for 2 years, the value of his services will probably be less than the one with 40 years experience, not so much as he knows more of what is contained in the statutes, but that his experience in applying the law to benefit his client.
The skills you acquire in real estate are similar, if you are new and you flip a property that was not touched and you try to get 35% profit, and get it, you may be viewed as greedy considering what you brought to the table, more like lucky, but if I made it, those in the business would probably say something like, he identified a great bargin and worked magic to bring it to market value. Is it fair? No, probably not, while the young attorney may not be viewed as experienced, but if he is talented and demonstrates his ability to win, the value of his services go up, in time.

Being seen in your community as to how you operate is very important in this business. I'm in a small city, 150,000+ with about 10,000 agents, but news and the word travels fast. If you get a reputation of being a ripp off artist, you're dead in the business, no one will work with you....black listed! So, as one becomes known and accepted in the community (and the business) you can make that extra 5K, maybe 10K....maybe 50K on a deal that most would only pull a modest fee out of and without scrutiny.

Guess what I'm try to say is that new folks should not expect to walk in the door and pull out as much as an experienced investor in some cases. Many times it's best to be stealthy and testing the waters, making a reasonable amount of profit in a community than walking in and trying to pull out 35% profit...I guarantee you people in the business will be watching you and the first thought will be that you pulled a fast one....just human nature, IMO. And, if it's too much, that's when others will begin to squak, maybe call their attorney....

So, make what you feel the deal is worth, what is reasonable for the effort, risk and expertise required to put the deal together.

Again, sorry for the brashness. Good luck!



Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Nov 16 '10, 12:47 AM
3 votes


Originally posted by Daniel Alexander:
...
An agent told me "..I don't want to represent greedy investors who try to put in low ball offers" "I don't want them as clients"
...

This quoted piece highlights your problem: Find a different agent, or make your REO offers directly through the listing agent.

All other discussion is fine, but regardless of the numbers, this agent that you mention will still have this aversion to working with you in the manner how you need that agent to represent you.



Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Nov 16 '10, 01:43 AM
5 votes


Originally posted by Daniel Alexander:

Financialexaminer began to scratch the surface a bit more though, with his comment about "20% being kind of the limit set by many lenders". That Psychological barrier seems to be all too common when buying REO's.

In my experience, banks and listing agents *don't* understand investors or investing, and therefore I don't put any stock in a bank thinking, "You can have 20% and I want the rest."

The banks have no idea what 20% profit margin is for an investor, as they probably have no idea what the realistic ARV of a property they're selling is (the listing agent's rarely know what a property will sell for fixed up).

Add that to the fact that every investor is going to do a different amount of rehab (meaning different costs and different ARV), every investor is going to pay different prices for labor and material, every investor is going to have different holding costs (cash vs hard money is a HUGE difference) and every investor is going to pay different fixed costs on commissions (we generally pay 3% because my wife is an agent, but could easily pay 6% or even just $500 if we did FSBO and flat-fee listing).

So, to say that a bank is okay with an investor making 20% is just meaningless. The banks don't know if I'm going to make 20% or lose 20% based on my offer price -- it's taken me a couple years to consistently and accurately figure this out myself, and they certainly don't have the rehab experience I do.

As for greed, remember that *BOTH* sides are trying to get the best possible deal, so if that makes the investor greedy, it also makes the bank greedy. Personally, I don't consider either side greedy -- it's a business negotiation and getting a great deal is the name of the game.



Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Daniel A.

Real Estate Investor from los angeles, California

Nov 16 '10, 05:12 AM


All good feedback. Thanks again.

ADDRESSING A FEW REPLIES:

Steve B-
My quote came from the listing agent. And he was offered the both commissions. He simply said that he doesn't want to represent investors that make low offers. Obviously, that was a ridiculous statement, but the point of it was to shed light on the issue at hand.

J Scott-
You make many valid points. With that single minded focus, I am certain that you will continue to succeed in this business. That said, it would be a mistake to think that we can work in this field, without the knowledge of what the other side is doing or thinking. You are very correct to say that they don't know the ARV. We all know that ARV is very subjective. However, their judgement (right or wrong) of what we do, has an effect on the market place that we rely on to do business.

Again, as I said before, they tend to write laws that govern our day to day activity, and if you think that there are no investors consulting with the banks for investor insight, think again. They are not totally clueless. They need to know what we are doing, in order to regulate. The issue is that we are simply subjected to what they think and do.

THE AGENT:

Someone referred to agents as "scum", and although I do agree that agents and investors are a dime a dozen, and good ones are hard to find, I don't think they deserve to be called scum. (for the record, I am a full time investor, and have been for over 14 years)

Consider this:

ABC Bank gives a Broker/Agent 10 REO listings. That agent does a bunch of free work to get the listings, and then he or she is rated by the bank on how close to the asking price the listing is sold. The rating is actually more complex than that, but the entire purpose is to hire agents who recoup the most for the bank. Which is why banks tend to just collect offers for the first 2-4 weeks before making a decision. They are incentivized to just collect offers, and choose the highest and best. Thus the only party who is actually being properly represented by by the agent (making a full commission) is the bank. The agent is simply shuffling paper for you.

Most agents will just wait beneath the same "faucet" as all others do; waiting for the next batch of listings to drip out, so they can earn a living; and the way to ensure that the faucet keeps flowing for them is to continue to sell over priced investment properties, that often end up in the hands of another bank.

QUESTION:

What concrete ways do you have to level the playing field for investors?

How do we use our collective influence to produce a more investor friendly atmosphere?



Telephone: 2132904449


J Scott Moderator Donor

Real Estate Investor from Ellicott City, Maryland

Nov 16 '10, 05:45 AM


Originally posted by Daniel Alexander:
That said, it would be a mistake to think that we can work in this field, without the knowledge of what the other side is doing or thinking.

But, as you will find as you work with REOs, this is *exactly* what the banks and listing agents are doing. They have very little knowledge (and very little interest) in our business, and approach the sale of property very uniformly, regardless of the fact that their buyer base is not uniform.

If you've ever worked for a big company, you'll recognize the type of bureaucracy that is exhibited by large banks with large REO inventory. Very little of what they do is based on a rational examination of the "other side."


You are very correct to say that they don't know the ARV. We all know that ARV is very subjective.

I disagree with this statement. Someone's opinion of the ARV may be subjective, but the ARV (given a small range of error) is set by supply and demand.

Good investors know what the ARV of their investments are...banks and listing agents rarely know, because they rarely care...


...if you think that there are no investors consulting with the banks for investor insight, think again. They are not totally clueless. They need to know what we are doing, in order to regulate.

Do a little more research on how the industry works, and you'll see that the banks have very little control over the regulations that affect both them and us. Banks don't consult with investors because banks don't set their own lending or purchasing rules (with the exception of some very small banks); as such, those who run most banks have absolutely no idea what's going on in the investor world.


Thus the only party who is actually being properly represented by by the agent (making a full commission) is the bank. The agent is simply shuffling paper for you.

Legally, this is the way it has to be when you make an offer through a listing agent. The agent is NOT ALLOWED to work in your best interest, and is only allowed to do the paperwork for you.

This isn't the fault of the listing agents...this is the the job that they are legally required to perform.


What concrete ways do you have to level the playing field for investors?

I'm not sure the playing field is not already level. Banks are completely unreasonable, completely irrational, and very difficult to work with.

That said, I'm still buying property for pennies on the dollar that banks are desperate to get rid of.

Because banks don't understand our business, there are plenty of ways we can exploit them to benefit our business.



Medium_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


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