In previous weeks we discussed rehabbing a home for personal use (Getting Started In Rehab) and rehabbing for use as a rental (Rehabbing a Rental Property). This week we will look at rehabbing with the intention of flipping. This is, by far, the riskiest of the three. However, it can also be the most lucrative if you do it right. The key word here is “if.”

Swimming in a Pool of Sharks

When rehabbing to flip it seems that every problem is magnified. Never mind Murphy’s Law, in rehab it seems as if Murphy has moved in with you. The most pressing problem is usually your holding cost. This is especially true if you are using hard money financing. You also have the risk of the market changing during the course of your rehab. It may not be as easy to sell as you thought or had hoped. You may experience weather-related delays or problems finding the necessary contractors.

Sometimes you can experience something that seems to come from out of the blue. Shortly after Hurricane Katrina hit New Orleans I was rehabbing a house in Nevada. I was nearing completion and I needed about 10 sheets of drywall. I went to the only lumberyard in the area and was told that they don’t have any sheetrock at all. When I asked when they expected to get some in, I was told that a delivery was coming in on Tuesday. I figured that wasn’t too bad since it was Saturday. Then I was informed that the load that was coming in had already been sold. I could reserve some from the next delivery two weeks later! It seems that all available building materials were being diverted to Louisiana to help in their efforts to recover from the storm. I had to drive 250 miles one-way to find the material to complete the project. All told, I lost about three days. That may not be much time when you are working on your own home, but when working on a flip it can be a huge problem.

Time Is Money

Managing a rehab project can drive you crazy enough to think that you are hearing voices in your head. What you should be hearing is a ticking clock, like the one on 60 Minutes. Every tick you hear just cost you money. Contractor doesn’t show up…tick, tick. Failed an inspection…tick, tick, tick. Unexpected problem arises…tick, tick, tick, tick. Project is behind schedule and another mortgage payment is due… tick, tick, tick, tick, tick…BOOM!

Effective management of the rehab is the key to a successful deal. If you do this part poorly you will feel it in your wallet. Some important points are as follows:

If you're new here, you may want to subscribe to our RSS feed or sign up for our real estate social network. Thanks for visiting!

Tags: flip real estate, flipping, real estate investing, rehabber, Rehabbing

• We can assume that a great place to cultivate a farm area is where we are getting the most responses from current marketing pieces. This requires a bit of performance tracking but I will save that for another post. If sellers in a specific area seem to be more receptive to the ad campaigns you are using than sellers in other areas; go for broke. There is no need to spend money and time on dreams when you have deals staring you in the face.
• Go to a great online source and purchase a state-wide foreclosure list. Look for the area with the highest concentration and target that part of town. This is a neat trick I learned when I first got started in the business.
• You can decide to target new subdivisions or new construction areas because you seek to provide sellers with instant debt relief. Warning: Buying in these areas requires a certain savvy on negotiating terms.
• Military Bases or neighboring developments to military bases are strong target areas for real estate investors. It isn’t a secret that America’s finest do quite a bit of moving and most of the time their mortgage products are in the form of VA loans. These types of properties are right on time for investors that are hip to buying with no equity or negotiating short sales.

One may ask, “Why a small target area?” My answer is, “why a large target area?”

For the sake of this write-up, I will use my favorite neighborhood in Washington, DC: Deanwood NE. Deanwood is full of 4 bedroom 2 bath raised ramblers with basements ranging in value from $279,000 to $324,000. I would consider myself an expert on Deanwood real estate. You could be an expert on properties in Deanwood as well if you pulled comps for the subdivision on a daily basis. This supports what I would consider to be the greatest benefit to a small farm area – being an area expert.

If you invest in a small area; by default, you become the go to guy or gal when it comes to investing in that particular subdivision. It is much easier to reach 1000 homes 5-7 times than to reach 5000 homes 1 time. Sellers will see you as the ONLY choice for their real estate needs and that is the notoriety that an expert should expect. When targeting a smaller area, you can easily oversee projects, manage properties, time-block efficiently, avoid new relationships, keep tabs on competition, and literally specialize in that area. Believe me, if you want to take over, this is how it’s done.

Blessings to Your Real Estate Investing Business,
Milton B. Yates

Tags: learn real estate investing, marketing tips, real estate farm, real estate investment, Real Estate Market, real estate marketing, real-estate-deals, short sale

For the novice real estate investor, it’s mighty tempting to handle business deals and tenant phone calls from home, but having a home office or dedicated office area provides a degree of separation essential for running a successful real estate enterprise. No matter how hard you try, it’s impossible to sound professional with a screaming baby on one hip and SpongeBob blaring in the background.

Thinking like a successful business person and presenting a polished front to clients and colleagues begins with a state of mind, not a desk. Think separation-keeping business and home life apart where never the ‘twain shall meet. A home office doesn’t have to be elaborate to get the job done. Many a successful business person’s started with a separate phone line and answering machine.

Our first office consisted of business phone line coming through the dining room wall, a $10 phone and an answering machine atop a 2 drawer filing cabinet we picked up at Wally World for 25 bucks. When the phone rang, I threatened all child-units into silence, plastered a smile across my chops, imagined myself with neatly coiffured hair and a French manicure and transformed from June Cleaver to Betsy Businesswoman. The kids pantomimed their hysterics by clutching their bellies and rolling about the floor -silent hysterics as any peeps would’ve earned the little ratfinks cow-stall cleaning duty for a month.

A Place of My Own

A step up from the cabinet in the corner would be dedicating a room entirely to business use. When we built our current home, we looked for a plan with a first floor room near the front door (and the potty) to corral all the landlord office equipment and paperwork in one easily accessed spot. A single closet with shelves evenly spaced to the ceiling provides tons of room for office supplies. A cup-hook system with color-coded tabs keeps keys to each house out of the drawers and within reach. (Its super secret squirrel location also keeps nosy neighbors from knowing all our business if they stop by for afternoon java.)

Office furnishings don’t have to be elaborate or trendy, but if you’re spending tons of time staring at the walls anyway, you might as well make things pleasant. Recently, I found a totally cool MCM bookcase for $25 (that’s Mid Century Modern for all you decorating challenged individuals. You remember, the stuff your grandma couldn’t give away at her yard sale back in ‘73 that’s now going bonkers on ebay). It’s big enough for all my REI books plus the writing books that should’ve taught me how to quit writing mile-long sentences interrupted with dumb tidbits of useless information.

My office: plastic tables, antique swivel-chair, lovely HP-Officejet, etc.

A nicely equipped home office would include:

• A desk: We use two plastic folding tables from Sam’s Club sitting at right angles in a corner. Not pretty, but cheap and sturdy.

• Office chair: Make it adjustable and cushyand your back will thank you.

• Phone + answering machine: Spring for a better machine if possible. The newer, digital messaging system makes yours truly sound young, hip and professional, no lie. My kids snicker every time the silly thing comes on.

• Lighting: This is surprisingly more important than you might imagine. Any extra will help, but recently we splurged on one of those new daylight bulb lamps and the difference on my poor middle-aged eyes was immediate and dramatic.

• Dedicated phone line: Out here in the boonies, cell phone reception’s beyond laughable. We pay $40/month for a basic line with call waiting, caller ID and call forwarding. Even if you use a cell phone (young whipper-snappers), a landline may be necessary if you need a fax machine. Speaking of which-

• Fax machine/ printer/ scanner/ copier: I’m totally in love with my HP Officejet all-in-one. In fact, I’d marry the thing if the mister didn’t have first dibs (might do it anyway if the ink were a bit less expensive…) If you don’t have a copy machine, this puppy will make you cry with delight every time you throw your keys back in the drawer instead of fighting the Goth chicks for copy-time at the library. And don’t even get me started on the fax machine… so lovely.

• Filing cabinet: Word of experience–don’t skimp here! The cheap-o model we started with drove us to the loony bin and back– drawers sticking every which way, files falling sideways and out the back. Look for solid construction and file drawers with *sides* not rails. Hon’s a good brand available at most office supply stores.

• Shredder: Self explanatory, really, but be careful-one ate my fingers during a feeding frenzy and the result was very ugly (and painful.) I’ve given all my kids shredder lessons since that time and having a mangled hand to wave around illustrated the point quite well.

The Holy Grail: The IRS Home Office Deduction

Lots of folks are afraid to take the home office deduction, fearing they’ll trigger an audit or worse. But these days, with hundreds of thousands of folks working from home, the deduction is much more common and fairly simple to figure, as long as you have dedicated space used only for business purposes. Our accountant suggested we forget the idea of putting a sleeper sofa in our office, suggesting that making the office a multi-purpose room (office + guestroom) would muddy the waters, making the deduction harder to justify if we were ever challenged.

There’s no reason to forgo a legitimate deduction and, over time, this one can really add up. This year, ours is running in the $3000 range-nothing to sneeze at, for sure. For a simple calculator, check here to see how much your deduction might be. You can learn about the legalities through a simple, online search. (Here’s a good place to start.)

Home Offices are Good and Stuff

For any type of real estate related business, you’ll need a separate phone line or cell phone, answering machine with caller ID, and a filing cabinet. Later, you may want to add a fax machine, a computer just for your business, printer and (gasp!) perhaps a real desk.

Our home office is one of my favorite spots. Business stuff stays where it belongs-away from my kitchen. The ability to turn the volume up on the answering machine and close the door means we hear incoming calls and messages from most anywhere in the house, but can choose to ignore them all we want. During office hours, we set the answering machine to pickup after 4 rings, giving plenty of time to get to the phone if we’re advertising a vacancy or just feel like playing big-shot real estate investors for the day.

One of these years, I plan to outgrow my home office, but in the meantime, it’s probably my most favorite spot…

… right after that fishing hole just down the street a’ways.

Another look at nirvana: Even the drapes are deductible.

Cool MCM bookcase, file cabinet and other stuff.

Tags: deduction, home office, irs, office, productivity

A few years ago, I bought a house that had been infested with black mold but it had been cleaned up by a professional remediation company months before I had bought it.

The house had an ARV over $300,000 and I got it for $160,000. Most of the walls did not have drywall and it was obvious that the mold had been treated as the wood framing had all been treated with Kilz paint. The rehab ran about $50,000 for the 5 bedroom, 3800 square foot house and we put it on the market for less than the going rate in hopes of a fast sale.

We had a lot of traffic during the first month. A lot of families were interested in the house because it was located in a nice part of Dallas and the house was perfect for a family.

The feedback we were given was almost all positive. Kids seemed to like the basketball court in the back as well as the swimming pool on the side. The men had commented how they were impressed with the media room and the large 3-car garage.

We were told the women liked the all new kitchen, improved master bathroom and how close the schools were.

We wondered why no one had made an offer on the house with such positive feedback.

In Texas, sellers are required to disclose and past mold issues. We had listed the previous mold problem on the sellers disclosure and provided a copy of the environmental report. I had personally located the source of the moisture that had led to the mold and corrected it. If mold was going to show up in that house, it would have needed to come from a new source.

It didn’t matter.

Mold is one of the biggest, most over rated issues in real estate. It is very easy to get rid of yet it continues to get negative attention.

We were trying to reason with mothers. When it comes to mothers and the health of their children, there is no room for compromise. To go to the extreme, we could have bulldozed the house and I doubt I could find many mothers who would buy the property as long as they knew there had been a previous mold issue.

I have asked mothers who have attended my classes if they would ever knowingly buy a house that had a previous mold issue, even if it had been cleaned up.

Thus far, I have not had a single mother admit that they would.

The bottom line is, no matter who might be buying the house or making the payments on a house… If the buyer has a family, the mother decides whether or not a house is bought.

It ended up taking 13 months to sell that house. The carrying costs added up to over $20,000 and in the end, it was bought by a pilot with American Airlines who was single and had no kids.

People say that “Mother Nature” is not something to mess with. I agree with that and I also agree that a “Mothers Nature” is not something to mess with either.

In the end, you won’t win that battle.

Prospective homeowners rejoice: conventional loan limits have been raised. Homeowners on the coasts should be especially excited, where the median price of homes often far exceeds the traditional $417,000 limit on loans.

If you were unaware, home buyers who needed loans for more than $417,000 would previously need to obtain a “jumbo” loan, with matching jumbo interest rates and monthly payments. This new law would now allow homeowners to take out bigger mortgages without knuckle-biting, arm-twisting interest payments each month. This should also stimulate the markets in high-end locations with home prices above this range.

Peter Miller of RealtyTimes.com has a different perspective on higher loan limits:
“To have jumbo mortgages–there must be investors who buy mortgage-backed securities. If securities buyers…don’t purchase mortgages with bigger loan limits, then it doesn’t matter what Washington wants. Without investors, super-jumbo loans simply won’t be available…regardless of what the rules say.”

Money doesn’t come from trees; it comes from big, wealthy foreign investors. If they aren’t willing to take on a high-risk mortgage, then Congress’s move won’t do much for the housing market. With two sides to every story, it will be a true test to see if the housing market is uplifted by this move, or if the popped housing bubble will remain stagnant.

What do you think?

Fannie Mae & Freddie Mac Mortgages

Nearly every Bank, Credit Union, Mortgage Banker and Mortgage Broker can offer the loan products backed by the federal charted companies Fannie Mae and Freddie Mac. Investors that have good credit, can document income and are ready to put money down can acquire a loan from either Freddie or Fannie. Investor’s utilize this loan because they are the most competitive loans when it comes to interest rates and closing. These loans are underwritten through an automated system which takes credit, assets, loan to value, and debt ratios into consideration. Because the loans are underwritten by a computer there are certain compensating factors that can help approve your loan. Let’s say Joe investor has ok credit, high debt ratios (60%), but has lots of reserves and can put 30% down. They could approve this borrower because there are assets reserves to compensate for his high debt ratios and just ok credit. Believe it or not Freddie Mac even has a Stated income program. That’s right, a federal charted company has a stated income program. It truly is designed for self employed borrowers, but salaried individuals can use it as well.

Below is a thumb print of what you can expect from Freddie Mac on investment properties:

Full Documentation: Ideal for borrowers looking for conforming loan amounts who have good credit and assets:
1 unit: 90% LTV / 85% 1st Lien / 90% TLTV - $417,000
2 unit: 90% LTV / 85% 1st Lien / 90% TLTV - $533,850
3 unit: 75% LTV / 70% 1st Lien / 75% TLTV - $645,300
4 unit: 75% LTV / 70% 1st Lien / 75% TLTV - $801,950
Cash Out 1 unit: 85% LTV / 80% 1st Lien / 85% TLTV - $417,000
Cash Out 2 unit: 85% LTV / 80% 1st Lien / 85% TLTV - $533,850
Cash Out 3 unit: 70% LTV / 65% 1st Lien / 70% TLTV - $645,300
Cash Out 4 unit: 70% LTV / 65% 1st Lien / 70% TLTV - $801,950
Not available IO

Stated Income: Ideal for self-employed/salaries borrowers with excellent credit. No tax returns or other written verification of income. Assets are required to be verified.

1 unit: 90% / 90% - $417,000 - 720 75% / 90% - $417,000 - 680
2 unit: 90% / 90% - $533,850 - 720 75% / 90% - $533,850 - 680
3 unit: 80% / 80% - $645,300 - 720 75% / 80% - $645,300 - 700
4 unit: 80% / 80% - $801,950 - 720 75% / 80% - $801,950 - 700
Cash Out 1 unit: 75% / NA - $417,000 - 680
Cash Out 2 unit: 75% / NA - $533,850 - 680

A-minus; Ideal for borrower who don’t meet “A” paper credit standards. Allow borrowers to obtain a conventional product at a slightly higher rate.

1 unit: 90% LTV/85% w/sub. financing/90% TLTV - $417,000
2 unit: 90% LTV/85% w/sub. financing/90% TLTV - $533,850
1 unit:* 90% LTV/85% w/sub. financing/90% TLTV - $417,000
2 unit:* 90% LTV/85% w/sub. financing/90% TLTV - $533,850
3 unit:* 75% LTV/70% w/sub. financing/75% TLTV - $645,300
4 unit:* 75% LTV/70% w/sub. financing/75% TLTV - $801,950
Cash Out 1 unit:* 85% LTV/80% w/sub. financing/85% TLTV - $417,000
Cash Out 2 unit:* 85% LTV/80% w/sub. financing/85% TLTV - $533,850
*Borrowers may not own any other financed investment properties

This is great news for the investors that rely on the Fannie Mae and Freddie Mac loan products to finance your properties. Rates are down and Congress has passed legislation to increase the minimum loan about. The details are currently be worked out but some figures are has high has $739,000 in some markets. This increase will only be for 2008

Tags: community first financial, Conforming loan amount increase, Fannie & Freddie Mac Loans, Investor Loans, Stated Income investor loans, troy schuricht

The home-sales season is almost upon us, and it’s time to prepare for the open curtain. You already know your home needs to be clean, uncluttered, and in good repair; but you can further distinguish your home from the competition by staging it. Staging can be a bit like the “Make-over” TV shows where a not-so-attractive person is miraculously turned into a supermodel!

Although your home may just look wonderful to you, and those pictures of Aunt Betty and the kids seems to add a certain family feel to the room, professional stagers will see your house as buyers do, and can set the scene so that buyers can imagine living there. Often they will streamline the furniture in a room for better traffic flow and to enhance its spaciousness.

They may neutralize “too-personal” color schemes (such as that pink dining room that seemed oh-so-cool when you first painted it) or add touches of color and accessories when and where needed. In vacant homes that feel cold and lack visual landmarks, stagers often bring in rental furniture and create “vignettes” such as a seating area by a fireplace, or reading area by the bookcases.

You can hire a stager by the hour or the room; often you will receive a per-item price sheet so you see what you’re paying for. This is helpful if after time you wish to reduce your cost, you may be able to remove certain items later to reduce cost’s. Homeowners typically pay from $1000 to $3,000 (per month) depending on the level of service required, furniture used, etc. There is also typically a set-up or design fee.

Often you can simply re-arrange your furniture or artwork, change your bedding or window coverings, add an area rug here or a simple vase there, then top it all off with beautiful flowers, fresh fruit and candles!

WHAT IS HOME STAGING?

Home staging is the process of preparing a home for sale, with the goal of getting the most money in the shortest amount of time possible. Home staging is proven to work, if it didn’t, builders wouldn’t spend thousands of dollars decorating model homes. It works for occupied and vacant properties, for small and palatial homes, at all price points, in all markets. And in a soft market with lots of inventory, you really need to do all you can to distinguish your property from the competition.

FIRST IMPRESSIONS

Most buyers decide in the first 30 seconds whether a house is right for them. That is the time a seller has to capture their interest, and staging your home will help maximize the impact of those seconds to ensure a quick sale! It’s crucial to stage your house before you list, so you can impress buyers the first time they visit. Otherwise, there may not be a second time.

DE-CLUTTERING

Clutter eats equity, it’s that simple; and the longer you live in a home, the more cluttered it becomes. I once listed a home that had so many tiny mementos and statuettes it looked like a garage sale, I counted 56 separate items on a single table! So remember, you’re about to move anyway, so let the stager help by showing you which unnecessary items to pack up and store out of sight of your buyers. A good, thorough cleaning is also a must to make your home sparkle! Hire a cleaning service if that works best for you and it’s within your budget. You want that bathroom, and kitchen to shine like no ones ever been in them!

NEUTRALIZING

It can be difficult for buyers to envision themselves living in your home if they can’t picture their own belongings fitting in to the surroundings. Sometimes that impossible to do because you have so many personal items stuffed into the room, the buyer can’t mentally remove them from the picture. The wall that is covered with family pics from the last twenty years only looks good to you! Remove many of your personal items, including family photos, collections and anything else that might reflect too much of your own taste and keep the buyer from mentally “moving in” to your home.

VACANT PROPERTIES

Vacant houses present special problems for the seller and agent: because the rooms are empty and cold looking, it is often difficult for buyers to envision how they would look with furniture. Sometimes it is impossible to figure out the purpose of a particular space. In vacant properties, buyers tend to focus on every imperfection. Many times I’ve been asked “what in the world would you put in that odd little space?” and staging helps eliminate such curiosities. Funny as it seems, empty rooms actually seem smaller than furnished rooms, leaving buyers to wonder whether their things will even fit. Furniture gives the room scale and proportion. Staging vacant houses solves these problems for the buyer, and can also make a bleak, barren room feel warm, comfortable, and a bit like home.

How Much Does it Cost?

When you contact a home stager, ask for an estimate. Most home staging businesses will be happy to give you a free estimate (though not all will) and it’s usually a quick process. Keep in mind that this is only an estimate. Get several free estimates and make some calculations to see which will work best for you, and within your budget.

Just like any service, pricing in the home staging industry can vary over a wide range. Some charge an hourly rate and some will charge you a set fee for the entire job. Be sure to ask how they determine their fee. Also, factor-in the condition of your home, the average amount of time homes have been on the market in your area, and the asking price of your home. For the most part, a good agent should be able to determine if a home is in need of this type of service, and if it would be of benefit or not.

Many books are available on the subject for those that wish to do their own staging:

• Stage Your Home for Profit by Peggy Selinger-Eaton and Gayla Moghannam
• The Winning Way to Sell Your House for More Money by Barb Schwarz
• Dress Your House for Success: 5 Fast, Easy Steps to Selling Your House, Apartment, or Condo for the Highest Possible Price! by Martha Webb & Sarah Parsons Zackheim

Regardless of whether you hire a pro or choose to go it alone, one thing is certain, you must be prepared for that first day on the market, and that first open house.

When the curtain opens, its Showtime, and believe me the critics are tough!

Tags: open house, prepare to sell your home, putting your home on the market, selling your home, staging tips, staging your home