If it weren’t for my wife’s support and willingness to take a chance, we would not be where we are today.

Flipping houses requires a certain level of risk tolerance to be able to stand the pressure involved in dealing with large amounts of money. Houses aren’t cheap, ok, maybe we’ve proved that they can be, but relative to other investments, you are most likely risking a large sum of your own or someone else’s money. Tough decisions have to be made when purchasing an investment property and through the process of getting it fixed, flipped or rented. If the wrongs decisions are made, thousands of dollars could be lost, sometimes tens of thousands or more.

Managing the risk is no easy task, but it can and must be managed and minimized. I don’t say all of this to scare you, but rather to let you know that we all deal with this fear when getting started. This fear keeps most people on the sidelines. For those of us that have worked through several deals, we must keep a level head and not get overconfident. The moment we write off the risk and assume that we can do no wrong is the moment we set ourselves up for a big fall.

People are different when it comes to how much risk tolerance they naturally have. Some can go out and sign up a contract on a house without a second thought, while others need to analyze every single thing that could possible go wrong. There is a balance and a middle ground that needs to be achieved. This difference in people’s level of risk tolerance needs to be understood and appreciated so that we can move forward to getting all concerned on board, with minimal stress.

If your significant other has trouble accepting the level of risk involved in flipping houses, there are several things that can be done to try and help them cope and develop a tolerance.

1. Determine Your Shared Goals – This is very important. If you do not have shared goals, you need to stop everything you are doing and write down where you and your better half want to be and what you want to do. Get excited about it and really feel the energy this provides. Without a specific reason to do something, you will not likely succeed because the amount of work and risk involved will require a lot to overcome. The strength to do so comes from knowing that you will be rewarded with what you really want.
   
   Be specific. Don’t just say that you want to be rich. Specify an amount and how soon you want it. Do you want to travel the world? Where exactly do you want to go? Make some concrete goals, write them down, find pictures and print them out. Take all of this and periodically talk about them, think about them and keep them in mind when things seem difficult or impossible.
2. Read House Flipping Success Stories – Have them read the real estate investing forums online at BiggerPockets.com. Find success stories, especially ones from new investors. There are tons of posts from people that have started from nothing and flip full time now. They’ve left the rat race and are living their dream.
   
   You should also become members of your local real estate investing associations. Meet other couples and ask them about what they’ve gone through and how they’ve coped with it.
3. Be Prepared – I don’t just mean to study all there is to study about flipping houses. You must be prepared by having the resources to handle what you are getting into. I’ve heard of people quitting their day jobs after attending real estate investing seminars and having never done a deal. This scares the heck out of me. What were they thinking? Paydays can be few and far between in this business, of course each payday has a very real possibility of being close to what a lot of people make in an entire year.
   
   Build a good team that can help answer questions for you quickly and that have your best interest in mind. You can find quality attorneys, Realtors, title companies, contractors, and others by talking to other investors and getting their recommendations.
   
   Try to build a relationship with a successful investor. This mentor will help you to avoid mistakes that you may not have considered. They can help you the moment something pops ups. You are the one calling the shots and making the decisions, but all successful people have people that they get advice from to help them with those decisions. You don’t have to be totally alone in this.
4. Start Small And Build From There – I don’t recommend quitting your day job until you’ve proven that you can consistently profit from flipping houses. Make some money with less risk by trying the following the methods of profiting from real estate. This way you can show your significant other that what you are proposing and doing really does work and can require little risk. It would be hard for anyone to not be on board after you show them the quick money you could end up making.
   
   Many investors start by birddogging leads to other investors. This is where you market for motivated sellers and pass the leads on to investors that have the ability to buy the houses. Usually, this is set up where they pay you if they buy one of the houses. This is typically anywhere from $500 on up to $2,000 and more. This is a great way to gain experience with little money and no risk. You will quickly learn what a motivated seller is and see which ones the investor ended up buying so that you get a good idea of which leads to spend time on.
   
   The next step would be to start wholesaling houses. There are several ways to do this but the most common, and least risky, is to get a contract to buy a house at a very deep discount and then sell the contract to an investor that will close on it. You can typically make much more money wholesaling contracts than birddogging leads. You will start to figure out what your investors are willing to pay for different houses and you negotiate your wholesale fee into the purchase price with the seller.
5. Include Them – Include the other person in the business. Have them help you drive for dollars or keep the books. Determine what strengths they have and what they would enjoy doing to help the business succeed. They need to be a part of it. My wife has been absolutely amazing and has helped me every step of the way in this business. She helps with all planning and handles our property management, collections for our owner financed notes, selling our houses (with the help of our Realtor) and keeping the books. It really is exciting to be able to talk about the business and our goals and to both be working on something together.

Most of us were taught to do well in school, go to college and get a good steady job to provide security for our families. Going into business on your own with nobody to get orders from and nobody to make decisions for you, can be a very scary thing. You have to be able to handle this fear and then be able to help your significant other overcome or at least cope with it as well. Don’t ever dismiss their concerns, help them to see the possibilities so that they can in turn encourage you and not want to quit as soon as the going gets tough.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Is Your Significant Other On Board With Your Harebrained House Flipping Scheme?

Over the years I’ve benefitted by flipping various kinds of real estate. In fact, the only category I haven’t rehabbed for a profit is a house. 2-4 units, small apartment buildings, even a medical building once. In fact, that one was my favorite. I’m not the flipping type, but those who do it well have my respect and admiration. The real pros can fix ‘n flip in pretty much any market conditions, with few exceptions.

What the vast majority of ‘em can’t do is retire well. Some can’t retire at all.

Those who buy and sell for a profit on a consistent basis will definitely improve their lifestyle. They’ll drive better cars, send their kids to better schools, live in better homes, and enjoy superior vacations. This is a good thing. We all like the finer things in life.

Problem is, though an incredibly enhanced lifestyle is wonderful, it does nothing for retirement. Maybe that huge RV would work?

In the last decade or so I’ve had, perhaps, a dozen new clients who came to me as first class flippers. With some exceptions they fell into the age range of 40ish to 60ish. What they shared was the realization that their ability to make profits by adding value to homes hadn’t done squat to ensure a happy retirement. The next thought poppin’ into their heads is that they don’t wanna be rehabbin’ homes their whole lives. Even with excellent teams workin’ for ‘em, the process gets old when retirement beckons.

Unless rehabbing is gonna be the source of your retirement income, you need an additional strategy.

Next week I’ll address how a skilled, experienced flipper can create a stand alone retirement plan that will get them where they need to go — and likely more quickly than those who aren’t talented flippers.

What you wanna take away from this post is simple: Flippers often live very well — and often retire, um, not so well.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

A Flipper’s Retirement – An Oxymoronic Phrase

I’ve addressed this topic several times in the forums, and much of this post is taken from an old forum post I wrote, but this subject is important enough to rehabbers and other investors that I wanted to make sure it was captured here on the blog…

One of the biggest areas where rehabbers and other investors are getting beaten up these days is in their property appraisals. They buy right, do a great renovation, find buyers happy to pay their asking price, and then find that the property doesn’t appraise high enough to make the sale! Obviously, you’d like your property’s value to stand on its own without any help from you, but in this market, anything extra you can do to ensure your property hits its target appraisal price is important.

So, below I will present some of the techniques I have used on all of my rehabs to help ensure that the appraisal doesn’t sink the whole deal…

First, it’s important to remember that appraisals are just as much an art as a science. Oftentimes, there is a lot of information that the appraiser is not privy to — such as what the interior of a comp looks like, the circumstances surrounding the sale of a comp, the circumstances surrounding the motivation of the seller of other comps, etc — so, while two appraisers may be equally experienced and skilled, they ultimately may select different comps, make different adjustments and come to different values of your property.

While it’s tremendously important to ensure that your rehab is top-quality in all respects (visually, functionally, price-to-value, etc), the key to ensuring consistently successful appraisals is to focus on your interaction with the appraiser himself. Because the appraiser does have leeway in making decisions on comps and adjustments, his attitude while preparing the appraisal — towards you and the property — may very well impact the result.

Specifically, when dealing with the appraiser, you should strive to do three things:

• Provide Information
• Build Rapport
• Build Trust

By doing these three things, you can go a long way towards getting appraisers to err on the side of trying to help your appraisals come in at your target price. Let’s look at each of these in more detail…

1. From a Providing Information standpoint, remember that appraisers have a tough job these days. They need to make a lot of people (on different sides of the table) happy. Helping them do their job effectively and efficiently will make their lives easier (especially when the underwriter comes back and asks for more details to substantiate the number), and in return, make your life easier. And given new HVCC rules, you may be more familiar with comps in a given area then they are, so you may actually have better comps than the appraiser!

2. From a Building Rapport standpoint, if someone knows you and likes you, they are going to want to help you. Ask the appraiser about his family, ask about his business, ask him questions that allow him to feel like you appreciate his “help”, and (if it’s true) insinuate that you may want to use his services in the future. We don’t like to let our friends down, so the goal is to get the appraiser to feel as if you’re a friend in the short time you’re together

3. From a Building Trust standpoint, many appraisers (and others) are leery of rehabbers these days because a few of them give the rest of us a bad name (shoddy work, lie about repairs, etc). Oftentimes, when appraisers walk into a rehabbed property, they assume that the value is LOWER than an equivalent house that isn’t being flipped. By proving to the appraiser that you’re in the group of rehabbers who take pride in their work and do things the right way, you’ll get the him to appreciate your work and efforts and to trust that your house is probably MORE valuable than an equivalent house that isn’t being flipped.

With that background, here are my concrete suggestions on how to work with appraisers:

• Always ensure that you know when the appraiser is coming to your property. We make sure that our properties are on an agent lockbox and are alarmed. We then tell the lender/broker that the appraiser needs to call us to get access to the property. Nine out of 10 times we’ll get a call the day before the appraisal, but occasionally the appraiser will call while standing outside the house when he sees the “Alarm” sign on the door; when that happens, we tell him how to disable the alarm, but now that we know he’s at the property, we can rush right over or send our project manager over to meet him.
• Always make sure you are present when the appraiser is doing his walk-through. This is your opportunity to build rapport, provide information about what work you did, brag about the fact that you pulled all required permits and only used licensed contractors, and to generally take credit for the great rehab your team has done.
• At the end of the walk-through, you have an opportunity to provide information to the appraiser that he can take back to the office and review. This is the information that will help him do his appraisal and help him justify the number he comes up with in case anyone asks. Here are the things I provide (nicely organized in a folder):
  • Renovation Overview (click here for example)
  • Rehab Cost Breakdown (click here for example)
  • Before/After Pictures (click here for example)
  • Comps (I print out comps from the MLS that support my sale price and add them to the folder)
• Of course, while most appraisers are happy to have you around during the inspection and happy to take the information you have, don’t just assume this. I will always ask upfront, “Do you mind if I stick around during your walk-through” and then before I hand them the folder, I will always say, “I certainly don’t want to do your job for you, but I have some documents here that will give you more information about the rehab I did, the money I spent, and some of the comps I know about in the neighborhood…would you like them?”

I’ve never had an appraiser who seemed bothered by the fact that stuck around during the walk-through (most of them are talkers and like the company) and never had an appraiser who didn’t want my extra information (again, most of them were very appreciative of anything I had).

Do these things, and you can be sure that the appraiser will at very least be “on your side” and hopefully use the leeway inherent in the process to your advantage…

Photo: Erich Ferdinand

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Controlling (And Conquering) Your Appraisals

When it comes to flips, the uglier the property you find, the better the chances are you’ll make some money.  Ugly houses not only scare off competition but the upside potential is typically better.  Rehabbers are problem solvers – ugly becomes attractive, unlivable becomes desirable and repairs result in added value. 

There are 5 areas that you must focus on when doing rehabs:

1. Curb appeal – First impression is extremely important.  Potential buyers must be wowed from the curb, with an inviting property that gets buyers inside.  Fresh paint, landscaping and some good contrast with your trim can drastically improve curb appeal at minimal cost.
2. Kitchens – Kitchens sell houses, plain and simple.  Functionality with some pop can be achieved without going overboard.  Kitchens are the one place where you can add the most value in a home; don’t hesitate to look for energy saving appliances.
3. Bathrooms – Significant value can be added in the bathrooms.  Adding a new bathroom or converting a half bath to a full bath is one of the best value added decisions.  It is still not necessary to go overboard as the increased value can be added at a reasonable expense.  Also, don’t hesitate to put in water saving toilets.
4. Go Green – Applying some green upgrades definitely commands a premium in your sales price.  Appliances, toilets, heating/cooling, energy saving components, green paint — many of these items do not add much expense, but can result in increased profits
5. Unique Selling Points – Some houses have unique features such as views, access to water (lakes, ocean, etc.), decks, 5 car garages, huge lots, and so on. Often times these selling points can be emphasized with minor changes to increase value and desirability.

Focus on these five areas to make smart value added decisions on your rehab flips.  One final thing to mention, make sure to resolve any inspection issues that will come up and any preventative measures for future potential maintenance.  Best of luck in your future success!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

5 Best Areas to Add HUGE Value on your Flips

We completed a successful flip in a high end blue collar area and it went perfectly.  It was a 70% LTV deal and we made a nice annualized return (tip #5).  The property was in a suburb just outside of a great rental area, we categorize this area as a high end blue collar area (tip #1), which is perfect for flips and/or rentals.  There, REO sales are in the $30k range with retail sales ranging from 80-130K, which shows a great discount for REOs (tip #2).  There was only 1 for sale property in the neighborhood compared to 4 sold comps (tip #3) and there was definite pride of ownership with few rentals (tip #4). 

5 Tips for Finding Great Areas to Flip Properties:

1. Target high end blue collar areas – These areas can be perfect for flips and don’t have too much competition like the nicer suburbs.  Many call them transitional areas and they are often just outside the rental areas or areas that are not as nice. 
2. Seek out large differences in REO prices vs retail sales prices - If there is a large difference in REO sales price vs retail sales price, then you could have found a great area.  In this case we have REO sales in the 30s and retail sales 80-130K – a difference which is great.
3. Look for a good ratio between Sold comps vs For Sale comps – Make sure there are close to as many sold comps as there are for sale comps.  Too many for sale properties and too few solds does not suggest a quick and high sale.  It suggests a lot of competition that will drive down your sales price and lead to a longer time on market.
4. Make sure you’re around homeowners with pride – Make sure there are not too many rentals and there is pride of ownership, where owners take good care of their properties.  If this is not the case then the area is likely better for rentals instead of flips as long as it is not a warzone.
5. Focus on annualized return – It is very important to focus on volume and an annualized return.  A 5% return in 1 month is a 60% annualized return where a 15% return in 6 months is only a 30% annual return.  If you can flip it quickly then do a quick analysis on annualized return as there are no guarantees you can sell it for more in the future.

We actually have another property under contract in the same neighborhood as the one I already mentioned, but this one we project to be in for 10K less; additionally, it is bigger and has one more bath then the other property.  It could be like the first flip, plus $20K profit.  Again there is only one for sale property and there are now five sold comps (tip #3).  We want to sell this one quickly in order to focus on annualized return then do another flip (tip #5). 

Here is what we plan to do.

3 Tips for Quick Sales:

1. Weekly price reductions – We want activity all the time.  So to keep our property in front of buyers agents, we do a small $250 weekly price reduction.  It is small enough that it is not going to hurt our bottom line too much, and it has worked brilliantly as it did with our flip above.  We had 4 times the showings and it only took 2 price reductions to get our offer.
2. Give free stuff – On this next flip we plan to offer a free flat screen TV for a sale by X date, 1-2 weeks out.  It will cost up to $1000 but that is fine with us if we get that quick sale at or near our asking price.
3. “List High Rehab Drop” – I will explain this more below but you list the property at the highest for sale comp during rehab then when rehab is done you drop it to your initial asking price and market a huge price reduction.  It can produce a really fast sale which is incredible for annualized return.

This last quick sale tip we are really excited to try and I believe it could work.  For this deal a realistic salesprice is $90K.  We are only going to be in around $50K so $90K would be a tremendous profit especially if we can sell it fast. Oour initial listing price is $90K after reviewing the last 6 months of comps, but during rehab we wish to list it for the highest for sale comp. 

So, I went digging for comps hoping to find something $110K or above and could not believe what I found.  If I go back another month to 7 months, there were sold comps for $114K and $127.5K. You could throw a baseball and hit the roof of both houses; one is across the street and two down, the other is directly behind the house across the street.  Even more good news though, our property compares favorably.  We have an extra bath compared to the 114K comp and we are bigger and with an extra bath then the $127.5K one, everything else near even.

We don’t have to use a for sale comp, rather we can use a sold comp, 2 to be precise.  Now our high list price during rehab actually may get some activity as the price points in the neighborhood can support it.  But we are not expecting activity.  We plan to complete rehab in 1 month and drop the price to around 100K.  Then we will market this huge $27.5K price reduction: “will go fast, bring all offers, free flat screen tv if sold within 10 days from now, fully remodeled, etc etc etc.”  This could work.  In fact, we think it will work.  And if it doesn’t work we are still $10K above our initial listing price and can start with the weekly $250 price reductions as we normally do.  Basically there is no disadvantage to trying this strategy.  We may get some questions and objections from buyers agents but that means there is still activity that we may not have otherwise had.

We expect to flip this property in 6 months to be conservative.  But 4 months is a very good possibility by implementing our quick sale strategies.  With rehab taking 1 month, if we get a quick sale we could flip this in 3 months.  After closing expenses we expect a 40% return since the numbers are so great on this one.  With our conservative expectation of 6 months this is an 80% annualized return which is astronomical!  But if we do get a quick sale in 3 months we could be looking at a 160% annualized return which is unheard of.  We have our fingers crossed; we will be proactive and make the best informed decisions to make this deal go as smooth as possible.

I hope this true story and these tips are helpful.  What quick sale strategies do you guys use?  And how to you target areas prime for flips?

Photo: srbyug

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

8 Ways to Find Great Areas to Flip Houses & Quick Sale Real Estate Tips

This morning I got my daily fix out of the way quickly, talking with a very bright investor who’s been doing well in turn ‘n burn mode. Not 40 yet, he’s married with three young children. They’ve been pretty successful in buying REOs, rehabbing them, and doin’ it over again. They’re now liking the whole lease/option approach in selling these homes. ‘Bob’ and his wife ‘Marie’ have very good heads on their shoulders — smart folks.

However, they’re realizing that even though they’re making five figures a month between them, their job related retirement plans are ticketed to be a colossal failure. Also, they can now see the emerging script with their rehab success. They’ll make a lotta money, but since by definition, the strategy in place  must keep their capital churning, getting a reliable retirement income established will be problematic at best.

What to do?

Time doesn’t allow for a detailed exploration of all their options and the execution thereof, but here’s a quick outline of their main menu.

1. Separate literal turn ‘n burn deals from the buy/rehab then lease/option deals.

2. Make use of either/or long term cap gains rate — tax deferred exchanges — for the closed sales of lease/optioned properties.

3. Move the equity to long term purchases — tax deferred if indicated — the agenda being the development of retirement income.

4. Stop — as in ‘by around 4:30 yesterday afternoon’ — making contributions to both 401(k)s and the IRA they now own.

5. Divert those contributions to separate EIULs  – one for them to develop a second basket of tax free retirement income — the rest for their kids’ education costs.

6. The rest will be in a separate post showing exactly how their particular Purposeful Plan will be structured.

As is true with so many people with whom I talk, they have the potential for a retirement far beyond what they may have envisioned as possible.

Next week I’ll show what they might consider doing — the primary goal being retirement in 20 years or less — with retirement income well in excess of $100,000 a year.

I strongly suspect they’ll be able to retire before 20 years pass. I also believe they’ll end up with an annual income above what they ever made while employed.

This is gonna be WAY fun.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Long Term – Short Term – Real Life Term

A lot of conversation goes on about buying the right way, and remodeling the property efficiently, but if you can’t get the property sold does it really matter?  According to a California Association of Realtors study, from February 2010, 63% of homes fall out of escrow before they close.  That is almost two out of three… if the average escrow takes 45 days, you could be stuck holding a vacant home for an extra three months.

Here are the tips that have helped us beat the stats… we run under 5% fall out

Step 1 – You want to Control the Listing Process

I am a big advocate that if you are planning to do volume in this business you should get your real estate license and list your own properties.  A listing agent won’t be nearly as tenacious to earn their 3% commission as you will be to get your original investment and profit back and you shouldn’t expect them to you.  You want to control the process, or have someone on your team that understands the importance of closing.

Step 2 – Sell a Good Product that Attracts Multiple Buyers

You have no leverage in negotiating when you only have one offer.  It is important to sell a well rehabbed product that can attract multiple buyers so you can pick the buyer who will close.

Step 3 – Use Your Team, or Pre-Qualify the Parties Involved Before you Open Escrow

The Buyer’s Real Estate Agent, Mortgage Broker, Lender, and Appraiser can all cost you money.

My favorite type of Buyer’s real estate agent is also the most annoying one.  I love it when an agent will call me 3x a day every-day until I accept their offer.  If they are willing to follow-up this much, imagine what they will do to the lender when they are waiting for something?  You can search how long an agent has been licensed, how many deals they have done quite easily.  It’s free and easy to do.

I always force my escrow company.  I always ask for permission to call the buyer’s lender on pre-qualification lender, if I don’t get the feeling they are deal makers I request we use my lender.

Step 4 – Don’t Put a Bad Buyer in Escrow

Sometimes we make poor decisions, trust me, if you have a bad feeling about the buyer or the qualifications look “iffy” you are better off not opening escrow.  Once you sign contracts you are obligated to the buyer and committed to the process.

Upfront, I always ask for: bank statements, copy of FICO scores, and a pre-qualification letter.  Be sure to review these and look at the details.  Ask the lender about them in pre-qualification letter.

Step 5 – Follow-Up

Once you open escrow, I contact the lender and the buyer’s agent weekly for a status update.  Lenders provide something called “Conditional Loan Approval,” ask for a copy of this report once they have it.  It summarizes what documents the lender will require before they issue loan documents, and what they require before the fund the deal.

The process and requirements always change, but if you put together a good team they will protect you and keep you updated on the rules.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

A Rehabbers Guide to Selling Property

First off, you gotta know I’m all for the newbie out there willin’ to plow the dusty south 40 hopin’ to work their way up the ladder. Really, I am. Most of my experience has been that if they did just that, over time they’d be as successful as their talent would allow. In other words, most of the time out there, if you packed a 16 ounce cup, and worked hard ‘n smart long enough, you’d fill your cup with 16 ounces of success. As a young man I thought somewhat naively that this would be so in all circumstances, all markets, anywhere, at any time.

What I never had to factor in, never experienced, was an over supply of real talent attached to a buncha money — all lookin’ for the same thing — somethin’ to turn ‘n burn in one way or another. Wholesalers, the down and dirty paint ‘n carpet crowd, all the way up to the seriously skilled heavy-fixer guys — in all my many moons in the business, all the different markets both in degree and geography, I’ve never seen it like this.

What’s ‘this’ you ask?

The sheer number of legitimately experienced buy-to-sell-quick investors is off the chart high. Regardless of what seems to be the case, the number of properties that can be acquired yielding quick, high profits isn’t unlimited. In fact, the market has adjusted in most regions to the fact there are nearly an infinite number of rookies out there willing to do whatever it takes to do the next deal. They deny that, but look at the typical wholesaler’s profit, or the rehabber’s last deal or two, and you’ll readily understand what I’m talkin’ about.

More succinctly put, the real pros with real money are makin’ almost all of the real deals. The rookies, those who’re working’ their way through the muck ‘n mire are getting’ what the real players are leavini’ behind. That sounds harsh, I know, but it is what it is. Yeah, I know all the stories you can tell me, and I believe you. But you’re simply not gettin’ the smoking’ deals you read about. You may think so, but for the most part? Sorry.

An example is an investor I’ve met about a year ago,  talked with, and chatted on line. He’s very well capitalized, smarter than the average bear, and has forgotten more than most of his competition has learned in the last year. Here’s a typical deal for him.

He pays cash for the property, then fixes it up, you guessed it, for more cash, all which is his own. He then goes to the local banker, get’s a 70% LTV loan (or less, often way less) which always covers every single dime he’s already put out. The property is then in excellent shape, commands top rents, is very well located, and throws off more cash flow than anyone might expect.

And not Dime #1 has left his pocket when the smoke has cleared.

Tell me 20% of the folks out there chasin’ those same deals can even carry his jock. How ’bout 10%? Maybe. Maybe not. Not on this or any other planet.

That leaves the next level down — the genuinely experienced and skilled folks who’re goin’ from one deal to the next — dependent upon the profit from this deal. They’re not capitalized for more than the deal they’re in now. Most never will be. They’ve never wanted anything long term — just the next payday. They’re good at what they do, work their butts off, and are truly deserving of their rewards.

Problem is, when you’re constantly fishin’ in Lake Leftover, it’s almost axiomatic you won’t be able to gain enough lift and velocity to take you to the next level. Furthermore, it’s only gonna get more difficult. The first guy I spoke of? The guy who now owns all the cash flowing homes in areas in which you and I would let our mothers live alone? He’s now decided to up the ante big time.

How?

He’s gonna leverage his impressive track record to the hilt with investors who have wheelbarrows of cash just lookin’ for a great return. They know this guy, or someone they trust knows him. Now, instead of buying with just his cash, he’s buyin’ everything he can find that fits his already very well defined gold standard. He’s applying the same formula, which means not only are they gonna corral more properties than ever, they’re gonna do it over and over and over ’till there simply aren’t many left.

You can have the few he, and those like him, missed.

Meanwhile, 80-90% of their competition — which, less face it — aren’t really competition at all — are finding less and less. Where every now and then they used to be able to find the occasional gold nugget, the abundantly capitalized partnership is now able to snatch the ones that used to get away due to their finite capital.

They’re out there now in ever increasing numbers. Those who are, at least in their minds, competing with them, are in a race driving 1969 VW’s against a field of fully equipped, super-charged, state of the art Corvettes. I talk with these people almost every day. They’re buying/fixing for cash then takin’ all of it out with loans still allowing for solid cash flow.

Still,  even they’re not the ultimate warriors out there. Had lunch last month with someone I’ve known for awhile who’s very experienced, having gone through the fix-up wars successfully for many years in more than one state. He’s currently partnered with a relatively LARGE entity who’s now doin’ this in multiple states. My friend is handling just one major region of Southern California for Heaven’s sake. At any one time he has a dozen or more of these gold nuggets in various stages. As I said, he’s a bona fide seasoned veteran, and the guys running the operation he’s now a part of are even more experienced and adept than he is.

This might lead an objective soul to only one reality — most of the quick-turn investors out there are competing for the properties that didn’t make the ‘gold standard’ cut as defined by the big boys with the, um, gold.

This surely doesn’t mean there aren’t tons of folks around the country happily wholesaling their butts off for impressive annual paychecks. Ditto for rehabbers at all levels. What it does mean, is that while they think they’re diggin’ for gold, they’re swingin’ their picks in a silver mine — at best. Much of what I see out there isn’t even at that level. Copper would be more like it. This is what happens when values are crushed so low in such high numbers, for so long a period of time. Eventually the big boys can’t resist that much gold — good-bye little guy — take what the big boys leave behind.

As I said though, a wholesaler or rehabber makin’ six figures a year beats most of the alternatives from here to East Toilet Seat, Montana and back, right?

Photo: randa

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Fact Is – Most Are Diggin’ For Gold In a Silver Mine

It’s always been true, but since the correction the calls I get from those specializing in ‘quick turn’ projects, whether flipping or wholesaling, have more than doubled. The calls are predictable, usually coming within a few days after publishing a post about what their retirement will look like, given their long term M.O. — and that retirement ain’t part of a pretty picture. After their first reaction, usually anywhere from mild irritation to big time anger, denial often sets in. It’s after a few days of pondering the substance of the post that they settle down and call.

First, let’s define who they are, and the M.O. in question.

• They’re full time turn and burn types — and they’re good at it.
• They use profits to grow the business — now doing many homes at once.
• Their lifestyle has risen appreciably in response to their rising income.
• They’ve systematized their operation — boosting income yet again.
• Long term is defined as holding for a year so as to pay cap gains rates.
• They’ve earned their reputation as real pros, experts in what they do.

The age range of those calling is roughly 45-60. The older they are, the more you can hear the rising fear in their voice. Take a 53 year old guy who’s simply gettin’ tired of the toll it takes from him both physically and emotionally. Sure, he’s not doin’ much of the physically demanding labor now, but he’s still pitchin’ in almost daily. Combine this with all the day-to-day tasks a very successful rehabber/flipper/wholesaler must do, and you can easily understand why a 50-something guy/gal would begin to resemble the horse who’s been ridden hard and put away wet.

The #1 source of the rising bile in their throats is the realization that their acquired lifestyle is now their biggest problem. Their home really is their castle. They travel a lot, go on pricey weekend getaways, drive expensive debt laden cars/trucks, and maybe even have a nice boat or RV or both. Life is good.

‘Till it’s not.

The problem, of course, is a sorta good news/bad news joke. The good news? They’re rockin’ at what they do. The bad news? They MUST continue doin’ it ’till they drop, cuz they have zero, zilch, zip, nada that will do anything for them in terms of even a semi-viable retirement income.

In essence, as one of them put it so well, “I’ve become a very highly paid slave who must work or be financially ruined. I’m on a treadmill to the emergency room.” He was 52 when he said that, and a year later was diagnosed with very high blood pressure.

Sometimes I can help, sometimes I can’t. It depends upon how leveraged their lifestyle really is. I’ve concluded these guys aren’t exceptions, but the rule. I have no idea if that’s correct or not. I do know this though — their number is legion.

So, what to do?

If you’re under 45 or so, you should be able to add another basket to your portfolio — long term investment properties. Whether these props are local rehabs you’ve done personally, or you just found solid deals elsewhere, it’s imperative you start — now. In 15-20 years you’ll be able to retire with an enviable income. If you execute strategies I’ve outlined in previous posts, it’ll be even better.

If you’re in your late 50′s or over 60, you may or may not have a real problem. Last year two such men had to tell their wives that going back to work for a few years was the only way they’d be able to create a more or less job free retirement. Women who’ve been enjoying life without having to go to work, generally don’t receive this news, um, well.

Some of the turn ‘n burn contributors on this site have addressed this topic with sage advice. They set the example by having a stand-alone portfolio of ‘keepers’ — properties which will provide for them in retirement. You should listen to them carefully. They have seen the future without long term investments, and discovered the light at the end of the tunnel was a freight train comin’ their way.

Secure a long term real estate investment expert. It’s far to late to be gettin’ advice from those who’re merely a few chapters ahead of you in the book. Think you can do it yourself? Really? Maybe — but ask yourself THE question.

How much is a solid, reliable income worth to you in retirement?

Go ahead, take your time, no pressure.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Why Many Wildly Successful Flippers and Wholesalers Will Face Bleak Retirements

My all time favorite axiom was taught to me by Grandma one day at their Art Shack in Temecula. It was during summer vacation, I was about 10 or so, and it was HOT. Grandpa was in the middle of one of his signature paintings of the Grand Canyon, when without warning he stopped, put his brush into a can of something smelly, and said “Let’s eat!” We had some of Grandma’s homemade beef and vegetable soup, another post altogether. I asked Grandpa why he didn’t wait to finish the whole painting before eating. Whereupon Grandma smiled at me, and gave me my favorite axiom.

BawldGuy Axiom: ‘Bout the time the farmer got the ol’ mare to work without eatin’? She died.

Grandpa needed to eat. Also, much to Grandma’s chagrin, he began braying with glee, followed by his well known belly laugh which rocked the shack. Ah, good times.

Real estate investors in formerly huge growth markets like San Diego (Palo Alto is another great example.), still want their capital — equity, if you prefer — to work for them as well as it has the last couple generations. Problem is, that equity simply isn’t being fed by appreciation the way the investor had so easily become accustomed. Yet they’re flummoxed by how seemingly dead in the water that equity is — and has been now for quite some time.

This is something flippers who’ve kept some of their best properties for long term benefits can profit from also. Take San Diego — please. Badda booom! An astute flipper can still make some impressive short term gains here, and many are. The intelligent ones can easily recognize which ones to keep. They can then carry out the strategy of applying cash flow to the loan balance, creating more capital growth without the outside help of appreciation.

Let’s look at that a second.

You’re a smart cookie, experienced in buying property in need of rehab, at distressed prices. One of ‘em is a very well located home you snatched up for $250,000 in a pretty desirable San Diego neighborhood. After performing your rehab magic, at a cost of $30,000. you happily learn it will now rent for around $1,900 monthly. (It cost you $55,000 to close the purchase.) Also, it’s market value has settled in at about $350,000. The loan balance is roughly $200,000 with an interest rate of 5%. The monthly payment is $1,075 or so. You’re able to add give or take $325 a month to your payment. Here’s where you are in about a year.

Though you’ve gained maybe $7,000 in loan reduction, what you’ve really done is added a couple options to your menu. First, since you’ve owned it for over a year now, if you sell it, the taxes will be based upon long term capital gain, not ordinary income — a definite plus. Primarily though, you’ve also created the opportunity to trade that equity out of moribund San Diego into a real growth market.

If you sold for $350,000 paying 8% for commission/closing costs, you’d net close to $130,000. This will allow you to acquire a couple very well located duplexes in excellent neighborhoods in the Dallas/Fort Worth MetroPlex. (Though it could be any proven growth region with which you’re comfortable.)

Your cash flow would go from $4-6,000 annually to $7,500-10,000. Your tax shelter will rise from $7-8,000 to 10-12,000 a year. You produced this with your original $55,000 acquisition costs + $30,000 rehab — about $85,000 or so. You’ve now generated more cash flow and tax shelter, with a significantly better chance for future appreciation than if you’d remained in San Diego. Apply the cash flow to loan reduction as mentioned above, and in a few short years you’ve generated a fairly decent capital growth rate — without counting on appreciation for one second. None of this requires a degree from M.I.T.

The real benefit though, is how you created another basket for yourself. Just last week Jason Hanson made this point eloquently.

It’s one thing though to keep what began as a flip, and quite another to hold it hostage in a market in which it will languish. Yeah, you can do the loan reduction thing anywhere, and with the same predictable results. No argument there. But if you can do it in a better region, with 50-100% more property, with an end game resulting in far and away more retirement income, tax shelter, and equity in terms of dollars, why wouldn’t you do that?

The new paradigm in which we find ourselves has also removed much of the need for us to make use of the more sophisticated strategies and/or tactics. For example, I now advise clients to buy as much property as they can prudently afford, use the cash flow to rid themselves of the debt, enjoy the cash flow in retirement — OR — trade it to more or higher quality or more tax sheltered income — or all three if possible.

It’s entirely doable for most folks to acquire income property, free and clear it in 8-15 years, and either then, or somewhat earlier as circumstances allow/dictate, trade it to property(s) that will significantly and immediately improve their position.

Nobody has figured out how to keep plowin’ the field without eatin’. Remember this the next time you think one of your keepers might do better in another region. Chances are you’re right.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Is It Time For You to Get Outa Dodge? From Flip to Keep to See Ya!

Last week, my blog post discussed my method for determining the maximum purchase price you can offer for a property that you plan to rehab/resell or wholesale. In the formula I presented, I referred to “Fixed Costs” and I mentioned that I know my Fixed Costs to be about $17,000 on a typical project.

I wanted talk about how I calculated my typical Fixed Costs, and also give new investors an idea of what they should be thinking about when they try to calculate their Fixed Costs number.

Fixed Costs are compromised of the various fees, commissions, and costs associated with all parts the investment project (outside of the actual rehab costs). You may have heard the term “Holding Costs,” which generally applies to things like: Mortgage Payments, Utility Payments, Insurance, etc. These are costs you incur during the rehab portion of the project. Fixed Costs include Holding Costs, but also extend to the costs incurred during the other phases of the project: Purchase and Sale.

That said, I break Fixed Costs down into the following three categories:

1. Purchase Costs
2. Holding Costs
3. Selling Costs

And then each of these categories can be broken down in more detailed expense line-items. Below I’ll discuss the most common Fixed Costs I run into, and approximately what I spend on them for a typical project…

Purchase Costs

Purchase Costs refer to those fixed expenses that contribute to the purchase of a property. For my projects, Purchase Costs can specifically be broken down as follows:

• Inspection Costs: In general, I have an inspection for each of my properties prior to purchase (at least I did when I first started rehabbing). I use the same inspector for every inspection, and for the most part he charges about $400 for a full inspection of a typical property.
• Closing Costs: Each purchase comes with a fixed set of closing costs paid by the buyer. In Georgia, and for REO purchases, this generally includes a title search, attorney fees, courier fees, recording fees, state taxes, document review fees, etc. Basically, all those ridiculously inflated costs charged by the closing attorney to ensure clear title and recording of the new deed. Across all my purchases, these costs generally come in around $1000.
• Lender Fees: For the most part, I use the same lender to finance each property purchase. The lender charges a set of up-front fees to fund the loan, including a Loan Origination Fee, appraisal, underwriting fee, flood certification, document preparation fee, processing, fee, credit report fee, etc. (again, all those ridiculous and inflated fees that contribute to the lender’s bottom line). While every investor and every lender will have a specific sets of fees — and while these fees are somewhat tied to the purchase price of the property — for a typical acquisition I do, these Lender Fees total around $2000 per property.

You may find you have other recurring Purchase Costs, such as Appraisal Fees, Survey Costs, Bird-Dog Fees, etc. If so, add those into your Purchase Costs.

Holding Costs

Holding Costs refer to those expenses that add up between the time I acquire the property and the time I sell the property. For my projects, Holding Costs can specifically be broken down as follows:

• Mortgage Payments: On a typical project, my monthly mortgage payment will be about $500. And a typical project — from purchase to sale — will generally run between 4-6 months. So, during that time, I’ll generally make about $2500 worth of mortgage payments to my lender to keep the property.
• Property Taxes: On the properties I purchase, the typical yearly property taxes are on the order of $1400. Again, if I hold the property for 4-6 months, this will average out to about $600 in property taxes per project.
• Utilities: While performing rehabs, I like to ensure that all utilities (electricity, water and gas) are turned on. This is both for the convenience of my contractors as well as to help diagnose any issues with the property. Because the seasons in Georgia tend towards extreme temperatures, I’ve found that my utilities in my properties generally run about $200 per month for the duration of the project. Again, over 4-6 months, this averages about $1000 per project in utility costs.
• Insurance: Typical insurance costs for my properties is about $350-400 per year. On average, I pay about $200 in insurance costs for each project.

Again, you very well may run into additional Holding Costs, depending upon how you do your flips. For example, you may have costs for: Lawn Mowing, Rental Income, etc.

Selling Costs

Selling Costs refer to those fees and commissions that must be paid in order for me to sell a property. Again, different investors will use different marketing mechanism to sell their houses, so selling costs for each investor may be quite different. For my projects, Selling Costs can be broken down as follows:

• Commissions: Because my wife is our real estate agent, we save about half of the commissions we would otherwise incur when selling a property. That said, if our buyer has their own agent — they generally do — we must pay about 3% of the purchase price to that agent at the sale. A typical property of ours sells at about $120K, so that 3% comes out to about $3600 paid to the buyer’s agent at the sale of our property. Add to that the fees my wife pays to her broker, and the total commissions average about $3900 per property sale.
• Closing Costs: In this market, most buyers ask the seller to pay some or all of their closing costs. On our sales, we’ve been asked to pay anywhere from $2000 to $6000 in closing costs for the buyer. On average, we’re asked to pay about $4000 in buyer closing costs, and because it is a buyer’s market, we generally agree to it.
• Home Warranty: Most first-time home buyers (the type we cater to) request that the seller purchase a home warranty as a condition of the sale. We always expect to do this (and almost always have), and this adds about $500 to the cost of the sale for us.
• Termite Letter: In addition to the home warranty, many buyers (and/or their lenders) require us to provide a proof of termite inspection at the sale. This generally runs somewhere just below $100.
• MLS Fees: Because my wife is our agent, she is required to pay a fee to the local MLS for listing the property. This generally runs about $100.

Depending on how you sell your properties, you may have more or fewer expenses associated with the process. For example, while I don’t calculate it as part of our Fixed Costs, we generally receive about $5000 in commissions (between the purchase and the sale of the property), which goes right to our bottom line. It wouldn’t be unreasonable to subtract $5K from our Selling Costs (and therefore from our total Fixed Costs), though we prefer to account for this elsewhere in our analysis.

You may also have expenses associated with: Direct Marketing, Partnership Payments, Bonuses, etc. If so, add those into your Fixed Costs.

As you can see above, buying, holding and selling a property can cost a lot of money in fixed fees. Let’s see how these add up on a typical project of mine:

And there you have it — it costs me about $16,500 in commissions and fees just buy, hold and sell a property (which I round up to $17K to make my calculations easier and to have a margin of error). Many investors ignore these costs when calculating their potential profit on a deal; but, consider that if you plan to earn about $15K on a typical project, these costs can actually mean the difference between earning your desired profit and losing money!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Calculating Fixed Costs on a Rehab, Flip or Wholesale Real Estate Deal

The question I get most often from new investors looking to break into flipping or wholesaling is, “How do I determine the maximum purchase price I should pay when trying to buy a property I plan to rehab or wholesale?”

Most investors have some quantitative analysis technique they use for determining their maximum purchase price (MPP). Some use analysis techniques that require spreadsheets and/or complex formulas; other don’t use any formulas, but just go off a gut feeling they may have for the property or the location.

While I’m certainly not a fan of the “gut feeling” method, I’m also not a huge fan of the complex analysis method either. While this may surprise some people (especially those that know my tendency to sit in front of large spreadsheets for hours on end), one of the main goals of my financial analysis is to be able to do it in my head in less than 10 seconds while standing in the property I’m considering. Certainly the whole analysis can’t be done in 10 seconds, but most of it can be.

And no, this isn’t a post about the “70% Rule.” For those not familiar with it, the 70% Rule basically states that MPP should be 70% of what you can resell the property for (the ARV) minus any necessary repair costs; it’s probably the most common rule used by novice investors (and many experienced investors) to determine MPP. While the 70% Rule — and many other common rules for determining MPP — are certainly worth knowing and understanding, in my opinion they lack the accuracy (and often the precision) necessary to ensure you’re really getting a good deal.

The formula I use and that I discuss below is tremendously simple and straightforward; in fact, many of you will keep reading and think to yourself, “This is obvious!” And while it *is* obvious to anyone who has done even a few deals, for new investors it can often provide an “a-ha” moment that really clarifies what it means to analyze a real estate deal.

So, without any further ado, here’s my formula for detemining the maximum price I will pay for a property I plan to flip…if you’re a rehabber, pay attention, and if you’re a wholesaler, keep in mind that this is a formula your buyers may very well be using themselves:

MPP = Sales Price – Fixed Costs – Desired Profit – Rehab Costs, where

Sales Price equals the conservative estimate of what I can sell the property for (not necessarily the price I’ll list it for!).

Fixed Costs equal all the costs, fees, and commissions that I can expect to pay during the project.

Desired Profit is the minimum amount of money I want to make off the project when it’s complete.

Rehab Costs are the material and labor costs required to rehab the property into resale condition.

As an example, let’s say that I have a property I’m considering purchasing. I believe I can easily resell it in rehabbed condition for $100,000. Additionally, I know my fixed costs to be about $17,000, my desired minimum profit is $15,000, and I’ve estimated the rehab costs to be about $18,000.

In this case, my maximum purchase price is:

MPP = $100,000 – $17,000 – $15,000 – $18,000

MPP = $50,000

So, if I can purchase this property for $50K or less, I’ll jump on the deal.

Now that I’ve provided this formula and the basis for it, the follow-up questions I generally get from most new investors is, “So, how do I determine the Sales Price, the Fixed Costs, and the Rehab Costs?”

All three numbers are tremendously important to the application of this formula, so I will discuss how to accurately determine those other numbers in my future blog posts…

Photo: Horia Varlan

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Determining Maximum Purchase Price (MPP)