REO Start to Finish

REO Start to Finish

Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

This thread is about a recent REO deal I have done from start to finish (well, finish line is in sight) to help educate and inspire others to do the same.

Property details: 4+3, 2300 sq. ft, pool, spa, view, quiet street, great neighborhood, huge open kitchen with island.

This was an MLS listed property (I don't do these often) which was listed too high and received very little activity due to the over pricing. Long story short, I was able to contract it for $266k and I have since put $40k in rehab into the property.

Original estimated rehab budget was $35k so $40k is within the 15% contingency expense I always add on in my estimates.
What created the overage? Pool needed new tile which I did not originally budget for plus the size of the pool replatser job was greater than anticipated. Excess cost $2000
Appliances for kitchen were estimated at the usual $1500 for all stainless steel stove/oven, micro, and dishwasher. Ended up paying $3100 because I used a double oven (GE profile on clearence), & 36" inset range top rather than a slide in combo unit. At the suggestion of my agent, I moved the vinyl fencing seperating the backyard pool area from the front yard and brought it out into the front yard (to increase the backyard size) approx 15 ft. Extra cost $1500. Then there were the usual misc. extras.

Property is rehab complete, placed on MLS at $398,800 and had open house both Sat. & Sun. Received offer yesterday and am in the process of negotiations through counter offers/replys.

Assuming I settle at $390k for this property with current buyer, here are the numbers:
$266k purchase
$ 40k rehab
$ 23k re-sell costs (agent fees + title/escrow + recording)
$ 7k loan interest/costs Took $200k private investor loan at 12% + 2nd investor loan of $25k @ 12% (BP member)
$ 2k acquisition costs - rounded up (escrow/title)
--------------
$ 52k net profit before taxes inside of 3 months! Acquisition close date was Jan 25. so I have until April 25 to close sale escrow and stay inside of 90 days.

Have any questions, ask away, I am hear to help.
- Will Barnard

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Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y

I like the gusto Humerto.

See this reply in the discussion

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  • Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    15y

    Is your end buyer financed? Are they usually?

  • Real Estate Investor · Normal, IL · Member since 2010 · 15 posts · 0 votes
    15y

    I have done 4 flips, and its people like you that I was in desperate need to find before i did my first one. I think its great that you walked through the process. That means alot to new investors.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by Jimmy C.:
    Is your end buyer financed? Are they usually?
    Yes, I am selling to families and they all get loans either conventional or FHA.
    Originally posted by Derrick Williams:
    I have done 4 flips, and its people like you that I was in desperate need to find before i did my first one. I think its great that you walked through the process. That means alot to new investors.
    Thank you for your kind words Derrick and congrats on your first 4 completed! I hope my threads are beneficial to investors, my intent is to educate others. I only wish I had such specific assistance when I was first starting out!
  • Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    15y

    Will, is it true that FHA no longer requires 90 day title seasoning? I have heard that from two different people now, but I'm still skeptical.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by Jimmy C.:
    Will, is it true that FHA no longer requires 90 day title seasoning? I have heard that from two different people now, but I'm still skeptical.
    That is 100% accurate and has been for about a year now. They lifted their 90 day seasoning rule, however, they do make it as difficult as they can on you to close and they delay as long as possible, so expect FHA delas to be 45+ day escrows and not close on time.
    One thing you can be sure of, any flip inside of 90 days which is sold for more than 20% above what you paid will need verification of repairs made with costs. They will almost always demand that you show evidence to justify the increase in value.
  • Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    15y

    Thanks Will. Finishing up a rehab, and we have an end buyer waiting for repairs to be finished so that he can pay for appraisal etc... The mortgage guy he went with told me that the seasoning is gone. But it sounds like we will still have some hoops to jump through.

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    15y

    Will-hypothetical question:

    Let's say someone does rehab with OPM and it doesn't sell. Before having equity eaten up would someone consider an alternative like equity conversion-maybe renting or is it best not to go there?

    Been there so...

  • Real Estate Investor · Austin, TX · Member since 2009 · 66 posts · 12 votes
    15y

    Thank you for the post and video, Will. The place looks great! Can I ask a couple of questions?
    - Looks like you PI loans are straight interest? You do not pay points up front, correct?

    - Do you get any kind of insurance on the place and if so, is that included in these figures?

    - If I can ask, what is a target return that you expect on a typical project? This looks like 50k profit on 100k invested in 3 months. annualized at 200% or similar? Just curious what is a realistic target for the newer rehabbers out there (understanding that the experience, experienced teams and low interest loans come with time and demonstrated success)?

    Thanks very much

    jeff

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Will Barnard:
    ...expect FHA delas to be 45+ day escrows and not close on time.

    Will -

    Look around for another lender/underwriter...this definitely doesn't need to be the case...

    It will take a little bit longer than a standard FHA, if only because of the second appraisal, but we've found that the underwriting process goes just as quickly once the appraisals are complete and the renovation details have been provided.

    We're generally seeing 3-4 weeks to get an FHA loan funded for under-90 day flips...

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by Jeff Sielicky:
    Will-hypothetical question:

    Let's say someone does rehab with OPM and it doesn't sell. Before having equity eaten up would someone consider an alternative like equity conversion-maybe renting or is it best not to go there?

    Been there so...

    Jeff, holding and renting is NEVER one of my exit plans for So CAL flips for two reasons: A. They will not cash flow and B. I want that money out to re-invest elsewhere as quick as possible.

    So my alternative exit strategy is to lower the price until it is sold. I make sure I ALWAYS have plenty of room so that I could "fire sale" the property and still walk away without losing.

    Correct, although I have one lender who is a licensed loan broker and I pay him one point up front. All of my loans are principle and interest due in one lump sum at end of term so I never have monthly payments, unlike hard money loans. Of course! Always get insurance to protect investment and that of your lenders'. I use a policy that allows for vacant units and it includes coverage for replacement cost, covers rehab costs, and also includes $1M in liability protection. yes, my figures include insurance (as part of my holding costs). Typically, I shoot for a 20% or better cash on cash return and my exit usually is around 80-100 days, which calculates to a minimum of 75% annual return. I do two calculations, one with just my own cash I use, as you did in your posted question to me and the second is a calculation of the entire amount of money needed to do the project as if it were ALL my money invested which for this example would look like this:
    $306k invested, profit of $50k, ROI = 16.3% or 65% annual.
    I do this so I know if I were to invest 100% of my own money into projects, what my actual return would be so I can compare with other investment options.
  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by J Scott:
    Originally posted by Will Barnard:
    ...expect FHA delas to be 45+ day escrows and not close on time.

    Will -

    Look around for another lender/underwriter...this definitely doesn't need to be the case...

    It will take a little bit longer than a standard FHA, if only because of the second appraisal, but we've found that the underwriting process goes just as quickly once the appraisals are complete and the renovation details have been provided.

    We're generally seeing 3-4 weeks to get an FHA loan funded for under-90 day flips...

    Jason, unfortunately, it is not legal for me to demand that my buyer uses my lender, however, I do counter each offer to stipulate they they double app with my lender. Secondly, I agree that they do not always have to take that long, my post was just to warn others to expect that could happen and allow for that time in the calculations for holding costs. Certainly it is possible to close in under 30 days for an FHA, just not common here in So CAL. The homes here that I sell at all above $300k and it is CA so all loans are scrutinized (possible more than anywhere else) heavily.

    I appreciate all the comments and questions, keep them coming!

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Will Barnard:
    Jason, unfortunately, it is not legal for me to demand that my buyer uses my lender

    Why is that? Are you licensed?

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    I can not force a buyer to use my lender, it is agianst the law here in CA per my agent. That is what I was told several years ago, I did not question the legality.

    As mentioned, I do demand they double app with my lender in all my counters to buyer.

    And no, I am not a licensed RE agent, but I use one on my listings.

    Are you able to demand that a buyer use your lender in GA?

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Will Barnard:

    Are you able to demand that a buyer use your lender in GA?

    Here in Georgia, an unlicensed seller can refuse to accept a purchase agreement for any reason, including if the seller is uncomfortable with the buyer's mortgage broker. So, in essence, an unlicensed seller can say, "I'm not comfortable with any broker other than my own."

    I'm under the impression that's the case in every state. I just can't imagine you are required to accept a contract from a buyer if you're uncomfortable with their broker -- doesn't that put you in a position where you're forced to take your property off the market even if you think the broker can't get the job done?

    For example, what if you don't believe the buyer's broker can get a pre-90 day FHA flip deal done...are you not allowed to say, "I won't let you use that broker."

    Anyway, I can't do this because my wife owns half our company and she is licensed -- RESPA dictates that licensed agents/sellers are not allowed to "steer" buyers to a particular broker. But, that doesn't hold for unlicensed sellers.

  • Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    15y

    as always, great info j...

    will, nice job

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Jason, I do have the option to not accept any offer, for any reason, however, since I use a licensed agent, we can not demand that they use our lender, but can demand they double app, which is essence, accomplishes the same thing.

  • Real Estate Investor · Austin, TX · Member since 2009 · 66 posts · 12 votes
    15y

    Great feedback - thanks again, Will for sharing the experience and the great Q&A

    jeff

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by heffinsd:
    Great feedback - thanks again, Will for sharing the experience and the great Q&A

    jeff

    Thank you Jeff, it is my pleasure.
  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Will Barnard:
    Jason, I do have the option to not accept any offer, for any reason, however, since I use a licensed agent, we can not demand that they use our lender, but can demand they double app, which is essence, accomplishes the same thing.

    First, I'm not an attorney, but I'm pretty confident of this...

    Assuming your agent isn't a principal in the transaction, the fact s/he is representing you will not violate any RESPA regulations, because it is YOU (who is unlicensed and the principal) who is demanding the buyer use a particular broker.

    Certainly, your agent can't require a particular broker as part of the deal, and I assume your agent isn't getting any kickback or favorable treatment from your broker as part of the deal. Assuming those are both the case, you should be fine.

    Again, I'm not an attorney, but I think the rules around unlicensed sellers and "steering" are pretty clear (there are none).

    Check with your local Real Estate Commission to be sure...I'd be willing to bet they can give you an answer in about 5 seconds...

    Just trying to help make your life easier if at all possible...we all know how tough it is out there!!!

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Jason,

    Thanks for your input and advice. I took what was stated to me at face value and never questioned the legalities of it. I will look into it deeper as making my job easier is what I strive for!
    Not to mention the fact you pointed out:

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    @Jason - Update. My mistake, it was not a legal issue of not being able to demand that the buyer use our lender, but an issue of CA agents have a "lockhold" on their clients and if you demand they use your agent, the deal often will not go through.

    So to recap, at least here in my area, if you demand that a buyer use your lender, it is quite probable that you will lose your buyer.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y

    Interesting...

    Does that mean most of the buyers are using the broker that their agent recommends (and is probably affiliated with their broker)?

    If that's the case, you should counter any offers with, "Use my broker/lender, and I'll pay for your appraisal and inspection..."

    It may not help, but at least the buyer's agent will have to explain to the buyer, "Nope, I won't allow you to save $800 because my brokerage wants their kickback and I want to be able to pick up my check at the closing table"... :D

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by J Scott:
    Interesting...
    Does that mean most of the buyers are using the broker that their agent recommends (and is probably affiliated with their broker)?
    Yes, they are using the broker their agent recommends. It is of course illegal for agents to receive financial benefit for such a recommendation and kickbacks are not to be paid, however, this does not change the fact that in some cases, it does happen.
    Originally posted by J Scott:
    If that's the case, you should counter any offers with, "Use my broker/lender, and I'll pay for your appraisal and inspection..."
    Not a bad idea. Does FHA/VA allow the seller to pay for appraisals? If not, I guess a standard seller credit would suffice. Not sure I would like it if I paid for these two items only to have the buyer back out. Then I am stuck with two bills I shouldn't have. Risk vs. reward assessment needed on that.
  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    Will,

    Something like "seller will credit appraisal fee to buyer at closing" should do; if they don't close, no credit ...

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by Steve Babiak:
    Will,

    Something like "seller will credit appraisal fee to buyer at closing" should do; if they don't close, no credit ...

    Certainly a viable option, however, the whole point of offering to pay this fee is in exchange for them using my lender. Now I would be asking them to pay if they don';t close, making this arrangenment that much more difficult to get agreed to.

    The whole issue is the fact that agents have this hammer lock on their clients. There are so many agents who do not have a clue what they are doing, and often hinder rather than assist a transaction. In so many of these cases, a deal can be lost. It is a shame that is the case, but the case no less and something I as a seller must deal with. Not all agents are competant and reliable as my agent is.

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