When flipping properties to landlords.........

Question

Is it the same as flipping homes to an investor who will then sell that same property to someone else at retail price? We use the wholesale formula to get our offer price to the seller. Then we flip property over to end buyer with enough spread in between for the wholesaler/flipper and end buyer to make a profit. That is if the end buyer is going to resell what I already sold them. Is it different with landlords? I am saying landlords should not be concerned with ARV/FMV if they are holding the properties for monthly cashflow. Should they? Landlords make their profit on a continuous basis, so that would be the same as an investor buying from a wholesaler and reselling the property at retail. They both are making just as much profit but in a different way. So I shouldn't be worried about figuring ARV/FMV for the sake of the lanlords if landlords are not going to resell property for profit because the landlord is making up the profit with rent money received each month. Right or wrong? If I am wrong on this part, tell me what I missed. I do have a cash buyer that is a landlord.

That is just one cash buyer I found so far. Should I go ahead and start looking for deals to flip to this one landlord, or should I hold off until I get a bigger buyers list? By the way, how big of a buyers list do I need to get me going? I am still contacting more landlords to build up my list.

David Beard · Answer

Antonio, surely you're kidding when you typed the above.  Any landlord, or non-catatonic investor, is always and everywhere VERY concerned about value.  You must be thinking of RTO places that sell TVs and furniture for x dollars per month :)

As a landlord, I evaluate candidate properties on:  gross rent yield, net cap rate, debt service coverage ratio, ARV comps for rental grade, and ARV comps for retail grade (a nicer rehab, IF in an area with a reasonable amount of retail activity).

All of these are constraints on what I'll pay for a property.  Having an exit plan from a property that ensures you won't take it in the shorts is just as important for a landlord (OK, almost as important) as a flipper.  You just never know when you'll need to sell.  Plus, if you're getting financing, you need the property to appraise out with the bank, and they'll also evaluate comps.

Antonio Bodley · Answer

I will check and see if my state has something like yours to get all that information here in my county.

Chris Martin · Answer

Well, look. You have to work a little. I assume he is buying in a company (most likely) or his personal name (less likely). Get his name and company (or companies) name. Look up each purchase he made (personal or company) in county records. Now you know what, where, and when he buys!

Some counties will also have transfer tax stamps or sales information on the county tax rolls. Now you know what he paid! Some counties will also have mortgage information in the county register of deeds office. Now you know where he borrowed money! Many counties hve all this information online. Other than maybe Texas, you can probably get all the same information or more at your county courthouse. You may be able to get property condition information on his buys from online sources like trulia, old ads cached in google, etc.

At 5-10 a month, you have a good pile of properties... so research his 2011 purchases and get a really good idea of what he buys. Then find property similar to what he buys and these should be quality leads....

Antonio Bodley · Answer

I ask this end buyer what all he wants in his buying criteria. I wasn't told much other than they buy 5-10 houses per month and I can send them whatever lead I have. Like I told David I did ask for info and that is the only information I received from the end buyer. That's why I feel if he is not all too concerned about telling me what price he wants to buy and what area to buy and so on then why should I.

Antonio Bodley · Answer

Yeah David I am thinking of RTO places that sell TVs and furniture for x dollars per month. I asked this landlord/buyer what his buying criteria is. All I got from him was that they  buy 5-10 houses per month and that he looks at mostly anything. You can't say I didn't ask him what he is looking for because I did ask and that is all he told me. I didn't receive any details about gross rent yield, net cap rate, debt service coverage ratio, ARV comps for rental grade, and ARV comps for retail grade.

Antonio, surely you're kidding when you typed the above.  Any landlord, or non-catatonic investor, is always and everywhere VERY concerned about value.  You must be thinking of RTO places that sell :)

As a landlord, I evaluate candidate properties on:  gross rent yield, net cap rate, debt service coverage ratio, ARV comps for rental grade, and ARV comps for retail grade (a nicer rehab, IF in an area with a reasonable amount of retail activity).

All of these are constraints on what I'll pay for a property.  Having an exit plan from a property that ensures you won't take it in the shorts is just as important for a landlord (OK, almost as important) as a flipper.  You just never know when you'll need to sell.  Plus, if you're getting financing, you need the property to appraise out with the bank, and they'll also evaluate comps.

Jon Holdman · Answer

When I'm evaluating rental properties, I consider both the value of the property and the rent.  I want properties where I'm into the property for something less than about 70% of what it would sell for in a retail transaction (that include my purchase and rehab costs) and I want it to be at least break even.  Some will want cash flow, but that's not a huge priority for me.

I'm certainly not going to pay anything close to retail, or especially above retail, just because it will generate positive cash flow at that price.   I don't think most landlords would.  So your premise that landlords don't care about price as long as it cash flows is, IMHO, incorrect.

I think there are three factors that drive rental purchases:
1) Will it generate positive cash flow,
2) Am I buying at a discount vs. retail,
3) Is there rental demand for this property in this area?

If all are true, its a deal.

Chris Martin · Answer

Regarding "Where do you come up with that formula?" My first reaction is why do you care?. If you want to wholesale, you would be better off asking your customers what they want. Then supply them with properties that fit what they want. My formula fits my company's business model/plan and requirements of our current financing source(s). Both David (via "...an exit plan from a property that ensures you won't take it in the shorts...") and I (via "...price... will most likely be less than retail...") have told you that value of the house is important.

Ideally, you should strive to get answers, either directly or indirectly, to all the questions you raised in your original post from your end buyer.

Antonio Bodley · Answer

Where do you come up with that formula? I know if I was a landlord I wouldn't care what wholesalers do either. I'm getting paid rent every month, so I would not be concerned about the value of the house. My focus is how much rent I can get every month.

Chris Martin · Answer

The LL will have a different algorithm. The "acceptable" price for the LL may be higher or lower than a middle-man wholesaler, but will most likely be less than retail. You need to know what the LL needs in the deal.

I can tell you my current criteria. 75% of Rent price / 2 must be at most 10% above P+I payment at my commercial bank, using my basis as initial note balance, using current rate and terms. Assuming $700 in rent, 700 * .75 = 525 / 2 = 262.50.  So I can go to $288.75 max for P+I at 6.25% over 20 year amortization. So I'm thinking $39,500 is my basis limit on the (after fixed) property. I have found (and bought) SFR, condo, TH in my area that fit this criteria. The "retail" prices may be higher than the cap on what I'll pay, but there are not many comps... so I don't really know (or care that much) what flippers/wholesalers are doing.

When flipping properties to landlords.........

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