All Forum Posts by: Alex G.

@Jason Hirko - where did you find this chart? Thanks.

Hey Michael,
If you have some distress sellers who need sell yesterday, feel free to reach out. I just sold another deal and have cash to play with. No interest in anything retail. 

Thanks.

@Aaron Gordy   
Aaron, if you consider a full 6% commission, you're right. In my example the estimated 5% selling costs were: 3% to buyer's agent, 1.5% to closing costs and 0.5% for listing costs. These days Listing Spark gets your listing in MLS for $210/month, a negligible cost compared to a typical 3% listing agent fee.

This is a limited (not full) service representation. But it works for experienced investors who can negotiate their own contracts and don't need a full service agent to hold their hands. 

Labor cost is a factor, of course.

But how about truly MONSTROUS cost of doing business with City of Austin? On my current remodeling permit application I'm paying $900 in review fees alone, of which a $460 goes to an arborist inspection. Mind you, this is an interior remodeling permit, so nothing is done outside of the existing building.

By the time we actually pay for the main permit, plumbing permit, electrical permit  and inspections I'll be up there close to $3.5-4K in city fees.

That's not all. I had to pay $800 for a survey City needs with my application to see if there are protected trees on the lot, while a regular survey is $450-500, as you know.

I also had to include structural engineer's letter for a couple of walls we're removing, and I'll have to include another letter "compliance" letter from him. So that's another $800-1,000. 

On my last remodeling project I had to spent about $1,500 to pass the final close out inspection for variety of insignificant items that one would never have to do, if it weren't for the City. 

When you add to this an extra 2-2.5 months worth of delays related to the entire permitting process and inspections, and corresponding carrying costs at $3K-$4K per month,  we are talking a massive $15,000 cost add-on. 

I have yet to see a wholesaler's spreadsheet for repairs that has this permit related cost premium in their estimates.  

80% ARV? Yeah, right!

For a rehabber these discounts wouldn't make any sense. Just consider:

- 3-4% closing costs & loan origination to buy
- 12 months of property taxes, interest on the loan and utilities 
- 5% in commissions and closing costs to sell. 

These will burn through a 20% discount in a heartbeat.

Perhaps, in a sub $200K price range a 20% discount would get a rental investor juiced up a bit. Assuming they only have MLS choices available, at least 20% off might move them closer to a break-even point. But I find it to be a big stretch to even a landlord buyer.

The big question is what kind of ARV you're using. A rental investor doesn't care about a high retail ARV on a house. They have to conserve cash to increase ROI on down payment and repair equity and they're probably not going to fix it up into a resale condition.

In a competitive market when it's hard to buy at a big discount, you may look for ways to create add-on value. 

For example: today in my Inbox there was an email from a local wholesaler both of us know through IU forum. They were selling 3 side-by-side lots zoned SF-3 that are barely large enough for A/B condos (ADU regime). They are asking $580K for 3 of them, or $193K each.

Upon a bit of research, it looks like this used to be a good size single lot (Lot 1) in a certain subdivision on Chico St in 78721, zoned Sf-3. The owner, who happens to be a well known spec home builder (I sold them a lot or two in the past), bought the original lot 2+ years ago. It's unlikely they paid more than $200K for the lot then.  Probably less. 

Rather than building just one A/B project at that time - they probably spent time, money and effort to subdivide the lot into lots 1A, 1B and 1C. These 3 lots combined are are now marketed for about 3 X the price they paid for the original property.

Another example: a couple of years ago I bought a run-down 2plex off Riverside. I rehabbed the place, added a studio unit, took rents from $2400/month total to $5700/month - all in 12 months - and sold it for almost 4 X of what I paid for the building.

There are many ways to create add-on value, but it takes understanding of the market, honing certain skills to execute the plan and looking specifically for these kind of opportunities. 

By the way, these high margin opportunities are available predominantly in high, competitive markets like ours. You usually won't find them in a slow market. 

In slow times builders aren't eager to pay premium prices for small lots hoping to make $100K in profits on an A/B project. Rental investors are going to be a lot more cautious and conservative. You won't find them willing to pay astronomical list prices for 2-4 units like they do today.  None of today's numbers will make any sense in a slow market.

So....  Rejoyce the high competitive market we're having now!  Make it count as a seller of opportunities to aggressive  buyers who're betting on our market continuing to do well. 

I find that fear is a healthy  ingredient of risk management in a life of investor. I noticed that many new investors are, on one hand, afraid of making a purchase. Yet, on the other they have no concept of risk or risk management at all.

I recently had beers with a couple in their late 40s at a local meetup. The told me about their first investment -- a new construction project of a duplex property with a $230K lot purchase and $500-600K  in construction costs. They gave me a long list of reasons why they were going to net $250K profit on it and wanted me to confirm that they would make the profits. I could only shake my head in disbelief. They were somewhat upset when I raised a number of questions about their assumptions. 

The couple had no experience in construction, no prior ownership of investment real estate, no management experience of projects of this scale. 

The best way I found to mitigate fear and dramatically eliminate risk in any deal is to change my thinking about acceptable margins. In 1-4 units arena in a decent area of town a purchase at a 20-30% discount is, IMO,  a marginal deal that I'd pass in a heart beat. At 40%-50% I'll start paying serious attention, but will still check my numbers carefully. At 70% off, I'm drop everything and jump on it. 

I find that I can borrow hard or private money for these type of deals and sleep really well at night, knowing I can't possibly loose mine or lenders' money on something like this.

@Elisa Pinigis My understanding was that with commercial properties the assessed value is based on the NOI and the CAP rate for the area and for your type of property.

Was the appraisal you got based on NOI and prevailing CAP  rates? If so, would you mind sharing which  CAP rate the county appraisal office felt would be "market" for your property and what type of property you have. 

Overheard the tail end of this very conversation on the radio today. 

Most apartment syndicators in their Excel projections always show at least 3% annual rent increases built-in. That's their way to push up the NOI and the value of the property over the course of the ownership period. They need these rent increases to justify limited partners' capitial investment in the project. Investments in new construction of multi-family units are likely sold in a similar fashion.

A lot depends on the implementation of the policy. If rent contol policy is put in place that doesn't allow them this kind of rent increases - the projects won't be viable to outside investors. The equity capital won't flow into a multi-family property class. Sales, rehabilitation of old buildings and new construction will slow down dramatically.

And let's not forget property tax increases after a sale of a multi-family project (County will know about the sale). Tax hikes will zero out most of the current cashflow for a buyer. The only way for a buyer to justify ownership and have some cash flow is to improve the property and raise the rents. 

It's a sign of the times rehabbers and builders operate within these days. March 5th, 2019 foreclosure list shows around 15 hard money lenders posted various properties for foreclosure in Travis county alone. I've been carefully watching this count for the last 3-4 years. It's been trending up, consistently. But at 15 - it's the highest it has been in a very, very long time. That's about 15% of all postings for the month. 

If you're a flipper or a builder - be careful out there when you evaluate your projects. The price levels we are at today and with a slightly higher market interest rates than in the previous 3-5 years, the houses aren't flying off the market anymore. That means longer time on the market, higher holding costs, likely higher incentives and consessions to buyers, more inventory and choices for buyers. 

(Example: A buyer of one of my finished rehabs wants me to break down about 200 sf of kitchen tile flooring and replace it with the tile of their choice - at my expense.... And I'll sure be happy to do it with the right offer. Post closing, of course.)

Your end product has to be better and priced more competitively. And if your buy/permit/flip/sell cycle is running close to the time limit of your hard money loan, chances are you'll be under pressure to  sell at a lower price that you may have initially targeted.

And remember, if your exit price point is over $350K  AND you're leveraged - there may be very few alternative exit strategies to selling for cash. 

So.... Be more conservaitve in your projections. Screen deals for higher margins. Negotiate prices until your tongue bleeds. The risk is considerably higher than it was in the last few years.

Un unexpected cast iron sewer line replacements underneath a slab foundation - $21,000.