All Forum Posts by: Michael Evans

So here is how you calculate the numbers:

• Mortgage owed: $55K
• Seller Profit: $15K
• Your Profit: $5K
• Minimum Deal: $75K (not including closing costs)
• Market Value: $70K
• Net on Deal: -$5K

So based on how the deal is currently structured, there is no value in the deal.  So you have to create value, and here's how:

• Mortgage owed: $55K
• Market Value: $70K
• Net Value: $15K (27% of mortgage owed)
• Monthly cost: $570 + taxes + insurance
• Monthly rent: ??? You have to tell me, but let's say it's $1,000

If I'm a buy and hold investor looking for positive monthly cash flow of at least 10% per year, I need to make a net profit of $125 per month if I were to pay off the existing $55K mortgage using a conventional 20% down mortgage, 6% APR based on the following:

• Mortgage owed: $55K
• 20% down = $11K + closing costs = required investment (say $15K)
• 10% ROI on investment = $1,500/year = $125/month
• New mortgage owed: $11K with a monthly payment of $386 principle and interest
• Estimate taxes and insurance at $175/month based on 3%/year of market value
• Monthly PITI cost: $561/month
• Other property management costs: $200/month
• Total monthly cost: $761/month
• Monthly rent: $1,000
• Monthly profit: $239/month = 19% ROI
• Investor is looking for 10%, so you give the investor $125 and you split the rest of the monthly profit between you and the seller ($114/month)
• Takes 175 months (over 14 years) for you and the seller to make $20K, but you've made a deal where you've sold house so there's no mortgage on the seller's credit (didn't do subject to or seller finance), there's no out of pocket costs for you or the seller, you both have monthly income for the life of the mortgage and you can actually create second and third mortgages against the property to secure your position, so if the new buyer sells, you must be paid your $15K and $5K respectively.

There are a whole bunch of assumptions that you will need to verify and tighten, but the concept I am trying to show is that you can always make a deal even when there doesn't look like one.  If you and the seller both want your money now, you can sell the 2nd and 3rd mortgages (note selling).  There are many people (potential investors) who would love to receive a monthly cash payment of 10% per year backed by real estate and all they have to do is put down $5K - $20K.  Be creative and solution focused and look at a deal from different perspective.  Email me if you want more details.

I would recommend that you first develop an investment model.  The model should take into account your Inputs (time and money), what Actions do you perform with those inputs (look for properties, submit offers, earnest money, loan deposits, referral fees, etc.) and your expected Outcomes (property value increase, cash flow, and profit).  A typical model may look like this (very simple version):

Wholesaling

Inputs:

• 20 hours per week for the next 3 months
• $10K cash

Actions

• Enter into agreements with Bird Dogs to look for properties for me ($1K for each deal I close)
• Spend 5 hours/week contacting members of my team (Bird Dogs, realtors, title companies, friends and family) to locate properties
• Spend 5 hours/week making offers on properties
• Spend 5 hours/week working deals to find buyers for my properties
• Spend 5 hours/week negotiation wholesale deals between sellers and buyers
• $100 - $2,000 earnest money for each purchase contract
• $5,000 towards the actual purchase of a property per month

Outcomes

• Enter into 5 purchase contracts per month
• Assign 4 purchase contracts per month for at least $5,000 each
• Complete 1 property purchase per month to buy and hold and generate positive cash flow of 10% per year

This is a very basic sample of a real estate investment mode for Wholesaling (and I threw in the buy and hold for fun).  You would use an Excel file to develop your actual model (there are many real estate investment templates online and on this site.)  In 2003-2005 I developed a model for purchasing pre-construction homes to flip upon completion.  My model required $10K, a FICO score of 640 and I could double your money in 6 months with only $3K risk of the $10K.  I did this model for two friends.  One turned $10K into $25K in 4 months and the other turned $12K into $50K in 6 months.  I doubt that model will work now (required 100% financing, which was easy back then), but I hope you understand the concept.

God Bless you!

@Minh L. I used to track a lot of different economic indicators and was in the process of developing a predictive house pricing model (didn't complete it).  The main indicator I used was the affordability index for each state.  It had reached an all time low in 2005 in CA at the time I was doing these deals, so I knew by definition that home prices couldn't continue to increase at the rate they had been.  I predicted that the higher end counties (Orange, San Diego, Ventura) would decline the greatest by percentage, but I was wrong.  It was the lower end counties and areas (North Los Angeles, San Bernardino, Riverside, and Fresno) that got clobbered.

I recently had the opportunity to hear Bruce Norris (a man after my own heart) speak about his prediction for the CA market, and he is very uncertain, because the CA market is doing something it has not done in the last 3 real estate cycles since 1970: it is pausing rather than continuing to run up.  He believes this pause is due to the government intervention in restricting first time homebuyer's ability to get mortgages.  But like every cycle, greed is coming back into the picture and banks are loosening their qualification requirements, so we'll see what happens.

@Christian Bors I closed three deals in 2005 using this method. Let me clarify. I entered into purchase agreements with tract home builders (like KB) who were selling houses to the general public. I paid my earnest money of $3K in CA and waited for them to build the house. Upon completion, I would decide to close or not. Home builders are used to people falling out of escrow for various reasons. If I decided not to close, they would refund my earnest deposit. I would close if there was enough profit in it for me. At the time I needed only $10K to close on a $300K home. I would then immediately resell the house a FSBO at the current market price. So if I purchased it at $300K and it appreciated to $330K by the time it was built, I would list it for $330K. If I had $5K in closing costs, I would net $25K in profit. One of my friends that I did this deal for held the property for an additional 3 months because the prices were still increasing. He sold his house for $355K with $7k in closing and holding costs, for a net profit of $48K.

I am just now getting back into the real estate investing game, so I will do my research to see if my model will work again or if I need to tweak it.  I applied a modified version of this model in Frisco, TX where I entered into purchase agreements on 6 houses for $150K each.  I never closed on them, but in 3 months they appreciated to about $175K each.  Same principle.

Investing in appreciating is only risky if you don't know what you're doing.  In the model I developed, the only risk was the $3K earnest money deposit.  If the house value had not increase or had decreased when they finished building the house in 3-6 months, you would simply walk away and not close the deal.  The worst case scenario is the builder would keep your earnest money.  Except in CA I have never heard of any reputable builder keeping anyone's earnest money.

So to recap:  I invested $10K with a risk of losing a maximum of $3K and unlimited upside potential.  This is the classic scenario of purchasing a "call" option (I used to trade options online) where the option value increases by a factor of the increase in the underlining asset (in this case the unbuilt house). So it wasn't risky at all.

As far as what happened in 2008, I got out of the market in 2005 and had to let go of my 9 properties under contract (for which I received all of my earnest deposits back),  At the time I was doing this I projected that the market would top out in 2006 (I have a degree in Economics and over 15 years experience of data analysis).   You have to take risks in order to get large returns.  It's all about how you manage the risk, which I am very good at (I manage a $100 million annual operating budget).

How do you figure you will have negative cash?  What are the property taxes and insurances?  Remember to take into account depreciation when you calculate your costs and the impact to your cashflow.  Depreciation is a non-cash expense that you get to write off on your taxes.  It actually lowers your taxable income (most people forget to take this into consideration).

I will end by saying this.  You have to be ready to take advantage of opportunities when they present themselves.  God has presented you with a great opportunity.  Now you have to make the choice whether and how to take advantage of it.  The decision is not easy (if it was, everybody would take advantage of opportunities, but they don't).  You should look at this from the worst case scenario and decide if you have the risk tolerance or not.  If you don't, then think about another kind of investing because real estate deals may not be for you.  Ask the Holy Spirit to guide your thinking you can make a wise decision.

I'm always available to help you figure out the deal, you just have to make the choice.  God Bless You.

You're welcome.  They call that Unconscious Ignorance.  Once you know what you don't know, they call that Conscious Ignorance.  Then they have what they call Unconscious Knowledge and Conscious Knowledge.  My goal in life is to move from Unconscious Ignorance to Conscious Ignorance, then to Unconscious Knowledge and finally to  Conscious Knowledge.  I'm glad I was able to help you on your road in life.

God Bless You!

So you need $70K (purchase $60K and repairs $10K) to make $1K per month (from a tenant known to pay late). How long does your father expect you to keep the property?

I can set you up with a $70K 15-year loan with closing costs rolled into the loan (estimate another $5K) where your monthly payments will be around $800/month.  You need to determine the costs of renting the house that you have to pay (property taxes, insurance, repairs, etc.) and take into account that the tenant doesn't always pay on time (yet you will need to pay your mortgage one time or face foreclosure).  If you are serious, send me an email at [email protected] and I can send you the details of the loan directly and we can take more about specifics.

Joe, if you setup the combination of a Land Trust and LLC, it will be almost impossible to get the to actual owner of the LLC. The actual Land Trust document, which specifies the beneficiary, is not recorded anywhere and can only be forced to be produced by a court order. It is by far the strongest legal method for holding title without revealing the actual owner. You also make the LLC the beneficiary of the Land Trust. You don't make yourself the Trustee of the Land Trust or the registered agent of the LLC. To make this as secure as possible, you have your attorney take on both of these roles. This is how the rich stay rich and protect their assets.

You can take it even a step further by establishing a C corporation that functions as a holding company for your LLCs.  I setup this elaborate structure in 2005 because I was going through a divorce and did not want my future ex-wife to have access to or even know about property I purchased after I filed divorce papers (I used money I earned after the divorce to secure my properties so they weren't community property).  I went through a firm who specialized in setting up these types of legal entities.  You don't need anything that extensive when you start, but it's best to be aware of the type of structures you may need as you grow.  And I live in CA where everyone will sue you at a drop of a dime, especially of they know you have money.  Just some advice.

Thanks for the response from everyone.  I put 6 houses under contract using the same model in Frisco, Texas at $150K each with $9K total ($1,500 earnest money per house) and within 3 months they had appreciated a total of $125K (over $20K each).  I had some personal issues come up (was going through a divorce) so I wasn't able to close on them, but I got my $9K back.  So it's just not in CA.

You have to do your research, develop your investing model, test it using historical data, and then apply it within the criteria of the model.  I spent 6 months researching Texas markets before I settled on the Dallas area.  I then connected with a real estate agent through an agent in CA, told her the criteria of the houses I was looking to buy, and she found them within a week.  I flew out to Texas, met her, saw the properties, signed the purchase agreements and paid my earnest money.

Once you've made money and lost money, it's easy to make it again.  I lost my money because I lost my focus of what's important: God.  I put money and material things ahead of God and he took everything away from me to show me what matters and what's most important: my personal relationship with God.  So now I have the right mindset and I'm ready to get back to making money, because this time I will know how to treat it and what to do with it.  I have a very interesting belief system that is explained on my Facebook page at https://www.facebook.com/believedeclaredo (stands for Believe, Declare, Do).