Recent Posts

• TAO of Flipping and Investing in Real Estate - Part 4.6 - Making the Offer

  Making an offer on a investment property is much like pulling the trigger on all the work you’ve done.  After researching the actual value of your prospectus and doing the due-diligence on the liens and encumbrances it will be easier to make a offer that will be acceptable to both the buyer and seller.  Hopefully the offer includes the calculated risk of the purchase and the offer is adjusted accordingly.  Additionally, whether it be holding for long term or flipping for quick profit, knowing the exit strategy of the purchase should already be identified and planned before the offer is submitted. 

  Two elements of investing that should be addressed when making a offer is whether the property will appreciate quickly or if it would be a good cash flow property.  Most investment properties will be one or the other.  A property that might be in a good area with fast appreciating values is not always a good rental property that will cash flow.  Most homes that have quick appreciating sell for far more than the mortgage to rent ratio would allow, but a good cash flow house will usually be bought for less than the mortgage to rent ratio allots and will increase in value at a slower rate.

  Example 1

  • You bought a home for $100,000 that you determined the rents are $1200.00 a month and the mortgage payment with a PITI (principal, interest, taxes, and insurance) is $900.00.  After calculating in your management fees, maintenance, rent loss, marketing etc.. you determine that your monthly cash flow is $25.00.  This property will continue to show minimal profit and increase over time, but the value of the home itself will not go up very fast.

  Example 2

  • You bought a home for $200,000 and the rents for this home were determined to be $1500.00 and the PITI is about $1800.00 a month - as you can see, your already paying more for the mortgage than the rents will bring in.  In this case, the property needs to appreciate at a fast rate, otherwise you will own a alligator that will eat you alive in debt.  We didn’t even calculate in your management, maintenance, rent loss, marketing etc.. so realistic expectation should be a negative cash flow of possibly more than $500.00 a month.  

  From these examples, both can make an investor money, but understanding whether the investment will appreciate or cash flow is very important.  For this reason alone, investing is not something for the faint of heart to try to do.  There are things that can and will go wrong on every purchase - being prepared and calculate your risk ahead of time to help prepare you for these potential problems.

  
  

• A Day in the Life of a Distressed Seller

  I had the opportunity to sit in on a presentation a month ago by HomeVestors after being asked by a close acquaintance that had a rent home with foundation issues and was heavily dilapidation.  This presented an opportunity to see how competition works and also to get a different perspective on the home purchase from a seller stand point.

  The gentleman showed up on time and began to immediately converse about the many issues he noticed upon stepping out of his car.  He was driving a beat-up Buick with dirty windows/seats, as I recall.  I later told the owner that he reminded me of a car salesman.  He doesn’t own the business, he just sells for it and makes his commission and goes home.  I am sure I was right in this because when I asked him simple questions about the selling process, he stumbled and even referenced his notes for finding  most answers.

  The process is simple:  receive a call from a distressed seller or one that wants “out”, evaluate the property (usually have a second person come in to calculate possible repairs needed), calculate your bottom line for a cash offer, baddly diagnose repairs and costs to hold, and finally scare the owner into selling at a 50% or more discount.  Simple!

  I was perturbed and highly disappointed after this presentation and reflected on my own buying techniques and knew that my ethical boundaries were deeply more sound than what I had just witnessed.  I can only deduce that this was a gentleman that had his own cookie cutter way of doing things and would not delineate from or work with the seller if it was not a one sided deal.

  He presented 3 options to the seller which upon first review seemed reasonable, but after further “script progression” turned out to be a one sided hostile takeover.  Option 1 was to buy the property at retail based on the area comps, but with a discount for repairs needed.  Now, since this owner had a property that had foundations problems, this would make it very difficult for them to sell this on the open market to a buyer without first repairing the foundation so lenders would finance the buyers. 

  Option 2 would be a discount based on automatically discounting the property do to its dilapidation and deducting all repairs that would be needed from the offer price.  The problem with this offer was they were calculating holding costs, realtor fees, and a 15% discount based on unknowns.  First off - there will be no holding costs if they make an immediate offer and close in a week or 2 like they said they can and second, there was no realtor involved, so that was a b.s. deduction as well.  The discount for unknowns should have already been accounted for in their repair costs and should not have been deducted from a base fee.

  The 3rd Option was the greatest - after explaining that the first 2 options would most likely not be possible because the home had foundation problems (they somehow weren’t able to pay cash for options 1 and 2, but somehow option 3 automatically was a cash offer), there was no choice but to make a final offer of about 40% of what the gentleman had originally given the owner comparables for. 

  This was the most interesting option because by the time he finished explaining all the facts about what it would cost to repair the property and that since he was paying all cash, the owner would have to accept a significant discount for the offer.  So, on top of discounting 15% for unknowns, adding in the repairs, holding costs, and realtor fees, they almost were cornered into selling this home that had after repair retail comps for about 120k for a meager price of 46k.  The owner still owes 42k on the home.

  Lets fast forward.  I did a quick walk-though after the investor left and gave him a list of contractors to call for each area I specified needing fixed.  He now has the foundation fixed (with a lifetime warranty, I might add), renovated kitchen, bathrooms, and new siding outside.  Added landscaping and even had the interior walls textured and painted - all for a modest price of about 28k.  Even if he sells the house for a 15% discount now, he still stand to make a good 30k on the home and most likely sell it quick! 

  I am not about to say that it is not needed to sometimes let a house go, or that remodeling, renovating or rehabbing a house is definitely going to solve your problems.  I do however think it is wise to stay clear of people that are only looking to take you to the cleaners.  Especially from a car salesman dressed as a home investor.

  
  

• TAO of Flipping and Investing in Real Estate - Part 4.5 - Determining a Rent Price

  Determining what you will charge in rent for your investments may sound very cut and dry but it is not.  The rent price will determine how fast you will get the home rented, whether your going to be making mortgage payments while it sits, and the type of renters that will be calling.  Being able to adjust your rent to coincide with your needs is not only important, but crucial to investing and overall cash flow.

  Although renting a home is primarily for long term investors, it pertains to flippers and short-term holding as well.  Knowing what your house will rent for will determine what people you can market  and sell it to.  If it is an expensive home and the rents cannot warrant the mortgage a buyer will make, you will be stuck with marketing it to homeowners and long-term investors.  If the homes rent is equal to or close to what the mortgage will most likely be (this includes taxes and insurance), the market is much wider - to include investors and potential home buyers.

  If you own a house in a sub-division where all the houses look alike, how will you stand out?  As much as renters like pretty flowers and a big back yard, that is not what will bring them to renting your homes.  You may have learned in economics that supply and demand drive prices, this is true in stocks and its true in real estate.  Having the ability to determine where to price your rental is crucial for this reason - if there is too much supply (too many rentals in the area) then there will be less demand and you will have trouble renting out your home.

  I have a bit of a different take on this theory, but it essentially still follows the same rule.  If you can buy for the right price, you should be able to rent for the lowest price thus beating the market.  What this means is that you not only need to buy your investments for a better price than most, but you need to be able to rent them for lower than everyone else!  By doing this you are essentially doing two things: assuring yourself of a more viable rental because you have a more enticing rent price than the other homes in the area and you have lowered your calculated risk because you have increased you chances of renting your units quicker.

  If there are 10 homes on the same block that you just bought in, all were about the same look and size, and everyone had their house listed for rent at 1000 dollars, which house would rent first?  The answer is not really known because they all are equally marketable due to price.  Having a hut tub in the back yard, or a larger game room is fine, but renters care more about price than those things.  Now, if you had bought a house on this same street but you had added in all your expenses and could rent your house for 900.00, you would be more likely to rent your house than the other 9 on the block.

  The importance of pricing is not to determine just how much cash flow you will make, although this is important - it’s to determine your ability to get renters to sign a lease!  If you can buy a house for the right price and have used the rents of other houses in that area to determine your purchase price, you were able to determine what you would be able to rent your house for.  You should be able to discount your rents by at least 15% of the retail market and still come out even.  If you cannot do this, you are not able to account for the risk involved in buying real estate and being successful.

  Lets say we came into a recession and those 10 houses were all vacant, they all have not been able to get a renter because the apartments nearby are slashing prices to take the renters away from your market - what do you do?  Well, if you did like I told you, you will be able to discount your house more than the others on your block because you have calculated your risk and were able to lower your rents to equal or lezs than your competitors at the apartments.  This is how you will be and stay successful in keeping your houses rented.

  Now that you understand why you need to be able to compete against others in your local area, lets move on to how to determine what to rent your investment for.  This is not as hard as it seems, although it does require some practice to be good at being able to set your rents right the first time. 

  The first thing you can do is drive the neighborhood and call the people that have signs in their yard.  You will be surprised at how much information you can attain by calling the owners.  Next you can look in your local papers and online for the houses that are in your neighborhood and call them as well.  Lastly, find a local realtor that know the area well and have them pull a list of all the houses in your area that are listed or have rented in the last 6 months, this is the best way to determine your starting rents, but is also tough as times because the realtor might be a bit apprehensive if you are only using them and may not work with you in the future.

  Once you have set your rent price, you will test the market.  First try setting it 3-5% above the market price and see if you get any callers, if not, you will start to lower it 3-5% at a time until you have people calling regularly about your rental.  Eventually, you will have a good grasp on the market area and will be able to immediately determine your rents and will take less time researching.  Always remember that whatever your rent will be, you need to be able to discount that by at least 15% in case there is a turn in the market and you need to start slashing prices to beat the competition.