The guys over at Lending Clarity have posted an informative five-part series on the what to do to minimize your deal from falling apart.
Part One
Part Two
Part Three
Part Four
Part Five
Saturday, June 9, 2007
Thursday, June 7, 2007
The Reality of Rehabbing
Reality shows most often than not are not reality and that rings true for real estate reality shows like Flip This House from A&E.
By now you have probably heard about the trouble's A&E is having with one of it's flippers (or is it floppers?), Sam Mr. Leccima . It has been alleged that Mr. Leccima has not been as honest as he has been portrayed. According to Fox News Atlanta, Mr. Leccima and A&E have duped the public into thinking the homes that were featured were actually fixed and sold in less that 4 weeks. A&E has dropped Mr. Leccima from the show and now features one of his former team members, Angela Wilford. If memory serves me correctly Angela slapped some "sold signs" on some of the house, so she might not entirely be squeaky clean. Read more of this story here and here.
But enough of that. the purpose of this post is to show you a quick guide that your clients can read before they embark on a flip or as it used to be called a rehab. I'll use the acronym S.A.M.M.M.M. to show the different stages of reality flipping.
SEEK
The first thing your client or your self must do is find a property that is pretty much to the point of being uninhabitable. Why? Because your client needs to have enough room to make a decent profit. Your goal is to get your client to find a home that he can purchase for around 65% of the after rehab value or ARV. For the purposes of this quick guide let's assume you find a home whose ARV is $200,000. Please note that the ARV of the home can never be higher than the the highest comparable.
ACQUIRE
Based on what I said above, your client can acquire this home for around $130,000 right? Not quite. The offer needs to be around $110,000. You would think this is too small of an offer, but bear with me. The numbers will tell the story. Your client can acquire the property quickly by using sources such as a self-directed IRA or a hard money lender. If your client does use private financing or hard-money financing, be sure to add financing costs as part of the acquisition costs. Let's assume the acquisition costs are $5000.
For the purposes of this quick lesson, I won't go into much detail, but you can do the research yourself by going to websites like www.reiclub.com or www.creonline.com.
TOTAL ACQUISITION COSTS ARE $5,000
MEND
Before your client acquires the property he must have a good idea of what it would take to bring the property up to par. You need to advice him or her to use an experienced property inspector or contractor. Let's assume that he has received an estimate that the property will take $30,000 to fix. Add another $10,000 to this estimate, because trust me when I say to expect the unexpected.
TOTAL CONSTRUCTION COSTS ARE $40,000
MAINTAIN
In this stage you must take into consideration ALL holding costs. This includes taxes, interim mortgage payments, transaction costs, loan fees and whatever other holdings costs that may come up. Depending on the market plan on anywhere from 4 to 8 months of holding time. Let's assume this costs i $10,000
TOTAL HOLDING COSTS ARE $10,000
MARKET
You need to get paid don't you? And so does any other professional involved in the selling of this home. You client needs to move the property quickly, so I would offer up to 8% commission in this type of market to ensure you get as many agents as possible showing your home. You may also throw in the costs of a good staging company so that the home looks pristine. Assume you pay 7% in commission and $1000 to a staging company.
TOTAL MARKETING COSTS $15,000.
MOLLAH
This is where your client gets paid. Assume that he or she wants $20,000 out of this deal.
Now let's do the math.
$200,000-$20,000-$15,000-$10,000-$40,000-$5,000=$110,000.
The $110K is the maximum your client can offer. Heck, I would start even lower than that to give you a bit of room to negotiate.
Does this make sense? I hope so because this is reality and not a show like Flip This House. I am only giving you the basics here. There are things that I haven't covered here here like the tax ramifications in holding and selling a property less than a year, but I hope this post gives you a sense of what it really takes to "Flip a House"
Happy selling...
By now you have probably heard about the trouble's A&E is having with one of it's flippers (or is it floppers?), Sam Mr. Leccima . It has been alleged that Mr. Leccima has not been as honest as he has been portrayed. According to Fox News Atlanta, Mr. Leccima and A&E have duped the public into thinking the homes that were featured were actually fixed and sold in less that 4 weeks. A&E has dropped Mr. Leccima from the show and now features one of his former team members, Angela Wilford. If memory serves me correctly Angela slapped some "sold signs" on some of the house, so she might not entirely be squeaky clean. Read more of this story here and here.
But enough of that. the purpose of this post is to show you a quick guide that your clients can read before they embark on a flip or as it used to be called a rehab. I'll use the acronym S.A.M.M.M.M. to show the different stages of reality flipping.
SEEK
The first thing your client or your self must do is find a property that is pretty much to the point of being uninhabitable. Why? Because your client needs to have enough room to make a decent profit. Your goal is to get your client to find a home that he can purchase for around 65% of the after rehab value or ARV. For the purposes of this quick guide let's assume you find a home whose ARV is $200,000. Please note that the ARV of the home can never be higher than the the highest comparable.
ACQUIRE
Based on what I said above, your client can acquire this home for around $130,000 right? Not quite. The offer needs to be around $110,000. You would think this is too small of an offer, but bear with me. The numbers will tell the story. Your client can acquire the property quickly by using sources such as a self-directed IRA or a hard money lender. If your client does use private financing or hard-money financing, be sure to add financing costs as part of the acquisition costs. Let's assume the acquisition costs are $5000.
For the purposes of this quick lesson, I won't go into much detail, but you can do the research yourself by going to websites like www.reiclub.com or www.creonline.com.
TOTAL ACQUISITION COSTS ARE $5,000
MEND
Before your client acquires the property he must have a good idea of what it would take to bring the property up to par. You need to advice him or her to use an experienced property inspector or contractor. Let's assume that he has received an estimate that the property will take $30,000 to fix. Add another $10,000 to this estimate, because trust me when I say to expect the unexpected.
TOTAL CONSTRUCTION COSTS ARE $40,000
MAINTAIN
In this stage you must take into consideration ALL holding costs. This includes taxes, interim mortgage payments, transaction costs, loan fees and whatever other holdings costs that may come up. Depending on the market plan on anywhere from 4 to 8 months of holding time. Let's assume this costs i $10,000
TOTAL HOLDING COSTS ARE $10,000
MARKET
You need to get paid don't you? And so does any other professional involved in the selling of this home. You client needs to move the property quickly, so I would offer up to 8% commission in this type of market to ensure you get as many agents as possible showing your home. You may also throw in the costs of a good staging company so that the home looks pristine. Assume you pay 7% in commission and $1000 to a staging company.
TOTAL MARKETING COSTS $15,000.
MOLLAH
This is where your client gets paid. Assume that he or she wants $20,000 out of this deal.
Now let's do the math.
$200,000-$20,000-$15,000-$10,000-$40,000-$5,000=$110,000.
The $110K is the maximum your client can offer. Heck, I would start even lower than that to give you a bit of room to negotiate.
Does this make sense? I hope so because this is reality and not a show like Flip This House. I am only giving you the basics here. There are things that I haven't covered here here like the tax ramifications in holding and selling a property less than a year, but I hope this post gives you a sense of what it really takes to "Flip a House"
Happy selling...
Tuesday, June 5, 2007
Fix This House? No. Fix This Show
I'm sure by now you have heard about the recent troubles of Atlanta businessman Sam Leccima and A&E"s Flip This House. It seems that Mr. Leccima has been scamming the both the viewing public and allegedly A&E as well.
Some of the alleged hoaxes were that Mr. Leccima:
Some of the alleged hoaxes were that Mr. Leccima:
- Did a poor job of fixing the properties
- Did not sell the homes as advertised
- Used his friends a stand-ins for potential buyers.
You can view the entire news story here at the Fox News-Atlanta website.
The truth is that this "reality show" does not show much reality at all. Tomorrow I'll spend a bit of time as to what the actual process of an actual rehab is. Is not a simple or as fast as some of these show make them out to be. It will be a quick lesson that you can pass on to your clients.
Monday, June 4, 2007
Beaten to the Punch-Again!!
Those of you who read this blog, have heard me rant about how most real estate agents do not understand the differences of working with typical client and a real estate investor. I've tried to give advice here and there, but Chris Smith at Equity Scout has taken the words right out of my mouth.
In one post he pretty much summarized what I have been trying to do in three months.
Oh well...
I am not ashamed to give credit where credit is due.
Chris has done an excellent job in creating a table which shows the differences between a typical seller and a real estate investor. Go read his post and let me know if you don't agree.
In one post he pretty much summarized what I have been trying to do in three months.
Oh well...
I am not ashamed to give credit where credit is due.
Chris has done an excellent job in creating a table which shows the differences between a typical seller and a real estate investor. Go read his post and let me know if you don't agree.
Speculating Is Not Really Investing
Chris Smith, at Equity Scout has written a wonderful piece comparing real estate investors to real estate speculators.
For those of you who have the experience, can you tell the difference when acquiring clients who are interested in investing? How about you newbies, can you tell who is headed for trouble and who will make money?
If you can't print out the table, Chris has created and keep it in front of you as sort of a cheat sheet.
Happy selling.....
For those of you who have the experience, can you tell the difference when acquiring clients who are interested in investing? How about you newbies, can you tell who is headed for trouble and who will make money?
If you can't print out the table, Chris has created and keep it in front of you as sort of a cheat sheet.
Happy selling.....
Sunday, June 3, 2007
It's Just Not the Sellers. It's the Real Estate Agents Too.
May was a productive month for me. I took care of some lingering issues that had been going on with my multi-family property and I saw around 15 potential profitable deals go by the wayside.
Now don't feel sorry for me. In fact I am quite happy it happened this way because I am beginning to hone my skills in working with real estate agents. At first I thought the problem was the sellers. I thought they were expecting too much out of the current market.
But you know, some of the problems stemmed from real estate agents as well.
Here are few things I encountered:
Now don't feel sorry for me. In fact I am quite happy it happened this way because I am beginning to hone my skills in working with real estate agents. At first I thought the problem was the sellers. I thought they were expecting too much out of the current market.
But you know, some of the problems stemmed from real estate agents as well.
Here are few things I encountered:
- Un-returned phone calls-Left messages stating nothing more than I was interested in the property, but had a few questions. Around 50% of agents never returned the call. Of the remaining, around 65% didn't return the phone call an average of 3 days later.
- Did not want to work with investors-I had pre-approval letters and proof-of-fund letters too, but no dice. Some agents pretty much ignored me as soon as they found out I was buying real estate for profit.
- Selling price was firm-Granted I did not know the selling situation of the seller, but one even mentioned that the seller had not even considered an offer that was 10K under asking price.
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