June, 2013

Short Sales – A Great Source for Rehab Inventory


FrontBefor&AfterWhen I first started investing in short sales, I had one basic strategy.  I would tie the property up with a 1-year option contract that gave me the right to market and re-sell to a 3rd party, and I would then list it on the MLS to find an end buyer who would pay more for the property than I was purchasing it for.  After coming to an acceptable agreement with the short sale lender, I would do a back-to-back closing using transactional funding, and pocket the difference between the two sales.  My average profit on each flip was somewhere in the neighborhood of $7,000-$10,000.

That was a VERY successful strategy for me, and not only helped me survive the real estate crash, but actually helped me build up a substantial little war chest to begin funding my own deals (without transaction funding) AND start acting as a transactional funder myself for other investors in my area.  IKitchenBefore&Aftert wasn’t until the market stabilized, and prices begin to increase, that I began to see how short sales could be an incredible lead source for renovation properties…and with MUCH larger paychecks than just same day flips.

The first short sale deal that I converted into a traditional “fix & flip” property was located in a little patio home community on the North side of town, that is known for elderly residents, which of course means….CASH BUYERS.  The property was owned by an elderly couple in their 90’s, who had since moved to Mississippi and could no longer afford the home.  We started out with the same old process we had always used, and tied up a $95,000 cash buyer to flip it to, while we negotiated an offer in the $70k’s with the bank.

At some point in the process, the buyers went back to the property to walk through it, and felt like it was just too much work for them to take on and decided to back out of the contract.  Typically, we would have just re-listed it back on the MLS, and waited for another buyer.  However, by this time I was hot and heavy back into the renovation game, and this one was a perfect fit for a fix & flip.  The average days on market in the neighborhood was less than 30 days, while the rest of the area was still over 150 days, and so I knew this would be a home run.

MasterBathBefore&AfterWe ended up settling with the lender to purchase the home for $72,500 (on a balance of $150k) plus we had to pay off a junior lien of $3,000, so we were into the home for just over $75,000.  After about $18,000 in repairs, we turned around and sold the property for $129,900 (full price offer) after just ONE DAY on the market.  After closing costs, holding costs, and real estate fee, we made a profit of $25,038.47.  Not bad for a couple months worth of work!

This deal marked an epiphany for my business, as our strategy changed permanently to no longer viewing short sales as only a same-day flip strategy, but rather as a stream of steady deals for our renovation business.  We no longer even pursue an end buyer for a traditional A-B-C short sale flip until we see if we can make the numbers work as a renovation, and the success of this paradigm shift has been remarkable.  Our last 5 or 6 renovations have come directly from short sale leads, and we are closing on another short sale deal this Friday.  You can expect to see that one added to our list of “Success Stories” in a few months!

Check Out Some More of Our Success Stories at the Links Below!

Big Profits from Ugly Houses

Flipping Houses You’ve Never Seen?

Replace Your Income Renovating Homes

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Know When to Walk Away…

“You got to know when to hold ’em, know when to fold ’em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.”                                                                                                                                                                                    ~Kenny Rogers, The Gambler

the gamblerThis iconic Kenny Rogers song is notorious in poker rooms across the country, and has undoubtedly played on a loop in the heads of many gamblers as they contemplated their next move in a game of Omaha or No-Limit Texas Hold’em.  However, the advice found in the lyrics of Roger’s Country Billboard Music chart-topper reaches far beyond the world of old western saloons and smoke-filled poker rooms.  In fact, this infamous chorus should be the mantra of every savvy real estate investor worldwide.

It’s easy to walk away from a bad real estate deal, much like folding a 7-2 off suit in poker.  It’s also easy to move forward on deals that are slam dunks, like playing a flopped full house all the way to the river (please forgive the poker references for those who have never played). It’s the ones in the middle that get you, the hands that really could go either way, and the real estate deals in which you’re uncertain whether you should pull the trigger or just walk away.

A few weeks ago I placed a house under contract in the Northeast side of town.  This lady hadStark Pool called me 2 years prior, and rejected my offer of $70k.  A year later she called again, with the house still sitting there, and this time I offered her $60k.  She rebuffed my lower offer, and once again disappeared off the radar.  After a few months she resurfaced, now slightly more motivated and willing to consider an offer of $62k, and so we agreed to meet at the property to sign the papers.

After walking through the house, and making a cursory inspection, it was revealed that the home also had aluminum wiring.  Deal killer, right?  Nope, the seller actually agreed right on the spot (in the driveway) to reduce the contract price another $6,000 to $56k.  So, we signed the contract and I scheduled a more thorough inspection with my contractor and JV partner the following day.

The contractor pointed out a lot of little things that were wrong with the house, which by themselves were no big deal.  However, the seller’s attempt at being Bob Vila (the do-it-yourself superhero) had basically destroyed a good part of the house, and most of his work had to be completely ripped out and redone.  The renovation costs began to mount, and it was becoming apparent that after chasing down this seller for nearly 2 years, I was once again going to have to let it go.

The hardest thing for many new investors to do is walk away from a “deal”.  They are so desperate to get that first deal, that first victory, that first testimonial to share at the local real estate club…that they are oftentimes blinded to the reality of the situation.  They are so eager to validate their decision to become an investor, and to recoup their start-up expenses, that they will overlook (or intentionally ignore) important repairs, underestimate the costs to improve, and overestimate the after-repair value of the home.

home run dealThis is why it’s imperative that novice investors are extremely conservative on their first deal.  It MUST be a home-run, no-brainer, big-profit deal, or they should walk away.  If beginners bite off more than they can chew, and the deal turns south, they will probably never make another real estate investment again, and will sadly avoid the greatest vehicle to wealth creation our country has ever known.

It’s OK to make a mistake, as long as it’s not a fatal one.  That’s why it’s advisable for all new investors to start their business as a wholesaler, where they never have to take title in their own names, and they can avoid some of the pitfalls and greatly mitigate their risk early in their careers.  Then as they become comfortable with running their numbers, and build some confidence in their understanding of the market, they can branch out into renovations or rental real estate with the knowledge and expertise necessary for success.

What are your thoughts?  Have you ever had to walk away from a real estate contract?  Share your thoughts and experiences below, so we can all grow together.


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7 Great Online Tools for Rehabbers


Flip This HouseThe most popular (and easiest to understand) real estate investment strategy is certainly the “fix & flip”, which is simply buying a home that needs repairs, fixing it up, and then reselling it to a retail buyer/homeowner.  While reality television shows may have made it the most common technique, tackling the renovation business is certainly not the easiest path to real estate success.   However, with a sufficient source of capital, a reliable crew, and the right deal…it can definitely be the most profitable.  So, if you’re thinking about living out your own real life episode of “Flip this House”, here are a few great online resources to help you in this new endeavor.

TheSweeten.comSometimes the hardest part about renovating homes Sweetenis finding a reliable crew that will show up on time (and sober) and get the job done on budget.  TheSweeten.com is a new website that matches investors (and homeowners) with the right contractor from their invite-only network of professionals.  You simply submit a project description, along with your timeline, budget, and photos, and the Sweeten will match you with 3 contractors from their database.  You then get the chance to review the contractor’s profiles, interview them, and select the best one for the job.

Google SketchUp – On a rare occassion, you may decide to redesigsketchupn a home’s layout, or remove some walls to open up the floorplan.  If you don’t have the budget for an architect, you can use Google SketchUp to get your thoughts on paper and help your contractor visualize your ideas.  Check out this great 2-minute YouTube tutorial, which shows how easy it is to create your own 3-D floorplan drawings.

 Valspar’s Virtual Painter – When you do a lot of renovation projects, you will eventually settle in on a colorValspar scheme that you will use on nearly all of your projects.  After all, if it isn’t broken, don’t try to fix it.  However, every once in a while you will come across a project that needs a special touch of color to help set it off.  Whenever that day comes, a great free online tool is Valspar’s Virtual Painter.  Simply set up your account, upload a picture of the room, and you can then choose from Valspar’s hundreds of colors to help find that perfect hue for your project.

RemodelingCost vs. Value ToolOne mistake that new rehabbers often make is to over-improve a house, or spend too much money in less important areas, and not enough money where it really counts.  While it’s usually common knowledge that the biggest bang for your buck comes from the wet areas (kitchens and baths), other renovation projects aren’t so obvious.  Remodeling Magazine’s annual cost vs. value tool is a great place to get ideas on where to best spend your investment dollars.

Here are some other great tools that you will find helpful in planning and organizing your renovation projects:

Kitchen Planner Online – Enter your kitchen dimensions, and then design your cabinet layout, sink, dishwasher, stove, etc.

Home Depot CalculatorsEnter your measurements and find out exactly how much material/supplies you need for carpet, tile, sheetrock, and more!

Pinterest – No, it’s not just your wife’s favorite go-to resource for a great quiche recipe.  Pinterest is a great resource for ideas and inspiration for your remodeling projects as well.

 Do you know of another helpful online tool for rehabbers?  Join the conversation, and let us know in the comments section below!


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Big Profits from Ugly Houses

Ugly HouseIt’s a common misconception that you have to “fix up” houses in order to sell them for a profit, but nothing could be further from the truth.  I have a made a pretty penny flipping ugly houses to other investors, who spend their time and money making it look nice, while I spend my time cashing the checks.

The difference between a successful investor and one who sits on the sidelines, is the ability to eliminate emotion from the purchasing decision.  To make money on ugly houses, you have to look solely at the numbers, to determine whether a profit can be made.  New investors will oftentimes walk into a stinky, trash-filled, rat-infested house and turn around and walk right back out.  They mistakenly allow their 5 senses to determine the deal’s value, rather than the dollars and cents.

I recently received a short sale lead (pictured) from another investor that was an absolute mess inside.  Most of the windows had been broken, virtually everything needed to be repaired or replaced, and the home was full of 6553 Sellerstrash (and had the smell to prove it).  While most investors would turn up their nose at the opportunity…I smelled money, and decided to negotiate an aggressive price with the short sale lender.

The lender was owed over $80,000, and yet they settled with me to purchase the home for just $14,500 BECAUSE it was in such poor condition.  Unfortunately, even at $14,500 the numbers DID NOT work for me as a renovation project because it was in a high-crime neighborhood that didn’t lend to a lot of new home purchases.  HOWEVER, it was a great RENTAL area, and there’s always another investor who will find treasure in what others see as trash.

So, we listed this property on the local MLS, and found an investor-buyer who was willing to $24,500 cash, and close quickly.  I purchased this ugly house in the morning, and turned around just a few hours later and resold it to the end-buyer for a $10,000 PROFIT …all without repairing a single thing.  Now that’s a good days work!

Questions? Comments?  Let us know in the comments section below…


Other Recent Posts by Professional Investors Guild

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For More Real Estate Articles & Advice (Plus 2 Free Gifts), Click Here to Subscribe!

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