Communication Is Key

About a week into demo, the front yard is still overgrown. It is also soaked from more than six inches of rain.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-18.

I walked the Ash House with our partner Larry and one of Larry’s favorite GCs this afternoon. We had more than six inches of rain yesterday, so the yard was really wet. Unfortunately, the rain prevented us from getting started reroofing the house, which made a couple of leaks very apparent.

The meeting was to make sure all three of us are on the same page with regard to redeveloping the house. The contractor thought a couple of our ideas were a little extravagant, so he removed them from the original bid. We had to be firm that we really do want to open the kitchen up to the dining room and bring all electrical to current code. So please make sure there is money in the bid to cover it.

The GC has also found a couple of problems while demoing the bathrooms and kitchen. You never know what you will find when you open a wall. In this case, we found more work to do and more money to spend. But we will not sell a house we can’t be proud of. So our margins just got a little thinner. Here’s hoping they don’t disappear completely.

And It’s Gone Again

Selling a house can feel like shooting a rapids. It takes patience, stamina, and skill to get to the smooth waters at the end.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-17.

The Blue Ridge house falling out of escrow is one of the forms of turbulence Carol writes about in her free handout “88 Forms of Turbulence.” Turbulence is anything that can make a deal go sour. It’s one of the things we protect sellers against when we buy a house. When we put a house under purchase contract, it stays sold. Unfortunately, we can’t protect ourselves against turbulence on the part of our buyers.

Within a couple of days after officially putting the Blue Ridge house back on the market, we again had multiple offers, and once again we accepted a full-price offer. Hopefully, it will stay sold this time. But when I was a kid, my mom used to tell me you had to sell a house three times to get it to close. So, who knows?

Texas Flood

You can usually step over the creek in the distance.

Well it's floodin' down in Texas

All of the telephone lines are down

—Larry Davis, Joseph Wade Scott

More than 4.5 inches of rain at a time is a lot of water! Even Brody is impressed.

Well, they would be, if we had any telephone lines. But the amount of rain we’ve had over the last few days troubles even the cell tower. Coverage has been intermittent. Luckily, data seems to take less bandwidth than voice calls.

I’ve been holed up in the house with the dogs. They seem to enjoy me not going anywhere, especially during thunderstorms.

Over the last week, we have had just over seven inches of rain, almost five of them fell last night. They ground is soggy, and the creek is well into flood stage. Luckily, it is a long way below the house. We planned that well, at least.

I can’t say I’m unhappy about the amount of rain. Like everyone else around here, I wish it would come more evenly over the year. But I know I’ll be wishing for more soon enough.

He’ll Be Watching Me

Brody watches me from the porch while Harvey plays in the grass.

Every breath you take, every move you make

I’ll be watching you.

— Sting

I wanted to post this picture to show one reason why we do what we do. These two keep me sane. Dogs are very grounded creatures. They care deeply about their pack family, but they live in the eternal present. No worries beyond right now. What a wonderful way to live.

Brody never takes his eyes off of me. In fact, Suna has a T-shirt with a cattle dog looking longingly up at you and the words to the Sting song on it.

Meanwhile, Harvey is rolling in something he loves out in the grass.

Builder's Risk Insurance

The backyard of the Ash House was grown wild for a number of years. I don’t think we can save the dog house, maybe the greenhouse.

The amount your builder’s risk policy will pay out in the event of a total loss varies with time (shown as weeks above), even if you insure (as I do) up to the full after repair value (ARV). Keep excellent records of what you have invested (blue line, shown in thousands of dollars) and how that investment affects the property value (orange line) to help get the most out of your insurance if you have to make a claim.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-08.

We closed today on our joint venture project in Temple, TX. As you might guess from the last few blog posts, there were a number of last minute details to work out with the private money lender and title company. But we got them all done.

And I learned something about Builder’s Risk insurance in the process.

What Is Insurance?

Let’s start with an overview of what insurance is and isn’t. Insurance is a financial product where the insurance company agrees to indemnify you in the event of a loss. For insurance to work, three conditions must be met:

• You have to feel there is sufficient risk to justify paying for the policy. (In redevelopment, there always is.)
• There must be a sufficient number of policy holders that need the coverage to interest the insurance company in writing the coverage.
• The insurance company must believe there is a profit to be made by indemnifying you, generally by spreading the risk over the “pool” of insureds.

Like the name implies, with buider’s risk the insurance company agrees to indemnify the builder (you and me) against specific types of loss during the process of building or remodeling a property. The word “indemnify” screws up many people. All it means is that the insurance company will pay you a specific amount of money if you suffer harm or a loss, up to the maximum coverage. That is, the insurance company will make it financially as if the loss never occurred.

What Will It Pay?

The question that makes builder’s risk insurance interesting is, “What is the amount of the loss?” You suffer less damage if a tornado levels your project the day before you start redevelopment than if the same thing happens the day after you complete it. And it is different on any day between those two points. I’m using a tornado in this example because a total loss is much easier to define than a partial loss, such as a minor fire.

So let’s say you bought a house for $70,000. You expect to spend another $70K redeveloping it over the next 60 days. When you’re done, you expect the house to be worth $180K. The beginning and end points are fairly clear. If the tornado happens on day one, the insurance company would pay you about $70K. If it happens after completion, you could justifiably expect (but might not receive) $180K.

But the amount of harm you suffer would vary at any point along the way. Let’s say you spent the first week cleaning up a jungle that had grown around the house. You spent $2K. That investment might not be counted a loss because it wasn’t spent on the structure. But if you spent $8K replacing the roof the next week, you have improved the value of the structure by at least $8K. The insurance company would probably pay you at least $78K of the $80K you have invested.

The same holds true for demolition costs. Do they actually increase (or possibly decrease) the value of the property and, therefore, the amount of loss you suffer? You could argue that you’re still out the money for demolition, and you’d probably win, but….

Document everything!Image by Bitmoji

What the insurance company pays in the event of a loss depends on the amount you have invested and the actual loss you suffer. Both of these depend on you keeping squeaky clean records with receipts and all sorts of other documentation. I wouldn’t expect the insurance company to cover anything over your actual costs unless the project is complete or so close to completion that you are actively marketing it. Even then, it depends on how your policy is worded.

The take-aways:

• Always carry builder’s risk insurance on your redevelopment projects.
• Make sure you understand how the insurance company will determine the value of a loss before you sign the contract.
• Document everything.
• Don’t expect the insurance company to pay more than you can prove you’ve spent.

The first three of these take-aways hold true even if you are a regular homeowner instead of an investor. Then the last one that the insurance company probably will not pay more than actual market value, no matter what you think you home is worth. They have not emotional attachment to it.

Caption Photo by: Suna

Entrepreneurial Blues

A good entrepreneur finds balance. Image by: Bitmoji

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-05.

Warning: This post can be construed as whining. If I hadn’t promised to be as honest as possible about our journey, I wouldn’t post it. It sounds like whining to me, and I don’t like whining. Feel free to skip it. But if you want to know what it’s really like to run a small real estate redevelopment company, I guess I’m writing this for you.

When you’re getting started—and possibly even after you’ve been doing redevelopment work for awhile—you don’t have a huge staff to rely on. Some of the many tasks required to keep a company like this one working include but are not limited to the following (presented in no particular order):

Finding money Budgeting Plowing through the MLS Prospecting for buyers, sellers, contractors, handymen, etc. Reviewing contracts Signing contracts to buy, sell, and finance projects Keeping the books Finding money

Monthly, quarterly, and annual financial reporting Paying contractors, assistants, lenders, suppliers, etc. Communications (blogging, Facebook posts, one-off letters, advertising, etc.) Marketing, marketing, and marketing Crunching numbers Estimating repairs Finding just the right wine

Finding money Managing contractors and vendors Setting policy and defining procedures Negotiating with buyers, sellers, contractors, suppliers, etc. Record keeping (physical and electronic documents like permits, licenses, contracts, etc.) Envisioning, inspiring, and directing operations Finding just the right whine

I believe in job creation, but I also believe in profits. So there are only four of us working on this enterprise, and we each have unique roles and skills. To oversimplify: Russell works on finding deals and keeping the back-end systems running. Carol is our real estate guru; she keeps all of our preliminary numbers realistic, is our numero uno marketeer, and manages projects. Sue Ann is our social media expert, editor in chief, and networker. That leaves most of the boring business stuff to me. I love what I do, but...whine!

We do have assistants—virtual and otherwise—who handle most of our secretarial work: printing, copying, and mailing marketing materials. But the other listed tasks (and many, many more) fall to one of the four principle investors.

What set off this whine-arama is that I spent almost my whole day for the last two days chasing down random bits of paperwork for lenders and title companies involved in two of our current projects. In a perfect life, this would have been work I delegated to a file clerk. Unfortunately, I am the file clerk (technician level, in Kiyosaki’s quadrants).

Now you learn in investor school to prepare for this by keeping the most commonly needed documents in a folder on your desktop. This I do. However, each transaction we do adds to that list of documents. My “Commonly Needed” folder now runs just over 8MB, compressed. I’m waiting for some bank or title company technician to balk at looking though it and ask, “Why don’t you just send me the documents I need?” But so far, they always find just one more document to request.

My advice: Keep smiling and telling yourself it’s all a brilliant learning exercise that you’ll get through and eventually have it all down and a staff to delegate it to. That or learn to “play the guitar on MTV.”

Private Money Anxiety

Your lenders are people, too. When they have anxiety about lending money to you, understanding what drives that anxiety can help make your business more profitable.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-04.

You hear a lot in this business about private money and hard money—often lumped together as if they are the same thing. Both are alternative financing options to banks. There are advantages and disadvantages to using either private or hard money. Let’s start by talking about what distinguishes the two:

Hard money

Hard money is more bank-like. It involves dealing with a lender whose business is lending money to individuals or companies for the purpose of buying, renovating, and possibly selling real estate. Hard money lenders are “bricks and mortar” operations; they have a building, marketing and collections departments, and strict rules they must follow.

Private Money

Private money is money you borrow form individuals. They can be sophisticated lenders or novices. They can be your lawyer, car salesman, or coworker. They may even make their living by lending money to investors. But they aren’t regulated by the government because they aren’t in the business of lending money. That is they don’t have a building and staff to support.

Investors often lump hard and soft money lenders together, because they serve the same purpose: they provide the money you need to do your business without having to go through the qualification process, wasted time, paperwork, and financial nakedity of a bank loan. The price for this convenience is a much higher cost of money and a shorter loan term. Neither private nor hard money lenders are likely to give you a payback period longer than a year, and you’ll probably pay more points for the loan and a much higher interest rate than you would with a bank loan. For example, we have paid two points (two percent of the total loan) and twelve percent interest for private or hard money as opposed to one point and five percent for bank money.

So why use private or hard money? When you find a profitable deal, you often have to close in a week or two. I have yet to find a bank that can make a decision in less than a month, even when you have an ongoing relationship—as if that meant anything to a bank. The added expense is just a cost of doing business. So what if you pay your lender $5,000 more than you would a bank if you’re still going to make $25,000 or more on a deal you would lose if you waited on a bank to act?

The people you borrow from have their own plans for the money they let you use. We always protect their money first. The lender is a named insured and gets paid before we do. Photo by: Suna

Which Is Better?

So which is better, hard or private money? The answer is it depends. Private money can make a decision faster, but it can also be more skittish. I have known private money lenders to back out at the last minute. I haven’t had that experience with hard money lenders. But because hard money is more regulated, they can take longer to make a decision in the first place, which can cost you the deal.

One thing to remember is that whether you’re using hard, private, or bank money, your lender is taking a bigger risk on your project than you are. You are risking their money, and the only assurance they have of getting it back is your word. Banks don't want the property that secures the loan. Hard money or private money lenders often don’t want it either, but they are in a better position to recoup their investment (plus a little) if you default than are banks.

When you use someone else’s money, you play by their rules. Be patient with them if they get skittish at the last minute. They are just trying to cover their assets. Help them overcome their anxiety and get the deal done. You’re going to protect their money better than your own; help them understand that.

Another thing to remember is that your lender is another set of eyes on the deal. They may see problems you missed or glossed over in your initial analysis. Anything that makes your lender anxious is something you should take very seriously once you uncover the root cause. For example, a private money lender we are working with recently got very nervous just before closing. (That’s usually the most stressful time for them.) They started by questioning our analysis, so we walked them through the deal step-by-step.

Then they asked the question that was really bothering them: “What about insurance? Will we be a named insured?” We always name the lender as an insured on our Buidler’s Risk policy. It’s only fair. But when I reviewed my checklist, I hadn’t checked the box beside insurance. Oops! My bad. Luckily, my lender reminded me a few days before closing. Now that box is checked and we’re moving forward.

Philanthropy and Networking

This ad will appear in the playbill for every performance by the Milam Community Theater this season. Consider sponsoring a community group in your area. It is “doing good” that does good for you, too.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-02.

Sue Ann and I attended the Milam Community Theater’s (MCT) “Night on the Town” tonight. It included a nicely catered dinner of roast beast and veggies followed by MCT’s presentation of Agatha Christie’s The Unexpected Guest. I won’t comment on the play here, but Suna was asked to write a review for the local newspaper.

So why am I mentioning dinner out on a business blog? I wanted to point out the power of networking and advertising at these otherwise “social events.” For dinner and the play, we were seated with the Cameron city manager, the host of a local radio broadcast, and two other business owners. In the audience was our insurance broker, a real estate broker, a lawyer, and several other Milam County elites.

All of these local big wigs had at least one thing in common: we had all helped sponsor MCT’s season this year. And we got to mingle with them and revel in that commonality.

While this kind of networking inevitably brings about new business contacts, that isn’t why you do it. As our mantra says, “People first, profits seconds.” In large cities or small towns, relationships are how you get things done. You have to be nice to people first, and you have to be nice to them because they are people—not because of “who they are.” I actually enjoyed the company we were in and only mentioned our business when someone else brought it up. But now when people see my name on a permit application, they have a friendly face to associate with it. When they know someone who needs help selling or buying a home, they know someone who (I hope) made a good impression on them to refer.

And there is the sponsorship aspect. Our ad will appear in every playbill for the current MCT theater season. It is a very low cost form of advertising and networking.

The Win-Win Works

Proof of a Win-Win!!

This post originally appeared on the Hermit Haus Redevelopment website on 2016-04-01.

Independent proof of a win-win came through my Facebook feed today. The screen shot to the right is from the Realtor® who represents the buyers of the Blue Ridge property.

Love having my buyers come out on top in this crazy sellers market.

Those with a scarcity mindset might interpret McKinsey’s statement to mean that we sold too low. We didn’t. Even after negotiating with the buyer to establish a fair price, the house sold at the high end of the comparables. This is one of the best examples of a win-win scenario I’ve encountered to date.

We made money—just not as much as we might have had we not learned some valuable lessons about working with contractors. We can keep the lights on, pay the contractors, repay the loan to purchase the property, and put a little in our pockets.

I’m also very glad the buyers got a good deal. “People first.” I hope they will be really happy in the house.

Lakeland Closes

We closed on the purchase of this lovely house today.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-30.

We closed on the purchase of our second Hermit House redevelopment property today. It is a lovely two-story house in Pt. Venture.

The Lakeland house currently has a view of the lake only from one window in the master bathroom. In fact, you have to stand in the tub to see the lake. We hope to rectify that situation by adding a second-story deck that will be accessible from new doors out of the upstairs living area and a stair case from the existing backyard deck.

Our exit strategy for the property is currently in flux. We have several options, but all will remain on hold for the short term because Carol and Russell will rent the house for the short term. They sold their primary residence but haven’t found another suitable property. Investors tend to move a lot.

This house is an excellent example of a win-win. The previous owners needed to sell the house to move on with their lives. A previous attempt to sell at full market had failed. We were able to put cash in their pockets and enable them to pursue their life goals. And simply buying this house improves our balance sheet.

This is my favorite kind of deal: everybody wins.