Figures Don’t Lie

Selfie by Suna Last year, Paul Esajian invited Sue Ann and me (and some other investors) to watch the San Diego Chargers from the Fortunebuilders skybox. Paul has given us some great advice in the time we’ve known him.

This post originally appeared on the Hermit Haus blog on 2016-09-24.

Hanging on every word

Believing the things I heard

Being a fool

—Russ Ballard

One of my mentors, Paul Esajian, says, “Always trust the numbers.” By that he means your numbers. Phill Grove, another mentor, emphasizes this concept. He says, “Always do your own due diligence. Run your own CMA. Do your own repair estimate.” In other words, buying real estate is a perfect opportunity to follow the advice of the old Russian adage, “Doveryai no proveryai”—trust but verify.

Trust but verify. Especially when dealing with wholesalers.

We expect homeowners to lie through acts of commission, omission, and ignorance. They, after all, are in dire straits. They really need to get out of a problem house, and they often know what they need to accomplish that goal down to the penny. We expect them to over-emphasize their house’s strong points and ignore or hide its deficits. Further, they may not even know about a termite infestation, a leak in a wall pipe, or countless other problems that can drive a renovation over budget and into red ink. And, to be fair, homeowners expect investors to lie to them, too.

But wholesalers are a different animal. They speak Investor, so it’s easy for investors to let their guard down too much. For example, wholesalers know how to get our attention with numbers. They know the secret formula we use to make sure we have some cushion for the unforeseen issues that arise in every project: .7ARV – R = O. Our Offer should be in the neighborhood of 70% of the After Repair Value of the property less the cost of Repairs.

The Perfect Deal

Asking Price	$100,000
Repairs	$40,000
ARV	$200,000

So when we see an opportunity like the one shown to the right, our immediate tendency is to short-circuit our processes and jump to the conclusion, “That’s a good deal!” Why? Because .7 of $200,000 is $140,000. Subtract $40,000 in repairs and we should be comfortable paying $100,000 for the house. I mean, what could go wrong? Well, there are only three possible reasons why the numbers match our formula so well:

• The deal is a perfect fit to our expectation, and we stand to make about $25,000 after holding and marketing costs. 
• The ARV has been overstated, intentionally or not, which could reduce or eliminate our potential profit. 
• The repairs have been understated, intentionally or not, which (again) could reduce or eliminate our profit margin.

We don’t need to talk much about what happens in the first outcome, where the numbers are correct. Everybody is happy. Everybody wins. But I reckon each of the other two outcomes deserves its own post. As I write them, you can find them gathered here.

Most wholesalers are hard-working, honest people. But especially with the growth of HGTV, DIY, and similar networks, vast numbers of newbies are coming into this profession, and wholesaling is the logical starting point. (We can discuss why in another post some other time.) People in our profession follow the distribution of the general population with roughly 2% falling somewhere along the psychopathy scale.

It’s like one of my favorite bosses (she hired me three times in the corporate world) once said, “Figures don’t lie, but liars figure.”

How To Finance Your Projects

Photo source: Amazon “Other People’s Money” didn’t originally have the connotation we think it does today. Based on what happened in 2008, Brandeis’s thesis is a lesson lost. I highly recommend this book to anyone who has money or wants to have money some day.

This post originally appeared on the Hermit Haus blog on 2016-08-30.

If you watch HGTV’s Flip Or Flop—and who hasn’t?—you’ve heard Tarek El Moussa say, “We buy houses for cash.” If you watch regularly you may have also heard him say that they don’t always use their own cash. Not using your own cash is a consistent bit of advice from everyone from Than Merrill to Phill Grove.

But if you have enough money, why not use your own? Honestly, if you have enough money to complete a purchase and remodel on your own, you probably should do your first one or two deals with your own money. But you really don’t want to continue that practice for several reasons:

• It limits the number of deals you can do at one time.
• It lowers your return on the money you invest.
• It ties up resources you might be able to use for bigger deals or personal emergencies.

But, to me the most important reason to use other people’s money (OPM) is that doing so enables you to spread the rewards of this business as well as the risk.

I seldom fund a project completely with my own money. Why tie up $100k on one project that returns $30k when you can tie up $40k on two projects that return $25k each in the same amount of time and still have a reserve? (All numbers in this post are provided to illustrate points and do not necessarily reflect any given project.)

So where do you get OPM?

Here are some sources:

Hard money

Hard money lenders are bricks and mortar businesses, like banks. But they play by different rules than banks. They generally charge the most points and highest interest rates of any source.

Private money

Private money lenders are people like you and me. They loan you their money to complete your projects in return for the guarantee you’ll pay them back.

Banks

You’ve probably heard the myth that banks won’t loan money on distressed houses. What that means is you can’t get a traditional mortgage on a house that isn’t up to code. But you can get a one or two year construction loan. In many cases, these loans are interest-only until due, and they are at a much lower interest rate than hard or private money. The catch is that you must already have a proven track record and assets to get a bank to finance your project.

Owner financing

Owners are the least likely source of capital. If they had the money to fix up their house and sell it on the open market, they probably would. But you can offer to fix up their house for them and split the proceeds.

My favorite source is private money. Even when a bank finances the purchase, private money often finances the renovation. Why? That’s the topic of my next post.

Number Three

Temple (magenta circle) is pretty far north of Hermit Haus’s focus area (magenta glob).
 

Here is the house with the pile of ashes featured.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-11.

My mentor Phill Grove always says, “Your Net Worth equals your NetWork.” Here’s an example.

A few days ago, I got a call from Dominic G, another redeveloper working in Central Texas. He was checking references on a General Contractor with whom I’ve worked for many years. As we chatted, we found out we have a lot in common, including the back office system both our companies use. Then Dominic mentioned he had a house under contract in Temple. Since Temple is well outside of his normal range of operations, he wanted to know if I would be interested in buying the contract from him.

Now Temple is also pretty far north for Hermit Haus to go. We don’t usually get much farther north than Georgetown. But the numbers looked good on the surface, so I said I was.

Last month, I met yet another redeveloper at the Houston Summit who has done roughly 20 houses over the last 20 months in the “Greater Temple” area. We’ve been chatting a bit, so I called Larry and asked if he’d like to JV (form a joint venture) with Hermit Haus to get the deal done. He did. We did an onsite evaluation with Larry’s lead contractor, revisited the numbers, and came to an agreement on how to proceed. Hermit Haus is now under contract to buy its third house since December.

We’re calling this project “The Ash House” because the previous occupants appear to have heated the house with a lovely wood-burning fireplace for several years. Unfortunately for the neighbors, they just dumped the ashes in a flowerbed until the pile is at least 36 inches tall and a couple of feet in diameter. One of the first items to clean up on the list!

Everybody wins!