Inflated ARV: Massaging the Numbers

When calculating ARV, you have to think like a buyer, a contractor, an appraiser, a seller, and an investor…all at the same time. Any question you can ask yourself is probably important.

This post originally appeared on the Hermit Haus blog on 2016-10-07.

One of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone. I’m just going to talk about how it happens, and there are only a few ways:

• Use the wrong comps.
• Make the numbers fit the model.
• Mis-time the market.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

There are are many ways to tip the scale in favor of something you want to do. Be honest with yourself and let the numbers make your decision.

Make the Numbers Fit the Model

As I mentioned before, wholesalers know our requirements, so it’s easy for them to (intentionally or not) make the numbers fit that model. Most wholesalers understand that their long-term survival depends on their reputation, but there are exceptions to every rule. Rely on your own or a third party for your numbers.

You also have to honest with yourself. We’ve all seen (and some of us have been) someone who says, “My house has to be worth $200,000,” with the implication being “because I need it to be worth $200,000.” Buyers don’t care, and they are the ones who make the final decision about how much a house is worth. If every other house like yours is selling for less than $150,000, nobody will pay $200,000 just because you need that much.

It’s very easy to convince yourself to pay more than you should. “I can pay another $10,000. If I fix it up to be the nicest house in the neighborhood, I should be able to get $20,000 more than those other houses have sold for.” Wrong. You may be able to push the market a little. You may even find a buyer who is willing to pay that $20,000 above market, but, unless the buyer is paying cash, the house still has to appraise. And appraisers work for the bank, not you. They aren’t going to ignore the comps just because you and the buyer agree on a higher price.

Suggestions

Here’s how to avoid these traps:

• Always run your own comps and trust your formulas. Never take the word of a wholesaler, especially when you haven’t done business with them before. Be conservative with your estimates of ARC and overestimate the repair costs. It’s much better to come in under budget and sell the house for more than the inverse.
• Keep your emotions out of it. Whether you are buying, selling, or renovating, your emotions will lead you astray. If you have to, keep a disinterested professional on your team to give you value advice in each stage of the project.
• When selling, it’s okay to be near the top of the market, but don’t try to push the market higher. Price your house just below the top, and let buyers push the price higher if they want to compete for it. Depending on your project, it can cost considerably less to discount a house than to hold it for even a couple of extra months.

Inflated ARV: When a Comp Isn’t a Comp

Just looking at the map, which set of houses looks more attractive? The ones facing the park or the ones facing other houses? I’ll give the answer in the body of this post.

This post originally appeared on the Hermit Haus blog on 2016-09-26

As I mentioned in my last post, 0ne of the easiest mistakes to make in renovating houses is to overestimate their After Repair Value (ARV). In this post, I’m not going to delve into motivations for inflating a house’s ARV. After all, I’ve done it to myself, so far be it for me to cast asparagus on anyone else. I’m just going to talk about how it happens, and there are only a few ways:

• Use the wrong comps.
• Mis-time the market.
• Make the numbers fit the model.

I originally planned to talk about all three of these risks in one post, but I soon figured out it would be way too long. Click here to open all posts on this topic.

Use the Wrong Comps

We rely on comparable properties—”Comps,” for short—to make our educated guesses at a house’s ARV. If we base our estimate on the wrong comps, we can really screw up. The rule of thumb is to only use comps within a mile of the subject property. But even if all the comps are within a half mile, they may not be appropriate to our estimate. We must always consider:

• Neighborhood boundaries
• Major streets
• Age
• Condition

Neighborhood boundaries are often marked by major streets. Any time you cross a major street, you’re likely to find the character of the neighborhoods surrounding the properties vastly changed, and the neighborhood influences property values. We looked at two houses in Temple that were on opposites sides of a road. The neighborhood on the north was 20 years younger than the one on the south, but the properties in the older, established neighborhood were higher than the newer houses to the north where it turns out the ground was more mobile, leading to more foundation problems (condition).

But we also evaluated a house in Round Rock where a very similar floor plan in the house directly behind the subject house—a privacy fence separated the two back yards—was worth about $20k more. Why? The subject house had once been the edge of development. All the houses one street over were 25 years newer and in much better shape thanks to a stronger neighborhood association. The subject house was worth considerably less after renovation than the house directly behind it. This was despite the subject’s proximity to a park and an elementary school. The numbers on the subject property were very attractive if we used the more newer, more appealing houses as comps but not when we only used houses on the same street.

A novice investor once showed me a map very similar to this one to justify the price being asked for a house. I pointed out that the so-called comps were in completely different neighborhoods from the subject. In fact, the only thing the “comps” had in common with the subject was that they were in the same ZIP code.

When evaluating another house in Belton, we were given comps that were on the other side of the Interstate from our subject property. Even though the “comps” had sold for more than $200k, our subject would have been overpriced at half that. Given that we were looking at a renovation budget of at least $60k, the $50k asking price was way beyond what we could reasonably pay.

The condition of the properties makes a big difference, too. When buying, if you only look at houses in similar condition to your subject’s current state, you can under value the ARV. But if the houses you use to price your purchase have already been renovated, you could end up paying way too much. The tricky part of buying a house to renovate is keeping both of these numbers in mind when you decide how much to pay.

Suggestions

Here are some basic tactics that will help you ensure you pay the right price for the houses you buy:

• Ensure your comps are as close to the subject property in size, age, and desirability as possible.
• Keep your comps close in proximity to the subject as you can.
• Don’t cross major roads, but remember to deduct value if your subject or comp is on a big road.
• Try not to use properties more than a half mile away from the subject.
• Mark sure the kids who live in the comps attend the same schools and ZIP code as your subject. I’ve seen the house across the street or next door go to a different school. Certain schools can be a tremendous motivation—in either direction—for parents.
• Always at least drive the neighborhood yourself before you decide to buy. If you can’t, make sure someone whose livelihood depends on your team’s profitability does.
• Keep both the current value and the ARV in mind. Make sure there is enough room between the price you’re paying and the ARV to pay for the rehab, your holding costs, and your profit.

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.”

What Is Reverse Wholesaling?

Reciprocity is the psychological word for fair play. When we do something for someone, they usually feel obligated to do something for us. It works both ways.

You can find blank assignment contracts on the Web. I recommend paying the money to have a good lawyer in your area draw one up.

This post originally appeared on the Hermit Haus blog on 2016-08-27.

I’ve talked about the benefits of wholesaling real estate on a couple of posts. In short, wholesaling is the process of getting a property under contract and selling that contract to another investor. (For a more in depth explanation, see “What Is Real Estate Wholesaling?” In “Marketing Pays Off!” Sue Ann discusses a double-close wholesale deal that brought us a needed cash infusion.

Today, I want to talk about a specific variety of wholesaling called “Reverse Wholesaling.” Now Reverse Wholesaling technically isn’t a different type of wholesaling. It’s really more of a wholesaling strategy. Simply put, it’s all about knowing who is going to want to purchase the rights to your contract before you make the offer.

Here’s how it works:

Let’s say you’re out Driving for Dollars (driving around looking for off-market properties you might want to buy). You find someone loading a U-Haul trailer, moving out of a house. So you stop to chat. You find out that they are going to walk away from the house for personal reasons (that matter a lot to them but not to this discussion). You walk through the house with them and realize that you can help salvage their credit score by buying the house. You make the offer and they accept. You now have a marketable interest in the contract to purchase the house.

So far, this scenario fits the wholesaling model perfectly. But what about Reverse Wholesaling?

You know this house is a good investment at the price you now have it under contract—just not for you. But your friend Samantha is looking for exactly this type of deal. You call Samantha and she’s thrilled you found the house for her. You assign the contract to her and collect your assignment fee.

How is that any different from traditional wholesaling?

It’s different because you never had to market the contract. You had a list of buyers, and you knew what they were looking for. You simply called one of the investors you already knew wanted to buy a house like this one.

I was involved in a transaction very similar to this one just last month. Eugene, a wholesaler, blasted a property to an investor group’s email list. I went to see the property and knew immediately that the deal was too thin for the Hermit Haus model, but I knew someone whose model it fit perfectly. I put my friend Larry in touch with the wholesaler, and Larry bought the house. I did not collect a fee because I had no equitable interest; I never owned the contract. But I earned goodwill points from both Larry and Eugene, who has since given me first dibs on several of his wholesale deals.

There are numerous tactics for building your buyers list, but that is the topic of a future post.

The Pros and Cons of Real Estate Wholesaling

When you have a property under contract, you have a marketable interest in that property: the contract. You can sell that contract in most states, but you can't sell the property until you own it. Talk to your lawyer.

I designed this infographic of the wholesale cycle way in the future. Too bad I don’t have it now.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-07-21.

Many "experts" recommend real estate wholesaling as a quick, inexpensive, and easy way into the business. While it may be the lease expensive way to start out, wholesaling isn't all that easy. For a complete explanation of what wholesaling is, see "What Is Real Estate Wholesaling?"

Pros

You can raise money fairly quickly.

Because you use very little of your own money and you collect on your investment quickly, it is possible to raise money very quickly. The amount of money you can raise depends primarily on your skill as a negotiator. How cheaply can you put the property under contract? How little of your money can you tie up in the process?

Risk is lower than renovating or buy and hold.

Again, because you use very little of your own money, you risk very little of your own money. But there are other risks.

Cons

It is not without risk.

Wholesaling can be very close to practicing real estate agency. You have to be very careful of your practices and wording to avoid this risk. Further, you will probably have at least a little of your own money at risk. And you risk your credibility with your peers if you don't perform a fair amount of due diligence before marketing your contract.

It takes a significant amount of effort.

Wholesaling requires more effort than just about any other kind of real estate investing and sales. It is a full-time marketing gig with very little repeat business. No seller will ever sell you more than one house. How would that sound? "Hey, Lee. You bought my house when it was being foreclosed on a few years ago. Guess what?"

You have to be willing to invest in marketing.

Because wholesaling is lead-driven, you have to generate a lot of leads for every deal that comes along. This part really isn't any different than other parts of the investing game, but it is something you have to be aware of. That means you have to be prepared to spend money and effort to generate those leads.

You can't do it on the MLS.

I see a lot of novice wholesalers trying to re-market a house they found on the Multiple Listing Service (MLS)—or from one of the big real estate sales websites like Realtor.com. The honest truth is, if it's on MLS, it's probably a very thin deal—usually too thin—for any investor already. By the time you add in a wholesaling fee, it probably isn't a deal any longer—if it ever was.

The point of this post isn't to try to scare you away from wholesaling. I want you to wholesale. We buy a good chunk of our deals from wholesalers. My business would be much smaller without reputable, reliable wholesalers.

The point is for you to understand what wholesaling is, what you're getting yourself into. You can make good money wholesaling, if you work at it and maintain good relationships with your buyers. But you will get much more out of it if you understand the needs of the people you buy from and figure out how to satisfy those needs.

Eight Exit Strategies

Sorry. There isn’t an Exit 8 in Texas. Or, at least, I can’t find a picture of it. Photo by TBD

This post originally appeared in substantially altered form on the Hermit Haus Redevelopment website on 2016-06-17.
 

Seems to me

You don't want to talk about it

Seems to me

You just turn your pretty head and walk away

—Joe Walsh

I’ve mentioned “exit strategies” in a few posts. I thought it might be worthwhile to discuss the exit strategies we use at Hermit Haus Redevelopment, LLC (HHR). But first, let me define the term “exit strategy” as we use it in the redevelopment industry and more specifically at HHR. Simply put, an exit strategy is a way to get out of a deal once you’re involved in it. Each of the exit strategies I discuss here can be applied in various parts of the deal cycle.

Okay. Let’s get down to it. Here are the eight exit strategies we use:

Before Going under Contract

If you exit the deal before going under contract, you essentially have no risk, not even opportunity costs. You don’t tie up any of your funds. The worst that can happen is you find out a better negotiator got the house and made a killing. This has never happened to me. Yeah, right!

Walk Away from the deal.

Speaking of “walking away,” it seems like whenever we go hiking I spend a lot of time looking at receding butts. Am I just slow?

Believe it or not, walking away is the most important exit strategy you can acquire. Most of the deals you see won’t make you any money. You have to recognize these bad deals quickly and not just walk, but run away. And you can walk away at any point of the deal cycle. You just have to be aware of the consequences, especially if you have already taken title to the property.

Refer the seller to a Realtor®.

Many of the deals that come your way are really retail sales. There is little value you can add to the property, and the owners need more money than you can pay. Period. These deals can help you maintain a good relationship with your Realtor by referring the seller to your listing broker, who can help the seller get the seller get the most for their house. Since this is another form of walking away, you’ll only refer out a deal if you can’t do anything else with it.

Of course, if you are a Realtor yourself, you could always list the property as an alternate way of monetizing your time.

Under Contract but before Closing

Simply by going under contract you are incurring some risk. If you can’t sell the contract, you could lose your option money and your earnest money. Then there is always a chance the seller could sue for specific performance, however unlikely.

The contract is what makes a deal real. This is the beginning of a contract where we bought a house from a wholesaler. In Texas, anyone acting as an agent (except, I believe, a lawyer) for another person is required to use a standard contract.

Wholesale the contract to another investor.

You have to have an equitable interest in a property to sell it without a real estate license. In most states, the contract to buy the house is an equitable interest that you can sell for a few thousand dollars. At this point, all you have invested is your option and earnest money. So if you have $100 down and assign the contract for $10,000, you can make a tremendous return on your investment without ever owning the property. A couple of caveats:

• Wholesaling is not legal in all states.
• It works best when you already have a list of buyers who might be interested in the property.
• In the states where wholesaling is legal, you must have a valid contract to sell.
• I recommend you always use an attorney when wholesaling.

You’ve closed on it. Now you own it. What are you going to do with it? This question is what exit strategies are all about.

After Taking Title to the Property

After closing on the purchase, there is no doubt that you have embraced risk. You own the property. Now you have to pay for it and the needed renovations. Unless you use the double-close method of wholesaling.

Double close on the property.

Although this is technically a type of wholesaling, you actually take title to the property. Because of the cost of closing twice, you would only want to double-close in a few situations:

• Traditional wholesaling is illegal in your state.
• You’re making enough money on the deal that you can afford the double close.
• You don’t want one or both parties to the wholesale transaction to know how much you’re making on the deal.

"Prehab" the property.

Prehabbing is doing the extreme minimal amount of improvements to a property needed to sell it to another investor. (Yes, you could call this another type of wholesaling.) We haven’t had the opportunity to prehab a property yet, but the most common example I’ve encountered of other people prehabbing is with hoarder houses. A friend of mine bought a hoarder house for $45,000. He then spent $500 to have the garbage hauled off and sold the house to another investor for $70,000, making almost $30,000. The investor who bought it put another $30,000 into the house and sold it for $150,000. In my books, that a win-win-win.

Rehab or redevelop the property.

This is our bread and butter. At this point, all of the properties you see described on this site is a rehab or a redevelopment project.

Buy-and-hold (and rent) the property.

Holding rental properties are a great way to build wealth. You use someone else’s money (mostly) to buy the property, and your tenant makes the payment for you. HHR doesn’t hold rental properties. We do, however, sell redeveloped properties to our sister companies to hold.

Owner finance the sale.

To owner finance the sale, you must have sufficient capital to absorb the risk. I have to say this is one of the riskiest exit strategies you have, and it is fraught with drawbacks. First, you have to pay taxes on the capital gains without having the income from the property to do so. Then you have to assume the buyer will continue making the payments you rely on either for income or to make wrap payments yourself. And finally, it eats the capital you would need to continue your investment business.

So that’s it: Eight different exit strategies to keep in mind on any deal. We use one of these strategies every time we look at a property. By far, the one we use most often is to walk away.

Another One Bites the Dust

Failure to do your own due diligence is a trap that can reduce your profits to single digits or even to a loss. Photo by Free Images

This post originally appeared on the Hermit Haus Redevelopment website on 2016-06-10.
 

And another one gone, and another one gone

Another one bites the dust

—John Deacon

We had to back out of another wholesale deal today, even though the numbers looked pretty good at first blush. I’ll call the wholesaler Dick for this post. You have to be really careful when dealing with professional wholesalers. They know the business well enough to know what you are looking for, and they can make the numbers look good—often by inflating the after repair value (ARV) or underestimating the cost of repairs. You have to do your own due diligence and trust your own numbers.

In this case, Dick was going to make enough money on the deal to require a double-close. That is where the wholesaler actually takes title at one closing and then sells the property to the wholesale buyer at another closing. These two closings can take place minutes apart, enabling the wholesaler to make a tidy profit in a very short time without disclosing the amount of that profit to either the original seller or the wholesale buyer.

Because a double-closing incurs two sets of closing costs—one when the wholesaler purchases the property and another at the sale—this exit strategy is generally only viable when the profit on the wholesale is at least $20,000. Now you may say that’s a lot of money.

Why wouldn’t I have a problem knowing the wholesaler is making at least $20,000? Because it all comes down to the numbers. If there is still room for me to make a reasonable profit, I don’t care how much the wholesaler makes. Dick found the deal, after all. If he hadn’t found the deal and sold it to Hermit Haus, we wouldn’t make any money at all. And 30% of something is better than 100% of nothing.

Hail damaged shingles can be difficult to spot unless you climb up on the roof yourself or hire an inspector to do so. Photo by Home Standards Inspection

In this case, the numbers worked only on the surface, and this is another reason why I recommend hiring an inspector on every house you buy. The inspector’s job is to find hidden problems. In this case, the problem wasn’t so much hidden as missed. The roof looked fine: 30-year architectural asphalt shingles in reasonably good condition to my eyes. But the inspector found signs of hail damage, which would require replacing the roof before any bank would finance it for the new seller.

The estimated cost of the roof was about $10,000. That would move the deal from a fairly reasonable profit range to the danger zone. There would be no contingency repair budget left, given the ARV. We have learned to never go into a deal without a contingency budget of at least 10% of the repair estimate. We could be placed in a position of either having to cut corners or lose money, neither of which is in our vocabulary.

When confronted with the bit about the roof, Dick said, “That’s a good roof. I don’t have to replace it. Nobody can make me replace it.” We all agreed. But there are two things to consider:

1. A new roof is the single best investment you can make in a property. It relieves new buyers of an expensive contingency to their purchase, making them feel safer about the purchase.
2. And while banks don’t require a new roof to finance a property, they do require an undamaged one. If you want to sell a house with a damaged roof, you had better fix it.

Since we couldn’t come to terms with Dick about the roof, we backed out of the purchase during the option period. It’s not that I expected him to replace it; I simply needed to have room in the deal to replace it myself.

Replacing the roof was the right thing to do. I believe in doing the right thing. In this case, scrubbing the deal was the right thing for us to do. We could have gone forward if we could renegotiate the purchase price downward to account for the unforeseen cost, but that didn’t happen. And Dick may still be able to sell the house to an inexperienced, unsuspecting purchaser, but we won’t be put in the position of choosing between taking advantage of someone or losing money.

What Is Real Estate Wholesaling?

This is a very large sad house offered to us by a wholesaler. We will see…. Photo by: Suna

This post originally appeared on the Hermit Haus Redevelopment website on 2016-05-23.

Yesterday, Carol, Russell, Sue Ann, and I went to look at a prospective wholesale deal we’re calling either the Antelope House or the Home on the Range because of the toy deer in the front yard. This was a frustrating trip. The wholesaler didn’t have the three things you expect a good wholesaler to have when asking you to meet at the property:

• The keys
• A firm idea about what he wants to sell the house for
• An understanding of the redevelopment business model

But there are newbies in everything, and I’m going to put down his performance to a lack of experience rather than to a lack of respect for the business or us.

In real estate investing, wholesaling is a process whereby the wholesaler:

1. Finds a (hopefully good) deal on a sad house
2. Negotiates with the current owner to establish the purchase price of the house
3. Signs a contract to purchase the sad house
4. Markets the contract to other investors at a premium
5. (Hopefully) finds another investor who is willing to pay the price the wholesaler needs for the property
6. Assigns the contract to the new investor who actually closes on the deal

Some people will tell you this process is illegal if the wholesaler is not a licensed real estate agent, It is, in fact, illegal in some states unless the wholesaler actual takes title to the property. This strategy is called a double-close because the title changes hands twice: once when the wholesaler buys it from the original owner and once when the final investor buys it from the wholesaler. In Texas, sale and assignment of the contract is legal because the wholesaler is marketing an equitable interest in contract itself, not the real estate.

You can find blank assignment contracts on the Web. I recommend paying the money to have a good lawyer in your area draw one up.

In this case, Sue Ann and I drove 40 miles each way (Russell and Carol drove farther!) only to waste our time with a wholesaler who was at best unprepared. He offered us the contract at nearly full retail prices without giving us the opportunity to look at the inside of the house. He said it would take about $15-thousand to repair the house, which would place the total cost of acquisition just north of what we could expect to sell it for—if his numbers were right. He said he would fix every flaw we found on the exterior of the house.

Now, there are ways to make an offer on a house sight-unseen. To do so, you must know your market extremely well. You can make the offer based on average cost per square foot of a sad house and your average cost to repair. Then you add in an allowance for worst case.

Also, never trust the wholesaler to make the repairs for you. There are two reasons for this:

• You are responsible for the quality of the repairs that the wholesaler makes without having any control over costs, materials,contractors, or corners cut. What’s the old adage? “If you want something done right, do it yourself.”
• The profit of a redevelopment company comes from the difference in value before and after redevelopment. Needless to say, allowing the wholesaler to reap these profits makes the deal too thin to think about.

The wholesaler wants us to meet back at the house on Thursday, at which time he promises to have the keys. If he still wants to sell us the house and act as a contractor, he will have read our contractor materials by then and understand the way we do business. If not, we will have other things to do on Thursday.

The bottom line is never be afraid to walk away from a “deal.” As my friend Larry says, “Some of the best deals I’ve done are the ones I walked away from.” It’s always better to walk away than to lose money.

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!

The Importance of Due Diligence

The wall art was the most interesting thing about the house. Other than the artwork, the interior of the hose was a disaster.

Even well-done pretty graffiti scares off retail buyers and drives down the price of an investment property. You can paint over it. It may take several coats of Killz, but you can.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-18.

I got an email from a wholesaler today offering a property in Round Rock for $90-thousand. I performed the desktop analysis quickly and became very excited. While I couldn’t find anything that had sold on the street in the last year, two houses on the next street over had sold for just north of $200-thousand. That left a lot of room in the deal to cover whatever redevelopment the house might need.

I told the wholesaler I wanted to make an offer contingent on a walkthrough of the property. The wholesaler said we had to close by Christmas, and I agreed to the stipulation. He mentioned that he had a bid for $7,000 to cover foundation repair. Other than that, he said, all the house needed was paint.Even allowing another $5,000 to cover accidental damage to the plumbing during the foundation repair, I was still happy with the deal.

The house looked pretty good from the outside. The schools across the street made it feel welcoming.

Boots Are Made for Walkin’

Russell and I met at the house during his lunch hour. The first red flag went up as I drove to the house. The comps on the next street turned out to be at least 20 years newer, and all of the houses on that street were much more appealing than any of the houses on the subject property’s street. My comps were not really comparable, but I couldn’t tell that without seeing where the main street had been extended for the newer development. Even the pictures on Google Maps made the houses look comparable.

Location, Location, ... Or Not!

On the other hand, the subject property was across the street from two schools. Location and location.

We walked the property and found that the exterior would need more than just paint. A dog had trashed the back door. Some of the eves and facia were rotten. No big problems but enough to start adding up.

Inside the house was in really bad condition, but the demo had already been started. All the carpets had been removed when a water pipe broken and flooded the house. A note on the kitchen cabinet said that repair was in process.

I won’t go into all the details, but the repair estimate came in at between $35- and $40-thousand.

The final analysis showed that we were likely to lose money on this deal. So we walked away.

To Buy or Not to Buy

When I got back to the office, Carol had run a much more accurate CMA than what I had pulled for the desktop analysis. She estimated the ARV of the house at between $140- $160-thousand. We determined that the deal was just too risky, even if we could get the house for $80-thousand. One of our mentors, Shenoah Grove, agreed. So we walked away from another property.

But the wholesaler said he had two other investors willing to take the property at full price. I wish them good luck. There are plenty of people with money to chase these deals—many of them are too willing to take on a project without fully understanding the numbers. No matter what you see on shows like Flip or Flop, those people are professionals. They almost always know what they are getting into before they buy the house, and they walk away from 20 or more deals for every project they take on.

Here is what I want you to take away from this article:

While I won’t accuse any wholesaler for outright lying, their numbers are almost always overly optimistic. This business is risky enough without walking into a deal without doing your own due diligence. Always include a contingency for unknown factors. Every project has them, but you can’t know what they are before it’s too late.

I’m going to keep my eye on this property to see what happens to it.

Peachtree Update

While looking for a gently used range for Peachtree, I found this classic full kitchen. Wonderful! It’s a steal at only $10-thousand. We decided to paint the trim red. It fits the neighborhood, and I think it will “pop.”

These cabinets will look great once all the crap is cleaned off and the sink is installed under the window.

The Peachtree project is coming along nicely. Demolition is complete. The popcorn is off the ceiling. The replacement stove is in the kitchen, and the new countertops and cabinets look superb.

Since Carol will list the property when it’s done, she came by to see the progress. She liked what she saw.

While we were thinking about what we wanted to do for lunch, she mentioned that Russell wanted her to go to an hour long presentation by a company called Fortunebuilders and asked if I wanted to go with her.

The hour long presentation turned out to be a two-hour pitch for a three-day event at the end of August. I was impressed and signed up for the three-day, as did Carol.

Fortunebuilders seems to focus on education in the real estate business. They introduced me to the concepts of wholesaling and reverse wholesaling in this event. They also have real systems that should take some of the load off of me. I have definitely turned this business into a full-time job. Maybe they can help me learn how to get back to enjoying my retirement.

Wholesaling

Getting a property under contract and selling that contract

Reverse wholesaling

Wholesaling to a known buyers list

I look forward to learning more in August.