SEVEN QUESTIONS THAT MUST GET ANSWERED TO BE SUCCESSFUL IN THE FIND, FIX AND SELL REAL ESTATE BUSINESS!

1. What determines the price you pay for a property?

2. What kind of seller are you looking for?

3. Where do you find the property?

4. What kind of property do you buy?

5. How do you insure the home you bought?

6. How do you fix the property?

7. What do you do with the property once you have fixed it up?

Rent, sell, or lease option home?

This is a business. You need to spend the time to learn the business. In any business you need to take the time to gather the knowledge and tools, necessary for success and you in this case will want to take on one property at a time (critical if you are just starting out). I have found you will best assure your financial success by measuring your success one property at a time. I have been involved in thousands of real estate transactions and the biggest mistakes I have made when I was trying to rehab more properties than I was capable of managing (see Mark’s Corner Article 3/19/04 Is Big Better?) Notice I said the biggest mistake made, was trying to rehab more properties than I was capable of managing. Let’s define trying as looking good, while failing. Any time, you hear someone say, or better yet you say I am trying, take a look. I bet what you really see is that they are failing but dressing it up the word TRY. Watch the words you say-- they really tell all.

1. What determines price you pay for a property?

The comparable sales in a one-mile area around the property will be the ones you want to be looking at. This is a general rule. There are many areas where you have do comparable sales block-by-block, or street-by-street. A comparable sale would be a similar property that has sold in the last six months compared to the one you are buying. For example, if you were going to buy a 1000 square foot, 3 bedroom house, brick, with attached 2 car garage, and full basement, you would want to look for similar properties in that one mile radius or closer, in some cases. If you are looking at a house that differs in size, square footage, bedrooms you will need to make adjustment in pricing to have a comparable to the target property. For example if the target property has a 3 bedroom house with basement, and you are using a comparable 3 bedroom house with no basement, you might have put a downward adjustment factor of $10,000 to compensate for the missing basement in order to get a real value of the comparable sale. You need to look at the amount of time the house was on the market (the number of days it took to sell the house). You don’t want to be basing your buy on a house that was on the market for long periods of time. If you use comparable sales that all took 10 months to sell and you are looking to buy the house, fix it up and sell it in 3 months, you sure don’t want to use these houses as “comps” that took 10 months to sell. So we now know how to determine what the house we are looking at would sell for.

I am going to suggest that if you are getting into this business to be a landlord that you treat your rental business as if it were the business of finding, fixing, and reselling. I say this because most landlords will be selling at some point in time. So don’t just look at buying houses based on cash flow, or tax benefits. You need to look at it from the point of view that if you were to get sick tomorrow could you resell the property at a profit.

Let’s talk about profit, after all this is a business and that is what you are after. So what is the profit you want to make in this business? That’s right; profit is where you want to start! Let’s assume that I am looking at houses that sell in 3 month period for $60,000. Let’s say we are looking at a house that needs a new kitchen, paint and carpet. If all those repairs were done, the house would sell most likely for $60,000.00 in three months based on comparable sales. So another way to say this would be that the after repair value of the home would be $60,000.00. Some nonconforming lenders and HUD 203-k mortgages use what is called a “subject to appraisal” (which is another way of saying the after repair market price) (see Mark’s Corner 03/12/04 Lessons Learned About Mortgage Companies). So we have a minimum profit goal for this $60,000.00 after market value home of $12,000.00.

So we now build the model to determine what the maximum $ we want to pay for the house we found are. You now have to start adding in your cost? The costs you need to add up are as follows:

a. Your time - What is your time worth? How much time are you personally going to be spending on the buy, rehab and etc? Put a dollar figure to your time.

b. How much is the rehab going to cost? I have seen a lot of people in this business who are very experienced. The majority of them will tell you that their rehabilitation cost will run 1 ½ more than they expected or estimated. It’s a must to build in cost over runs. If you are a new investor take your estimated cost and double them for figuring your rehab.

c. What is cost of your holding time? You need to look at how long you think it will take you to rehab the property. If you think it will take you 3 months to fix the property up – double the time to 6 months when doing the financial analysis. If comparable sales show 3-month selling time – double that time and cost. So if your property insurance, lights, gas, gas cutting, house cleaning, alarm system, mortgage payment are running you $800 month you need to take that cost times 12 months since we have double our 3 month rehabilitation time, and double our 3 month expected selling time.

d. What kind of reserves for breakdowns have you figured in? I once had a partner in the rehab of a house where he put up the money for rehab up as his contribution. I chose a contractor (this one actually had been with me for awhile and did good work) and purchased the supplies. The contractor kept giving me updates but coming up with problems that needed more money to handle. The reality was that the contractor had actually returned for a refund all the supplies or sold them and took off to parts unknown after going through all the allotted money my investor had supplied for the rehab.

Or this one---my partner researched the property at the city but “Oops, I don’t know why the condemnation notice wasn’t in the file but it is condemned and now requires a city team inspection which quadruples the cost. In addition, we are now on our third contractor—each of which requires money up front to get started.

Or, you are almost done with the rehab and someone breaks in and steals all the Kitchen cabinets, the furnace, or all the siding off the house. At one point in my life I found out that rival contractors that I hired were breaking into each other’s jobs and stealing everything. (Not a good idea to have them all meeting on one day of the week to collect their checks—it gives them opportunities to know their rival’s business.)

Or, oops, I am sorry the city water department read the wrong meter reading and you house is the one that had water flowing for a year because of squatters and you owe $3,000.00.
Oops, that wall in the basement that just needs to be straightened out and supported is actually crumbling from a chronic water problem and you will have to dig a new basement. What if, half way through the rehab you find out you have a problem that requires you to “quiet the title” to make it clean and sellable?

e. Don’t forget you might have mortgage costs for the buy and sell. You will also have other closing cost like commissions to realtors, title insurance, title fees and recording fees. All these need to be figured in your cost on the buy.

f. Don’t fool your self into thinking you will be able to buy fix and sell a house in 6 months. Base your buy on cost over runs! If you do bring your project in on budget then you are going to be smiling.

OUR EXAMPLE OF SETTING MINIMUM BUY PRICE: $60,000.00
Real estate commissions based 6% (3,600.00)
closing cost seller pay 6% allowable closing
subject to appraisal (after repaired value)
project profit (12,000.00)
cost for buyer, (title insurance, recording fees etc) ( 4,800.00)
cost of mortgage on buy (appraisal, mortgage cost) ( 4,600.00)

use 12 months (taxes, gas, electric, grass, mortgage payments) ( 9,600.00)
rehabilitation cost – est $7,000.00 (Double cost) (14,000.00)
price you purchase property for: (11,400.00)
60,000.00

This may appear as extreme example of cost over runs. I have doubled your cost and assumed that you had a realtor sell the house. I am clear as a person who has seen a lot of people come and go in this business, you need to figure your cost high and you need to be able to do your own comps (comparable sales) I recommend that people get real estate license. Why? Because the advantage is that it will give you access to MLS (listing service) which will give access to sales reported to the MLS. More importantly, it will train you to be a knowledgeable buyer and know first hand what is required to have your real estate transactions comply with federal, state, and municipal restrictions. Plus, you will learn what is necessary to have the transaction be complete and within integrity guidelines. In addition, you will be putting you license with a broker who will be there to train you while doing your beginning deals. It requires 40 hours of classroom on Michigan real estate, plus passing a test to get your license---even if you don’t end up getting your license. The knowledge you get in these training courses are invaluable.

I prefer to work with licensed investors, especially with challenged properties, because it assures me that the person you are working with has at least a basic level of knowledge of Real Estate. The more knowledgeable a person is, the more likely they are to achieve their goal. In fact some of the investors that have worked with me generally end up getting their license and sometimes even become licensed under the same broker I am. There are many reputable real estate schools. You can contact the state of Michigan. I went to Middleton Real Estate School in Southfield and it was excellent. This is business and you need to educate your self. At the same time you can cut down on some of your cost.

If you are not a realtor and you are looking for comparables, you can go on to your Internet server and look under real estate, there will be comparable sell section you can use.

2. What kind of seller should you be looking for?

You are looking for sellers whose #1 objective is to sell their property. You are looking for motivated sellers (A DON’T WANTER). If you are dealing with any one else, you are going down the wrong road. Earlier, I told you it would be a good to get a real estate license. Even when you are dealing with someone who is not a motivated seller and who’s #1 objective is not to get rid of the property a real estate license can earn you money by listing the property for the person, or referring them to someone else that would be better as a listing real estate agent for the property.

When I call on someone who wants to sell their property, I have found they know the value and their options. We review what the after repaired value is with them and what we would offer. We also advise them as to their options regarding getting pre-qualified by a mortgage company, or any other options that might be the best solution for them. If they are motivated sellers whose #1 objective is to get rid of the property, then they will look to work out a sale with you. I feel it is important to let them know all their options such as to list property, take investor offer, or refinance property. If you present to them what is you see as their possible solutions it will make a difference for them regarding saving the property through refinance, or you might get the listing or referral fee from another realtor that gets the property sold for the owner. The bottom line is you served them and in doing that, you get taken care of also.
Some examples of motivated sellers are:

a. Divorce—The couple has separated. They now have doubled their individual overhead. They have two house payments now. The home they shared required two incomes. The marital house is headed for foreclosure

b. Probated estates- The attorney in charge will want to liquidate the estate as quickly as possible

c. Tired landlords—people who jump into this business and can't handle property management. (See Mark’s Corner Is big better? 3/19/04)
d. Loss of job

e. Move out of state- double house payments

f. Partnership split

3. Where do you find the property?

You need to look at where you would go to find investment property. I recommend joining local real estate investor groups. If you are working a full time job, I recommend interviewing realtors who come to the investor clubs. If you want generate your own leads for motivated sellers here are some possible sources for them:
a. Business cards that state clearly on that say:

I BUY HOUSE FOR CASH
IN ANY CONDITION
ANYWHERE
PHONE #
YOUR NAME

b. Magnetic car signs with the same message as business cards

c. Cable TV

d. News paper ads say, I buy houses for cash in any condition

e. Post card mailings to landlords with the same message

f. Fliers at party stores, pawn brokers, hardware stores

g. Brochures in restaurants

4. What kind of property do you buy?

The answer in one word is: UGLY. You need to have a motivated seller (DON’T WANTER) and property that is ugly. Great buys in real estate are in rough condition. I can count the nice properties on one hand that I got great buys in over the years. I am talking about thousands of properties. So if you have not guessed it yet, if you get in this business you are going to need to be in the rehabilitation of property business. What do I mean by ugly:

a. Weeds two feet high in the yard

b. Gutters hanging down from the house

c. Holes in the roof are good

d. Maintenance neglected

e. Out dated kitchens, shag carpet, unpainted walls for 10-20 years

Some of examples of great buys:

a. “Keep cool indoor pool”. I bought a house in Pontiac once such that when you walked in the front door, the paint was pealing from the walls. The house was full of moisture. When you got to the top of stairs to basement, you ran into crystal clear water. The water was to the top step. Someone had stopped up the floor drains and broken a water pipe. Water was running out of the basement windows. I had no competition on buying this house. We called the water department and had the water turned off at the street. We had the house dried out and got a great buy. The point is that there was little competition to buy this home. They could not see past the water coming out of basement windows. This was a foreclosed property and the bank was a motivated seller.

b. “A little smell” I purchased a house where the owner had a dump truck load of sand poured into the basement. The sand was for a permanent litter box for her 25 cats. I had to take my clothes off in the garage when I got home. Again, I had no competition on the buy. The rehab on this house was labor intense.

c. “Moving walls” In this house, you opened the door and roaches fall on you or better said “the walls move”. Again, the competition fell away- this required an exterminator and all was well.

d. Also look for backed up sewers, fleas, houses full of trash, as things to look for when looking for a great buys.

This business requires hard work but the rewards can be great. The majority of properties that people donate to charities meet the above conditions. There are great buys in real estate but it requires investors with a talent to restore the homes to a classic condition. Restoring homes, and putting them back in great shape, is for me, part of a process of fulfilling the American dream for homeowners and is what I love most about this business. The investors who look and see fully restored homes instead of the above are ones that get the great buys on homes they otherwise couldn’t afford. If you are new investor, I recommend you focus on the lighter rehabs, paint and carpet changes for example. Some of the examples above were light rehabs they just had obstacles that others could not see past.

5. How do you insure the home you bought?

I address this in Mark’s Corner (hiring contractors to rehab investment property 04/07/04)

6. How to fix the property?

I address this in Mark’s Corner (hiring contractors to rehab investment property 04/07/04)

7. What do you do with the property once you have fixed it up?
Will you rent, sell, or Lease option the property?

First, let me describe the investment property after you have rehabbed it. When you get out of the car: the grass is cut, walks edged, new shrubs and wood chips in the front of the house, there is new quality storm door, the house is painted or sided, inside the home you have new quality carpet, in the kitchen a new sub floor and tile, new kitchen cabinets if needed, the bathroom has a new sub floor and tile, towels, toilet paper, and soap, curtain valances and lever blinds in all windows, the basement floor is painted with oil based porch deck paint gray and the walls are painted white.

Whether you sell it, or list it with a realtor, (if you have a license, you can pick up a listing commission and save money), hold open houses your self. Have someone at the house on Saturday for at least 1 ½ hours. Then you walk the neighborhood and ask the owners of the other houses in the block to walk though the house. They are going to have a son or daughter that may want to move close to them. This is a very effective way to sell the house. If you don’t have a deal in 30-90 days- don’t let the holding cost go on – do a lease option sell or rent the property. Happy hunting!