BiggerPockets: The Best Real Estate Advice That Cost Me $0.


Have you stayed up at night flipping channels watching infomercials? I’m sure everyone has done this once in a while.

If you’re anything like me, you’ve at least tuned in to what these people have to say. They make millions from get rich quick systems that the infomercial is selling, and you can have it for the low price of 4 low payments of $49.99! Does this sound familiar?

Maybe you’ve watched public TV during the day and have seen the most “entertaining” Flip This House star, Armando Montelongo, talking about his system to make you filthy rich in real estate.

The sad truth is that every day, dozens of people fall for this hype and buy into false promises. P.T Barnum once said that there is a sucker born ever second..

This brings me to the point of my blog post today, BiggerPockets: The Best Real Estate Advice That Cost Me $0.

I am a firm believer in Napoleon Hill and his way of thought. He believes in a principal called The Mastermind, which is basically the old saying “2 Heads are better than one.” His theory on the mastermind states that if one or more people come together, with the same goal in mind, you form a 3rd mind – the mastermind, which is greater than each single mind separated.

Joshua Dorkin created the online “mastermind” of real estate, and real estate investments. Josh is the founder of BiggerPockets.com, an online resource for all real estate matters. BiggerPockets features forums that you can publicly read, sign up for free, and post on. There is also an article section on the site that has many great articles on real estate.

In my opinion, and many other real estate investors, anyone interested in real estate should take note of this resource, and try to utilize BiggerPockets before moving to their check book. Experts that sell products want you to buy those products. That’s the beauty of BiggerPockets – they are not trying to sell you, they are trying to help you.

Lets say I wanted to research short sales, and would like to read up on them. I could Google the term “short sales” and get about 63 million results. I may click on the Wikipedia article and read about them, but what if I have specific questions?

Here is the “AHA” moment – I head over to BiggerPockets.com, type “Short Sales” in the search bar, and either search the forum or articles for short sales. When I searched articles, I came up with 20 articles written by both real estate investors and agents – people who actually work in the industry. When I searched the forums, I came up with many questions people had regarding short sales.

Go do some further digging and you will find an abundance of knowledgeable professionals, investors, agents, lenders, and much more on BiggerPockets.com.

Advertisements

How to identify a good deal in today’s market


Lately I’ve been working with buyers. Not to say I have not been selling homes, but it is a buyers’ market – and buyers are getting great deals on homes, all over the country – as well as in Houston.

Most buyers that I come across tell me what they are looking for, and we find it. One of my goals as a real estate agent is to get my clients the best deal possible – financially. Most of the time my clients have been looking at HAR.com long before they call me, and send me houses they are interested in. This is great. I encourage this kind of behavior, because it gets them familiar with what they want, before we go look at 15-20 homes.

I am going to explain how a buyer can get the best possible deal in real estate, in today’s market. The old saying goes “In Real Estate – You Make Money On The Buy”

I am going to explain this article with a sample deal that I closed as of yesterday. My client got a great deal on his home. Here are the details:

After Repair Value: $85,000
Purchase price: $52,000
Repairs needed: $10,000
Equity Capture: $23,000

You can read dozens of real estate books (I have) and they explain how deals work, but not how to find the right deals. I have my own methods of finding undervalued properties for my clients, I cannot publish on the web because others would take my method – but here are some guidelines to go by:

1.       Find out the after repair retail value
2.       Estimate Repair Cost
3.       Find out purchase cost / closing cost
4.       Work backwards
5.       Submit offer

Step #1: Find out the after repair value
The after repair value, commonly referred to as the ARV, is what the subject house should sell for  – after repairs have been completed. Your local real estate agent will be able to get this information off of sold comparables, preferably in the past 90 days. This information is valuable, because you will begin with the end in mind. If there is a $20-40k variance in the after repair value and the list price, then you are off to a good start. If there is no variance, or a negative variance, than the house is overpriced. In my sample deal, the after repair value was $85,000 – and the list price was $55,000, this was a $30,000 variance.

Step #2: Estimate Repair Cost
Once you have determined the after repair value, you need to find out what repairs the house will need. I would recommend doing a visual inspection / walkthrough of the house with your real estate agent. Ask them what they think the repairs will be. Pay extra attention to the foundation, roof, HVAC system, and any sign of flooding or mold. These repairs are the most expensive, and can eliminate any kind of profit or put you upside down. Have a general contractor look at the house, and give you a written estimate on what the cost will be so you know for sure. On my sample deal, the repairs were $10,000.

Step #3: Find out the purchase cost / closing cost
Ask your real estate agent to find out how much the closing cost will be on your house. If you are financing, you will pay more fees in closing than you would purchasing in cash. Your real estate agent should give you an accurate estimate on what your closing cost expenses will be. You can also ask the seller to pay for some of your closing cost. On my sample deal, the closing cost expenses were $950 total.

Step #4: Work Backwards
Add up your Closing Cost, and Repair value and subtract from the After Repair Value. Now subtract your offer amount, and you will come out with how much equity you will capture on buying the property. If you have a negative number, than your offer amount is too high. The higher the number, the more money you will pocket. So for an example, on my sample deal: $10,000 (repairs) + $950 (closing cost) = $10,950. $85,000 (ARV) – $10,950 = $74,050. Then $74,050 – $52,500 (Our offer) = $21,550 profit.

Step #5: Submit Offer
You can run the numbers and see how much you’ll make based off different offers. Once you find a number you are happy with, then have your agent write up the offer and submit to the seller. Make sure you have determined your maximum offer amount, and stand by your offer. I’ve spent 2-3 months negotiating offers, and it paid off.

Now you know how to analyze a basic real estate deal. Don’t be fooled by the media – purchasing is a great way to make equity in a down market. If you can buy right, you will always be able to sell right..

Flip This House: Finding your deal


The third section of my recommend-blog post entitled “Flip This House” explains how to find the house you are interested in renovating.

There are many houses on the market right now, including short-sales, distressed homes, foreclosures, etc. The question I get asked most is, how do I find the right deal for me?

I am going to go over some things you may want to consider, before you purchase your “flip” house. As a real estate investor, your REALTOR should be able to give you the most accurate advice that makes both logical and financial sense. Hopefully I will raise awareness in your deals, to some things many people will look over.

As I said earlier in one of my previous blog posts, I would recommend finding a house that is less than 10 miles away from your own. My reasoning behind this is that you will be traveling to this house many times (sometimes multiple per day). With gas prices the way they are right now, you do not want all your profit sucked away in gas expenses – as well as time.

Once you have established a few different areas you would like to invest in, inform your REALTOR you are considering an investment property in those areas. Here are some questions you should be asking your REALTOR:

  • How many months of inventory are on the market?
  • What are the average Days on Market for the area?
  • What are the average sales price compared to average list price?
  • Is the area in a flood plane?
  • Is there high crime in the area I am interested in?
  • How are the schools in the area?

You should get a good idea of where you want to put your money, and where you do not want to put your money. The more inventory on the market, the longer your house will sit vacant to sell (unless you price aggressively). The sales price / list price will show you what percent the houses are selling for vs. listed for. For example, an area that is selling at 95% list price is better than an area selling for 81% list price. This could save you thousands!

Once you have found the area you will be investing in, let your REALTOR know your intentions, up front. Some REALTORS love working with investors (I do!), others – do not. If your REALTOR does not work with investors, find one who does.

You should now be considering what type of houses you want to target in the area. Before you purchase a house, the most important thing to consider is how well the house will sell, after it has been repaired. Houses with strange floor plans (walk through bathrooms to get into bedrooms, etc) do not sell fast. Houses with master bedrooms upstairs (in Texas) sell slower than houses with them downstairs. The key idea here is: know what sells fast. If you don’t know, ask your REALTOR.

Typically, I believe you can’t lose with a 1-story, 3 bedrooms, and 2 baths. Those are the easiest houses to sell (in my market!). You should be able to provide your REALTOR with what you are looking for, such as: 3 bedrooms, 2 baths, in X neighborhood, priced below $50,000. Your REALTOR can find that information fast, and will be able to start working on which one to pick. If you want cheap houses right now, have them only send you houses that are foreclosures or corporate listings.

The key idea here is get specific. Get specific as possible. If I did a general search for active 3/2/2’s in Houston I would come up with thousands. If I did a general search for 3/2/2’s under $50,000 in Winchester Country – I would come up with 3.

Note: from my experience, short sale houses dead end deals. Typically, the bank must approve short sales, and this process can drag out over 6 months. If you want to make a deal happen fast, stay away from short sales! Some investors only invest in short sales, but I would recommend you do not start there due to time constraints.

Let your REALTOR know which ones you want to view, and have them run a CMA on the subject property. A CMA (Comparable Market Analysis) will show what you can expect to sell your house for, or After Repair Value (ARV).

The first step is figuring out your ARV. If your ARV is not high enough to make the repairs, pay the commissions, the fees, holding costs, etc – and you do not profit, what’s the point? Don’t worry – that’s why you’re reading my blog! I’ll explain all of this.

After you have determined the ARV, and have comparable, you will see a nice spread between purchase price and ARV. Here is a sample deal I’m doing now:

ARV (After Repair Value): $139,000
Less Purchase Price: $65,000
————————————–
Total: $74,000

That’s a nice profit! Well – that’s not all profit. We have to take more money out before we can get to our goal, Net Profit. But its a start – a good one at that. If you start to see double digit thousands in your totals from this equation, then you’re on the right track.

On my next blog post, I will discuss a truly important skill you must develop – cost estimation.

Flip This House: Financing Your Deal


The goal for every real estate investment transaction should be to come out-of-pocket with as little as possible. This is sometimes called ‘leverage’, or ‘other people’s money’. Although it does sound nice to use other people’s money to finance your investment, there is a price that comes along with it.

I am going to discuss various ways to finance your “fix & flip deals”, and hopefully shed some light on some new ways of financing investments.

The obvious way to finance a deal is through a conventional loan: 20% down, 30 year fixed rate – or you could get in with a 15 year, or even an ARM. This is NOT the best way to finance a “flip” deal. Remember: The goal of a flip deal is to get in with as little as possible, and get out fast.

FHA loans have requirements that you will live in the house for X number of years, so this won’t work either – unless you plan on buying the house as a personal residence, then you can roll your rehab expenses into whats called a FHA 203k. With a FHA 203k you can roll your rehab expenses into the loan, as well as the purchase price of the house. Remember, this is only a feasible option if you’re planning on living in the house as your primary residence.

The other (and best) route you can go is cash. Private money is a big in real estate. I remember in one of my real estate investment books it said there are two kinds of real estate investors:

Those who have time, and no money.. and those who have money, and no time.

Which kind of investor are you?

If you’ve got time, and no money – then you need a private money guy. Either someone with deep pockets who is willing to stake you $40-150k, or a bank willing to put the money up behind your investment.

The good thing is, there are banks who do this every day – they are called capital banks. They deal strictly with investors and investments, and do not handle the traditional transactions that the general public typically uses a bank for. These kind of banks already have worked with real estate investors before, and they have their own ways of doing things.

One way to find these banks is search Google for “hard money lenders” in your area.

Hard Money Lenders do exactly that – they bring money to the table, at an increased cost. They finance deals that most banks would not finance. Their deals are considered “cash” deals, and they can typically close within 7 days. Exactly what distressed home owners, or banks want.

Your hard money lender will typically charge you anywhere from 12-15% for the money, and sometimes origination “points” on the loan. 1 point is 1% of the loan, 2 points is 2%, etc.

You will also be able to roll the rehab cost into the hard money loan.

You will still need to come out of pocket with some expenses. Typically, you will incur about $5-10k out of pocket with a hard money deal (numbers depend on how much your rehab expense is, how much the purchase price is, etc).

Your potential profit can be $5,000 or it can be $50,000. You maximize your return on investment by limiting the amount of funds you put in, and staying on a strict budget.

We will go over this more in depth in the next few chapters of this blog.

Here are some Houston area hard money lenders:

  • Flagstone Lending – Frank Sheehy – 713-539-9697
  • ISB Capital – Tom Kenney – 281-482-2700
  • CMAC Lending – 281-377-4845
  • Jet Investor Lending – 281-872-7800
Until next time,
 
Danny

Flip This House: Getting Started


Once or twice a week I get asked the same question: Danny, how I get started investing in real estate?

My answer is always the same: Dive right in!

No, not really. Investing in real estate involves time, money, and a little bit of risk. In my opinion, real estate is one of the safest investments you can make, due to the item being tangible.

Other benefits of real estate is that prices will float with inflation, and if you can’t afford it – you can always lease the house, and let someone pay it off for you!

I’ve been studying real estate for years now, and I’ve learned a lot of information. I’ve read many books on real estate investing. I’ve been to real estate seminars, auctions, and events.

Let me relay the best piece of advice I ever got: In Real Estate, You Make Money On The Buy.

Its true! If you buy right, you should always be able to turn a (gross) profit. Sometimes, Uncle Sam takes his cut and your net profit is smaller. We’ll get into ways on how to defer that in later opportunity posts though.

I am a real estate investor. I buy distressed houses, renovate them, and sell them to families who want a good house to live in, at market value.

“Flippers” have a bad reputation in the real estate world right now due to shotty work and taking advantage of others – both things I do not partake in. I try not to refer to my business as “flipping”, but its a catch phrase that everyone knows from TV shows.

Let me break down another misconecption: It Is Possible To Make Money This Market.

It boggles my mind that so many people discourage investing right now. This is an opportunity of a lifetime, to invest in real estate. No other time in history have we had home prices so low, with interest rates so low. To put it short, Its a gold mine for real estate investors.

So how do you get started? Thats the most common question I’ve been asked. When ever I explain what I do, everyone asks questions. Thats good though! I like answering questions.

My first reccomendation: get your team together, get your area, and get your market knowledge.

Get your team together:
There is no single person in real estate investing. It takes a team of people to make the process work. You’re going to need (at the least) a savvy real estate agent, a lender, title company, inspector, and contractor(s). As you grow your career in real estate investing, you’ll need add on people to your team. Always make sure you find the best people on your team, who you can rely on.

Get your area:
Focus on a niche market area. I recommend somewhere thats less than 15 minutes from your home. I spend a lot of time driving back and forth to my rehabs. I don’t have the time (or the patience) to sit in Houston traffic or go across town. Get the area you know, that is close to you, that has everything you’re looking for – and become the expert.

Get your market knowledge:
This is where your realtor will be a key player in your journey through real estate investing. They have the in depth information on market areas, and can tell you whats moving – and whats not. In my business, I would rely on relators before to tell me things about the market, run comparables, and get me facts and statistics on the market. I got my license now, so I can do all this on my own – as well as assist others in the process.

This is the start of a multi-part blog. I will go over, from start to finish, how to successfully “FLIP” a house in this market. Those who say it can not be done, please read along and learn how I show others how to make money in any real estate market.

Until next time,

Danny

The Technology Era


It’s been a while since I blogged here! I am going to try and keep up more with it.

Today I wanted to blog about the importance of keeping up with technology. I know sometimes we can all feel overwhelmed with new technology. It is bound to happen to us all one day.

I’m going to try and provide some tips for you to keep up with technology, and why you should.

I’ve been reading http://loveoftechnology.wordpress.com (http://bit.ly/i5SHFa) and found some very interesting statistics, go ahead and read these:

  • In excess of 1 000 000 000 books are published each year, a Google book search scanner can digitize 1 000 pages an hour
  • Americans have access to 1 000 000 000 000 web pages, 65 000 iPhone apps, 10 500 radio stations, 5 500 magazines, 200+ cable TV channels (near identical to the UK, apart from the radio channels, if you exclude web radio channels)
  • Newspaper circulation in the USA is down by 7 million in the last 25 years, but in the last 5 years unique readers of online newspapers are up by 30 million
  • In the last 2 months more video was uploaded to YouTube than if all the major US broadcasters had been broadcasting 24hrs a day, 365 days a week, since 1948
  • The same broadcasters get 10 million visitors a month to their websites.  In that period FaceBook, YouTube and MySpace receive 250 million (none of these sites existed 6 years ago).
  • 95% of all the music downloaded last year was not paid for.
  • Wikipedia launched in 2001, has 13 million articles, in 200 languages and worldwide employs just 12 full-time staff (no, that was not a typo).
  • Cisco’s Nexus 7000 data switch could move all of Wikipedia in just 0.001 of a second
  • The average American teenager sends 2 272 text messages a month, one of  my daughters regularly sends 4 000 a month
  • Nokia is manufacturing 13 mobile phones every second
  • 93% of Americans own a mobile phone.
  • 1/3 of mobile phone users feel it is unsafe to use them to make purchases.  So much for the ‘digital wallet’.
  • In 2007 Dell claim to have earned $3 million from Twitter posts
  • In February 2008 John McCain attended fund raising events for his presidential campaign and raised $11 million.  In the same period Barack Obama attended no such events.  Instead his campaign team used social networks to raise $55 million in 29 days.
  • 90% of the 200 billion emails sent each year are spam
  • By 2020 the mobile device will be the primary device for accessing the Web
  • The computer embedded in your mobile phone is a million times cheaper, a thousand times more powerful and a hundred thousand times smaller than the single mainframe owned by MIT in 1965
  • The computer that once filled a building now fits in your pocket, and in 25 years from now will be small enough to fit in a blood cell.

Amazing? Yes. Scary to some? I can see why. We’re constantly getting passed up by new technology. You go out and buy something new, and it seems almost instantly you’re considered obsolete.

My blog today is about the reasoning behind why you need to keep up with technology. I have recently been licensed by the Texas Real Estate Commission, and am now working for Coldwell Banker. I’ve noticed there are different kinds of people in real estate – those who work with technology, those who are trying to learn, and those who do not.

Some people understand the concept of why you should incorporate technology into your life. The basic reason is that it makes your life simpler. If you can leverage technology with your time, you usually come out more productive and with more time on your schedule.

Facebook is growing. YouTube is growing. Mobile devices are becoming faster, smaller, and more feature packed.

We are in an information age. The way I see it is if you do not get with the times, you will probably be left behind.

If you are trying to learn about how technology can change your life, I recommended you take some basic computer classes for a foundation. It is absolutely essential that you learn how to use a computer, email, and the internet. Check out http://www.gcflearnfree.org/computers for free online classes for computers. This will be a great resource for you.

If you are computer savvy, and want to upgrade to the next level of technology in your life, I would recommend a smart phone. My smart phone is pretty much a computer, in my pocket. It gives me the power of the internet, GPS, camera, and communication wherever I am. This is very powerful in my field of work. Keep in mind that you will have to normally pay a monthly data rate on your cell phone bill for this service. I’m not going to go into full details about why you should buy a smart phone, but http://cell-phones.toptenreviews.com/smartphones/ will explain the new ones out, and what it can do for you.

If you’ve got the computer mastered, and you have the smart phone down, the next type of technology I would recommend to you becoming familiar with is social networking sites. Twitter, Facebook, Blogs, etc are all considered social networking. This will allow you to expand your network, learn about your clients / customers, and reach out to them to hear what they are saying about YOU. Twitter allows you to do a search with a “real time feed”, so you know what is going on – up to the second. You can search by location with phrases, and all different kinds of searches. Its great, check it out at http://www.twitter.com. If you join Twitter, be sure and follow me at http://www.twitter.com/redannyday.

There are other ways to leverage technology. As I said earlier, I am a realtor in the Houston area. I am able to connect with potential customers and clients on my Twitter – http://www.twitter.com/redannyday or my Facebook Fan Page at http://on.fb.me/fdpfOu, or my own personal website http://www.danny-day.com.

The point of this blog was to open your mind to technology. Instead of being afraid of it, realize that it is here to stay. Embrace technology, commit yourself to learning something new – once a week, once a month, etc and you will find that you’re having a great time.

Until next time,

Danny

The Art of Shopping Around


It’s been real busy this past week. So far we’ve found a deal, got it under contract, and got inspections. We are closing on Thursday (2/24) and will start the renovation on Friday (2/25).

I wanted to create a blog post on here that will hopefully reach someone in all areas of business, The Art of Shopping Around.

So far on this house I’ve got over 20 bids from contractors. Some were for small $250 jobs, and some were for large $29,000 jobs. Trust me, there is nothing more frustrating than meeting with 5-8 different people per day, for something different. Many people will hire general contractors and not worry about the headache.

I’ve got some experience in rehab & development, as well as project management, so I decided I would find out first hand how much the general contractor would charge me. I got bids from about 20 contractors for all different scopes of work. I got bids from 4 different general contractors, and the rest were individuals doing various things. For each type of work that was needed, I got at least 3 bids on the job.

  • GC #1 bid: $29,450.63 (materials & labor)
  • GC #2 bid: $6,210 (labor)
  • GC #3 bid: Can’t open his attachments, GC’s use PDF or DOC files

Wow. We’re looking at about a $23,000 rough difference.. What gives here? All I need in labor is some paint, granite counters, appliances, and tile. Not $23,000 worth though.. less than half of that.

So I started shopping around and meeting with skilled laborers who do certain types of work (tile, landscape, carpentry, refinish floors, etc). What I found was that these guys are normally the best in their trade, because they focus on one thing and do it all day.. and they normally are cheaper than a GC.

My tile guy will install slate for $1.20 a sq. foot, and ceramic tile for $1 a sq. foot. Thats not too bad at all. What will cost the most in this will be your materials (slate can go up to $3.50 sq. foot). I interviewed and met with 4 tile guys.

My refinish guy will refinish the wood floors for $1.75 plus $200 in materials. My refurbish guy will refurbish the wood floors for $.50c a square foot. I interviewed and met with 3 guys who refinish hardwood, and only one guy who refurbishes (its a very deep clean / seal).

Landscape is tricky.. I budged $300 for landscape in my first deal, and my first bid came out to about $1,200. I told him thanks, but I had to find something more cost effective. This guy was telling me I was getting a good deal because of the sod ($.88c sq. foot) and the plants he wanted in my yard, as well as the mulch.

I priced this out at the local landscaping shop and I feel like I’m going into the wrong business. He was making some money on his end. If we have 2 day laborers removing / adding plants and mulch we will spend less than $250 on our landscape job.

I started pricing out cabinet 3″ pulls and knobs at Lowes and Home Depot. I had originally budgeted $1.50 for knobs, and $2.25 for 3″ pulls. If you’ve ever been to Lowes or Home Depot they have them, but they are not that great.  I started looking at my other options, and found http://www.usaknobs.com had knobs that were 1/4th the price from Home Depot or Lowes. I know the savings is only about $100 total, but each dollar I save goes in to my pocket.

I had some demo guys come over to the house to take a look at what I wanted to demo. They wanted $600 for half a days work and removing some ceiling fans and doors and trash removal. I had to hold in the laugh when he told me the price. I started to price out the dumpsters in my area, and I can get a 30 yrd roll off flat bed in my driveway for $300. Luckily we don’t need a 30 yrd, and I can just get a trailer for $150. This is another duty for day laborers at $10 an hour.

My original cost estimations and budget allowed for a $25,000 rehab with a 5% contigency, so in total we were looking at $26,250 total spent on the rehab end.

My insurance budget was $400 total for the job. I checked with 4 different insurance companies. My first quote was at $980 for builders risk 6 month term. I checked with 3 other places, and I got my rate down to $516.

By pricing materials out myself and eliminating the GC from the deal, we will be saving over $9,0000 on the deal.

This is why from now on, in all aspects of my life, I will be giving more attention to the art of shopping around. It’s not about being cheap.. it’s about being smart.

Until next time,

Danny