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Do You Have a Property Inspection Checklist?

Over the weekend, Kelly and I looked at six properties we were interested in and we ended up putting an offer on one of them. We didn’t hesitate on the offer we put in because we were very confident in the property. Now, when you’re looking at investing thousands of dollars on a property, it is extremely important that you know what you’re buying. You don’t want to miss things, and looking at the property with a critical eye is very important. It’s very easy to overlook things when you’re inspecting a property and that’s why we always take our Inspection Checklist with us.

Click on the link and you can see that this is a simple 1-page form that we can use when inspecting a property. We simply print it out, put it on a clipboard and we use it to systematically go through each house we look at. This checklist is a system for us and it incorporates several important elements:

First of all, it provides a full checklist of potential issues with a property. When we’re done we can be sure that we’ve completed a thorough inspection of the property.
It provides a way for us to document the repairs that are necessary or the things we want ask our contractors about. When you’re looking at six houses in one day, the repairs can start to run together and it is very difficult (if not impossible) to remember what needs to be done on each property. The checklist takes care of this problem and gives us a way to take very good notes.
For each item in the checklist we also show directional pricing for common repairs that may need to be performed. With this information we can quickly develop an estimate for the repairs that are necessary. This is very important for turning offers around very quickly. If we know it’s a good deal, there’s a good chance other investors will think so too. If we can get our offer in and accepted before anyone else looks at the property we have a big advantage.

Now, there are some houses we walk into that we know are not for us with a few sniffs (sometimes literally). But for the properties that pass the initial sniff test our inspection checklist servers as a great tool for us to fully evaluate the property. Once we have the checklist filled out we use it as input to our financial calculations, and we can quickly develop our offer.

So this weekend we used this system to look at six houses and we wrote one offer…we’ll see where it goes, but hopefully it will be our next property.

Stay tuned…

2012: 02/06
CATEGORY: Deal Analysis
Rehabs / Flips
Rentals
Turnkey Rental
Wholesales
3 comments

Don’t Be An Accidental Landlord…Plan For It

I recently had a friend who, because of his financial circumstances, had to move out of his home and rent it out. He had purchased the home at the height of the real estate market in 2005, and for a number of reasons, his mortgage payment had gotten the better of him. Rather than let the home go back to the bank he decided to rent the home out.

At the time, he asked me to help him get things setup, and the first thing I asked him is whether the house would cash flow. He kind of looked at me funny and said, well I’m gonna try to get $1600 per month and that should cover my mortgage payment which is $1550. You see, this is the common thought for most accidental landlords. They think that as long as they cover their principal, interest, taxes and insurance (PITI) that they will cash flow. What they fail to realize is that there are a number of other expenses that need to be accounted for.

Well, he ended up renting the property for $1550 (less than what he wanted) and he’s struggled ever since. About a month into the rental contract he had some electrical issues with the house that cost him about $300. Then a few months later his septic tank needed to be pumped to the tune of a few hundred dollars. He hadn’t accounted for these maintenance costs, and when they come up, he has to come out-of-pocket to pay for them.

Now, if you’re considering becoming a landlords don’t be like my friend. Please take the time to analyze your numbers correctly. If you think you can make it work, you’re just fooling yourself because these costs are real.

When talking about rental properties, the number you need to analyze is your monthly cash flow. Cash flow is simply the amount of money left over after you pay all of your expenses and any debt service on the property. So here’s what you need to consider…

Rental Income

The first thing you need to establish is how much income the property will generate on a monthly basis. The first place I normally start is by looking at a few online rental estimators. There are three that I know of:

Of these three I like Zilpy the best because they give you a map showing comparable properties to yours. Nevertheless, you need to take these numbers with a grain of salt because these estimates are based upon properties that are listed on classified sites like Craigslist and Kijiji.com. You cannot be sure that properties are actually being rented for these amounts because these are the list prices, but they will give you a good start on what you may be able to get…plus they’re just a mouse click away.

To get a better idea of your expected rental rate, you should speak with a realtor who can pull rental comps for you. The rental comps that a real estate agent pulls are a much better indication because these will be actual rental rates for the properties that are found. Another resource you can consult is a property manager that works in your area. They should also have a very good idea of the rental rates because they are managing properties in your area. Once you conclude this research you should have a very good estimate for what your property will rent for.

Expenses

As I talked about above, this is usually where most newbie landlords get into trouble – they simply do not account for all the expenses involved with a rental property. Here’s what you need to consider:

Vacancy – Vacancy is the expense you will incur when the property goes vacant. It is the single biggest expense you will face as a landlord. You will want to do everything in your power to minimize it, but you must account for it. With our rental properties I normally apply an 8% – 10% vacancy expense every month. This means if I’m collecting $1000 per month, I will account $80-$100 per month for vacancy in my monthly cash flow calculation.

Taxes – This one normally doesn’t get missed, but you need to account for paying your property taxes. However, if you are converting your home into a rental one thing you should consider is that your taxes might increase. In Michigan, you will be taxed at the non-homestead rate because you will no longer be living in the home. To get an idea of your tax rate in Michigan, you can visit Michigan’s Online Tax Estimator

Insurance – Again, this expense doesn’t normally get missed, but please acocunt for it in your calculation. You’ll want to speak to an insurance agent because you should change your policy. You will want to get a landlord’s policy instead of a standard homeowner policy. This type of policy covers the building (not the contents) and it normally also provides you with liability protection.

Maintenance – Okay, this is a big one that most newbies neglect. You will have things that come up, and if you don’t account for them, you won’t have the money to pay for the repairs when they are needed. Normally I account for $50 per month on each of our properties. This is a good number if you have several properties, but if you only have one, you may want to increase your maintenance expense to $75 or even $100 per month. As you collect more properties you can reduce the expense a little because you can share the maintenance costs across all your properties.

Association Fees – If your property is a condo, or there is a homeowner association, you need to account for the monthly or annual association fee that is charged.

Property Management – Even if you plan to manage your property yourself you should include a property management fee in your cash flow calculation. Doing this will give you the option later on to hire a property manager if you choose to do so. 10% is a standard rate for property managers, so again, if you are collecting $1000 per month, the property management fee would be $100.

Utilities – Normally we like to have our tenants pay all the utilities, but there are circumstances where we don’t do this, or it is not possible. If you will be responsible for the utilities on your property, then you need to include the cost in your cash flow calculation.

Lawn Care / Snow Removal – Again, we normally have our tenants take care of these items, but if you are responsible, you need to include this in your cash flow calculation.

Legal Fees – You may incur fees for setting up an LLC, maintaining your LLC, filing your taxes, preparing lease documents, etc. All of these expenses get lumped into tax and legal fees, and you should account for them. Typically $25 per month should more than enough to cover these costs.

Other Expenses – Okay, this is a pretty exhaustive list, but if you know of any other expenses that you need to account for, you should include them in your cash flow calculation.

Mortgage Payment – We leave your mortgage payment last because we normally calculate a net income for the property before subtracting the expense for the mortgage payment. We do this because the net income shows the maximum potential for the property once your mortgage is paid off.

Putting it All Together

Okay, I know this sounds like a lot, but honestly it’s pretty easy to put all of this together into a spreadsheet and make your calculations. Below is an example showing our net income and cash flow generated for a property. You can see that we collect $1000 per month, which after expenses results in a net income of $538.75. After the mortgage is paid the property generates $329.18 in cash flow.

2012: 01/22
CATEGORY: Deal Analysis
Rentals
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What We Look For In a Rental Property

As we talked about in our business plan, our long-term strategy for creating financial freedom is to purchase a number of cash flow rental properties. We’re not just purchasing any properties though. They have to meet strict criteria that we have developed. These criteria are aimed at maximizing both our cash flow and appreciation potential for the properties that we are investing in.

Criteria # 1 – Location

The first three rules of real estate are LOCATION, LOCATION, LOCATION! Well, it really is true because location is one of the few things you cannot fix on your property. If you purchase in the wrong location, the performance of your property may be doomed from the beginning.

Now, there are specific things we look for with any location we are purchasing property in.

Good schools - when we say good schools, it’s really a relative thing. You want the school district your property sits in to be better than the school districts in the surrounding areas. This creates a natural demand for people to move into your area which drives home prices in your favor and creates a generous supply of long-term renters.
Good neighborhoods – This goes without saying. Obviously you want the neighborhood where your property is located to be a place where people want to live. You need to look for things like well-kept lawns, flower gardens, and well maintained homes. You don’t want to see weeds, overgrown grass, and houses that are falling apart.
Low home prices – At the end of the day, your property will need to cash flow. Finding good neighborhoods is relatively easy, but finding good neighborhoods with low home prices is where things start to become difficult. They do exist though…

Criteria #2 – Property Amenities

Once we find an area, we need to be looking at specific properties in that district. This criteria is really aimed at maximizing your tenant pool by providing your prospective tenants with the amenities they are looking for. So each property should have the following features:

3 or more bedrooms – We really don’t like the idea of purchasing 1 or 2 bedroom homes because it simply limits your tenant pool, and your rental rate will be much lower. We’ve found that 3 bedrooms is just about right for rental properties. This size home will allow a family of 2, 3, or 4 to comfortably move into your property.
Basement – For us basements are a must. They provide your tenants with extra room that they can use for storage or they make an excellent playroom for kids.
Floor plan – We don’t have specific requirements for a floor plan, rather what we are looking for here is to make sure there aren’t any oddities with the property. For example, you don’t want to open the front door and walk into the kitchen. Your tenants will find this weird too. As a result you will get lower rents, and you may have a tougher time keeping your property rented.
More bathrooms are better – Obviously your property needs to have at least one bathroom, but having an additional bathroom is always a plus. It is not mandatory, but it will definitely make your property much more rentable, and it will increase your rents.
Garage – Garages are an excellent feature for a rental property because they provide extra storage space for your tenants. Garages are not mandatory, but they make your property more rentable.

Criteria #3 – Property Condition

We’re not afraid of doing a little rehab on our properties especially if it means we’re getting a great deal. However, there are specific things we’re on the lookout for with our properties. These items can cause big issues and many times we don’t even want to deal with them because there are many properties out there that don’t have these types of problems.

Water Issues – We don’t like to mess with water because it can be a huge problem with any property. Water can cause damage to your property in many ways, and if you have water issues it can be a real nightmare. Generally if we see evidence of water in the basement or a leaky roof we start asking lots of questions.
Foundation Issues – Foundation issues can be very expensive to fix. If we see a foundation issue we really don’t like to consider the property.
Roof – Generally we want to see a new roof on the property. If the property is in need of a roof, we may still purchase the property, but the cost of the roof replacement will be figured into our offer.
Windows – Windows can be a very expensive item to replace, so you’ll want to make sure they are in great condition. Again, if they’re not, you need to figure in the replacement cost when you’re submitting your offer.
Mechanicals – We like to lump the plumbing, electrical and HVAC systems into one category called mechanicals. The fact is these systems need to be in tip-top shape and up to code. If they’re not, you need to figure in the cost of repairs in your offer.

Criteria # 4 – Cash Flow

Lastly, we need to make sure our property will cash flow, so you need to look at the rental income you can expect along with the expenses the property will incur. We will talk about this more in our next blog when we discuss how to analyze the numbers on a rental property.

If you can meet all 4 of these criteria in the rental properties you are purchasing, you will be taking the right first step towards making your rental properties a success. Remember, it’s all about planning with rental properties and meeting these criteria will help you maximize both your cash flow and your property’s potential for appreciation – both of which will increase your bottom line.

2012: 01/15
CATEGORY: Deal Analysis
Getting Started in Real Estate Investing
Rentals
Turnkey Rental
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Day 19 – SOLD!

So yesterday we told you that we had completed our Michigan Cash Flow Property Tour and that we hadn’t sold a single property. Well, about an hour after I published that blog post, one of the investors who had been in town over the past couple weeks phoned me on the way to the airport and we arranged for him to purchase one of our properties. So, now we’re well on the way towards our goal.

We purchased this property at the end of March, and here are the list of costs we’ve incurred for the property:

-$15,500 Purchase Cost
-$2,500 Financing
-$2000 Closing Costs (Buy & Sell)
-$15,000 Rehab, & Holding Costs
-$900 Tenanting Fees
+$1,800 Rent Collected

Total Cost - $34,100

Sales Price – $45,000

Profit – $10,900

That’s right where we wanted to be with this property, so we’re very pleased.

This puts us a big step forward in our goal, and we have now earned $12,000 towards our goal of $60,000 in 60 days.

More to come…

2011: 07/16
CATEGORY: $60000 in 60 days
Deal Analysis
Deal Negotiation
Deals We're Doing
Rehabs / Flips
Rentals
Turnkey Rental
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FreedomSoft Contract Crusher Fails – Here’s a Better Way to Automate Your Contracts

I recently had a discussion on Facebook with another investor and they were talking about the “Contract Crusher” online software offered by FreedomSoft. These guys are expert marketers because they do a great job getting their information in front of everybody myself included. So, I have to admit I was intrigued by their offer to provide this free “Contract Crusher” software. Their marketing makes it sounds like Contract Crusher will revolutionize how quickly you can create and send contracts.

Well, I checked it out, and quite frankly I was not impressed. Their software gives you the ability to upload a contract to their online portal and then point and click where you want to add your information to the contract. They do have a nice feature that allows you to email or fax the contract right from the web portal, but here’s why I’m not impressed. If you have your contracts written up in Microsoft Word (or any other word processor software for that matter) you could do the same thing by putting the information in with text boxes…that’s essentially all they’re doing. I’m not sure how this makes it more efficient for you. And, if you’re a little more savvy with Microsoft Word you can create a “Form”, and then you’ll just be able to tab between each of the fields to fill the information in.

So all things consider, I’m giving Contract Crusher a failing grade. I also think I have a better way for you to create your contracts because my method AUTOMATICALLY fills out your contract while you complete your due diligence on the property.

Here’s how…

When I take a look at a property I start off like many do taking a 30,000 foot view of the property. For instance, if we’re looking at a rehab property I use the following formula:

Purchase Price = 65% x ARV – Repairs

If I think the seller may accept a purchase price given by this equation then I’m going to do a more in-depth analysis. I start a property analysis using an excel spreadsheet I created. The spreadsheet is organized with the following 5 tabs:

Tab 1 – Property Information – Includes property address, seller name and phone number and date of analysis
Tab 2 – Property Inspection – Includes property inspection report including summary of required repairs. The output of this sheet is an estimate for the total cost of repairs including labor
Tab 3 – Comparative Market Analysis – Includes information about subject property, data on sold properties, pending properties and listed properties. The output of this sheet is an estimate for the After Repair Value (ARV).
Tab 4 – Property Cashflow – Even if the primary exit strategy is a rehab we always do a cashflow analysis in case we “get stuck” with the property. The output of this sheet is the cashflow the property will generate if rented.
Tab 5 – Rehab Analysis – This tab includes a summary of the purchase costs, holding costs, repair costs, & selling costs associated with the rehab. The output of this sheet is the maximum purchase price and the expected Return On Investment (ROI) for the rehab.

Now, we have a standard contract for purchase that we use, and it requires that we fill in the following information:

Seller’s Name
Property Address
Purchase Price
Date
Signature

Well, it occurred to me that for every property I analyze that I have already input this information into my analysis. So, I created a 6th tab with the purchase agreement on it. The power behind this is that I can link the cells in the purchase agreement to the other 5 tabs and as I fill in my analysis on the property the purchase agreement is AUTOMATICALLY filled in. For example, in the area of the contract where the property address needs to be filled in, I just pull this information from Tab 1, and the purchase price is pulled from Tab 5, etc. If the analysis I put together looks good, then I just print the purchase agreement and fax it, or I can print it to a PDF and email it.

One more thing I should mention is that I even went so far as to add my signature to the document. To do this I simply signed a piece of paper and scanned it in using my scanner. Once scanned in, I was able to save it as a picture file. Then I just inserted the picture into my purchase agreement tab in Excel. It took about another 30 seconds to crop, resize and move the signature to the right spot on the contract, but now I have a contract that fills itself out and is already signed.

My next step is to put together additional contract that I frequently use and have them automatically populated as well. (Assignment of contract, mutual release agreement, contract addenda, etc.).

I think the guys from FreedomSoft had the right idea to take this to a web application, but perhaps they should redirect some of their marketing dollars to create a piece of software that has a little more capability…currently I’m not impressed…

2010: 11/09
CATEGORY: Deal Analysis
regular
Time Management
Uncategorized
Video
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We Have a Deal, But No Money…Just Yet

3 bed / 1 bath Brick Ranch with Basement & 2-Car Garage

As we talked about earlier in the week, we spent the good part of this past Saturday putting together the numbers on a rehab in Waterford, Michigan, and the numbers looked good. The property shown in the picture above is a great little 3 bed / 1 bath brick ranch with a full basement and 2-car garage that really just needs some updating. The house is solid from top to bottom with no structural issues and the roof is great. Everything is telling us this is a great little property, and so we submitted the offer on Saturday night.

Since then we’ve been back and forth with the seller, and right now we’re at a bit of a stalemate. Originally we had planned to put the property under contract with a financing contingency because we were planning to fund the deal through a hard money lender. With the analysis we have put together I am confident that we could obtain the funding, but I cannot be 100% certain, so we need the financing contingency. This is a major issue for the seller, and they are requesting a $5000 deposit with no contingencies on the offer. In addition to this, they are asking that we close in 14 days.

Unfortunately, we’re not in a position to put the property under contract right now, but if we are able to locate private funding, we could easily snatch this deal up and be off and running with the rehab.

Right now we’ve completed a full analysis of the property and we’re reviewing this analysis with a few private lenders. We don’t have the funding lined up just yet, so if you are interested in partnering with us on this deal, we would be happy to discuss the full details with you as well. For now, here is a summary of the numbers:

After Repair Value = $95,000
Purchase Price = $38,000
Purchase Costs = $1,700
Repairs = $21,400
Holding Costs = $2,400
Selling Costs = $7,600

Potential Profit = $23,900

To see our full analysis, you can download it here.

If you are interested in partnering with us, please feel free to contact me at todd@michiganpropertybuyer.com or give me a call at 248-917-4416.

2010: 10/14
CATEGORY: Deal Analysis
Deals We're Doing
Financing Deals
Market Analysis
Photo
regular
Rehabs / Flips
Uncategorized
Video
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Tools to Use In Your Real Estate Investing Business

Mark Ijlal is a real estate investor in Michigan that has been writing his blog Michigan Foreclosure Report by Mark Ijlal for quite some time. Personally, I have found his articles to be spot on and straight to the point. Mark has an excellent ability to relate real estate investing to many facets of life and really drives his points home with his unique writing style. In his latest blog post, Mark provided a great list of Tools He Cannot Live Without in his real estate investing business. As I expected this was an excellent article listing several useful tools Mark uses. I have used many of these tools myself, and I’m sure I will look at using some of the others in the very near future. It was really a great article, and I wanted to post a comment to Mark’s blog, but unfortunately Mark does not accept comments on his blog. So instead, to followup on Mark’s blog post I decided to offer additional tools that I cannot live without in my real estate investing business. Here’s my list…

GADGETS

Mark mentioned that he uses a Kodak Zi8 flip camera to shoot videos of houses to make video tours. I have this same exact model and it really is a great little camera. It takes video in high definition, takes still photos, and to download them it actually has a USB port that flips out and you just plug it into your computer. This feature is nice because you never have to worry about losing the cord. In fact it’s so easy to use, I found my 4-year-old daughter making her own videos one day. So go out and get yourself one of these cameras, it’s a great little tool.

In addition to a flip camera, I would recommend the following gadgets that I cannot live without:

Laptop Computer – I will never buy another desktop computer again. To me they are dinosaurs of the computer age. A laptop is so much more practical to use for the simple fact that you can take it anywhere. I use my laptop with every aspect of my business and would not be a real estate investor without it.
Smart Phone – Next to my laptop, my Blackberry is the gadget I use the most. I’m really not sure how I was able to manage things for so long without it. The ability to have access to your email, outlook calendar, phone, and internet all in one handheld device is great.
GPS Unit – We bought a Garmin earlier in the spring because we were driving down to Florida for vacation. It certainly came in handy during that trip, but I thought it would not be very useful after that. I was dead wrong. We use the GPS unit everytime we go and look at a house. You just get in the car and go…no looking up maps or directions on the internet…just get in the car and go. We’ve used it so much that we just purchased a 2nd GPS unit, a Garmin 295W. This one is a little more sophisticated as it has the ability to access the internet and also take pictures. The camera feature is particularly useful because it actually “Geotags” the photos with the location of where the picture was taken. This is extremetly useful when you combine this technology with Google Earth software.
MP3 Player – Most people use MP3 players to listen to music, but I use it for education. My drive to work each day takes about an hour, and I have listened to countless audiobooks using my MP3 player during my commute back and forth to work. This has proven to be a very effectient use of what would otherwise have been wasted time.

SOFTWARE

Mark mentioned that he cannto live without Quickbooks to keep track of his finances. I currently use Quicken, but as Mark said, your CPA uses Quickbooks and that is exactly who told me I need to switch over. I think I’m going to ride out the rest of the year with Quicken and then startup in the new year with QuickBooks at the beginning of the new year. In addition to QuickBooks, here are few pieces of software that have been invaluable to me.

Google Earth - This is a free application offered by Google, and quite frankly it’s one of the coolest pieces of software I think I’ve seen. If you want to check out mount everest, you just type it in, and the globe spins taking you to Mount Everest. So you can have fun with the software, but you can also use it in your real estate investing business. The nice thing about Google Earth is it allows you to plot locations on the map, create notes, etc. Kelly and I have used it extensively to map out the areas we are investing in, and it provides a great way to help understand the market.
PDFEdit995 – I’m sure everyone has opened a PDF file before. The nice thing about PDF files is that they cannot be changed, and when writing contracts or official documents they work out very nicely because you know that nothing can be changed on the doucment after you sign it. The person you send it to can only open it and print it. If they want to make changes to the contract, then they will have to write them in, and you will know exactly what was changed.
Microsoft Office - Excel, Word, & Powerpoint are a must to have, and I think this goes without saying. Being an engineer, I’m a little partial to Excel because I think you can pretty much do anything in Excel. We have used it to create a template property analyzer that contains all the sheets we need to fully analyze a property and write a contract. In fact, it automatically populates the contract for us once we fill in the owner’s name, address, etc. The sheet includes a market analysis form, a cashflow analysis form, a repair estimate form, a rehab analysis form, a loan amoritzation calculation form, and the purchase agreement. We systematically fill out each page, and they are all linked which creates a complete analysis for the property. When submitting an offer on any property I’m confident of the numbers because I know they were calculated correctly.

WEBSITES

Mark mentioned several websites in his post – some I’ve used and some I haven’t but probably will very shortly. Below are some additional websites that have proven to be extremely useful for us.

BatchGeo.com - This is a really cool website to use if you have multiple properties that you want to go and look at. You just create a list of the addresses in Excel of the properties you want to map, and then you just copy and paste this list into BatchGeo.com. Hit submit, and BatchGeo maps each of the properties. This makes it really easy to figure out which property you should see first, second, third, etc. In addition to this, BatchGeo has a feature that allows you to download a “.kml” file which you can read into Google Earth. This makes mapping multiple properties in Google Earth very easy. Check out our post Getting to Know the Pontiac Real Estate Market to see how we’ve used BatchGeo.com in conjunction with Google Earth.
WordPress.com – Of course this is the platform we use to host our blog. We actually started out on Tumblr.com but found that WordPress has many more useful features to it, so we moved over to WordPress. This blog has aided us in so many ways, and I would encourage everyone to try blogging in their real estate investing business.
TubeMogul.com – TubeMogul is a website that allows you to upload videso to multiple different websites simultaneously. When people think of web videos, most think of YouTube, but there are actually many more video hosting sites out there. Sending your videos to multiple sites increases the exposure level, and TubeMogul makes it very efficient to do this.
Facebook.com – Everyone knows about Facebook, and if you’re not using it in your real esate investing business, you really should. The possibilities are truly endless. Check out our post Use Facebook to Promote Your Real Estate Business to see how we are using Facebook.
RealInvestorWebsite.com – This website really caters to real estate investors, and it is the hub of all our website activities. They have many templates setup that are geared towards setting up websites for real estate investors. Their web interface is really easy to use, and if you don’t know how to do something they have a great video resource library showing you exactly how to do everything on the site. The nice thing is that they will host up to 10 different websites for you for one low fee of $27 per month. I know 10 sites sounds like a lot, but when you have a main site, several squeeze pages, and a couple sites dedicated to particular houses you’re trying to sell, you’ll find yourself wishing you had more sites available.

OTHER BUSINESS ESSENTIALS

Mark mentioned how to setup an LLC, and the forms you might want to have ready at a moment’s notice. In addition to these things, you should really think about the following things:

PO Box – A PO Box is very handy for keeping security in your business dealings. You don’t want everyone under the sun to know where you live, and a PO box is a very handy tool to help you accomplish this.
Separate Bank Account – As your CPA will tell you, you need to keep all of your financials separate in your business dealings. Therefore it is imperative to obtain a separate bank account. Follow Mark’s suggestions on setting up an LLC (or another entity) and obtain a Federal EIN number, and you’ll be all set to go to the bank to get a bank account.

2010: 10/04
CATEGORY: Deal Analysis
Getting Started in Real Estate Investing
Marketing
regular
Social Media Networking
Video
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Day 54 – Our Plan for Due Dilligence on a Rehab Property

Today is Day 54 in our drive for $60,000 in 60 days through real estate investing. As we discussed yesterday we have gotten a property under contract that is a great rehab project. Today we are going to share with you our plan for due diligence on this property so we can bring it to close.

The Contract

First, let’s talk about the contract and how we have this setup. The closing date is state to be on or before September 15th, 2010. As we mentioned in Day 42 – Anatomy of A Deal – Part 8 Closing The Deal, we are making a checklist of all the items we need to do to bring this deal to a close. Here is our list:

Send contract to title company
Order title commitment/insurance
Obtain financing
Inspect property
Obtain repair estimates

The way we have structured our contract, we have one main clause that will protect us in the event that we find something in our due diligence that we are not currently accounting for. The clause I am referring to gives us a 21 day period to complete inspections and obtain repair estimates on the property. If these estimates do not align with our assumptions, we have the right to exit the contract and get a full refund of our earnest money deposit.

So, we have a plan in place to act on each of the items listed above. Some of the items like sending the contract in and obtaining title insurance are pretty straightforward. These are things we will kickoff immediately with a simple phone call to the title company. The other items we will discuss in more detail below.

Obtain Financing

On Day 39 – Anatomy of A Deal – Part 7 Financing the Deal, we talked about all the different methods available to finance deals. For this particular deal, we are going to look to a private investor and/or a hard money lender to fully fund the purchase and repairs on the property. To present our case to these potential lenders, we have created a business plan for this project. This plan will include the following items:

Project financial analysis including all costs and expected profit
Detailed information and pictures about the property
Initial repair estimates
Market analysis of properties that have sold & properties currently for sale (Comps)
Project timeline
Loan request
Credibility Kit

Click this link to see a copy of full plan – 1634_Tamson_Rehab_Business_Plan.

This package did take about 8 hours to put together, but it really serves two purposes. First, and most importantly, it will serve as a great tool to explain the project and solicit funding. It adds instant credibility to anyone we speak with, and really shows that we have done our homework on the property. Additionally, this will serve as a great template for us when we do additional rehab deals in the future. It should take less than half the time to put this information together again, so we really think it was time well spent putting it together. Now, I will also add that you really should be putting together this level of detail on your deals. Going through this process will ensure that you are buying the property at the right price and have considered every angle.

Inspect The Property

We have completed our own walk-through on the property and we have generated a list of items that need to be repaired on the property. The purpose of the inspection is to determine if there is anything we have missed. Currently we are expecting the following repairs:

Replace Roof / Repair Gutters
Remediate Mold / Repair Drywall
Replace Front Porch
Update Kitchen
Replace Carpet / Floors
Paint Interior
Minor Landscaping

The inspection will serve to confirm these repairs are needed and also alert us to any additional repairs that might be needed so we can account for those.

Obtain Repair Estimates

Immediately after we have the inspection completed, we will bring contractors in to provide estimates on the repairs. Currently we have budgeted $25,000 for the repairs on the property and we feel this is a conservative estimate, but we need to confirm our numbers. We will also be confirming any additional items that come from the home inspection.

2010: 08/20
CATEGORY: Deal Analysis
Financing Deals
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Day 53 – You Make Your Money When You Buy!!!

Today is Day 53 in our drive for $60,000 in 60 days through real estate investing, and we received some awesome news today! Our offer on the property in West Bloomfield has been accepted! This property is in need of significant rehab, and right now, our conservative estimates show that the deal will net us about $24,000. Here’s a summary of our analysis:

Purchase Price: 28,400
Purchase Costs: $3,800
Rehab Costs: $25,000
Holding Costs: $6,300
Selling Costs: $7500
Expected Sales Price: 95,000
POTENTIAL PROFIT: $24,000!!!

They have a saying in real estate:

You make your money when you buy!

From these numbers, we are extremely excited, and can’t wait to get started on this rehab. Of course we need to confirm the assumptions in our numbers, so we have many activities planned over the next couple weeks. Of course, our contract was written to allow us to complete these activities, and if our numbers are not confirmed we have the right to exit the deal. We think our numbers are conservative, so we’re confident that this will not happen, but if we uncover anything in the inspections that was not anticipated we are covered.

So, over the next week we have the following activities planned in an effort to confirm our numbers:

Bring inspectors in to review the property
Bring contractors in to gather estimates for the repairs
Speak with hard money lenders to fund the project
Begin marketing the property as a wholesale

This is our short list. You can probably gather that we have two exit strategies for the property that we are going to pursue. Our primary strategy will be the rehab of the property, and our secondary exit strategy will be to wholesale it. If you are interested in purchasing the property on as a wholesale or you are interested in participating in the financing of the project, please contact us.

Stay tuned, there will be a lot happening over the next week on this property. Of course we will keep you updated on our progress on this project, along with the other properties we are working on. Overall it has been a great day!!!

2010: 08/19
CATEGORY: Deal Analysis
Deals We're Doing
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Day 52 – Choose the Right Comps for Your Real Estate Deals

Today is Day 52 in our drive for $60,000 in 60 days through real estate investing. As we told you yesterday we have a few deals that we are looking at that just came in over the last couple days. We briefly discussed how to determine the After Repair Value (ARV) in Day 21 – Anatomy of A Deal – Part 2 Analyze the Numbers and this involves looking at other properties that have sold or are currently on the market. This does two things, it gives you an idea of what the market is willing to pay, but it also gives you an idea of what your competition will be if you are planning to rehab & resell the property.

Where do You Find Comps?

The best place to look for comps is in your local MLS (Multiple Listing Service). The unfortunate thing is that you need to have a realtor license to gain access to the MLS, so if you are not a realtor, you will have to have a real estate agent pull the comps for you. Neither Kelly or I are real estate agents, and we have really found this method of pulling comps to be problematic, so we are using alternative methods.

Sites like Zillow.com or Trulia.com can provide you with a list of properties that have recently sold, and the nice thing about these websites is that they also put the properties on a map. So you can quickly get an indication of where the properties that have sold are at. Zillow even gives you what is called a “Zestimate” which is their indication of the value of the property. Be careful with this number though because we have found the accuracy of this number to vary greatly. It should really be a starting point, and your full analysis should tell you the true value of the property.

Zillow & Trulia will also give you properties that are currently on the market, but generally we like to use Realtor.com to find a good list of properties that are currently on the market. Generally Realtor.com seems to be kept more up-to-date on the properties that are for sale.

Guidelines for Selection Comps

Whenever I speak with someone who wants to sell their property, I always ask them what they think the value of the property is, and how they arrived at that number. More times than not, I get a response like this:

Well, the guy across the street just sold his house last month for $200,000 so I think mine is worth $200,000 too…

Now, what the seller doesn’t tell you is that their house is half the size, was built 50 years earlier and has a completely outdated interior. Nevertheless, because the guy across the street sold his home for $200,000 their house must be worth $200,000 as well. This of course couldn’t be further from the truth. The problem here is that the two properties are not at all comparable.

Now, with Zillow, Trulia and Realtor.com you are going to have a pretty long list of comps to select from. However most of the properties they provide you are not comparable, so you have to sort through them. So what do we look for? When selecting comparable properties, we normally look for the following in our comps:

Size - The square footage of the comparable property should be 20% higher or 20% lower than our subject property. For example, if we were looking at a 1000sq ft home, we would look for comps that had between 800sq ft to 1200sq ft.
Area – The properties must be in the same area. Generally we don’t like to go out more than a half mile with our comp selection. Additionally, I should mention that you should also look at what school district the properties are in. Homes right across the street from each other can have different school districts and this can have a big impact on the value of the property.
Sale Date – You should be looking at properties that have sold within the last 6 months, and the more recent the better.
Age – The homes should be built within the same timeframe. For instance you wouldn’t want to compare a home that was built in 2000 with a home that was built in 1950.
Construction – The properties you are comparing to should be of similar construction. For example you do not want to compare a condo to a single family home.

Determine The Value

After you have selected the properties that have sold recently that are similar in size, age, area, and construction, you will want to calculate the price per square foot for each property. This is done by simply dividing the sales price by the square footage of the home. Then you will simply average these numbers to come up with the average price per square foot. Simply multiply this number by the number of square feet that your prospective property has and this gives you the estimated value of the property.

Drive Your Comps

Normally you should have a pretty good idea of the value of the property at this point. However, it really is a good idea for you to get out and drive by each of the comps you have selected. We normally like to do this and give a simple rating of “Same”, “Nicer”, or “Worse” for each of the properties. When we are doing this rating we are comparing to what our home will look like once we have completed all the repairs on the property and we are ready to sell. Through this process you may find that you really should not be using some of the comps, and you can fine tune the value of the property.

I should mention that you don’t necessarily have to physically “drive the comps”. In many cases you can do this virtually. Google Maps has a feature called “Streetview” that will literally allow you to walk down the street. You can type in the address of the property in question, and they will put you right in front of the house. You can pan, rotate and zoom the screen and really get a good idea of the condition of the property right from your desk.

Also many times Zillow, Trulia and Realtor.com have pictures and descriptions of the properties. This also serves as a great resource giving you very good insight into the condition of the properties right from your office.

2010: 08/18
CATEGORY: Deal Analysis
Market Analysis
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