Posts Tagged ‘ property ladder ’

Day 37 – Summary of the Deals We’re Working…

Today is Day 37 in our drive for $60,000 in 60 days through real estate investing.  We have a number of deals working, and we wanted to update you on the status of each one of them.  Some have gone very well, and others have not worked out as well.  The good news is that we are continuing to learn every day.

2846 Cherry Rd, Highland, MI

This property is a 1050sq ft home that sits on 1.75 acres and is a definite rehab because the house is currently gutted.  The nice thing about this property is that it has a lot of extra rehab materials included with the sale. 

We have had this property under contract since July 9th, and our initial exit strategy for the property was to wholesale it as is, or rehab it ourselves.  We put the property under contract for a very fair price to the seller, which made it very easy for them to say yes to our offer.

Since then we have employed our full sell that home fast marketing strategy and we have had a lot of interest in the property.  We have received well over 20 calls on the property and have had about 8-10 people out to look at it.

From our buyer list, we have had 3 people who I would categorize as serious rehabbers out to look at the property, and the consensus is that the repairs are probably too much for the property to be profitable.  We have confirmed this with our own contractor estimates.

Because of this, we have changed our plans on this property a little bit.  We have spoken with the seller on a couple of occasions and discussed the feedback we are getting from the buyers.  I think at this point, it is really going to take the right buyer to see the value in the property and it is going to have to be someone who is looking to do the repairs themselves and live in the house afterwards.  We have a couple of people who fit this profile coming to look at the property in the next couple days, so we will see…

2080 Commonwealth, Auburn Hills, MI

This property is a duplex and is currently rented.  Both units were completely rehabbed earlier this year, and at the price offered we’re estimating the property will cashflow at $371 per month.  This is a great deal for any investor!

We put this property under contract on July 16, 2010, and we have used the same marketing strategy to market this property.  To our surprise there hasn’t been near the amount of interest in this property as there has been on Cherry.  We think the price point may be the main factor affecting this. 

At this point we are going to try a few more things with this property.  We are going to put up some more bandit signs for the property, send out more emails to our ever-expanding buyer list and put out some more online classified ads. 

We will see what happens…

630 Lydia, Pontiac, MI

This property is a condo that is currently rented.  The intriguing thing with this property is that the lease is structured giving the tenant the option to purchase the property within 5 years.  They receive $100 per month towards a down payment, but they also pay the taxes, association fee, insurance and maintenance.  This has a huge impact on the cashflow, and our analysis shows the property will cashflow almost $400 per month!

We have had this property under contract since July 31, and we plan to purchase and keep this property because the numbers are just too good.  We will list it for sale, but we are going to be pretty stingy on the price because the cashflow is just too good to pass on!

Right now, we are just running through our due diligence on this property, but everything (including the financing) is looking good.  So, hopefully we will have this one closed in the next two weeks…we’ll keep you posted.

Royal Oak Bungalow

We are still in negotiation on this property, but things seem to be stalling out.  This property is a 4 bed / 2 bath bungalow and has a finished basement.  It’s in a great area of Royal Oak, and we’re estimating it needs about $18k in repairs to make it a really nice home. 

We submitted our initial offer on the property giving the seller two different purchase scenarios.  One was simply a cash offer, and the other was a scenario where we would delay closing for 6 months and we would have the opportunity to go into the property, make the repairs and find a buyer…then close.

I just spoke to the seller yesterday about the offer, and he told me the offer is really too low for him, and he thinks that with minimal repairs (paint) he can get a much higher price. 

At this point, we’re going to look a little closer at the comps we pulled by driving by them to get a better analysis of our after repair value.  We have also discussed offering him a piece of the deal on the back side if we are able to sell the property for more than what our analysis showed.  So this deal is not dead yet, but it’s definitely not looking that great…

Bloomfield Hills Ranch

This property seems to be fizzing out because we are simply too far away on price (about $150k) with the seller.  This property is really intriguing because it is in a great area.  There are literally homes on the same street that are valued at $1.5 million.  The trouble is, this home is a 1300sq ft 3 bed/2 bath home with no basement.  Everything else in the neighborhood is 2500sq ft plus and are quite frankly nicer homes. 

For our analysis, we are showing that the property needs about $15k in repairs, but we really don’t think the home will sell for more than $158,000.  The trouble is that the seller wants $200k and they’re being pretty firm on that price. 

At this point, we have to let this one go because we are just too far away on price…maybe they’ll come around 6 months from now after they figure out that they’re priced too high…

Summary

So this is where we are at after 37 days.  We’ve had a lot of activity and we’ve learned a tremendous amount just by attempting to execute these deals.  We need to hustle if we’re going to make it to our goal of $60,000 in 60 days, but we’re trying…Stay Tuned!

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Day 30 – Halfway Through our Drive for $60,000 in 60 days!

Today is Day 30 in our Drive for $60,000 in 60 days. We are halfway through, and we have some good news to report. The deal we have been negotiating for about two weeks on the condo in Pontiac has finally come to agreement. We will have more on this tomorrow, but we are really excited about this because the numbers on this property are great!

For today, we are going to give a recap on everything we have done for the first 30 days…

In Day 3, we told you that real estate is a marketing business, and in many subsequent blog posts we have described the different marketing campaigns that we are using to find deals, find buyers and market the properties we have for sale.  We are executing these techniques on a daily basis, and we are continuing to track our success or lack of success with the different campaigns.

What is working to find Sellers?

The best method we have found to locate motivated sellers has been the emails we are sending to folks on Craigslist.  In Day 4 we talked about how we are using the online classified sites to find deals, and the response we have gotten from emails we are sending to motivated sellers has been by far the biggest success. 

Bandit signs have also generated quite a few calls for us, however, the difficult thing with them is keeping them up.  We have found that the signs are only staying up for 3-4 days in most cases, so the exposure can be limited.  This has been a drain on time and resources, so currently we are re-thinking our use of bandit signs.  We will continue to us them though because they do produce results.

What is not working to find sellers?

To our surprise, the Yellow Letter campaign we described in Day 1 has been less successful than we had hoped.  We were looking for at least a 10% response rate from the letters, but we have received between 1% – 5%.  We have plans for the future to try a few different things with the yellow letters, so look for that in the future.

What is Working to Find Buyers

Quite simply the best thing we have done to locate buyers is the method we described in Day 5 where we have created a squeeze page www.foreclosed-homes-MI.com and linked a Google Adwords campaign to it.  This has not been free, but we have grown our list to 115 people and at least 60% of these additions have come from this one single campaign. 

As we talked about in Day 15 & Day 18, we are dedicating quite a bit of time and effort to social media (especially Facebook) to try to grow our buyer’s list and network with people online.  This is definitely starting to bear fruit.  We have gotten a handful of people to sign up for our buyer list and we have had a lot of great conversations with many folks online.  This is going to be a continued focus for us because the potential here is tremendous.

What is Not Working to Find Buyers

To be honest, I cannot think of anything we’re doing that has simply not worked.  It really has been a lot simpler to build our buyer list than we thought. 

Where Do We Stand.

Well, it’s day 30 which means we’re halfway through our drive for $60,000 in 60 days.  To date we have gotten 3 properties under contract, however, we have not had any success in selling the properties.  Let’s look at this a little closer:

2846 Cherry Rd, Highland, MI

We got this property under contract on Day 11, and we immediately began to market the property using the methods we described in Day 10.  Finding interest in this property was not a problem at all.  To date, we have probably received at least 30-40 calls on the property, and at least 10 people have looked at the property.  However, the flaw with the property is in the numbers.  Originally we assumed only $25,000 for repairs in the property, and based upon feedback from several potential buyers that have looked at the property, the repairs are probably closer to $45,000.  With this level of repairs, the deal simply has not made sense to fellow investors.  However, there is still potential in finding the right buyer for this property that is willing to make it their home.  So we are continuing to look for this buyer…

2080 & 2076 Commonwealth

To our surprise the interest in this property has not been as great.  Quite frankly I would love to keep this property for our own portfolio because I really think it is a tremendous deal.  The cashflow in the property is great at $371 per month, and it is a true turnkey property as it is completely rehabbed and already rented.  We are going to continue to market this property and see what happens…

630 Lydia

We will have more details on this property tomorrow, but we have a couple exit strategies that we can use on this property.  We would like to wholesale it if we can, but we are willing to keep the property in our portfolio as well.  The annual return on our investment will be 44% for this property.  It has great cashflow, and the property is currently rented to a tenant who has the option to purchase the property in 5 years for $21,000.  This is going to be our first win, and we will be able to put some money on the board towards our goal of $60,000 in 60 days…more to come tomorrow.

In Conclusion

So to end today’s post I will say that this has been a tremendous experience so far.  We have learned a great deal just by putting this blog together and we look forward to the next 30 days and the knowledge (& hopefully profit) that we will gain.  Hopefully everyone out there is enjoying our journey and learning a little bit with us as well. 

We will see you tomorrow!

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Day 29 – Anatomy of A Deal – Part 4 Analyzing a Rehab

Today is Day 29 in our drive for $60,000 in 60 days and today we are going to continue our series on the Anatomy of a Deal.  To recap we have had the following discussions:

Today we are going to continue our discussion on the numbers by talking about rehab deals.  Rehabs have become a very popular way to invest in real estate, and you may be familiar with the process from TV shows like Flip This House or Property Ladder.  Basically rehabbing involves purchasing a property that is in a state of disrepair and making repairs to it to “force” the appreciation of the property.  The end game is to sell the property for more than what you have into it.

Now, many of the reality shows seem to grossly neglect the investment that needs to be made when doing a rehab.  Typically they show an original purchase price, repairs and the final sales price and usually end up with a pretty hefty profit.  However, there’s much more involved.

So, let’s take a look at all the profit centers available for a rehab.  In Part 1, we talked about the 5 different ways to make money on any investment:

  • Cashflow
  • Appreciation
  • Depreciation
  • Interest Deduction
  • Principal Reduction

Now, with a rehab, the name of the game is obtaining the property, making repairs and selling the property as quickly as possible.  So, there will be no cashflow, and the depreciation, interest deduction, and principal reduction will be so minor that in most deals you will simply ignore them.  So, the only profit potential will come from the forced appreciation of the property through your rehab efforts.

Now, let’s look at some of the costs involved.  As I mentioned, this is where many of the reality shows heavily underestimate the cost of conducting a rehab.  In your analysis you should include all of the following costs before getting into any deal.

Purchase Price

The most obvious cost you will incur will be the purchase price of the property.  Now you may not have to pay for any of this up front because you may obtain financing on the property, but obviously you need to include it in your analysis.

Purchase Costs

With any purchase of real estate you are going to have some closing costs involved that are beyond the price you will be paying for the real estate.  In general you will have the following costs:

  • Down Payment – You should always try to get into deals without putting a down payment in, but this is not always possible, so if you do need to make a down payment, this is the first cost you should consider.  This can vary depending on the lenders you are working with to finance the remainder of the deal.
  • Inspection Costs – Generally with every property you should have an inspection completed before purchasing, and you will be charged for these inspections.  Inspection costs can range between $200 – $500 for each property.
  • Closing Costs – Closing costs are those costs that are related to the closing of the deal.  These may include but are not limited to recording fees, state taxes, attorney fees, courier fees, title search, etc.  These costs generally cost between $1000 – $1500 for each property.
  • Lender Fees – If you are financing the property, you need to include the fees associated with borrowing the money.  These include origination fees (also referred to as “points” where 1 point is 1% of the loan value), underwriting fees, appraisals, document preparation, processing fees, and anything else the lender wants to charge you for.  Now, these fees can vary widely between lenders especially when you consider the differences between conventional financing, hard money lending and financing through private investors. 

Holding Costs

Holding costs are the costs that you will pay while you hold the property.  By completing your project as quickly as possible, you will be able to minimize your holding costs, and therefore it becomes very important to keep your project to a strict time budget.  Many deals can go from black to red just because they took too long to complete.  I generally use a 6 month time budget but this may be longer or shorter depending on the amount of rehab required.  For holding costs you will want to include all of the following :

  • Mortgage Payments – The loan you obtained will likely have mortgage payments unless you have negotiated some delay in the payment schedule.  (That was a hint).
  • Property Taxes – Of course, you will need to pay the taxes for each month that you hold the property.
  • Utilities – These include electric, water, gas, and generally you want to have the utilities on during the rehab.  This is convenient for the contractors, and it will also help diagnose any problems with the mechanical systems in the property.
  • Insurance – You will definitely want to have insurance on the property during the rehab, and consult with your insurance agent about the types of insurance available.  You have much more to worry about with a property being rehabbed than your typical homeowner’s policy will cover.  Generally over a 6 month period you can expect to pay between $200 -$400 for insurance.
  • General Upkeep – In addition to all of this you may also have costs involved with the general upkeep of the property.  These may include things like lawn mowing or snow plowing.  Generally these costs are low (less than $300 for a 6 month period) but should be included in your analysis.

Selling Costs

After the rehab is complete, you will need to sell the property as quickly as possible.  You should include the following costs in your analysis:

  • Closing Costs – Your closing costs will include the same title, recording, courier, transfer taxes,  etc. that you paid when you purchased the property, and in many cases the buyer may ask you to cover all the closing costs.  In a buyer’s market (which we currently have) you should include all of the buyer & seller closing costs in your analysis.  Generally, the closing costs should be $2000 – $6000.
  • Home Warranty & Termite Letter - As a selling point, you will want to give your buyer a home warranty and a termite letter certifying the property is free from termites.  Typically you should be able to do this for about $500 – $600.
  • Real Estate Commissions – If you choose to sell your property through a realtor (and you should strongly consider this), you will need to pay realtor commissions.  In Michigan this is generally 6% of the sales price on the property.

Now, to sum everything up, you have the following:

Appreciation = Final Sale price minus Purchase Price, Repairs, Purchase Costs, Holding Costs & Sales Costs.

And if you remember from Part 1 the calculation for Return on Investment (ROI) would be as follows:

ROI = Appreciation / Investment

Where your investment includes the monies you put up for the deal.  Now, let me be clear on this, your investment does not include all of the costs we discussed above.  For example, you will need to include the purchase costs, cost of repairs, holding costs, but if you finance the deal, you will not include the purchase price, and since the sales costs come out at closing, you will not include these either.

Now, when you look at the numbers you are going to have to figure out for yourself whether the amount of profit will be enough considering the amount of work you will be putting in.  For example, $10,000 would be a nice profit to make on a property, but when you consider it might take you 6 months and many hours of work to make that profit, you may reconsider your threshold.

To run these calculations, I recommend you setup a simple spreadsheet to include each of these costs, and you can fill in the details for any property you come across.  The numbers you insert for each deal will be different, but the approach to the analysis will always be the same.

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