I guess I haven’t blogged at all about House #33 yet.  We put it under contract last week after having  the listing agent trying to get our offer accepted for almost 4 weeks.  Neither of us were that excited about the house, no garage, flat root in a mediocre area.  As you may have heard, California has been in a huge rain storm over the last 10 days so my partner was at the house and the roof was leaking.  We mentioned this to the agent and she basically said, the bank will do nothing to fix it, so tarp it.  Okay, we can understand that, so we go to tarp it and the electric meter was missing.

This basically means that the cities Code Enforcement Department has requested that Edison removes the meter due to code violations.  The bad news is, this house has an illegal laundry room added to the back and is in overall bad shape.  We were not very excited about having the City do multiple inspections on the property and once they completely sign off on the condition you can get electricity to the site (meaning you have to run on generator or the neighbors power while you’re doing the rehab).

So, not being that excited about the house in the first place, we requested that the meter be returned or we get a discount.  The agent said she would get the meter back on the property as the bank is not willing to provide a discount since we are buying the house “as-is.”  As a side note, when you a buy a house as-is, it means in the condition it currently is, not any possible condition the property could be in.  If it burns down when I am under contract it is the Sellers responsibility to return it the condition it was in when I originally looked at it.

The agent emailed today and said she can not get the meter back and we are going to have to do it. So I said we would like to cancel and this deal is dead .

Oh well…

When you read the title of this thread, you are probably wondering where I am going with this article.  This is not about working with or being friends with your competition, although I think that can be valuable.  It is about knowing the deals other people are getting.

I have this terrible habit, it is discouraging most of the time.  Once every two weeks or so, I do my target search, but rather than looking for active properties, I am looking at closed sales.  I basically go through every deal and I do a title search on that purchase.  When the property is bought in an LLC, Corp or with no mortgage you know it is to an investor.

Once I have the name of that entity, I can do another search that let’s me see all the properties they own.  I also check the California Secretary of State web site and see who the owner of the entity is.  Not only does this process make me feel like a stalker (lol) but it gives me an idea of two things: the deals other investors are getting in the market and who is doing the buying and how they are taking title and getting financing.

When we wholesaled House #21 when my friend mentioned who the buyer was, I had no idea who he was.  But when he mentioned the two entities he uses to buy in, I instantly knew he was one of the biggest players in my market.  That made me feel pretty comfortable with the deal automatically.  We also had a good chat and we had both heard of each other, but never officially met (we still haven’t).

The reason I am bringing this up, is I did this search last night, and normally I get pretty frustrated that people out there are getting the smoking deals, the market really has changed.  There was maybe 3-4 deals I would of bought at the prices other investors got them compared to the 20+ I am used to seeing.   This means that the market is getting saturated with other investors and everyone is sacrificing profit margins to buy properties.  Fix and flippers (aka: me) are the first people who have to back out because we have to pay 10% less than a long-term investors out of the gate (can you say closing costs).

Don’t get too discouraged, we do have 1 house in escrow still, and 4 or 5 rehabs going on.  But clearly it is time to broaden our horizons until banks release some more inventory.  I am just lucky that we have the inside track with quite a few REO offices, they should be good for 1-2 properties a month at great deals.

For New Investors

Please do this search, drive-by the properties and analyze the deals.  If nothing else, this will provide you massive encouragement that other investors are out there succeeding in real estate.  Your personality type should know that if someone else can be successful at something, you definitely can be too!

Finding that perfect deal that meets all the rules is already so difficult, but there are some problems properties have that no investor can fix.

I thought I would make a list of some of the things that get me to pass on a property, no matter what the price is:

• Busy Streets
  This is a judgment call, but if you have to risk your life to pull out the drive way, it should be a pass.  The worst is a corner lot, of two busy streets.  No investor can fix the busy street to a house.
  
  
• War Zone Neighborhood
  When you are first getting started in a part of the City it is important to drive by the house at night.  Most of the neighbors are home and you can see what the street really looks and feels like.  No investor can move the house from a good neighborhood to a bad one.  Your house will be vacant for a lot of the time you are working on it.  If it’s in the wrong spot, it is going to get vandalized.
• Mobile Home at the Price of a House
  A wholesaler tried to sell me a mobile home on a lot, for the price of a house yesterday.  The sad part is she laughed when I asked her if it was a mobile home, so she didn’t even know.  A rectangle layout, with a raised foundation and a 2/12 pitch.  Banks don’t like these properties, owners do not like these as much.  People make a lot of money in mobile’s, but s0metimes REO agents list them as houses, and use comparable sales of standard houses.
• Bad Additions that Cannot be Removed Easily
  We are used to removing un-permitable, unsafe additions.  But sometimes the homeowner has gone so far, that it is not cost effective to do anything with the property.  I was in a property about a month ago, they converted the house to a duplex and split the house right down the middle and put a kitchen on both sides of that wall.  We’ve seen that before, but they also converted the garage to living area and made some additions off the back of the house.  I would not take this property for free, because it costs so much to get back to a livable condition there is no profit left.
• Former Meth-lab/Drug House Properties
  In California, you have to disclose if you house has been involved in a meth-lab anytime in the past 5 years.  I am sure there are people who specialize in these type of properties, but I would be very hesitant to get involved.  They’re difficult to sell and there are a lot of disclosure requirements I am uncomfortable with it.

Everything else, I love to buy!

One of the age old debates of real estate is should an investor buy properties in the “war zone” areas.  These properties usually go for very low prices because a majority of investor won’t touch this area.  The numbers almost always look good on paper, but what happens if your property gets vandalized, what happens if your neighbors are gang members?

From what I have read the definition of a “war zone” varies greatly.  Does it depends on the neighbors?  Does it depend completely on the city the property is in?  Do you base it completely on what other people say?

I will not invest in what I consider war zones, but I will drive by questionable properties and make my own decision.  My main factor is, do I feel safe getting out the car and looking insde the property.  If I am comfortable getting out and taking a look at it, it usually passes my test.

Neighborhoods Can Be Deceiving

Some of the properties we have bought seem like they are in great areas and the longer we own them we learn that the area is not very bad.  House #3 was in what we thought was a great area.  The house was built in the 80′s, not too many properties for sale in the area and what seemed to be good neighbors, all great signs.  Once we finished the remodel, the staging furinture got stolen and someone broke in the garage and was sleeping there.  If you go to a property in the evening you sometimes a get more accurate representation of how safe it is.

This works both ways though.  Sometimes what seems like a bad area on paper is actually pretty good.

When the Market Recovers War Zones Go Up in Value Faster

Buyer’s call the shots right now.  They want to buy the best inventory at an affordable price.  This forces banks to unload “war zone” property at a steep discount.  As the market starts to recover, buyers will get more aggressive and trying to acquire property the condition and neighborhood will become less of a factor.

If the property is somewhat safe, war zone investors can do very holding the properties.  As long as carrying costs are not huge (renters damaging properties, vandalism etc).

Remember to give every property and city a fair chance.

When you submit an offer on any piece of Real Estate you will have to provide an Earnest Money Deposit on the property.  This demonstrates that you are willing to take action on purchasing the property and you actually have the funds.Your deposit is a commitment to purchase the property and after your agreed inspection periods are over you have to purchase the property or the seller will keep your funds as damages they’ve incurred for stopping marketing the property and holding costs.

Now the investor’s goal is to put as small of a deposit as possible and the seller would like the largest deposit as possible.

The Standard

From what I’ve seen the standard was $2,000 – $3,000 on properties under $100,000 and $5,000 on properties for sale over $100,000.  A 10% earnest money deposit will show a bank that you are serious about the process, but usually will not overcome a higher offer.  Realize this is a negotiation ploy and it really can show how serious you are without costing any extra money.  I know of a couple different investor who brought in an earnest money deposit at their full price, if that doesn’t show the bank you are a serious buyer, I don’t know what will.

The Process

Depending on your agent, you typically will not need to provide the actual check when you write the offer.  We just write out a check and scan a copy.  In California, the seller typically picks the escrow company.  So you would just write a check out with a bunch of spaces “                              Escrow”.  When your contract is accepted the idea is, you can write in the escrow companies name in the blank space, “West Coast       Escrow.”

The Accepted Offer

More often then not, the seller wants a cashier’s check versus a personal check.  So the original check will be thrown away and you will have to go to the bank and make a cashier’s check.  If you are bringing it directly to escrow always make a copy first and email or fax it to your agent so they can pass it on to the seller.  Sometimes they will take a personal check.

Why is my Agent telling me to write a check in his Company Name?

Some real estate agents sent up what is called a “trust account” for their clients.  They handle money for clients and will pass it directly to escrow.  In my experience this is becoming less and less common as there is a lot of liability that comes with handling this money.  It is totally legitimate to do this as a buyer and it is heavily regulated.  Most agents prefer not to deal with it, as it is one of the most common reason for them to lose their real estate license.

Some things not to do

• Do not ever write an earnest money deposit in for less than $1,000 dollars (especially to a bank)
  This shows that you are in-experienced and do not have a lot of cash.  You should offer a low price if you would not be willing to put a $1,000 deposit up on the property to get it.
• If you get an accepted contract, have the money!
  Real Estate agents can tell very quickly when someone is trying to buy time.  If you do not bring a cashier’s check to escrow promptly (usually within 2 business days of an accepted contract), you will be thrown out of escrow and ruin your reputation.
• Get a Professional Check Book
  There are a lot of fun check book designs out there.  Disney characters, the galaxy, etc.  But if you want to come off as a professional investor try to go with a professional check design.

Wholesaling Properties

If you wholesale properties.  ALWAYS make sure that your buyer’s earnest money deposit is bigger than the one that you put with your purchase escrow.  If the buyer does not perform you want to be able to keep their deposit at damages and not lose out.

If you have been following the blog, you probably know that right now our biggest problem is not finding a willing buyer, but getting a bank that is willing to fund the loan.  The rules have changed and appraisers now are our biggest challenge.

Most of our properties sell to FHA Buyers, so we already have to deal with the FHA 91 Day Rule.  Some banks allow the loan officer to pick the appraiser, so we try to work with smaller lenders and ones we know give us some control in the process.

When all other attempts fail and we get a review appraisal ordered or we are working with a big bank and cannot recommend an appraiser for the original appraisal we are stuck and need to find a way to make lemonade with lemons.

Step 1, typically the appraiser will call the seller’s agent and ask how they can gain access to the property.  At the start I’d happily give them the lock-box combo and let them view the property at their convenience.  We have changed our game plan and now we always go meet the appraiser at the property.

Step 2, we are never very pushy with the appraiser but we tour them through our property and spend a lot of time discussing what we did to upgrade the property.  Essentially, our goal is to build a relationship with them while making a case for the increased value.

Step 3, we discuss that we have received multiple offers on the property and talk about how some appraisers can use these in lieu of comparables.  Most appraisers have turned this method down as I think most of them are uncomfortable with this.

Step 4, we offer our business card and discuss how “hot” the current market is with them.  How we have seen multiple offers, values increasing etc.

We have used this strategy three times so far and we have got the desired results everytime.  Some appraisers just will not work with you regardless (especially VA and special program appraisers), so we don’t expect it to work all the time.  But us being there and trying to be friendly is not going to hurt our value and in most cases I think it will help matters.

My partner met someone at House #4 for a FHA Bank of America loan on Thursday.  The appraiser was adament on how impressed she was with our work.  At the end of the meeting she told him “not to worry about the value, as we will easily get there.”  That is sure a comforting thing to hear in this market!!

A long time ago I spoke about how I used a very small part of Zillow to help with my price analysis.  They changed their site, to no longer allow quick sorting on their “Search Nearby Sales” which basically makes the tool a lot less useful for me.  But even before that I found a tool that I liked a lot better.

The MLS I am a member of has a Title company data feed that proves to be very useful for pulling comps.  On a subject property I typically do the following search.

The Criteria I use

• Plus and minus 15 years
• Plus and minus 200 sq ft
• The comps from the last 3 months
• Within 1 mile radius of the subject property

Here is a copy of the results it spits out, obviously some are better then others, so I then pick the three or four best properties and base my price off of that.  If it does return any good comparable properties I typically expand my radius to a bigger zone.

The market sure seems to be hot with a lot more buyers than inventory.  We are search to buy at least two properties in April, so we identified 10 properties that looked like they would meet our criteria.

After spending three hours looking at them, I got home and ran some numbers.  Four of them seemed like they could work, so I did my math using the MLS, Zillow, etc to get an estimated after repaired value on each them.  I subtracted our rehab costs, fixed costs and desired profit.  Here is what I came up with:

1. House #1 - was listed at $142,800.  It was built in 1991 and did not need very much work, maybe 5k-10k.  We knew this one was going to get a ton of action, but I figured I’d call the agent and see what she would say to $120k ALL CASH.  I get on the phone and talk to an assistant.  She told me they had 18 offers.  Curiosity got me and I asked what number I needed to bat at to get it.  She said that would be unfair to the others divulge that info.  So I said, my client was thinking of offering somewhere in the 160′s would that work?  Apparently, she had a couple offers above that…  NEXT
2. House #2 – was our favorite.  It was listed at $119,900.  Built in 1971, in a good neighborhood.  The comps in this area were very weird, the two houses next to this one where both for sale/in escrow.  One was a short sale listed at 120k and the other one was listed at 125k, and pending.  I assumed it had quite a few offers over asking price, but with the MLS you can’t tell.  I figured we needed to be at 90-95k to make it work.   Called the agent  and he said, it is in escrow… NEXT
3. House #3 – was the first one we looked at of the day.  A little bit farther south than we normally work.  It was listed at $119,900 as well.  This neighborhood turned out to have some solid comps and fully fixed it is worth $180,000.  It needs about 25k of work though.  This one looked promising with a solid ARV, I could come in at around $100k if I needed too.  I called the agent, apparently, he has 8 offers with over half of them above asking price… NEXT
4. House #4 – was in a mediocre neighborhood, but it was listed at $89,900.  So we figured it was worth a look.  This house isn’t the greatest flip, as there is no master bathroom.  It would make a great rental though, so this went on my wholesale list.  At $70,000 or maybe a bit more this would work. I emailed the agent (per her request) and apparently she has 2 offers on it… one cash near full price… NEXT

For whatever reason the market is really hot right now, at least in our area.  So that could mean a couple things, inventory has dropped and there are more buyers than sellers.  Or, what I think, the moratoriums have affected the amount of properties on the market and people are paying too much in a panic.

That means, I am going to stay cheap.  If prices flatten out or start to increase, I probably won’t end up with too many more flips (short-term).  If a whole crap-load of inventory hits the market (which I think it will), I will buy cheaper than my competition and not get burned.  Either way, by staying cheap, I can’t really lose money.

The good news, there is a property we had an accepted offer on in December.  We had 4 other deals in escrow and after further inspection we did not really like how high our offer was.  Three months later that property is on the market and I just asked my agent to offer 25% less than our accepted price earlier.  I think we have a pretty decent chance of getting it.  We will probably end up wholesaling it, if we do (as it makes a better rental) but we would probably make a bit flipping it.

If your an experienced investor you have probably heard people talk about hard money.  I am going to provide a brief explanation of what it is, and who it is best suited for.

Hard Money in terms of Real Estate is basically a private loan against real estate.  Typically it is a single person or a smaller company buying the loan and the interest rate is much higher.  The qualification process is very different then a traditional mortgage.  Hard Money Lenders are most worried about, the quality of the deal, the exit/refinance plan and the borrowers ability to execute that plan.

The Advantage

A hard money loan is very similar to a traditional mortgage.  The  lender takes a deed on the property, forces you to have insurance, will commonly require you to make monthly payments.  The biggest difference is they loan money where traditional banks will not (a property is badly damaged, you only want to own it a short period of time, you need to close really fast, you do not have great credit etc).

The Terms

Sometimes it seems like Hard Money Lenders speak their own language.  But it is very simple once you get the hang of it.

• HML - Hard Money Lender as they are sometimes referred too.
• ARV – After Repaired Value, this is essentially what the property is worth (would sell for) once your plan is complete.
• Points – This similar to a traditional loan.  A point is 1% of the total loan amount, and usually due upfront.  So if a deal has 3 points, you will have to pay 3% of the loan amount upfront to get the loan.

So if a lender says their lending requirements are:

• 70% of ARV, 3 points, $500 in Processing Fees, 15% Interest Only Loan for 12 Months with a Balloon Payment, No Prepayment Penalty

This means:

• 70% of ARV
  They will loan you 70% of the ARV they determine.  Typically a hard-money company has their own appraiser that they will send out to a property (at your cost).  So if a property appraises at $100,000 (after the repairs are completed), they would be willing to loan you 70% of that which is $70,000.
• 3 Points
  The lender will charge you 3% of the loan amount to process the loan.  On a $100,000 loan, they would charge you $3,000 to establish the loan.
• $500 in Process Fees
  This is the flat fee (in addition to the points) that a typical lender will charge to establish the loan.  This number will be added to the points and charged upfront.  FYI, this varies greatly between lenders, try to get as much information on this as you can upfront.
• 15% Interest Only Loan for 12 Months with a Balloon Payment
  This is your monthly payment and your terms.  Once again, if we have a $100,000 loan you would be paying $1,250 a month ($100,000 * 15% / 12 months).  The full principal amount would be due within 12 months.
• No Prepayment Penalty
  This is another area to be careful with.  This can vary widely.  Some Hard Money Lenders want you to pay back the loan as quickly as possible and do not charge an early payment penalty, while others like the high interest rate and want to be paid a premium if you pay that back early.  Factor this into your budget.

Don’t feel stupid asking questions of the lenders.  Sometimes there terms are different from industry average, so they are not going to laugh at you if you ask an educated question.

Other Comments

• Most HML’s will force you to have insurance just like the traditional banks.
• In the current market conditions expect lenders to want you to put at least 10% of your money into a transaction.
• Most HML’s will provide a pre-qualification letter to you.  They are usually pretty vague but it is always something nice to add to your arsnel.

The Process

• Pre-Qualification – Like most banks you typically will have to pre-qualify with HML’s.  They will usually run your credit, will want to see your balance sheet and some rough guidlines of your income.  The strenght of your deal is highly factored into their decision though.  If you have a property under-contract taht will appraise for double your price, most lenders will do it, no matter what your credit is.
• Get a Deal Under Contract and Send them the Specifics – Once you have a deal under contract and you have been pre-qualified you will send the specifics out to the lender.  You will send: your purchase price, the escrow documents and your general idea of what you think it will appraise at.
• They will make you an offer – Once they get their valuation back they will let you know what loan amount they are willing to do and the terms of the loan.  If everything works for both parties you are ready to close the deal and make some money!
• Close the deal!!!

Where to find them?

I have been working on compiling a list of HML’s in Southern California as there is not a great resource on the internet.  But in realty, in most markets there are only a few good ones and if you go to your local REI club the members there should point you in the right direction.

You’ve worked your butt off and now your agent calls you and said the bank/seller has agreed to the price and is ready to open escrow. What do you do now?

Step 1 – Go look at the Property Again
Once an agent tells us we are close on an offer we always go look at it again.  In a typical week we look at over 20 properties (sometimes 20 in a day) so we like to get a refresher so we can get our numbers as close as possible.  We typically take a lot of pictures and redo our mini-budget as exact as possible.  If we don’t like something about it, or missed something, now is the easiest time to back pedal with the agent.

Step 2 – Identify any Problems or Unknowns
If the property has any potential pitfalls (structural damage, leaks, etc) or structural issues we bring in our hired expert on these issues and have them provide a quote or their opinion. Does it need that new roof?  Is the HVAC system okay?

Step 3 – Redo the Numbers
I will go and redo all comps.  Check how close my original ARV estimate was.  Are properties selling in the neighborhood?  Is a lot for sale in the neighborhood?

Step 4 – Order a Termite Inspection
We our in California, so termites are a problem and our inspector will give us a free inspection.  When we sell the property you can guarantee our buyer will order an inspection, so we do the same.  If there is any bad damage we try to negotiate with the bank.

Step 5 – Order an Appraisal
Almost always my estimated ARV number is within 5% of the appraisal.  But it is nice to have a second opinion.  We are talking a lot of money with each transaction, so I want to make sure I did not miss anything.

Step 6 – Review the Escrow Instructions and Preliminary Title Report
By now escrow should have documents ready for you.  In this market escrow officer make it pretty clear they work for the bank and not you in REO transactions.  So you have to make sure you cover yourself.  If they send you with paperwork you are uncomfortable signing, refuse to sign it.  This may save you big in the long run.

Step 7 – Get Quotes from your Trades
If you’ve made it this far, chances are you are going to close this deal.  Now is the time to start getting your trades into the property to provide quotes on what you want to do.

Step 8 – Close the Deal
Now you’re ready to close escrow and start to fix the property!