Investors Gobble Up Profit on Their Own DealsPosted on June 9, 2014 by
I partner with my students on short sale deals and my Mentor students on all types of deals. As a mentor, my students obviously learn the importance of negotiating as low as possible in order for us to get a good deal on a property. But even after the student has negotiated as low as they can go with the Seller, I will walk through the house and tell the Seller that the price that my partner offered is too high. I finish up by negotiating the property even lower. Why? Because my students are just looking at the front end of the deal and I’m looking at all the expenses to purchase the property, private or hard money interest and points, and the rehab costs for materials and labor. In addition, I’m looking at the cost of insurance, taxes, and the utilities plus the hold time until we sell it, the cost of another Realtor to sell it should the student not conduct open houses/auctions to sell the property themselves.
It’s really hard for my students to see the entire back end of a deal when they are just focusing on the front end. When we go to Home Depot, we must be aware of which features sell a home. Kitchens and bathrooms sell BIG, so we spend extra money in those areas. We get nicer cabinets, granite countertops, medium grade faucets and lights that all match the hardware throughout. Recently I have negotiated and closed several short sales and straight purchases that need rehab. I always stay with a neutral wall color (Behr Toasted Cashew – a light beige), flat white ceilings, and semi-gloss white around the trim and doors throughout. The walls and ceilings are a knock down texture throughout for consistency.
I never ever change any colors in the house (i.e. burgundy master suite) as the buyers/new homeowners may not like the colors that I prefer. One of my students decided that the kitchen and bathroom needed to be mustard yellow. However, she forgot we had already matched the paint to the cabinets and granite. It was funny because I was on vacation during the rehab and she sent me pictures of the rooms and I went bonkers! As partners, we always have to mutually agree on any changes to the property; this is the reason for a partnership. However, with me as a Mentor/Partner and a Funding Partner, I may dominate somewhat as to how things will be painted and fixed up. The cabinets in the kitchen were cherry and the granite countertop was white, beige and had flecks of cherry. In my opinion, the mustard wall needed to be repainted to beige and she agreed. But did this rash decision of the student cost us money?? ABSOLUTELY! We had to pay a contractor to repaint the entire kitchen. I did allow the mustard yellow walls to remain in the bathrooms, as the bathroom cabinets were oak and the granite had a yellowish tinge to it, so luckily it matched. I can still remember my student/partner saying “Don’t worry about the color.” However, I take my Mentor position very seriously and I never leave anything to chance. We did sell that house and my partner and I profited over $68,000.
Recently, my partners and I purchased a manufactured home that previously had a fire in it. The home sits on a private lot at the front of the park and the association dues are only $30.00 a month. It is a 55+ community. We purchased it for $42,500 and we have approximately $7,500 in it for rehab, not including holding costs. We had to do all new plumbing, electrical, 2 new windows, paint, insulation and a vapor barrier underneath. There were some holes in the walls with wallpaper, so we put wainscoting in the hallway, power washed the outside, and added some exterior curb appeal. It is listed at $97k and is one of the only recently updated properties for sale in that subdivision. However, all the neighbors are talking about the “FIRE.” The property has not sold yet, however, I believe it will if all the neighbors would keep their lips zipped! Ironically, they all walked through and complimented us on all the repairs we made and stated “This is like buying a brand new home.” However, people who are 55+ are sometime afraid to purchase a property that had a fire, even though all the repairs are complete. We had an open house/auction and the highest bidder was $67,500 along with 40 other possible buyers, which the students are responsible for calling. Follow up with the list is very important as many of the people were actually looking for their out-of-state family members.
Offering a Home Warranty is very effective as well, as buyer is protected. We recently placed an ad in the Tampa Bay Paper looking for new buyers, so the property will be sold soon. We also offered the selling agent a 3.5% commission, as I only charge a $195.00 transaction fee as the listing agent. The next step is to place an ad on Craigslist and post bandit signs. In addition, another open house needs to be held to find our buyer, as counting on the MLS to sell your house with selling agents is not the best way to sell the house “FAST.” So, a plan of attack had been put in place, as the loan interest, taxes, HOA dues, and utility bills continue to eat away at the profit.
Two other deals I am working on are 2 houses in Tampa with 2 different student/partners. These houses were total gut jobs removing walls and rearranging layouts. I had to go shopping with the students to agree on the light fixtures, tile, backsplashes, granite, cabinets, doors, door handles, etc. Every little penny you spend at Home Depot is very important, and if you spend over $2,500.00 on materials in the same purchase, you receive a minimum discount of 10%. I had my students obtain bids from local contractors for a roof and an A/C condenser. The range of quotes was extreme. The price ranges for the roof were $5,600 to $8,000 and the A/C condenser ranged from $2,700 to $6,000. I spoke with the contractors and told them I need their best quote as I am building a rehab crew out in this area. I also said that I want good material with the cheapest price as this is an investment property that is being fixed and then re-sold. By using that verbiage, the quotes were lowered and we received at least a 10% discount or more. That is why I am the Mentor/Partner. I started having problems with one student who was focusing on the “best of the best of the best” materials to put in the house, as she was only focusing on the front end of the deal. I also allowed her and her family to gut the house. However, there were certain things that I wanted to keep, like the thermostat which was only 6 years old, and all the closet shelving throughout the house. These things can be cleaned, painted and we would save at least $500.00 on the cost. There were other items that were damaged while they were gutting (tile, lighting, etc) that resulted in additional costs to us that were unnecessary. I informed her not to remove anything else in the house, but too late, there was nothing left! She hasn’t seen the back end of the deal and she is also dreaming to build her own dream home. Her mentality was not to “flip a house.” I can’t wait until the end for her to see how much profit that we are going to receive on the house once we sell it. My goal is at least $40,000 profit on each property. The budget I keep is very tight; partnering with me really does save you $1,000’s of dollars!
The reason I wrote this article is that Investors need to know that if they’re doing a big rehab over $20,000, then they really need to keep up on material costs and be sure everything matches: i.e. brushed nickel throughout, from locks to lights to handles. Your goal is to sell each house fast, at the best price and make a huge profit. Don’t build your dream home, rehab your houses with everything matching, use the same tile throughout, same paint color, same brushed nickel throughout, same front door color (a deep burgundy red which means prosperity), make sure your bathrooms and kitchen are beautiful and looks “WOW!” The rest of the stuff really doesn’t matter other than it needs to match.
Take your purchase price and figure out the cost of the private/hard money loan interest for 6 months plus points and add this to 6 months of HOA dues plus utilities. Figure your rehab cost on the property and subtract it from the cost of the sale of the home. Pay close attention to the neighborhood comps! When you are flipping before 90 days from the date of purchase, you will need 6 sold comparables for two appraisals to justify your price per your buyer’s lender and seasoning guidelines. Get your sale price and then subtract the above expenses along with 6% commission and 2% for closing costs. Now subtract an additional 10% for miscellaneous and see what you have left? Did you eat up your profit??? I hope not and don’t beat yourself up, just learn from any mistakes and stay on top of your numbers so you will always know your potential profit.
You must imagine that on every deal you have 3 huge buckets. One is filled with $100 bills, the other 2 are labeled Cost and then Profit. Each time you take a “George Washington” out of the money bucket, you are either putting money into rehab costs or you are putting money in your own pocket. Which do you prefer? There is a fine line when making these decisions. It takes practice and it takes learning from your own mistakes. OR….you can cut down on “mistake time” and learn with a Mentor in a “hands-on” situation and save yourself significant time and money.
2014 is all about you and I have decided that for the rest of this year I am going to write about what YOU WANT and answer questions YOU HAVE. Please email any topics that you would like to see me write on and email all of your questions to admin@SellFastRealty.com. I will answer them in my articles. This way, it is all about moving you forward by taking the advice from a Mentor who is physically still working and enjoying the business and wants to give you a Power Push to success!
Looking forward to your topics!