2010 wrap-up

How did we do? Our goals were simple:

1. 6 additional rental houses
2. Buy-sell 18 houses for profit
3. Raise $500,000 in private money

With a last minute purchase we got accepted on Dec 23rd and closed on the 30th, it brought our total buy-sell purchases to 16. We ended up landing 4 rentals (all of which came in the 2nd half of the year). As far as raising private money, we well exceeded the $500k goal. Overall, not too shabby.

The last few months of the year we proceeded extremely cautiously as this market tries to figure out which direction it wants to go. We slowed our acquisition way down, only picking up 2 rentals and one flip in November and December. On the whole we are very satisfied with our progress this year and will be posting our 2011 goals very soon.

I'll also be updating our progress on the "Cash Flow Challenge". Real progress has been made and the challenge has already been a success as it has succeeded motivating us and keeping us accountable to acquiring that "get out of the rat race" cash flow.

As for next year, I expect it to be the best year yet for investors! Continued low prices and motivated sellers along with rock-bottom interest rates. Can you say "perfect storm?" Post a comment and let me know what you think.

How much to rehab?

We were taught that when trying to sell a house you don’t want to be the house that isn’t selling because "we didn’t fix the house enough!" What if you fixed the holes in the walls and repaired the air conditioner but decided to save some money by just cleaning the old carpets and leaving them in place. Do you think this would have any affect on a buyer's willingness to pay top dollar for your house? Whatever the “one repair” is that was not done could ultimately be the deciding factor for a buyer to pass on your house. The point is that if you “under repair” your properties in a down or flat market you are just that much less likely to sell them for the price you desire or to even sell them at all.

So how do you know how much to repair your properties? Well, we have always taken the approach of being at least on par with or one step better than your top tier competition in your particular marketplace. For example: If all the top resale comparable houses in your neighborhood have granite counters and stainless steel appliances, don’t expect your 20 year old yellow tile counters and white appliances to bring you the same demand. You need granite and stainless too! In a hot market, this theory goes out the window. Anyone and everyone is just trying to get their hands on some real estate. As long as the house isn’t falling down you are probably going to get it sold at a reasonable number. That type of market is not what we are experiencing currently.

In our houses we tend to use the same materials (flooring, counters, paint, etc.) that seem to appeal to most buyers. We take a bit of pride in improving the asset from something that was a hideous neighborhood eyesore and turning it into a beautiful home. We do all this, of course, with a budget in mind of what will ultimately bring in the highest return on our money. There have been many times where neighbors thank us for fixing up that "dump" and improving the neighborhood. Those "thank you's" are validation that we are doing a good thing, not just for business, but for the communities.

Your rehabs will vary of course, based on the needs of the house and the demands of the marketplace. For example, here are some pictures of a house we recently fixed. The house pictured below was actually in good shape when we bought it (nothing needed on the outside at all). It was just a little dated and no upgrades. We simply replaced the kitchen counters and appliances, painted the cabinets and walls, replaced a few fixtures and called it a day. By doing this we improved the value of the home nearly 30% and brought the home to the expectations of a buyer willing to pay top dollar for a home in the area. We resold this house in 1 day.

Below is a video of a major rehab projects we have done recently. This house was completely destroyed on the inside and needed a lot of work. The transformation on this house was probably the most dramatic of any house we have repaired. Added value: 90%

The photos below were a house that also ended up being a major rehab. This house needed everything: roof, windows, flooring, kitchen, bathrooms, fixtures, a/c, heater, pool work & landscaping. Value added: 110%

Is it ime to unload your Inventory?

Below is a chart from the latest ForeclosureRadar monthly Foreclosure report...




Take a look at June on this chart. There were more than 2 times as many cancellations of Trustee Sales as there were properties that reverted back to the bank. In September, the number was virtually the same.

I seem to remember hearing one of my most respected mentors Bruce Norris at The Norris Group recently say something to this effect: "When properties begin to go back to the bank at a higher rate and the number of cancellations dramatically decrease I'm going to dump every thing I own." I don't want to mis-quote Mr. Norris but I think this is what he was saying. I'm not sure about you, but to me, the chart is screaming "SELL, SELL, SELL!!!!".

If you are a flipper hoping for retail profit (as I am), this is important stuff to pay attention to. If you are a buy-hold person (as I also am) you may want to plan to get your funds together because prices could be lower soon.

This is nothing that we haven't heard before in the past several months, but the chart seems to be confirming the inevitable. I'm certainly no economist nor an expert on market trends. I merely try to pay attention to what is happening and follow the advice of people I respect. Who knows what will happen. I'm still buying, but with this chart in mind and appropriate exit strategies.

Goals update...

I thought I'd put a quick update on the goals we had for this year and how we are looking as of the first of October.

Our goals were simple...

1. 6 additional rental houses (Avg cash flow $250 per house)
2. Buy-sell 18 houses for profit
3. Raise $500,000 in private money.

We also have a visual "monopoly" board to help us see how we are doing. Here is what it looks like now (see picture). So far in 2010 we have purchased 14 houses to sell and 4 rentals properties. We also have a 5th rental and 15th flip that should find their way into escrow in the next couple of weeks. As far as private money, this one is a little tougher to gage. We are currently borrowing somewhere in the neighborhood of $625,000 from private individuals and their IRA accounts right now. Of that total, about $450,000 was raised this calendar year. We are always looking for more people with "lazy money" that would like to put it to work earning 8, 10, or 12%. If you are interested please contact me.

One thing that Andrea and I have learned about setting our goals is that they can and probably should change and morph as we go along. We try not to set unrealistic goals but at the same time are not afraid to challenge ourselves either. I may write another post about that later. We'll check in again at the end of the year and see if we ended up meeting all of our goals.

Let the Cash Flow Challenge begin!

Well, it's official. The cash flow challenge begins today. What cash flow challenge you say? Let me enlighten you...

A few weeks ago Justin Williams, a fellow investor friend of mine thought it would be a good idea to have a competition that would push both of us toward the ultimate goal in our real estate centered business life, financial freedom. You know, the point in your life when you wake up and realize you don't need to get up and work today because the rent checks that have just arrived in the mail box are more than enough to cover all your expenses for the month. You are now free to do as you choose. Financially free. Anyway, the challenge was issued as simply the first one to reach $4,000 in monthly positive cash flow wins. What's at stake? The loser sends the winner and spouse on a cruise. The challenge was accepted and the word was getting out.

Since that time, the challenge has grown and morphed into a 4-way "team" challenge featuring some more investor friends of ours. Team Justin & Doug vs Team Bill & Kevin. After a lunch meeting in a dark and musty Italian restaurant (more dramatic), the rules were laid out:

1. First team to arrive at a documented $8,000 net positive cash flow will win. (total rent X 30% expense ratio - debt service & property management fee's etc = net cash flow)
   
2. The team must maintain the $8,000 for 2 consecutive months.
3. All types of real estate which is purchased for cash flow in which a "tenant" pays some sort of rent will be allowed. (i.e. 1-4 units, apartments, mobile home parks, office buildings, etc)
4. All forms of financing the properties is allowed and encouraged. (Conventional, Hard Money, Private Lenders)
   
5. Any currently owned cash flowing property does not count.
6. Each team will fully disclose their progress along the way.

The prize remains basically the same. The loser sends the winners on a cruise.

I'll post updates on the blog periodically so please follow the blog if you don't follow it already. You can also read about it on Justin's blog.

I'm going to enjoy that cruise!

Goal setting "Monopoly" style

My friend Derek gave me this idea of posting monopoly houses on the wall. The idea is to post the number of green houses that you want to flip in a year and replace them one by one with pictures of the actual houses as you buy them. The red hotels will represent keepers that you hope to pick up. I'd never done anything "visual" like this when setting my goals so I wasn't sure if it would make difference or not. We decided to try it this year.

It started off a little slow. January came and went and the board had not changed at all. Then February and March came and a couple green houses were taken away and replaced by photos. The months continued to fly by and we saw our board begin to have a new look to it. In July we changed 4 more green houses to photos!

We're right on track for our "flip" goals for the year, but way behind on our keepers. Those red hotels are getting dusty up on the wall. Our new 'short term revised goal' in August is to pick up 2 keepers and we'll re-evaluate after that.

I must say that I love the monopoly wall goal setting and I'm glad we did it. It's right in our office where we can see it every day and it really is a great motivational tool to help us stay focused to meet our goals, one small green house at a time. to see some of our projects and wholesale deals available go to our website www.FreedomRealEstateOnline.com

Using technology to bail you out

So my wife Andrea delivered our 3rd child last Thursday. Owen came into the world a month early and caught us all by surprise. He and Andrea are both doing very well right now and we have been taking it easy on the couch for the past few days.

The early delivery came at an inconvenient time in our business life. (He didn't even bother to ask if it was a good time to come out! What manners eh?). We were smack dab in the middle of trying to shuffle through several offers on a recently listed & remodeled house. At the same time, we are fielding applications for an available rental we have in Hemet. In addition to that, we were right in the middle of buying two REO's, wholesaling one of them, and are juggling escrows, disclosures, and lining up private lenders.

Well, all these time sensitive issues needing immediate attention poses a real problem when you are bunked up in a hospital room for a few days. Not to worry! We now live in a mobile , digital world.

Using the free service log me in, I was able to remotely access all the files, photos, etc that I needed from our home office computer. Using efax, were able to view all offers that came in via fax and even sign and initial the one we chose to counter, sending it back to the buyer nicely wrapped up in a PDF file. Google voice, another free service, allows me to read a transcript text of my voice mails from the mobile phone that I wasn't answering, making for a quick and easy filtering of which messages were urgent and which were not. With some of the spare time we had in the hospital, I was even able to search the MLS and mark potential properties to inspect the following week.

The best part about all of this was that I didn't have to leave my wife's side or be away from my beautiful new son. It was business as usual direct from the hospital room and it's free wi-fi service. Technology can be pretty cool when it works for you.

Help your appraiser justify your house's value

We bought a home in Bloomington in September. An agent brought us the deal as a first day "pocket" listing and we made a full price offer within a few hours. The price on this 3 bedroom 1435 sqft home was $63,600. I felt the ARV on the home would be about $90-95k based on the comps during that time.

There wasn't really enough room to comfortably flip this home because it did need around $10,000 in repairs to make it tops in the neighborhood. We decided we would keep this home as a rental because market rent appeared to be $1250-1300/month.

Fast forward two months: Our rehab was complete and we have about 5-6 applicants ready to move in once we give the thumbs up. Well, we weren't too excited about any of the applicants that had applied, and I started to notice some higher listings and pending sales in the neighborhood. Some of them up around $115,000 and $125,000 or so. The market was really tightening up and there were very few fixed properties available. Taking all this into consideration, we decided to list the home for 3 weeks to see what kind of interest we might get. Our thinking was if we get a buyer for $100k, we'd take it, pocket the cash and move on.

We listed for $119,900. Within the first 4 days we had cash offers of $100k, $125k as well as conventional financing offers of $140k, $150k & $165k. Wow! Wait a minute. We know this is the game that buyers have to play in order to get their offer taken seriously. Write an outrageously high offer, wait for the appraisal to come in low and then begin negotiating. Knowing full well that there is NO way our house would appraise for anywhere north of $125k or so, we decided to go with the buyer who agreed to pay us $10k over whatever the appraised value ended up being. It happened to be the $150k buyer.

Being an appraiser myself, I always put together a little packet for the appraiser with a few items:

1) A cover letter describing the circumstances of the entire situation.

I explain that the home was a foreclosure in need of massive repair and was not able to be financed. I briefly list the repairs/improvements that we have done to the home and the money that was spent doing so. Finally I explain that we had multiple offers once the home was listed and there is huge demand for our product in this neighborhood. If there is a shortage of available homes in the area (i.e. all "active" listings are short sales), be sure to point it out!

2) A before & after photo sheet of the house.

If you had a real junker of a house to start with, this page can really make an impact. Just one or two pages will do. If you've taken a video of the house, give the appraiser a link to view it.

3) Comps supporting the purchase price.

This is a tricky one because without comps, your sunk. The house really must be worth what you say it is based on actual data. In the markets I tend to focus on, there are plenty of comps to show you what an average REO is worth, but very few comps to demonstrate the market value for a clean fixed-up house. Try to stay within the typical lender guidelines here; 1 mile radius, closed date of 6 months back maximum (try to stay within 3 months) and similar in square footage, age and bedroom count. Cherry pick the few good comps and highlight the similarities. You don't need a lot, just two or three will do.

Back to the house in Bloomington. I met the appraiser at the property (critical), gave him the package, had a nice conversation about the market and held my breath. I had included comps in the $120k's to $140k hoping for the best. To my surprise, the appraisal came in at $146,000. The review process came and went and we closed a few weeks ago.

Not only is this buyer happy because he gets the house he wanted; the neighborhood now has a $146,000 comp to use to help their values. Win-Win-Win! By the way, this home previously sold for $317,000 in December 2005.

I understand this is quite the exception to normal circumstances concerning appraisals, but I'm certain that the info package I provided, coupled with a friendly smile and willingness to "help" the appraiser however I could, didn't hurt.

AMC's Auctioning Appraisal Assignments

It appears as thought AMC's (Appraisal Management Companies) are really the only viable method for the typical appraiser to get mortgage based appraisal request these days, thanks to uncle sam's steady stream of new regulations. Below is an example of an email I received on New Year's Eve for an "appraisal assignment":

Hello Doug,

Clear Capital is looking for an Appraiser to complete the assignment outlined below. This solicitation may have been sent to other local Appraisers and will be granted to the first person to accept this request. Thank you!

APPRAISAL ORDER DETAIL

---

Property ID:		4466###
Property Address:		386## Calle --------- , Murrieta, CA 92562
Form Type:		Appraisal Form-1004
Lender/Client:		EMC Mortgage Corp 2780 Lake Vista Dr. Lewisville , TX 75067
Due by:		12:30 PM PST on Wednesday, January 06, 2010
Compensation:		$250.00

__________________________________________________________________

Basically if you are lucky enough to be sitting in front of your computer on New Year's eve and have a quick finger on your mouse, you may just get a chance to appraise this million dollar home for less than half ($250.00) of what you would typically charge for such an assignment as complex as a custom home on 5 acres.

Do you think this is a responsible method for choosing a qualified appraiser to value this home? Would you appreciate it if your bank was doing this to value your home?

This, my friends, is why I have chosen Real Estate Investing as a primary source of revenue. I'll keep my Appraiser license current until this all fixes itself someday and I can once again be paid fairly for the work and expertise required for such an assignment. By the way, the hours and pay are much better over here on this side.

If you'd like to earn 8-10% on your money for short-term loans on some of our projects visit Freedom Real Estate's website by clicking here!

Doug Van Soest