Jul
06

SO YOU WANNABE A REAL ESTATE INVESTOR

By

At DFWproblemhousebuyer we pay cash for homes.

The prerequisites for being a successful real estate investor are:

  1. You must have funds to invest
  2. You must know how to accurately value property
  3. You must be able to accurately access property condition
  4. You must have reliable, trustworthy contractors
  5. You must have multiple exit strategies

I. Funds to Invest

Whether you intend to flip, rehab and retail, or hold for rental; you should anticipate that you will need an amount of cash equal to 35-40% of the purchase price for the property that you wish to acquire.  Let’s explore the most commonly used financing vehicle for each exit strategy.

A). Flip-  In its true, orthodox form; if you flip the house you never actually close on the house.  You do a pass through closing.  The transaction is funded using the end purchaser’s cash.  Therefore, if you don’t have to fund the transaction, then you should not need any cash.  However, it is a good idea to have funds available…just in case the end purchaser fails to perform.

B).  Rehab and Retail- There are three possible financing vehicles available:

  1. Cash
  2. Bank financing
  3. Hard money

The cost of funds associated with these vehicles ranges from almost nothing in the case of cash, to 50% of the deal in the case of hard money.  There is also a direct correlation between loan to value and cost of funds.

C).  Hold for rental- There are only two options for this strategy.

  1. Cash
  2. Permanent (15-30 years) mortgage loan.

II. You must know how to accurately value property.

This is where many investors get tattooed; especially by the so called “wholesalers”.

A solicitation from a “wholesaler” will typically include:

Property description-  Subdivision, room count, square footage, age,
and a watered down description of the property’s condition.

An opinion as to the After Repaired Value (ARV), which is usually overstated.

Comparable Sales Date- While this data may be somewhat valid; if the user does not know how to properly apply the data, then the user may reach an erroneous conclusion.  Garbage in, garbage out.  Here’s a clue-  If the “wholesaler” or Realtor express value to you in terms of dollars per square foot…grab your wallet and RUN!  While dollars per square foot may have some legitimate applications in commercial real estate; it is merely a consequential number in single family residential realty.  The proper method for calculating marginal value for differences in square footage is as follows:

Sale price X 70% divided by square footage divided by 2 = Factor

Factor X square footage difference = Adjustment to sale price.

Alternatively, there is a short cut that will work most of the time:

Sale price divided by square feet divided by 3 = Factor

Factor X square footage difference = Adjustment to sale price.

Comparable sales should come from the same subdivision as the subject property; or at the very least from competing neighborhoods.

Other features that you may need to adjust for include:

Number of baths
Covered parking- number of spaces; garage or carport?
Construction- Brick veneer or Frame?
Year Built
Condition
Swimming Pool
Seller Concessions
Luxury features

How well versed are you on all of the above?  If you believe that none of this matters; or that you can do just fine with dollars per square foot, then please call me when you are ready to make your next investment!

III- You must be able to accurately access property condition.

Here are some things to watch out for:

  1. Electrical service weather mast does not extend above roof.
  2. No extra spaces available in the electrical service panel
  3. No main electric service disconnect
  4. Ungrounded electrical system
  5. Missing gas or electric meters- will trigger costly city inspections!
  6. Low water pressure- may require line replacement
  7. Previous termite infestation- there maybe considerable hidden damage.

These are things that the “wholesalers” ignore.  Unfortunately, these are things that the home inspectors look for.  Add them to your checklist.

IV. Budgets and Contractors

If you lack the experience to accurately budget for repairs; I suggest that you ask your team members for help.   For your team of contractors you need:

  1. Foundation
  2. Plumber
  3. Electrician
  4. HVAC tech
  5. Roofer
  6. Engineer
  7. Drywall contractor
  8. Carpenter
  9. Painter
  10. Tile setter
  11. Carpet layer
  12. Counter top vendor

It is important that your contractors give you fair prices, that they arrive at the job on time and complete their task; and that they advise you of any issue that may need your attention.

V. Exit Strategies

First, a little truth.  Things like principal reduction and appreciation are not to be considered when calculating your return on investment (ROI).  To include the aforementioned items in the ROI calculation serves to overstate the ROI.  When an overstated ROI is applied the result is an overstated value.  This practice is routine for most “wholesalers” and some real estate agents.

The hierarchy of exit strategies is as follows:

  1. Flip, or pass through closing, a/k/a assignment of contract.
  2. Rehab and retail
  3. Hold for rental

Flip- In order to utilize the “flip” strategy  you must either buy at a deeper discount, or be a very good liar.

Rehab and retail- In a rapidly inflating market it is not as important that you buy at an extreme discount in order to be profitable.  But, what happens if you pay more than you should, and the bubble subsequently busts?  (Reference 2009-2010).  The answer is that you end up with strategy #3- hold for rental.

If you buy with exit strategy #1 in mind, and it doesn’t work; you still have exit strategies 2 and 3.  However, if you pay a price that can only be justified using cheap money under the buy and hold strategy; you will find that the other two strategies are not available to you.  Trust me… 15+ years can be a very, very long time!

In a nutshell, being a real estate investor is much like baseball.

First Base- Accurately estimate the value

Second Base- Accurately assess repairs and prepare a budget

Third Base- Buy at a price that will enable the use of any of the three exit strategies

Home Plate- Execute your plan and collect your profit.

In baseball, the batter can hit the ball out of the park, but if he fails to touch first base, he’s OUT!  Same deal in real estate.  You can do everything else right, but if you miss first base (value), you may soon be out of the business!

We pay cash for homes.  If you have a house that you would like to sell, please call 469-774-6655, or simply complete the online form.

Mike Brendel
Your DFW Problem House Buyer

Problem House Buyer

Categories : Market Info

Comments are closed.

DFW Problem House Buyer buys problem homes for cash, whether it’s due to divorce, inheritance, a problem rental, poor condition, or any other life circumstance that requires you to liquidate a home fast for cash. DFW Problem House Buyer offers “As Is” Cash Purchases, Specialized Brokerage Services, and/or Guaranteed Sales Plans. DFW Problem House Buyer serves Denton, Tarrant, Dallas, and Collin counties, including but not limited to: Fort Worth, Arlington, Hurst, Euless, Bedford, North Richland Hills, Colleyville, Grapevine, Trophy Club, Keller, Roanoke, Argyle, Robson Ranch, Grand Prairie, Mansfield, Dallas, Richardson, Garland, Mesquite, Plano, Frisco, McKinney, Allen, Denton, Corinth, Carrollton, Lewisville, Highland Village, and Flower Mound. © 2013 DFWProblemHouseBuyer.com. All Rights Reserved.