Are You Planning Poorly or Positively Profiting on Your Deals?
Calculating costs to purchase, fix and resell a house has always been a downfall for many Investors. At a recent Real Estate Investor Meeting, I heard a great explanation of how people come up with their numbers. You all need to be sure you don’t fudge your numbers and fool yourself into thinking you are going to make a profit. This Article focuses on all the things you must consider when purchasing a property, such as holding costs, cost of the money, and closing costs that you will incur on properties.
When a student contacts me on a property and says “This is a great deal,” I always ask “Why do you think so?” Their response is “because.” Well….”because” is not a good enough answer. This is how I analyze a deal. First, I look for the Sold comps in the same subdivision that have sold in the past 90 days. I will then look at a total of 6 months in that subdivision. I look at square footage, garages, bedrooms, bathrooms and pools. I then look for the Active, Active with Contract and Pendings which all affect the value of my property. I budget accordingly as if I am going to hold it for at least 4 months, which is required in order to sell to a retail buyer with FHA funding.
Depending on the price point, about 80% of our buyers have FHA funding. I look at the Active, Active with Contract and Pendings and note what ‘type’ of listing they are. If they are short sales, I really give weight on these sales because it’s very possible they would not be bank-approved and could sell lower or higher than list price. If they are Pending sale which is a straight sale, I can assume that they are close to list price; however, until they sell, I can’t be sure. I will then look on MLS or REIFAX and search a half mile radius to see what other comparables I can find. Based on all the comps and the repairs in which I plan on doing, I will determine if I believe the value of the home will be close to the middle value of the comparables or the high value of the comparables.
EXAMPLE: All Comparables Range from $100,000 to $120,000 on the property – Safely you should take the middle value of $110,000 as your ARV – After Repaired Value.
I am going to give you examples of 1) when you are the buyer and 2) when you are the seller. Remember, every deal will have 2 transactions which each have it’s own set of closing costs even though it’s the same property.
When you are the BUYER, you can expect to pay 2% of the purchase price for your closing costs which include the closing costs charged by the title company. This figure should be added to the cost of your purchase. Obviously this is a high number, for the State of Florida taxes are paid in advance and you will receive a credit at closing. However, the standard of 2% for closing costs seems to work well when taxes are paid in arrears where you will be responsible to pay for them at closing.
So what formula do you use when you purchase a property?
ARV ($110,000) x 65% – Repair Costs = Maximum Allowable Offer – MAO
Example $110,000 x 65% = $71,500.00 – Repair Costs of $10,000 = $61,500.00
Obviously many Investors say “my house will be fixed up better than the rest so I can sell it for more, which allows me to sell it for $120,000, making the ARV and the MAO more.” I would recommend that you are conservative with your figures due to calculation errors on additional costs i.e. holding costs, repairs, cost of the money, contributions towards buyer closing costs, and of course…”the unexpecteds.”
When you are the SELLER, as a rule of thumb, depending on if taxes are paid in advance or in arrears, the average closing costs can be 8% to 9% that you would have to pay.
Example: $110,000 sales price – 8% closings costs (6% for realtors, title work, closing fee, title search, recording fees and tax proration) which would be $8,800.00. This amount needs to be subtracted from the sales price of $110,000 – $8,800 = $101,200.00. Please Note: We have not yet deducted from this amount the original purchase price, closing costs on purchase, cost of the money, repair costs, insurance, utilities, marketing fee, code violations, concessions towards buyers closing costs, homeowner association dues, a projected profit of $20,000.00 and taxes. You will definitely want to create a form which has all the above information on it so that you will be able to keep the numbers straight in order to make a profit on the home.
When you borrower money to buy, fix, hold and then resell the property, it is better that you obtain more than what you need, unless you are able to pay for unexpected items out of your own pocket. With our Purchase Price of $61,500 plus 2% for closing costs ($1,230.00) will be $62,730.00. Add $10,000.00 for repairs, then holding costs and then a miscellaneous number for overages. I would suggest on this transaction it would be $75,000.00
So .. if you followed the above information here is how your deal will turn out…..
As the BUYER:
Purchase Price = $61,500 + 2% for closing costs = $62,730.00
Money Borrowed – $75,000.00 to cover cost of purchase, repairs and miscellaneous
Cost of Money – 2 Points of $75,000 = $1,500 plus 12% interest yearly ($750.00 mo for 4 mths = $3,000)
As the SELLER:
Rule of Thumb percentage of all the above costs = 8% of SALES Price = $8,800.00
Sales Price of $110,000 – 8% closing costs = $101,200 – $75,000 (cost of purchase, repair and misc), – 2 Points for money $1,500 – 4 months of monthly interest of $750.00 per month = $3,000 (2 points $1,500 = interest $3,000 = $4,500 plus money of $75,000 = $79,500.00) leaving the balance of $21,700.00 profit for you at closing.
Obviously, if you exceed your cost budget or sell it for more, all of these numbers change. I hope that you will apply this information immediately to a deal, as we all want to purchase real estate with BIG PROFITS! As such, we can always say that our house is worth more than the middle price range and convenience ourselves; however, the buyer makes the decision on what they will pay for a house. If they only think it is worth $110,000, then that is the highest offer you will receive and you will need to close and Enjoy Your Paycheck!
Thank you so much to all of you who continue to send me your questions and topics that are most helpful for you to read about. Your Success is important to me, so let me know how I can help!!!
Happy Negotiating!
Kimberlee Frank
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Bona fide Buyer or Broke & Busted?
Many Buyers start house shopping without even knowing the price range in which they are qualified. At Sell Fast Realty, our company policy is that the Buyer must be pre-qualified by a Mortgage Lender and has already submitted all their financial documents so their debt to income ratio can direct them to the correct price range of homes. I get a lot of Buyers who have no idea if they can qualify for the price of the home that they want to buy.
My Mentor Students and I use my Buyer information sheet to pre-qualify all of our Buyers.
1. Are they a Homeowner, Investor or Realtor?
2. Their full name, telephone number and email address.
3. What are their wants versus needs: how many bedrooms, bathrooms, and then garage/pool etc.
4. How much money do they have to put down NOW? (Notice the now, because they could be waiting on income tax refund, lawsuit or gift money etc.
5. How much can they afford monthly? I use this rule of thumb: If a house is selling for $100,000 then their monthly payment will be close to $1,000 principal, interest, taxes, and insurance (PITI). However with lower interest rates, then their payment would be lower).
6. Are they a CASH or Mortgage Buyer?
7. If Cash, then what is the price range they can afford? We would request a bank/IRA/investment statement showing this amount.
8. If they are a Mortgage Buyer, have they been pre-approved and for how much?
9. How is their credit? Good, Fair or Poor and what is their credit score?
10. Have they ever filed bankruptcy and when was it discharged (Chapter 7) or dismissed (Chapter 13)?
11. How soon are they looking to move and why?
Before I give information about the house that I am selling, I will ask these questions. If they are represented by a Realtor then I want to know if they are a CASH, FHA, VA or Conventional Mortgage Buyer.
Having a couple Mortgage Brokers on your side will help you qualify your Buyers. I will always send them a purchase agreement at the price and terms we agreed to and make it subject to my Mortgage Broker approving them acceptable to the Seller. This way, when a Buyer signs a Purchase Agreement they will stop looking at other houses even though the Seller hasn’t signed, in their mind, they have the house. I hate sending Buyers over to a Mortgage Broker and in the end they are told to do certain things in order for them to qualify for the house I have for sale. Because once they have done that, they move on to another house. By having the Buyers sign a Purchase Agreement, it keeps them emotionally and legally connected to your house and they STOP looking for another home. Many Realtors and Investors do not understand this concept, but as a Master Negotiator, I want my Buyers to only want my house and no other. Its just a mindset that I have created for my Buyers that the house is theirs, so look no more.
In addition, if a Buyer is willing to sign a Purchase Agreement on a house, then they are considered to be serious, no matter if they are qualified or not. This removes them from the “suspect” category. I call this technique “Romancing your Buyers” so that you are always in front of them and they can start to envision themselves in the house you are selling.
First off there is a difference in having a Buyer qualified through a big Bank or Credit Union versus using a Mortgage Broker who has contacts with all of the Lenders to see what program the Buyers will qualify for, versus being denied by the Big Bank (Wells Fargo) or Credit Union based on their underwriting guidelines.
Before my Sellers/Student Partners would sign the Purchase Agreement for the Buyer, I will contact the Mortgage Lender and ask the following questions in order to determine if these Buyers are able to purchase the property.
1. How strong are these Buyers; what is their credit score?
2. Have they been employed in the same type of business for 2 consecutive years with no time off? (In other words, did they decide before changing jobs that they wanted the summer off)
3. The property is being FLIPPED. What are the guidelines based on your lender? Meaning how long does the Sellers have to own the property, which is referred to as seasoning. Will the Lender need a list of repairs done on the property, is there a maximum percentage that the Sellers can make as a profit and does this property require 2 appraisals to justify the price the Sellers purchased the property for versus the price they are selling the property at now?
4. Is there an exception to the rule? Meaning, are they counting gift money, took the summer off to enjoy life before starting the new job, had a bankruptcy or foreclosure etc. ANYTHING?
5. Did they fill out a 1003 Form which states all their financial obligations and their assets?
6. Did they receive the Buyers paystubs and tax returns? (Watch out for the Buyers who have a bunch of cash in their pocket because maybe they haven’t filed income taxes for awhile!)
7. Did they run them through Desktop Underwriting or Underwriting which automatically tells them that the Buyers should qualify based on the above information.
8. How long has the Mortgage Lender been doing this business?
9. Is the Mortgage Lender part-time or full-time? (One of my mortgage lenders waited tables at Applebees while being a mortgage lender).
10. How soon can they close?
11. Are they applying for a Florida Bond Program which normally takes 45 days to close and if the Mortgage Lender drops the ball even longer.
12. Do they need money towards closing costs or can they pay their own closing costs. (I had one Student Partner that couldn’t wait for me to find this information out and we lost $6,500 towards closing costs only later to find out that both buyers had 401ks with a boatload of money in their accounts and really needed NO help with the closing costs!)
Now is the Mortgage Lender allowed to tell me all the above information about the Buyers? Some do and some don’t and if I don’t get my answers from them, I will contact the Realtor and/or the Buyers and advise them that I need consent to talk to the Mortgage Lender so that I can present all the facts about the Buyers to the Sellers. I haven’t had any problems being allowed to speak with the Mortgage Lender, only one time, and what a wild ride that was with the Buyer!
Collecting all of the above information allows me to be the best Mentor I can to help my Sellers or Student Partners sell their properties to these Buyers. I will ALWAYS ask for back up Buyers as no one gets paid until the deal is closed. So … DON’T STOP MARKETING UNTIL THE HOUSE IS GONE!!! Many Sellers, Realtors and Student Partners fail in this situation. as they think they have the Buyers or they pre-judge based on some of the information they obtained from my Buyer’s Information Form found in my Foreclosures Gone Wild Course. Remember, you are not the Mortgage Lender and there are lots of programs out there that can help people who had bankruptcy, foreclosures, or poor credit, so let the Mortgage Lender do their job.
Always, and I mean always, read the pre-approval letter that you received from Buyers’ Mortgage Lender as it could say “subject to collecting all their financials” versus “subject to the house appraising.” And always call the Mortgage Lenders and ask the questions prior to signing the Purchase Agreement, as you could be giving your money or our money away when it is not necessary.
Having a Mentor/Partner review all these things about your Buyers and help you make the right decisions pays for the Mentor alone! Recently, I just saved my partners and I over $7,000 worth of money that was requested by the Buyers to help them with their closing costs. After speaking with the Realtor and the Mortgage Lender, I was informed that she does not need OUR money and that if she needs any more money, that her mother that is going to live with her will give her a gift letter/money to purchase the property.
In other words, slow down to romance your Buyers and as you do, you will make thousands and thousands of dollars versus not even asking the questions or countering the offer to see how the Buyers respond.
My May and June Trainings are coming up and this is one of the many topics that I teach you. Taking 5 Days out of your life with me will make you thousands of dollars, as I make sure before you leave my training with ALL of the answers to ALL of your questions and I will hold your hand every step of the way.
Save the cost of flying to my training and check out my online training at www.foreclosuresgonewild.com/online where you can download everything from the Home Study Course System, all cds, forms and dvd, the 3 Day Live Event with 19 cds and the 2 Day Live Negotiating System with 9 cds. Also stay tuned for updates for my online Mentor Program that teaches you to buy, fix, flip, hold, lease option, subject-to, short sales and more!!!!
Thank you so much to all of you who continue to send me your questions and topics that are most helpful for you to read about. Your Success is important to me, so let me know how I can help!!!
Happy Negotiating!
Kimberlee Frank
www.SellFastRealty.com
www.ForeclosuresGonewild.com
www.RealEstateJunkie.com
www.ShortSaleNegotiating.com
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REHAB JUNGLE IN SHORT SALE LAND
There are times when we are going to purchase a short sale and then rehab the property for a higher profit. During the rehab on the property, I take my partners shopping. We go to Home Depot and look at all the items I normally put in my cookie cutter houses and I show them why I have chosen each and every product. Then they get to pick their own products and we discuss the price differences to analyze the affect on our profit. It is really fun shopping for an entire house in Home Depot, but the bottom line to save money. After our trip to Home Depot, we will head over to the cabinet shop if it is a higher end property and we will pick the cabinets and handles. Then we are off to the granite company with a piece of floor tile and a cabinet door so that we can match our granite throughout the house. I call this program my Mentor Program as I bring everything I have learned and down through my Real Estate Junkie course to my students. By the time we are done, it’s been a “power-shoppin’ day!”
I always recommend that you have a Pro Account at Home Depot which gives me an automatic 10% off everything and if you are a member of a REIA group, you can save another 2% so … working with me already has saved you the cost of a new kitchen on the rehab or more.
From there, I ask that all my items be placed through the bid room at Home Depot and see how much of a discount that I receive. They always have to adjust my bill based on the high volume of business I do with them. I get a quote from the cabinet and granite companies and forward all these bills to my students and we discuss the costs. This way they are educated on costs. In addition, if electrical or roofing is necessary, the student is required to provide me with 3 bids and then we call the contractors on the telephone and ask them “is this best you can do?” I normally get them to drop their prices again!
The main point of partnering with individuals is that most of the time my butt is in the seat and their feet are on the street. Their job is to check the house daily and make sure everything is in order. Recently, Aisha went to a house to receive the appliances, which isn’t always necessary, the water heater had given out and was leaking in the garage. This is a common problem with water heaters so…..Guys and Gals be aware! Always walk through the entire house each time you visit.
The worse thing that has ever happened was when Janeil went to show our house in Ocala to a new buyer and saw water running out of the garage. Of course, my first thought was the water heater; however, I was wrong. As she moved throughout the house and made it up to the 2nd floor bathroom, there was a tub that was deliberately plugged and turned on. It was overflowing from the bathroom, onto the new carpet in the hallway and heading to the bedroom. Thank God there was a knott in the floor board that served as a hole that had all the water go into the garage ceiling. She called me very upset. I told her lock up the house and tell the new buyers you can’t show it because there is no key. Well…. The buyer found the glass sliding door open and he walked in and unlocked the door for them. What a surprise to Janeil because she thought it was all locked up. She continued to show the house and I immediately called Stanley Carpet Cleaner who charged $1,200 to clean the carpets, throw the pad away, and use 3 HUGE dehumidifiers to take the moisture out of the air. The heat had to be turned on to 90 degrees, it was HOT!!! I immediately left the office and headed out there with my 2 huge warehouse fans to help dry out everything.
I arrived in time for Stanley Carpet Cleaner, but wasn’t fast enough to see if we could save the padding by having them extract the water out of them. I made them attempt to do this outside and the pad fell apart into tiny pieces. As we waited for them to return with their equipment, I started tearing down the drywall and the insulation in the garage. About half of the ceiling was damaged and the cost for repair and replacement was $2,000.
Lesson #1: Always go inside your house and check every door and window and make sure that no one has left the doors or windows unlocked so they can return later. Don’t ever assume that all Realtors or Contractors will lock up your houses. I often drive off and get 5 minutes away but go back to double check myself that I scrambled the code on the lockbox. This is very important.
Lesson #2: Change your actual lockbox code once all contractors are out and your supplies have been delivered, so that nothing comes up missing (I haven’t had this experience, but I don’t want to, nor do I want this for you!).
Lesson #3: Never show a house unless it is complete because 60% of people think through visual processing. If something is incomplete and most people cannot envision a complete home, then you have now lost your Buyer. First Impression Is Everything!
Even though this Article states “Rehab Can Be a Jungle,” I can honestly tell you we bought the property at the right price so we will just take a little less profit. I cannot stress enough the importance of buying low, so events like this don’t have a great impact on your profit.
Stay tuned for the profit numbers on these deals! I hope to see you either at my training at my office or you can go on-line and order the 3 Day Live Event that you can download to get the real facts about shorts and rehabs. Always remember, “having a Mentor walk you through it and hold your hand will stop you from freaking out” and that is a direct quote from Janeil!
The Rehab Jungle can be just as much fun as swinging from the vines as long as you know what you are doing. Even if you have a few blips, when you buy low, there is always room to profit BIG no matter what! Please continue sending me your questions and topics that are most helpful for me to write to you about. Your Success is important to me, so let me know how I can help!!!
Happy Negotiating!
Kimberlee Frank
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INVESTOR MATH QUIZ: “XX” Hours = $65,000 Profit
Let me summarize with a question before I start writing….How many hours in your current job or situation will it take for you to make $65,000? For most, this is more than an annual income, so I know your answer would be 2,000 hours or more. I didn’t count the hours on this deal, and we haven’t closed yet, but I know it will be double digit hours, not in the thousands. If someone has told you that short sales don’t work, they either didn’t have the right partner, weren’t properly trained/educated, or……..they are lying to you because they want all of the short sales to themselves and don’t want you as competition.
My office exploded in December! I’m thinking “time off, relax, jingle bells” but I had a short sale deal that had other plans for me. I ended up at the City of Margate fighting two liens that were filed against my short sale deal, in addition to a $2,300+ water lien. Lien #1 was for a Dirty Pool and Lien #2 was because seller did “not” file a Vacant Home Affidavit, Lien #3 was the water. The total due, without the Water Lien, was over $40,000. The Lien notices were attached to the front door, which was covered like a jungle, on April 7, 2014. I represented the Seller as a Listing Agent and the Buyer as a Selling Agent. I got a Power of Attorney from the Seller so I could appear before the City of Margate and negotiate the liens. Whatever was agreed upon at that hearing would be set in stone and could not be re-negotiated. Before we could even get the City to stop assessing daily fees, the dirty pool had to be cleaned. We didn’t know there was a Water Lien of $2,300+, as the lien that was regarded was only for $500.00 but the City charges a maintenance and garbage fee monthly of $70.00 no matter if the water is on or off. Not Good! I needed water in order to drain the uncovered pool (no screen) and refill it.
I contacted the Seller for help, as I had already received a short sale approval letter for a purchase price of $112,000, no deficiency, but without the bank paying any liens. My Student Partners, Aisha and Douglas, and I can sell (ARV – after repaired value) the house for $230,000. The Seller works at Home Depot in New Jersey and said he had NO MONEY to clean the pool. So … what would you have done? The house needs about $50,000 in rehab from Top to Bottom (roof, ac, marcelite for the pool, etc.) and had been vacant for over 4 years. The Seller had an attorney who also wanted $7,000 for his services, but the Short Sale Lender, Bank of America, wouldn’t pay attorney fees. Of course, I negotiated with the attorney and got him down to $2,000.
We then started marketing the house for $135,000, leaving us a $20,000 profit should we decide to do a quick flip in case the Margate City Liens and Attorney would not be paid for by Bank of America. We had 3 Cash Buyers ready to buy the house, but remember, there is a 30 day hold. However, when you come to my training, I teach you how to legally transfer property the day you buy the property with the 30 day hold in place.
Bank of America’s negotiator said the investor (whoever loaned the Bank the money) would not pay any of the liens. Once we received the lien information, we submitted it to Bank of America and demanded that they pay it and that I would personally go down and negotiate the liens and once they are agreed to, they were set in stone and could not be changed. Therefore, based on my Master Negotiating skills, I knew I had to attend and that my Student Partners needed me do this versus them. We had a February sale date and needed to close NOW, as Bank of America’s value would have increased based on the recent sales. We couldn’t take the chance that would happen.
I went to the house with Aisha and looked at the pool. We turned the electricity on, as we needed that for the pool pump. I brought my lead contractor with me, in case we needed to fix anything. I spent over $1,000 to purchase and install a new pool pump, and then tons of shock and liquid chorine to see if we could clean the pool ourselves. Unfortunately, there were about 1-2 feet of leaves in the bottom, so it didn’t make a dent in the pool at all. My Student Partner got a few pool contractor quotes to drain the pool, powerwash, refill and stabilize it so the lien fees would stop and I could argue for a discount. The water company demanded that we pay $2,300 to turn the water on. If you know me, I don’t like spending any more money on a deal that I am not sure I have, until the issues of the liens are settled and that the bank pays them and not the Buyers (us). I had the pool guy immediately start draining the pool. He paid the neighbor $100, without our consent, to use their water. I had the water turned on for a 24 hour inspection on behalf of the Buyers. They were to turn on the water at 9:00 a.m. and turn it off the same day at 4:00 p.m. I advised them that I needed at least 24 hours, but they said NO. The guy who went to turn off the water saw what we were doing and called and said that he was instructed to turn off the water, however, he would do us a favor and turn it off at 8:00 a.m. the next day. God was on our side!
I attended the City of Margate hearing for the Dirty Pool and the Vacant Home Affidavit that was never filed. I argued that the Bank is doing a short sale and they only have granted $1,000 for both liens which would have to suffice for the $40,000 lien. I also informed them that in order for the pool to get cleaned, I had to spend my own money as a Single Mom with two kids and an 85 year old mother dependent on me, to pay for a new pool pump and clean the pool. I told the Judge/Magistrate that I had hard costs out of my own pocket of $1,000. He stated he didn’t think the Seller cared about his property, so I shared his situation based on his hardship letter, that he attempted to do a loan modification, his wife left him, he got a job transfer and the tenant he left in the house (family) didn’t pay any rent and damaged the home. Long story short, I got them to agree to $1,000 for the Dirty Pool and $1,000 for the Vacant Home Affidavit. Both needed to be paid in 30 days or interest and fees will go back to original fee and keep growing. That was a savings of $38,000 on this deal that I just made for us! 99% of Investors would have thrown this short sale deal away, knowing all of the expensive liens that were cutting into their profit. I then went to the water department and tried to negotiate the maintenance and garbage fee; however, they refused.
Next, I had a HUD prepared making the Bank pay for all three liens in the amount of $4,300 and attorney fees of $1,500. I put $2,000 on the Buyer’s side for the attorney. The negotiator for the Bank stated that they will not pay any liens on the property. I asked to speak to a supervisor and after a long conversation stating everything above except that the water lien was $2,300 (they normally don’t like paying water), they agreed to pay $4,300 worth of the liens but not the attorney fees. Again, most Investors would have thrown this deal out, only because they don’t know all of my tricks that I teach. I said I think I can negotiate with the attorney and get him to accept $2,000 from the Buyer instead of the $7,000. The attorney threatened to lien the property. I asked how quickly we can get the approval letter so we can close and he said 24 hours.
To make a long story short, we bought the house for a total of $114,555.22 including closing costs, got the Seller’s deficiency judgment waived and are now in the process of rehabbing and selling it for $230,000. Again, I ask, how many hours in your current job or situation will it take for you to make $65,000 profit? If you added up the hours, it will only be a few weeks of work to make this money. And this is only ONE of the many deals that you could have in the pipeline! SHORT SALES WORK!
The things I did to get this deal done can be done by YOU….or you can just partner with me. My system is a step by step program that will teach you how to do it yourself, instruct your own negotiator, Title Company or whomever and also teach you how to wholesale a short sale without lifting a finger. My next training is February 20-22nd and there are only 30 seats and many have already been filled so … act now to fill your seat. If you need to see me live before you sign up, I will be speaking at the Tampa REIA on Thursday, February 12th at 6:00 p.m. and holding a One Day Event in Tampa on Saturday, February 14th from 9:00 a.m. to 5:00 p.m.
Let me help you make 2015 your MOST ABUNDANT YEAR EVER, so that you can leave a legacy for your family. Looking forward to seeing you at the live training or the One Day Event!!!!!
Happy Negotiating!
Kimberlee Frank
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