Here’s the post… - Posted by Lou Pohl
Posted by Lou Pohl on September 28, 2003 at 22:22:48:
Here is Brent’s post…
http://www.creonline.com/wwwboard/messages/arc_2002/arc_87/87495.html
Here’s how … - Posted by Lou Pohl
Posted by Lou Pohl on September 28, 2003 at 22:20:43:
In the strategy I posted, MY profits are made on the spread between what I buy for and what I sell for. I really could care less about the cashflow (although if I’m getting it, that’s nice too).
In my area a 200k house rents for around $1800-2000. I buy that house for 20% below FMV or 160,000. If I put 10% down (using investor money) my PITI will only be about $1500 a month (and that’s high - property taxes are roughly 2.5% here!). So my PITI is $1500 a month and I’m renting the place for $1800-2000 a month.
For all I care I can give ALL of that cashflow to the investor if I wanted. But let’s say I agreed to give my investors a whopping 20%. That is $333 a month in interest. The property is cashflowing $300-500 a month so I can give them that and they would be thrilled. Of course I would probably “only” pay my investors around 12-15% but my point is that there is plenty of cashflow. This depends on what properties rent for in your area vs what they are worth, but it works in my area.
My point is that I don’t need the cashflow. I’m prepared to cover any repairs/maintenance, vacancies, etc. out of my own money since I’m making 40k, 50k, 60k etc PER deal. Actually, what I might start doing is borrowing a little more than I need per property. Say I needed $15k for the downpayment and closing costs to acquire a property. I’ll borrow the 20k I previously mentioned from the investor. That way I actually put an extra 5k in my pocket to cover any repairs, vacancies, etc. What do you think? =)
Re: Ridiculously profitable L/O strategy - Posted by Tom PA
Posted by Tom PA on September 28, 2003 at 11:36:22:
I am taking your comment at face value.
If you are only buying at 20% of FMV then I bet that you aren’t buying many properties. Of course at that much of a discount, you don’t have to buy very many. But it seems to me that in any market the pickin’s would be very very slim.
Re: Refinance terms - Posted by Hank FL
Posted by Hank FL on September 28, 2003 at 14:05:17:
How did I get into the advice business I ask myself.
You should talk to an expert like a mortgage broker that “gets” REI and see what’s available these days.
There are two things that SFH RE investors don’t like to do for the most part.
Taking money out of their pockets that won’t be replaced shortly and guaranteeing debt.
Since the later doesn’t give you fits I thought I’d throw up the aforementioned idea.
New financing generally requires more hoops to jump through as well as money out of pocket and a lower loan to value among other things.
You also might want to invest in a sub2 course. William Tingle (sub2deals.com) has a good one I understand. If you want to shell out more bucks, the France’s (ABCs of Sub2) have a course that I can personally vouch for.
Re: Only need a few… - Posted by Kristine-CA
Posted by Kristine-CA on September 27, 2003 at 22:50:30:
Heather: maybe I am missing something. All I buy is properties with enough equity for me and for the rehab buyers that buy from me. But I work with properties that aren’t ready to go like the ones the original post described.
In the price range used in the example, we’re talking 40K in equity that needs little in the way of repairs, etc. Why wouldn’t a seller reduce their asking price by 10% first?
Now that I’ve asked that question, I think I know why. The same reason that sellers of distressed properties sell to me–they need to sell NOW. With no hassles, etc.
Good point about the number of loans. But with private investors, one could do have any number of mortages.
Sincerely, Kristine
And finally… - Posted by Lou Pohl
Posted by Lou Pohl on September 29, 2003 at 17:39:09:
Just out of curiosity, what exactly is it you do Marcos? You sound quite intelligent, and I’m always eager to hear what other people are doing. Are you rehabbing, or wholesaling these 60-100k houses to other investors, etc.? Just curious…
Quick and easy way … - Posted by Lou Pohl
Posted by Lou Pohl on September 29, 2003 at 16:01:48:
Thanks for the reply, it’s much appreciated. I’m curoius what online newspaper you’re referring to?? There are tons of houses for rent over $1800 in my area - which is primarily Denton county.
If you’re interested, go to realtor.com and click on “More Search Options”. Type in Lewisville for the city, and Texas for the state. Uncheck Single Family Home and check Rentals instead. Also at the bottom check the box that says Lease Option Considered. Then do the search. This alone will bring up over 150 properties - many of them over $1800.
There are a bunch in the 1500-3500 range, some in the 4000 range, and the most expensive one is asking $6000 a month. I ran comps on the $6000 one and it’s worth right around $800k.
If you’re really curious you can cross-reference a bunch of these with the dentoncad.org website which is the Denton county appraisal district site. Just type in the address and it will give you the tax roll value - which is usually within 10% +/-. But you will see that the rents pretty closely follow the “1% rule” give or take, all the way into the 200-300k houses, and slowly goes down from there. But as I said even the 800k house rents for $6000 - nowhere near the $3000 you said it would be in your town.
I have also called on a bunch of for rent and rent to own signs and they all pretty fall in line. Of course you have some that are less and some that are more, but all in all it sure seems like the numbers are in my favor in Denton county. Of course some towns/areas/neighborhoods are better than others, and I’ll try to focus on the “good” ones.
I’ve done just about all the research I can, short of finding people who are currently renting and asking them exactly how much they are paying. This is really the only 100% accurate way to find out what the rents are for different types of houses, neighborhoods, etc. I’m slowly working on this too. I am relatively new to this area, so believe me, I am doing as much research as I can.
Back to the online newsletter in my area that you referred to, which one is that? I mainly look at dallasnews.com which is the big one around here. Even the $6000 a month house I mentioned is in the rental ads of that paper.
Re: How do you figure? - Posted by Lou Pohl
Posted by Lou Pohl on September 28, 2003 at 22:31:49:
My profits are generally the difference between what I buy at, and what I sell at. I will basically sell at FMV so my profits aren’t dependent on the market going up very much. Yes if I sell on a L/O today at a price that assumes say 5% appreciation over the option period I am technically selling at 5% over today’s current FMV, but that’s no big thing. I could set the strike price of the option at today’s FMV and still make huge profits.
Maybe I’m not explaining myself clearly, but I’m NOT holding on to property with “not alot of equity” in the way that you seem to be saying. Any property that I am holding with “not alot of equity” is one that I have already pulled a ton of cash out of.
Generally I will hold these properties with 20% equity for a year. The t/b will either excercise the option or not. If they don’t I will sell at FMV in a month or two. If the market dropped 20% I would still break even. And the chance of my market dropping 20% in 1 year is about slim to none. Perhaps in Southern California or other places that have appreciated at an unreasonable rate, but not where I’m at.
Worst case scenario I sell for a small profit, or just hold on to the property or properties and continue to rent them out for awhile. I don’t know about where you live, but where I live when property values fall rents do not fall very much if at all. So where’s the risk?
I have considered tenants who stop paying, repairs, maintenance, etc. With 40-60k in profit per deal, I have plenty of room to deal with those things. Personally I am going to stick with houses in the 200k range, which is quite different from houses in the 100k range. With proper tenant/buyer screening and selection, the risk for some of the “serious” problems you allude to are very minimal in my experience.
Either way, I guess we can agree to disagree. I really do appreciate your input as it causes me to think more and more about my strategy, and look at it from other angles, and that’s a good thing. I’m moving forward…
Re: Here’s how … - Posted by Brent_IL
Posted by Brent_IL on September 28, 2003 at 23:15:33:
Get out of the habit of calling them “investors.” SEC, don’t you know.
I used to pay 1% a month to cash partners. At first, because I had to in order to generate any interest. Later, I just wanted to say I had paid 12% for twenty something years and because 1% is an easy number to work with.
I’ve come to the conclusion that this no longer makes sense. Seven percent APR for a secured transaction will probably be just as acceptable. When folks gave me money to play with without question, I would adjust the numbers so their annual return would fall between 14% and 15%. Fourteen point something always sounded like a good ROI without being so high that it scared people away.
Remember that when you deal with a private investor, you are the one that controls the numbers. From what I?ve seen, when creative real estate investors actively work the deals, they will earn 40% cash-on-cash year-in and year-out on average transactions. After a while, returns approach infinity. Passive partners just can?t relate; it?s not within their frame of reference. If you propose to give them all of the money, you?ll run into the ?Too good to be true? syndrome that infects potential providers of cash. Sometimes your pro forma will be better accepted if you use up some of the profit in fees payable to you or an alter-ego, even if they have to be taxed.
Re: And finally… - Posted by Marcos
Posted by Marcos on September 29, 2003 at 19:35:13:
Ok, I only did a quick search and found this site. Darn google. First site that popped up.
I obviously didn’t spend a whole lot of time doing research on it. And yes, I agree there does look like there’s lots of rentals in the high end market. My area doesn’t happen to support that. Many areas don’t. They tend to drop off around $130k in my area. And by the time you get to a $300k house, you just can’t really rent it in my area. Very, very few rentals above $2k in my area. I have rentals in my particular neighborhood that are on canals to the intracoastal and right across the street from the beach, and they run $600 1-2BRs/ $800 3 BRs and $1000 for newer homes.
The best way to continue your research is to start collecting Sunday papers. Let them collect for about a month or so. And call all the ads from four weeks or more ago. You don’t want to call the brand new ads. You want the ones that have been in the paper for a while, see how many of them are gone. Anyone can put an ad in the paper for any price. However finding a quality tenant for that price is a whole nother story. Ad in the paper is one thing, tenant in the house paying the rent is something a little different.
I guess my problem with rentals in this price range is the cost when they go bad, as they inevitably will. Ok Lou imagine this, a tenant that goes bad. They lead you on for a month or so before you decide to evict. Your eviction process takes a month or so. Then it takes you a few weeks to clean the process up. On a 3000 sf house, the cleanup costs are much higher. Just paint and carpet could cost you $6-8k. You might easily put in $10k in rehab. Then it takes 2 months to fill your vacancy. So, from going South to re-rented it takes you 4 1/2 months. The mortgage costs alone are $7k. Remember you’re paying utilities for 2 1/2 months. That could cost you another $1k. All in all it could cost you $15-25k by the time you’re done. Not a pretty chunk of change. That’s assuming they don’t decide to fight the eviction by breaking some windows and claiming you hadn’t kept the property up. I had a property like that in a similar price range, and it was costing me like $100/day while it didn’t sell. My last big house, I lost money on. Hence my hesitation.
Versus my bread-and-butter lease option deal. House I bought for $42k. Payments of $330/mo. 1500sf 3/1 older home in decent shape. Tenant is paying $800/mo. And has an option to buy at $82k. If this deal goes south, it would cost me half as much to rehab. And almost nothing in rent and utilities. My cost for the same above scenario might be $3k rehab. $1500 mortgage. $400 utilities. For a total cost of around $5k.
I had it rented in less than a week. And I make the same $500/mo you do. And I will make $40k on the back end just like you.
Good luck to you Lou. And eventually stop doing that research and get to work.
Marcos
Forgot to mention - Posted by Lou Pohl
Posted by Lou Pohl on September 29, 2003 at 16:06:11:
I forgot to mention, I have also spoken to another investor who currently has 8 houses, all over 300k, that he has lease optioned.
Another investor is Bill Barnett, who wrote the book “Are You Dumb Enough to be Rich?” He’s supposedly some local “guru” who has been pretty darn successful with the subject to/lease option strategy that his book describes. His website is garbage, but unless he makes up all the info on his site, he moves a lot of houses in the 200-500k range. Here’s his site and according to what’s there he has lease optioned 2 350k houses in the past month (I check his site often).
Unfortunately he doesn’t like to talk to people it seems. After reading his book I emailed him with a few comments - comments that he solicits in his book. No reply so I sent another email. No replies after a month now. I emailed a week ago pretending to be a prospective tenant buyer on one of his houses and he replied right away. Guess he’s too busy making money to respond to a newbie investor … I don’t know.
Re: How do you figure? - Posted by Heather -Tx
Posted by Heather -Tx on September 29, 2003 at 08:03:22:
While it does look like a decent plan, you also have to remember that the top 10% of equity should be looked at as “air” too… and not to be completely relied on. So if you go in considering you might only have 10% in equity, and are ok with that and plan accordingly you might do well still.
As with the economy the way it is… I’m going to stick to rehabs myself. Buying at 50 cents on the dollar, I am fairly certain that no matter what happens… I can profit. The only event that I wouldn’t profit that I can see is if we get swept up in a war so bad that Real Estate will be the last thing on everyones mind.
Taking on risky investments can turn you into a Millionaire or Bankruptcy. Everyone has to analyze the risk they are comfortable with. I hope the market continues and you can be very successful in your plan… and come back here in a few years as a self made REI set for life.
Re: And finally… - Posted by Lou Pohl
Posted by Lou Pohl on September 29, 2003 at 20:18:56:
Let me just say right off the bat, I really do appreciate your time and input. Now, I’m the first to admit - if I/you can make the same amount of money on a much cheaper house, I’m all for it. You didn’t mention any work you had to do to the property, but I just am not able to come across houses for 42k that I can L/O for 82k. Where do you find such deals on a consistent basis?? I just can’t find these - not unless it needs to be fully rehabbed first. And if they are paying $800 a month it sounds like it’s in pretty good shape. Either that or you are even better at what you do then I already think! =)
Your estimated 15-25k “from South to re-rented” is the reality of the business. I would definitely learn much closer to the 15k side ($1000 for 2 1/2 months of utilities? How do you come up with that when the house is vacant??) Anyway, let’s assume 20k. So instead of making 40-50k+ on this particular property maybe I only end up making 20k. The way I look at it, costs and risks just need to be built into the model, like any other business. On average, if you do 50 of these, how many are going to go south in a big way and require full carpet and paint, etc. etc. 1 out of 10? 1 out of 5? Unless it was every other deal it doesn’t seem to matter. And if it was every other deal then I would realize I’m doing something wrong. =)
I guess my logic for going bigger if possible was that overall all of these numbers are a percentage of FMV. On the more expensive properties I make more money, so naturally my costs/risk etc. are proportionally higher as well. But the extra profit justifies it. And if you ask me, I’d rather do 5 deals a year and make the same money as having to do 10 smaller deals.
Obviously if I could do what you describe in your final paragraph, I’m all for it. Again, I’m just not sure how to consistently be able to buy houses for 42k and turn around and L/O them in a week at $800/mo at a price of 82k.
I mentioned in an earlier post (I think) that I just closed on a house the other day. 42k, and it needs about 8k in rehab to make it worth around 80k. We are doing a garage conversion to turn it into a 3/1 just like your house. I paid cash for this property and we were planning on just fixing it up and selling it retail, but who knows, maybe I should take another look at it. Maybe get a loan or private money to take me out and then L/O it LOL…
Air… - Posted by Lou Pohl
Posted by Lou Pohl on September 29, 2003 at 08:25:16:
Thanks for the reply Heather. I guess my unspoken assumption when I say 80% of FMV, 20% equity, etc. is that these numbers are based on what the properties are being bought and sold for. When I say 20% equity I mean I have bought the property for 80% of what I can actually sell it for. If I were to list it with a realtor I would automatically include some “air” on top with the expection that the potential buyer would “negotiate” down to where I really wanted to sell anyway. I guess the short answer is that I won’t be selling my properties at 90% of FMV. I have the resources and time to be able to wait 2, 3, 4 months if necessary to sell a property and get full “FMV”. Of course, if I bought it with 25 or 30% equity etc. I may sell it slightly below FMV if I wanted, etc.
I guess in a nutshell it boils down to this - the way I see it, the type of strategy I’ve outlined is overall much easier than consistently being able to buy properties at 50 cents on the dollar. What’s your secret?
Re: And finally… - Posted by Marcos
Posted by Marcos on September 30, 2003 at 08:57:32:
To be honest the house for $42k, I misread the value on it. I thought it was worth about $60k, and I only had about an hour to make a decision on it, when I was out of town. I went ahead and did it. It turns out it’s really worth $75k or so. So I lucked into that one.
Another deal I did that was cashed out two months ago. I bought a house for $42k three years ago, sold for $77k on a one year L/O. My payments were around $400. And I was actually getting $1050/mo in rent and additional option consideration. Thought I was making a great deal, then he actually bought it, and it appraised at $88k. Oh well, he got a good deal. That was a converted rental I did have it rented for $650/mo. And then made it a L/O after two years of renting it.
There are many ways of increasing cash flow on a lease/option deal. You just have to learn what works in your area.
$1000 for 2 1/2 months of utilites is actually a true story. I have the bills to show it. This house was listed though, and even with the AC set to 80, it takes money to heat/cool a 3000 sf house. My typical empty house bill was around $150/mo. I believe they paid double that in electric. And then for the water, most of those houses have sprinkler systems. There’s another $150/mo. Trust me, it’s not pretty having a vacant house in Florida in the middle of summer.
I guess my challenge to you would be to find ways you can buy houses cheaper. 80% as you mention is easy. I could supply you all the houses you could buy at 80%. However 60-70% is where you lock-in the profit. 80% is still risky. 60% you really don’t have a lot of risk. I won’t touch a house at 80% of FMV. Actually I won’t touch at house above 70% of FMV. Why? There are too many deals out there, and not enough time. But, when I first started, I remember thinking that 80% was something to shoot for. I probably sat right in your shoes and thought the same thing.
I prefer to work in the bread and butter market. If I hit the bottom of the market that has it’s own challenges although it can be profitable. And hitting the top of the market is something I have never enjoyed. It’s hard enough trying to sell, I couldn’t even imagine the difficulty finding a tenant for a $300k house that was actually qualified to live there. In todays market like Brent said if they can fog a mirror they can qualify for a loan. And when you get into that price range, and the type of incomes that these people make, I don’t know how you find a qualified tenant. That house I sold on L/O two months ago, he had a 520 middle score and got 100% financing. I’m closing on one next week where her score is 510, same thing 100% financing. I’ve found it harder, and harder to find good tenants. I’ll accept tenants now, I wouldn’t have even considered for a second three years ago. For that reason, I’m not doing many L/O’s any more. But, I look forward to picking up some properties at these insanely low interest rates and doing some nice wraps and L/O’s with them in a few years. At today’s interest rates however even 80% deals might not be that bad. I guess.
Good luck to you Lou.
Marcos
Re: Air… - Posted by Heather -Tx
Posted by Heather -Tx on September 29, 2003 at 09:25:46:
The higher priced homes mind you that I am speaking of are a little over 50 cents on the dollar, but they need under 15K in repairs.
I use the FMV x .65 - repairs as my formula. On the under 150K homes, that need alot of repair it is usually 50 on the dollar.
Re: Air… - Posted by Heather -Tx
Posted by Heather -Tx on September 29, 2003 at 09:14:41:
Actually I am new, so I don’t have any secrets! LOL
Started investing back this Janruary, so only about 10 months in. I just look for deals that need alot of work… or ones that have a very strong need to get out and fast. My first was a pre-foreclose/rehab/sub2. Talk about learning!! The second on was a rehab listed by a church that a wholesaler I know got under contract before it was even on the market for a day. Believe it or not it was priced already under 50cents on the dollar, he actually offered over the list price by 3K, and I bought from him.
I am working on one now, that if their attorneys ok our sub2 paper work today, will be a great one. I gave two offers. One CASH at 175K and one Sub2 at 185K (There is 173.9K owed on the home) The seller actually propsed the 185K price… much to my delight! (And a neighbor she has helping her that is retired from rental properties.)
This one is an elderly lady with no family, her husband passed away and the home needs foundation work, and the sheetrock & tile work that that always entails when dealing with foundations. FMV is 295-313K.
She just wants out of the home, with no money out of her pocket and wants to move to Ala. into a retirement community with her friends. It’s in a gated country club subv… and holding times are LONG since you can’t even put a For Sale sign in the front yard. I factored in 18 months holding time for this one. Average Days on market for some homes were a year.
So I just deal with the situations of needing to sell and fast. Then I look at the house. No secreet to it really. And this would be my 3rd deal (crossing my fingers!)
Heather Zaal
Re: And finally… - Posted by Lou Pohl
Posted by Lou Pohl on September 30, 2003 at 11:11:10:
I guess for me the bottom line is that I can’t consistently find properties at 60% of FMV that don’t need MAJOR rehab like you apparently can. Man that would be sweet. I mean yeah, every now and then one of these types of deals falls in your lap out of pure luck, timing, being in the right place at the right time, etc. but so far - for me anyway - this doesn’t happen consistent enough to make it my core business. But for sure, if I could buy lots of properties for 60% on the dollar I’d probably just do the minor fixup and retail them. Maybe I should go back to the drawing board and spend some time seeing if I can’t figure out ways to find these 60% deals more consistently. Any tips? How do you do it??
Curious about your last few sentences…
>For that reason, I’m not doing many L/O’s any more.
>But, I look forward to picking up some properties at
>these insanely low interest rates and doing some nice
>wraps and L/O’s with them in a few years. At today’s
>interest rates however even 80% deals might not be
>that bad.
Can you elaborate on this a little? Then I’ll quit bugging you I swear! =) Are you saying that you will be looking to pick up additional properties now, rent them out for a few years, and then selling them on a CFD or L/O in a few years when interest rates are higher?
Re: Air… - Posted by Lou Pohl
Posted by Lou Pohl on September 29, 2003 at 09:28:30:
If that is the case then you are doing something that I haven’t been able to do that consistently. Good for you! On a 300k house that needs only 15k in repairs, the seller would have to be pretty darn motivated to sell to you for 50% on the dollar. I haven’t been able to find many of these…