All Forum Posts by: Nick Aalerud

Welcome Ryan!

YES - agreeing with both Justin Silverio & Ann Bellamy and many others on here... once you have a direction, and then a basic understanding, I say GO FOR IT!

I wrote a post on when I started - it all started with holding myself accountable with my own shampoo bottle in the shower (for me, a date didn't work). Feel free to take a look here:

[url]http://www.biggerpockets.com/forums/223/topics/91583-my-first-5-deals-went-horribly-wrong-what-next

We're all from the Boston area - and real estate changed my life. I still work 80 hours a week, but the difference is, I love 90% of what I do every day :)

Good luck - we're all here if you need us, and come to some of the loval networking groups! I like Black Diamond REI myself (shameless plug)... ANn, myself and two other investors put on the FREE meeting twice a month, once in Waltham & once in Worcester.

See you there!

Thanks all - this is why I shared it. I kept the huge failure inside for years while I tried to re-establish myself as a legit wholesaler & then rehabber - finally, when I told others about it, it helped me let go and truly propelles my business forward.

I wish you all the same. This is an amazing forum, and I'll be doing my best to try and log in at least a few times a week. Happy to answer anyone's questions, and VERY happy to get any wholesale deals anyone wants to share in the Boston, North shore, Southern NH or seaocoast area!

I thought it may be useful if I shared some of the biggest mistakes I made as a real estate investor, and hopefully you can learn from my mistakes. You hear a lot of gurus say “my blood is all over this material”, and I, to a point, can empathize with them.

So hopefully at least some of this can prove helpful to others…

1. When flipping, start with your AFTER-REPAIRED value, FIRST.

Don’t just assume you’re getting a great deal because you took $30K off the list price in your negotiations. List price DOES NOT MATTER. EVER! One of my first deals in Massachusetts, I was so excited to finally be negotiating for a deal. An owner (motivated seller, of course) was selling her house in a nice section of Haverhill (for those who know MA). She was selling it for $272,000. I had learned from listening to others negotiate, that a great question to ask is “is that the best you can do?” after every counter offer. So, I was able to negotiate the seller down to $241,000, AND I got her to pay 2.6% toward the closing costs (why didn’t I go for 3%, or 5%? Well, I TOLD you I had no idea what I was doing).

Sounds like a great deal! Well, I spent weeks marketing this property to my buyers list, which I was just building. I was wondering why no buyers were interested. Then, one of my buyers educated me on "ARV" (after-repaired value):

ARV on the property was around $260K at the time. Contracted for $241K (what a sweet negotiation!), needed maybe $40K in work. OOPS! Thank goodness I never closed on that property. Lesson learned – start with the ARV FIRST, then subtract all your costs from THAT number (INCLUDING your profit requirement).

How do you get an accurate ARV? You must form a relationship with an investor-friendly real estate agent, who should know what the house needs for "flare" and how to accurately price it to sell quickly. Unfortunately, I could not find an agent I could work with, so I became my own agent. Now being surrounded by them, I've found many who would have been good candidates!

2. Family members may NOT be the best partners suited for your business.

Before I continue with this story, I just want to say I have a fantastic relationship with this family member. He and I have an awful lot in common, and he’s one of the smartest guys I know. However, for the task we had at hand, he was not our best choice.

We had just finished a condo conversion in Somerville, MA where we had closed on the 3-family property for $749K (this is back in 2005), and the seller wanted to lease it back from us for around $20K. Nice chunk of change to start our rehab! We had all the units rehabbed and completely redone with the stainless steel, square tile, refinished hardwood, the works. We were poised to make a good small fortune upon resale of these three units, which we turned into condominiums. (As you can see from the picture I'm going to try and insert, I still attempted to do most of my own work back then – another horrible idea! My time was MUCH better spent elsewhere…)

So we decided to enlist the help of this family member to list the condos through his office. We did not check credentials or his performance / closing ratio – we just knew he was family, and that he could sell them for us. Well, it was also the top of the market here in Boston – condos sat on the market for one month… a second month… then a third… and no offers.

After three price reductions, and us switching to another agent, we lost quite a bit of money on that deal. However, it taught me the lesson to always qualify EVERYONE on my investment team. You have to know what questions to ask, and you should reciprocate the relationship with your agent (or attorney, inspector, etc) by establishing yourself as a loyal client and performer with them.

Nothing is better than if you have your entire team working for the benefit of everyone else. If you do your homework up front, your transactions go a lot smoother and you spend a lot less time!

I have some power team questions that helps qualify some team members; if you’re interested, e-mail me, I’ll e-mail you the attachment.

3. Property Management – Tenants LOVE to “test the waters”.

My first experience as a property manager was when I closed on my first 4-unit in Haverhill, MA, which I still have today. I took over ownership, and immediately assumed that the tenants would all just continue to pay as was shown to me on the statements before I closed on the property (not really having any clue about due diligence back then, I also didn’t really verify any numbers the previous owner showed me, but that’s another blunder for another day!).

The tenants were notified through a letter that their management had changed hands. The first month, everyone paid; the SECOND month, one tenant was about $500 short on her rent. “My Mom went into the hospital, and I had to pay her medical bills.” Well sure, how could I say anything to that excuse?

“It’s OK – we’ll work something out. Just do your best for now.”

That was probably the WORST answer I ever could have given her.

Next month, I received NONE from her… and worse, the OTHER tenants paid a partial amount, or were 15 days late. Hmmmm… it’s almost as if they knew they could get away with it!

Now having been in the business for a few years, I’ve heard every tenant sob story there is to hear. The truth is, everyone has priorities. Housing (at least, for me) would be a BIG priority, so I would make sure I’d pay that bill as one of my first every month. Now, I tell every tenant up front,

“This is my primary business. I don’t want you to leave this community, but I have to tell you, the systems are automated; you are late by one day, and our system sends you an eviction letter.”

Do I still have to send eviction letters? ABSOLUTELY. However, I will say that now when a new tenant moves in, and their third month when they are one day late, they receive that letter – and they are never late again.

You should treat your rentals as a BUSINESS, since that’s just what it is. You’re in the business of providing clean, affordable housing to your tenants. In return, they pay you for that service.

Of course, there have been a hundred other lessons I’ve learned (and continue to learn) through my investment efforts. I find that those are the best ways to learn; but, if you can avoid one or two by hearing someone else’s sob story, why not?

~ Nick AA

Let's say the quick and dirty is, I (like so many) investors had taken too many courses from national speakers in TX, FL (and everywhere NOT in New England), and had still not done a deal. I forced myself to do a deal before a shampoo bottle ran out (many know the shampoo bottle story - I'll post if need be). Every day, I'd use the bottle, and a little more would be gone. I used the bottle to hold me accountable. So when my first opportunity came about with an out of state contact that was not only going to help me get my first deal done but also teach me everything I needed to know about lease options, I forced myself to take action.

And I didn't just do ONE, I did my first FIVE, and was THRILLED I was finally a real estate investor!

The first five were out of state, and my buddy here in Boston and I were relying on this birddog / property manager to help these lease options go right... the in-state contact needed a credit partner (alarm #1). When I closed on FIVE of the deals in a week, I went out to celebrate. The big alarm #2 hit when all of a sudden, we couldn't get a hold of the guy (who got paid some of his up front money at the closing, for finding the deals).

All said and done, the tenant buyers weren't real, the only one he lined up never paid, he vanished, and the houses sat at the PEAK of the market in 2005, and the value dropped... and dropped... and eventually, I lost all my money and couldn't afford the $17K per month in mortgage payments these 5 deals were costing me.

My cell phone was ringing literally every 48 seconds with another automated collections call from the mortgage company (who I had 10 loans with!). I shut it off and put it in my drawer. Anytime I heard a phone ringtone like mine, I shook. Sometimes, I still get anxiety to this day.

My first 5 deals ended up with 4 short sales and a 5th approved short sale, but because "EMC Mortgage is moving their office, so I'm sure the Texas office has your file" , ended up getting lost and went to foreclosure. All this went down in 2005 / 2006.

Tough Start. Especially when I just signed anything and everything to sell these damn liabilities, and ended up with not only irreparable credit, but $400K in judgments and collections accounts I signed when I sold them.
Call me self-disciplined or call me an idiot, I didn't believe in bankruptcy.

[b][u]The important thing to learn was: What happened after?

Credit was the least of my worries when I was coming out of my troubles. I still had a fear of the telephone (from the collection calls coming every 48 seconds from the banks), my cash was gone, and my pride was hurt. I mean, though I would have liked to, could I really blame anyone else but me for what happened? I was in bad shape, and stuck my head in the sand for a while before I attempted to gather the courage to move forward… for the second time, with a lot less resources.

You know how they say that getting over the first deal, makes everything much easier? That’s not necessarily true when the first deals go so badly. Getting over the SECOND hump was truly harder than the first.

Here are the 9 steps I took, after I had gone through that awful experience:

1. I Took Time to Rest, and Re-evaluate.

Was real estate really for me? Obviously not. I screwed up… big time. No matter how much I wanted to blame that out of state partner, I SHOULD HAVE known what I was doing. I SHOULD HAVE done more background checks. I SHOULD HAVE listened to my friends, who all had 9-5 jobs, who told me I was crazy for doing something like this.

And at the end, I re-evaluated my situation. I started with a 790 credit score, and some decent bank reserves. I was now left with less than $10K to my name, and a score I couldn’t even bear to check (I think it went below 400 at one point). So what do I do? Lay low. I’ll keep my bank job for a while longer. Build up some cash again, save for retirement, pay down debt. Just like those smart, traditional financial planners teach us to do.

Then again… what about all those infomercials I saw on TV? They were STILL eating at me. And what about all those cashflow projections I ran? Gosh… real estate still seems to be a really great vehicle for making money if you know what you’re doing—IF you’re educated, and don’t get swindled.

And so, it began to eat at me again.

2. CHANGED my MINDSET, back to a positive one.

OK, I went through an awful place in my life. Let’s hope this is the worst thing that ever happens (as it turned out, that was only the start of my life challenges, but we grow stronger!). Does it mean that real estate itself is bad? What are the takeaways I can learn from this whole situation?

I learned / re-realized that real estate is still a great tool to build wealth, with proper education & training.
I learned that sometimes, no matter how many background checks you perform, someone can still choose to be unethical & be untrustworthy at a moment’s notice. All I can do is mitigate that possibility as best I can.

3. Realized I was the ONLY ONE responsible for my future.

My success, OR my failures, are a direct result of what actions I take. My actions are a direct result of how I think, plan, and react to things. In the end, no one else was going to look out for me. I knew that I had to look out for me and my financial future. This meant making some serious changes. The scariest, as I mentioned before, was knowing I had to get back on my feet at some point, and getting back into the real estate game.

I knew I needed to start learning again. Back to the online forums, and I still had a couple of those seminars I had paid for, left to attend. “I better damn well get something out of them”, I thought to myself. (Despite the fact all the “gurus” were from out of state, and had little clue about the Boston market).

4. Changed my strategies, & revamped my business models to be ULTRA-conservative.

Here’s where I started taking my new outlook on life into a plan, by writing down my NEW business onto a sheet of paper. Having analyzed my resources, I had little cash, and no credit to speak of. I CERTAINLY was too gun-shy to get into another partnership right away. What real estate strategy fit best with my situation?

I chose wholesaling to start. And I was determined to NOT lose money on a deal EVER again, even if that meant I had to submit 10 times as many offers. I carried this philosophy through to my wholesaling business. If I could find deals using my own new-found ultra-conservative business methods (this was back in 2006 / 2007), and built partnerships with good rehabber / buyers who would buy my deals, I knew I could learn a bit from them, and see where I could go next once I was comfortable and had some resources. My new business model was the MAO approach (60% ARV, less rehab, less $30K profit, less my fee). I OVERESTIMATED rehab, AND included a 10% fudge factor. I UNDERESTIMATED my ARV, usually by 10-15%.

5. Identified and started to set up SYSTEMS.

A guru (or two, or six) once taught me CONSISTENCY in my marketing was the key. Wholesaling was a business based almost entirely on marketing, so I knew I had to hold myself ACCOUNTABLE for doing certain things every week. Using my manuals, bootcamps & procedures I had gained from several guru courses, I started putting together what would eventually be my standard operating procedures, and flowchart for my business. My writing these down and putting these in place, I would NEVER forget any steps, and could add things as I went, to make my business better and better. For those that have seen me speak on my systems, I now SWEAR by them. This was also a key way for me to hold myself accountable – FORCING myself to stay on track and keep going.

6. EXECUTED the new business.

The hardest part was jumping back in. I now had my systems, armed with education and learning experiences I knew I would never replicate again, and the beginning of a POWER TEAM, and the only logical next step was to jump back in the marketing game, to get my wholesale business booming.

Any good wholesaler will tell you, ANY money you put into marketing, especially SMART marketing, is ALWAYS worth it. I didn’t have much money left, so I borrowed against my 401K and used my measly paycheck earnings to start my marketing machine going. I knew EXACTLY (to the penny) how much I had coming in, and how much I needed to live on, and how much it cost me to send out each round of marketing. However, I DID leave an awful lot of debts unpaid, while I convinced myself I NEEDED to make this work, in order to pay off all my bad debts and awful creditors from my “learning experience”, and finally start building my bank account again.

But first, I needed to get over my fear of the phone, especially when just a short few months before, it was ringing off the hook with collections calls.

7. FORCED myself to make calls and answer the phone.

Want a humbling experience as a real estate investor? Try calling FSBOs and For Rent ads in the local newspaper. See if you find anyone interested and motivated to sell to you. You’ll get a LOT of rejection, and maybe this rejection will make you uncomfortable. GOOD! That’s the POINT. You can ONLY SUCCEED and BREAK OUT of your current situation, when you do things that make you uncomfortable.

I still remember the day I took my phone out of my drawer, and plugged it in, and turned it on. I had SERIOUS issues, thinking it would still be ringing and ringing and ringing with the banks, on their auto-callers, trying to get me for what I had left them with. To my SHOCK, it had stopped ringing. But I knew I’d have issues again once homeowners started to call me, from my marketing.

I needed to go back into changing my mindset, and start thinking of the POSITIVES. Imagine how I would be HELPING those homeowners out of a troubling situation, like mine. Imagine how I would be structuring a win-win-win for all parties involved, using my marketing expertise and negotiation alone. Imagine the CASH coming back into my account, again… these thoughts, over and over again, and me FORCING myself (literally) to answer my phone and call people back, finally started to pay off.

As a side note… this is also where I learned to FOCUS, and NOT procrastinate with my uncomfortable actions. I knew each night I needed to spend at LEAST 1 hour on the phone talking to homeowners.

This meant: STOP over-checking e-mail, STOP reading online, STOP “gathering materials I would need before I could make the calls”, and NOT put down the phone until I had made my calls.

My motto at that time which I said to myself over and over again was, “Nick, SHUT UP and DO IT.” Sometimes, when you think about it really hard, your whole entire life can change with these words, if you say them, and MEAN them.

8. Ramped up my Networking, Finalized my POWER TEAM.

A GREAT way for me to stay motivated was to surround myself with like-minded people. I found them at the REIAs, or real estate investment clubs. We’re lucky in Massachusetts, as we have a ton now. At the time, I joined one and started forming new relationships, and using referrals, I started to rebuild my team of professionals (real estate agents, attorneys, accountants, contractors, local successful mentors, hard money lenders, etc).

9. Began MAKING OFFERS

As I stayed CONSISTENT in my marketing, all of a sudden, the IMPOSSIBLE happened – I started getting calls!! And then – the SECOND impossible thing happened… after a bunch of screw ups, I managed to get a DEAL!! AND I even managed to sell it to an investor-buyer I had met at the REIA!!

The very first paycheck I made in my NEW business, was SO much more rewarding than the paycheck I had made the first time around… and it was less than 100 times the size. But, I knew I was finally doing it right.

Where I Went From There

Over the long term, after my credit was damaged, I started wholesaling to build up some cash again, and to pay down the bad debt that had formed as a result of my experience. Having learned to be ultra conservative in my structuring of deals and in analyzing the numbers, I then brought that into the rehabbing & condo conversion arena just a short 10 months later, using the cash I had built up, to test all what I had learned. After a few successful rehabs, and through my networking efforts, I then was approached by a few individuals looking for me to put their money & credit to work, and the rest, is history.

Now, I find myself looking to do 45 rehabs this year, with a TREMENDOUS team behind me – a real estate brokerage with some GREAT investor-friendly agents, a coaching program with incredibly motivated & deserving students, a short sale company that specializes in helping homeowners go through the tough change in their lives (that I went through only a short 5 years ago), a tight in-house property management company that oversees my out of state acquisitions, a full-service investment servicing company for my fantastic investors & partners, and even a couple Edible Arrangements stores, for differentiation and to keep my Mom happy. (Love you, Mom!)

Looking back on it, believe it or not, I would NOT have changed ANYTHING. Everything I went through led me to where I am today – I wake up every morning never knowing what to expect. I LOVE not working 9-5 (or, 7 to 7, as it was in my case). I LOVE running through potential rehabs, and seeing the vision of a beautiful home. I LOVE structuring the win-win situations with homeowners & sellers. I have come into contact and made some GREAT personal & professional relationships over the last few years, many of which would not be possible were it not for what I learned and went through.

If you’re going through some challenges now, or have in the past, know that YOU have this same ability to dramatically change your life.

Make your own steps, and feel free to use these steps here as a guide. Refocus, plan, and then go for it. Set up systems, and hold yourself accountable.

No excuses. “Shut up, and DO IT.”

Your partner & coach,

Nick

Ray & Dan,

Thanks for bringing this up to me last night.

Your party A&B story made me dizzy - and I'm now more confused than I was last night. Did Party B switch roles? I thought they didn't live in the property, but in PA? Or did they move in?

Here's my understanding:

John finds a property, and gets his buddy Bill to finance it for him (for no money down). John then, in turn, gets Bill to do this by saying he'd work to fix the place up, and they'd both split the profits at resale.

Does John pay rent, as WELL as sweat equity? That wasn't made clear.

Bill now wants to sell, and wants $275K (after paying $245K for it in 2011).

John wants to get his $45K in sweat equity back out of the house as a result of the sale too - so essentially, total purchase price is $320K.

HOWEVER - John has no say in the sale, and cannot purchase on his own due to having bad credit and out of a job.
-----

Good so far?

You want to buy is for $320K, and give a full payoff to Bill for his $275K, leaving $45K.
Was this $45K going to be used for rehab? This means you're using either a 203K reno loan, or hard money? Normally this $45K would also be going to Bill, as the closing attorney would enforce... the only way is for Bill to then give you this money BACK AFTER closing (without closing attorney's knowledge).
Otherwise - hard money will lend you 60-65% LTV - if ARV is $400K, they would give you $260K, but subtract out rehab first (so, $45K)... you'd have $225K for the closing, have to come up with $50K + your first contractor down payment.

I guess this was my first confusing statement - I don't understand where you're getting the rehab money from.

I say you buy the house for $275K, pay off BIll totally (unless you CAN get a renovation loan, which would give you another $30K if it's a streamlined FHA) - so you'd buy it for $305K, and have $30K to play with.

THAT SAID:

You now want to "lease back" with an option, to John, who does not have a job or seemingly, steady income.

If their portion IS to pay your private investor the points & interest - I would get it ALL UP FRONT - in fact, I'd say they need to come up with another $10K.

The other problem - would the house really appraise in 18 months, for the $389K? Most likely, if you've done your homework.
HOWEVER - would John's credit and income be acceptable in 18 months? If he still doesn't have a job, than most likely NOT. And then, you may have had them pay for your investor's points & interest for x months, but you're now stuck with the month to month after that - and all the additional rehab you have to do, after they've lived there and "fixed" the house.

You need to remember that even though John has an option to buy from Bill - he CAN'T right now. So unless that piece of paper is good for another 2 years, they're dead in the water, and you'd only be doing them a FAVOR... worth $45K to them? Your call, but I'd say you should treat them as a wholesaler, and pay them based on your end profit. If you wanted to set a base saying any money over $xxx ($15K?) and up to $45K goes to them, than go for it. Or offer them $15k when you sell, flat rate, and they suck up the other $30K they've already spent. They're desperate to keep the equity they've put into this (that's why they are talking to you), and if there's enough profit in the deal, than go for it.

For me?

So even though I LOVE how creative you're being (I find creative investing very SEXY), let's analyze the deal as a deal:
ARV: $399K (your number)
Soft Costs: 5% Resale commission (in case buyer walks or can't perform), 7% holding costs (high due to 18 month hold), 3% Acq & Legal (around $58K)
Rehab: Roof & Cosmetics: $15K Minimum (flooring refinished, paint throughout, upgrading appliances, minor touch up)
Required Profit (mine, not necessarily yours): $30K
Nick's Max Offer: $296K

Not enough juice in this one to keep tenant buyer happy.

ANd I would NEVER, EVER get into a situation with negative cash flow when it depended on another party to live up to their payments / side of an agreement - especially one that didn't have a job or good credit.

You asked for my two cents? That's it. In a nutshell. :) Deal is way too skinny for the effort, but it was awesome how you're trying to work it.

I say buy it from the other guy at $275K (ensure you can raise the additional $15K Rehab + $4K closing costs, and have enough $$ in escrow to hold for 6 months), tell John "you'll do your best to help him out," tenant has to leave (OR... pay him $20K to relinquish his option... you're still below the $296K max mark), he's out of the picture. Rehab and sell it, make $30K, and anything above that, you can give to him.

That's MY plan. :)

Good luck guys!!