All Forum Posts by: Bryan Scott

Sorry, if some of this is repetitive.  This one sounds like a gut, studs-out rehab.

You mention you're a newbie...  That said, add at least 20% to your rehab budget for all the mistakes you will make.  Even without the cost overrun just mentioned, based on your numbers, you are going into this one with no equity (personally, I wouldn't touch it unless I thought I could go in with at least 15% equity, because at the end, it'll be less anyway).

This looks like any other retail deal out there, but with a lot more risk because of the extensive nature of the rehab implied by your estimate. Your ARV range should be tightened up. This can be accomplished with a comprehensive CMA from a licensed agent.

Long story short - take a pass on this one.  Make your mistakes on a cosmetic, facelift sort of rehab.  Then, rinse and repeat till you feel confident in all of your numbers and your contractors.  If you decide to go forward, get a seasoned partner, but right after I say this, I am reminded that no seasoned partner will be OK with no equity going in and the projected cashflow will not attract anyone with any experience.  

Sorry!  Hit the post button too quickly:

Plugged into the above formula:

($300,000 - $75,000 - $2,700 - $13,500 - $21,000) x .80 = Offer price not to exceed $150,240. BTW, the .80 multiplier means you need 20% gross profit before taxes. If you need more, change the multiplier. Less gross profit needs, lower the multiplier.

As a first time buyer noobie, use a buyer's agent who gets distressed property listings in your market.

Your offer price depends on how you intend to use the property; fix and flip, or buy hold rental, or buy live-in.  Once this is sorted out, what is your time horizon and what will your holding costs amount to?  Just make sure these dollars are reflected in your budget model.

For fix and flip, you will see formulas like, (ARV (after repair value) - rehab costs - holding costs - finance costs - projected sales expenses) x .80 = Offer Price.

Example with assumptions: ARV = $300,000. Rehab will be $75,000. Holding costs (utilities, property taxes, insurance) is $300/month for 9 months, or $2,700. Finance costs = $1,500/mo for 9 mo, or $13,500. Sales expenses will be 7% of ARV, or $21,000.

Plugged into the above formula:

($300,000 - $75,000 - $2,700 - $13,500 - $21,000 = Offer price not to exceeed $187,800.  BTW, the .80 multiplier means you need 20% gross profit before taxes.  If you need more, change the multiplier.  Less gross profit needs, lower the multiplier.

How to negotiate the above deal?  Depending your your market and the seller's motivation, you will be highly unlikely to get this done.  Why, because in most markets, the seller will have no issues finding and contracting with a retail buyer, who intends to occupy the property and who will be happy to pay the seller alot more than your maximum, calculated offer. 

Having done a number of sub-to's, contract for deed/ILC's, I will tell you that most licensed agents are not qualified to broker such deals.  If I were doing one myself, I would seek out and use a Real Estate Attorney who knows these deals inside out and backwards.  There are way too many pitfalls to be aware of and avoid in order to not get yourself into trouble.

On pricing, I've paid $1,500 to $3,000 depending on complexity.

Most title companies will not do these deals unless title passes, hence, no ILC's, but so long as title insurance is involved and purchased, most will do a sub-to, because title passes to the buyer.

I hate to be the wet blanket in this message string, but licensed real estate agents and bird dog fees, from the standpoint of tying one to the other, is not consistent with Real Estate Commission rules and regs in most states.  Why?  Because licensed agents may ONLY be paid for brokerage services by their employing broker.  If the broker doing the bird dog deal just happens to be an employing broker, there are other issues relating to full service vs limited service that must be observed as well.  In Colorado for example, I am not able to do such a deal, because it would be considered "limited service."  If the RE Commission found out I did such a deal, I could lose my license.

It is also true in most states that anyone selling or transferring interest in a property, who does not own or have legal title to, may not act in the capacity of real estate broker, unless licensed to do so.  So, any of these deals being done are done so at risk to the parties involved.

As a long-time investor, I will tell you that the amount paid to a wholesaler or a bird dog, really doesn't matter so long as your deal pencils out and meets your own profit requirements (after rehab).

Hey Grant, Sounds like you're pretty busy already.  Seems to be that your current tenant base is a lead machine worth pursuing.  While they live at one of your rentals, aren't they pretty much a captive audience?  When they move, where are they moving?  Sounds like a no-brainer Buyer Agency Agreement for those who wish to become owners vs. renters.  

How many "Friends" do you count on FB?  Use your background and experience to generate a weekly topic on "how to" just about anything related to remodeling, repair, maintenance, sales, landlording, etc.  Layer in the fact that you can assist them with their next real estate transaction, maybe even offer a "Fam & Friends" commission discount, throw in a moving truck, or do something that makes you different from their other family "friend" agent and see what happens.  If you are always in their FB Inbox, when the need arises, perhaps they'll call you instead of the agent who just sent them a postcard, which is still sitting on the kitchen table.

@Evan Ponssa  Just did quick Google Search on "real estate brokers no office fees or commission splits."  This one was on page one, among others:  

http://www.realnettampabay.com/cheap-houses/100-commission-plan-real-estate-broker/

If not this office, perhaps there are others that would fit your need.

What would motivate an investor/landlord to purchase this property?  It's all about the numbers, right?  Why not provide some metrics here so we can assist you in analyzing the opportunity, as seen from a buy/hold investor?  BTW - you have to know that any seasoned investor will not pay full retail for any buy/hold property, right?  As well, there isn't a retail buyer in the pool, who will purchase the property now and wait till next year to move in, so stand pat, leverage your equity with a cash-out refi, or give part of your equity away to an investor.

@Ben McMahon

Excerpts from your initial post and my reply comments - from the perspective of someone who has done rehabs for 20 years, has been a landlord for 30 and a licensed agent for 10:

"For years now, we have all known that a good portion of the traditional real estate agents job is unnecessary."  Well, for you maybe, but for many who do not have significant experience and lots of transactions under their belt, not so much.

"This is a heated topic for a lot of people particularly if you are an agent."  Yes, it can become heated, because the one usually cutting down the agent community has either had terrible experiences with prior agents, or has a great deal more transaction experience than most and just don't see the price vs. value relationship.  In other words, don't lump all agents into one basket with your comments.  Some agents suck for sure and some are creme of the crop, while others fall somewhere in-between.  When you agree to hire an agent, you must handle this just like any other employer/employee relationship, which is to find the best match for your situation.  So, if you have had a bad experience, I would suggest re-visiting your own qualification criteria, including your interview questions and how your verify their answers.

"The best argument for the traditional agent in my opinion is that some individuals have the ability to be in the deal flow, have good relationships with vendors, lenders, escrow agents etc. and know how to negotiate on behalf of the client."  You want/require agents to have relationships with vendors?  Only when I represent newbie investors has this ever been important, because, well, they are new and don't have any yet.  Most seasoned investors have their own and could not care less about mine.  Escrow agents, etc., sure.  But if you do lots of deals, you will want your own because they will give you preferential treatment, as well as discounts which may not be available from an agent. Lenders, maybe, but all the rules on this changed right after the banking crises of 2008 - 2011.  Lenders/originators were then required to be separately licensed and, for the most part, agents are hands-off and definitely arms-length.  Do they know multiple lenders who can successfully close your deal, absolutely, but they are not supposed to get more involved than that.  How negotiate and how to navigate the market and certain types of listing agents?  Yes, this is where a lot of the rubber meets the road for sure.  Some are exceptional negotiators, but most are order-takers.  As the buyer, you need to be an active participant and have your numbers down, dead to rights.  No exceptions on this.

"Since everything has been moving remotely, the enormous fees agents have been getting has largely stayed in place due to the Lobbying powers of the NAR and belief that an agent can truly be the best financial option. Its taking awhile, but slowly over the last 10 to 15 years some of that has been chipped away. Discount brokerages, FSBO websites, etc. I wonder if this is the last straw?"  Again, enormous fees are a bit subjective as inferred above.  Some clients need more hand-holding, hence, higher commissions and more time may be required.  If you require little hand-holding, then perhaps your chosen agent will negotiate with you something more agreeable based on what you need and their time involved.  Keep in mind though, that many states have rules about "limited service" and other variations in the agency relationship that the Real Estate Commission in your state requires of all licensed agents.  In other words, the agent may not have a choice to act as a consultant, who might provide only certain services.

"My question, is this the end of the traditional agent? If most everything is being done remotely right now, how long will it be before agents start getting cut out of deals?"  The market will decide what happens to traditional agents for sure.  Those agents that don't embrace change will simply go away, but I can tell you with confidence that unless a buyer is really sophisticated and does lots of deals, you will always benefit from having a good agent in your corner.  He/she may not be worth 6%, but there has to be a happy medium that satisfies both sides somewhere between $0 and 6%, right?

"I can guarantee there's not going to be many open houses this summer. LOL"  Open Houses serve one master -- the listing agent, who depends on these partially to bring in their next buyer or seller client.  Less than 7% of all sales are the result of the buyer showing up at an OPEN.  If you engage the services of a listing agent, just know that this is partially how they keep their business alive.  These days, Open Houses are virtual, via 360 or 3D tours and other digital media.  So, listing agent will still get leads in this fashion.  Besides, as a buyer, why does this matter?

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Moral of this story is to seek an agent that compliments you and your need.  They are a valuable part of any real estate investment team, but as with any employee, take care in your selection.

@Mike Soofian:  From your last reply:

"She said while the title is something to be concerned about but it is handled at attorney review."

Yes, true, but how much time and effort will you save by getting this info up-front, before you win the bid, only to find it out later.  I use First American Title to run preliminary title so I can see what will eventually appear on title report provided after you have won the bid.  I believe their pricing is still $5.00 per file.  Pretty cheap if you consider the hassles that occur after the auction is closed.

"However, one thing she mentioned that stuck out was that foreclosures generally do not have Inspection Contingency which she is saying is probably my biggest risk as you cannot back out while under contract if there is are big ticket issues."

Correct, auctions do not provide for inspection or other typical contingencies like normal transactions do. When you win the auction, you usually take it as-is, where-is. As well, most MLS properties being sold by banks or other institutions (REO) usually sell as-is, where-is, but the difference here is that you usually have time to inspect and handle due diligence, but your only recourse to get out of one of those contracts is to simply submit notice to cancel. Sometimes, the listing agents on those can intercede and keep the contract together by satisfying your concerns, but with auctions, no way, no how.