All Forum Posts by: Don Alder-LaRue

I hear about great cash flow with them but one must be VERY careful in PS.  They have strict rules to follow if you don't want to get fined. 

@David Lutz Many people are going the STR route, but one must be VERY careful with that strategy, especially in the city limits of Palm Springs. They have cracked down hard on them over the past years, and you MUST know what you are doing. I am only in the process of learning it myself.

I've always been a fan of the LTR strategy.  I like knowing that each month I will have X amount of dollars coming from a particular property, without the seasonality of the amount changing.  When you purchase a property and before you first rent it out, make sure everything is in perfect working order, the place is sparkling clean, and your rent is in line if not slightly below market rent for the area and you'll always have tenants.  Make sure you do your background screening and you should be fine.

LTRs in the valley can be a challenge to find, properties that make sense don't come on the market every day, but they do come on the market.  Occasionally a fixer comes on the market that can be purchased using hard money at 70% of ARV so some if not all your repairs can be financed into the deal, then get a tenant into the property and refi....and enjoy the cash flow!   These are more rare here in the valley, but again they do come along.

@D Taylor. It appears you're looking at a buy and hold strategy for real estate investing. I have to agree that finding such properties that make sense here in California is extremely difficult, and that the STR (short term rental) market may bring you the cash flow you are looking for, but it can be a lot of work unless you have someone managing it for you. I'm still learning this strategy myself, and have a lot of questions for @John D.  This may be a good way to go if you have the time to manage the properties.

There's also the out of town approach to investing, especially for buy-and-hold properties.  There's a lot of deals that can be found in the mid-west, this is true, but there are deals to be found in many areas.  I recently returned from Texas where I was helping investors.  It's difficult to find properties there with immediate capital gains, but many properties make sense in terms of cash-on-cash returns, ESPECIALLY if you can get creative in the financing aspect.  I helped one investor locate a property where the owner was in financial trouble.  They had owned the home for 12 years and had fallen behind on payments.  The investor was able to pick up the house for the back payments plus $3,000 out of pocket so the seller could move out of the home, and the seller carried a wrap around mortgage.  The home needed minimal repair/improvement and now the investor is making some serious bank renting the property for about $2,000/month.  Not only did he pick up capital gains (from the seller's equity) but cash flows like crazy!

Personally,  I'm a fan of purchasing with hard money to minimize cash out of pocket when buying a fixer property so some if not all the repairs/improvements can be made using the hard money loan, then locating a tenant and getting the house rented, and finally refinancing the home and enjoying the cash flow.  This is difficult to do as it's hard to find properties that make sense, even in places like Texas where it used to be relatively easy.  Searching in the larger cities with this strategy is proving to be a fools run, but secondary cities it's still possible.

Since this is your first investment, and you have limited funds and experience, I recommend fix and flip, using hard money for the purchase. It is possible to find, even in SoCal, properties that need repair/updating that when purchased using a hard money loan based on 70% of the ARV can return a minimum of a 100% return on capital gain, even after 6 months of carrying costs and including closing costs. They are not easy to find. They take time to locate. You MUST be careful, especially with limited funds, to ensure that your numbers are good. EVERY time you get new numbers in (repair/improvement quotes, ARV, ANYTHING) run your numbers again to make sure you're going to be OK.

PS does have a lack of houses for rent. The STR market is swallowing up most of the houses. This does create an opportunity to raise rents for long term rentals HOWEVER I am still not finding any homes that actually make sense (as far as I'm concerned, that requires at least a 10% cash-on-cash return). It may be possible, but you'll most likely find homes in undesirable areas that are difficult to rent (ie extremely windy areas north of town).

I would check with the Realtor I have on my power team and ask them for a lease agreement that they should have in their forms software. You may need to scan it into into your computer as a PDF, then it's simple to type in what you need to using a PDF editing software.

Here in Texas, you can go to the Texas Real Estate Commission website and download all the forms the Realtors use for free.  I don't see that option on the Washington Real Estate Commission website.  The Realtor forms will spell most everything out for you, offer both you and your tenant good and reasonable coverage and be in full compliance with all state laws as they've already been gone over (and created by) Washington State attorneys.

Consider your returns, then make the decision.   Paint is a lot cheaper than new cabinets.  Have it professionally done though so it looks good.  Use a good QUALITY paint.  Don't just go to Home Depot or Lowe's.  Got to a true paint store and don't skimp.  A good paint, sprayed on the cabinets will look great, save you money, and freshen the entire kitchen.

Sounds to me like a partnership is in the works.  You each have something the other wants or needs and can use (your friends have the money but not the experience, you have the experience but aren't in the area).  Leverage is everything....Other people's money, Other people's knowledge, Other people's time.

Since you don't live in the area, are your friends able to "disconnect their emotions" from a property.  I'd check that first.  Someone is going to have to look at the actual property before the buy and many people aren't able to disconnect their emotions, meaning they look at a house as if they'd be moving into it instead of  an investment, so they pass on a lot of good investments.  If they CAN do that, then half the battle is over.

Start building a power team in SD.  You know...the Realtor, Hard Money Lender, contractors, wholesalers etc.

You bring the knowledge of how to evaluate a property, they have the money.  You be in charge of running the numbers, interviewing the power team members etc.  Let them be in on a conference call when you do that so they can learn too.  Find a property where the numbers make sense, and it cash flows properly.  If you have every thing fixed as soon as you buy, you won't have much property management headaches so a management company shouldn't be needed.  The handyman on your team should be able to handle most problems within 24 hours as they're reported to you.  Your friends/business partners should be able to drive by the property at least once a month to check it from the curb and make sure basic maintenance is being handled (the lawn mowed, place isn't looking trashy, etc).  Since you already have property in the area, you may consider getting a property manager to make it easier on everyone.

Sounds to me like a 50/50 partnership on this would be pretty simple.  Just be sure to get it in writing.   Split the cash flow, and keep an eye on the market so you'll sell at the right time and gain from the appreciation.  

Fair market value of a duplex is calculated just like you would determine the fair market value of a single family residence.  Properties of 1 to 4 units are done this way.  You don't start using the income approach to valuing a property until you hit 5 units or more.

If you want to determine the FMV of a duplex, you need comps; preferably from the same neighborhood, and preferably within 20% of the square footage of the subject property. You want to compare apples to apples, so if in the subject property each side has 2 bedrooms, 2 baths you want to use comps where the other duplexes each have 2/2 each side. Construction will hopefully be within 5 years of the subject property etc. Make your comps as close to the same as the subject property as you can, and keep the comps within 6 month old if possible. You may need to go back a year to find the comps. You want at least three comps.

Finding comps in the same neighborhood as the subject property is not always easy.  Sometimes you have to go outside of the neighborhood your property is in to find comps.  If you have to do this, make sure the second neighborhood is in the same city, and hopefully at least in the same zip code.  Go to the neighborhood and determine if the neighborhood is truly comparable to the neighborhood your duplex is in.  Remember - apples to apples, not apples to bananas.

Once you find at least three comps as close to the age, size, condition of the subject property you take the square footage of each comp, and divide the selling price of each by the square footage to determine the selling cost per square foot. I prefer to use the average selling cost per square foot and multiply that by the square footage of the subject property to determine the FMV.

Note: Whenever possible, I try to get 5 comps for any property I'm working on. I then toss the highest and lowest comps and average the selling cost per square foot of the remaining three. Your numbers will be closest to what an appraiser will use in determining the FMV of the subject property.

If all else fails and you can't find comps for your duplex, call an appraiser and ask if they'll do a "desktop appraisal" on your property. The cost of the desktop appraisal can vary. I often use a desktop appraisal to verify my ARV on properties I intend to buy and hold. Many will say it's a waste of money, but I don't mind spending $100 for the peace of mind that my numbers are good. Often, and especially in an up market, the appraiser's value will be higher than my numbers (I run conservative to be on the safe side). I'm used to paying $100 for a desktop appraisal from a small appraisal company (2 people work in the company, father and daughter), but depending on the deal I'd pay more if they asked for it. It all depends on what the peace of mind is worth to you.

When you ask for the desktop appraisal give them a full narrative of the property, neighborhood and condition.  Be brutally ho nest as to the condition of the subject property.  Start at the curb, look up and down the street and across the street; is the subject property of like size, age and condition as other properties on the street?  If so, state that.   Then describe the condition of the property.   My narratives often start out looking like this:

"The subject property is a 2,000 square foot duplex built in 1978 and is located in an area of similar size duplexes that appear to be of the same approximate age and condition as the subject property.   Each side of the duplex has 2 bedrooms and 2 baths, and each side also has a one car garage. The subject property's landscaping, roof, and exterior appear to be in good condition with no obvious deferred maintenance..."  Then describe in detail the condition of the interior of each unit.  State exactly what is wrong with each unit if anything.  The more complete and honest your description of your property is,  the more accurate your desktop appraisal will be.

@Heaven Boswell Wholesaling to raise capital so you can do fix and flips, and eventually buy and hole properties is how a lot of people start in REI. You're doing the right things to start, and it will work if you stick with it. Good job!

I'm a little confused as to how you're doing your calculations for your selling price to the investor.  You stated "I was getting the houses under contract for a good price for investors and then adding about 10k for my profit."  If you're getting the property under contract at a good price for your investors, that's what your end price needs to be.  If you're adding $10K on to that, you're digging into THEIR profit.  That may be why they're not taking your deals.  If you want to make $10,000 in profit, it needs to come off of the price you're getting the property under contract so there's enough meat on the bone for the end investor.  Clear as mud that is I'm sure.

Lets say 75% of ARV on a property is $75,000 (making the ARV $100,000), and the property needs $10,000 in repairs, and investors in your area are willing to pay up to 75% of ARV less repairs for their properties; the most your end buyer investor will be willing to pay for the house is $65,000. If you want to make $10,000 on the deal, you need to get your seller to come down to $55,000 on your purchase contract. In this instance, I think looking to make $10,000 profit as a wholesaler is too much. I"d take $5,000 and leave with a smile on my face. :-) That way you would only have to get the seller down to $60,000, which will be a little easier on you, the end buyer will be happy, and you get 5 grand with a smile, and an investor who will look at more of your deals as you get them.

Personally, I don't put a set dollar amount on what I want to make out of each deal. I prefer to use a percentage of the ARV. That's why I mentioned earlier getting properties under contract at 50 - 60 percent of the ARV, and sell at 70% ARV. You'll get more deals done, and will leave less money on the table on the larger ARVs and not take too much on properties with a lower ARV.

Picking apart some more....you stated "75% of the ARV - repairs (which I would calculate at $15/sq ft) - my profit." In the paragraph above, I explain that using a percentage of the ARV as your profit to be better than a set amount. In this statement though, it reads as if you are not doing enough of your homework; you're not actually calculating what the repair cost will be and are simply using $15/sq ft to estimate the repairs. Don't do that! Do it right as I mentioned in the LONG post from earlier (sorry for the length, but I'm trying to help you and want to be thorough). The more accurate your numbers are (ARV and repairs), the better your deal will look and the more deals you'll get and do.

Now, your end buyer investors are picking apart your ARV, and you're explaining that you had a Realtor pull your comps. There are a few things you can do to combat this:

a.  Put together the package like I recommend in my previous post.  This way your end buyer investor will see exactly what you're pulling for comps, can go over them and show you what their objections are.  It's a learning curve, and they will be teaching you what they are looking for without even being conscious they are doing it.  

b. Make certain you are calculating what the comps are selling for per square foot, and multiplying the subject property's square footage by the AVERAGE selling cost per square foot to end up at your ARV. Show your calculations, and show that you are using the AVERAGE ARV. You may also want to calculate based on the lowest and highest cost per square foot to show that your not gouging your end investor. They will appreciate this, and come back to you for more deals.

Example:  Subject property is 1,000 sq ft.  Comp A sold at $90/sq ft.  Comp B sold for $97.50/sq ft.  Comp C sold for $102.50/sq ft.   The subject property is a 3/2/2 on 1/4 acre of land.  All three comps are 3/2/2 and on 1/4 acre lots as well.  What do you comp the subject property out at?   Show your calculations

Low comp:  1,000 sq ft x $90/sq ft = $90,000

High comp:  1,000 sq ft x $102.50 = $102,500

Average of comps:  (90+97.5+102.5)=290, 290/3=96.67

$96.67/sq ft x 1,000 sq ft = $96.670

Your end investor will probably comp out the property at $102.500 ARV, but you're selling it to them using $96.670 ARV making your deal look even better by almost $6,000. Your end buyer investor will continue to come back to you and look at your deals. You'll still make good money on this one, and future deals.

c.  I don't know who you're using to pull comps, but you may want to try a different agent on your power team.  Contrary to popular believe not all agents can comp out a property properly.  Are your comps from the same subdivision as the subject property?  Are they within 20% of the square footage of the subject property?  Do they have the same number of bedrooms and baths?  Garage or carport?  Lot size, is it comparable (usually they are if in same subdivision, but not always)?  How old are your comps?  You want to make sure they're less than 6 months old if at all possible, less than 3 months would be even better.  Appraisers will use comps up to a year old, but they adjust for market conditions which is more in depth than I'm willing to go here.

Again, I don't know who you're using to pull comps, but consider this...it's a hot market...  Realtors are having a difficult time finding listings too!  Real estate sales is a very competitive profession.  Might your agent be purposely giving you bad comps so you lose the deal, and then they can go in and get a listing?    If you're giving your agent the non-motivated seller leads they'll be more apt to give you good comps so you keep giving them leads that don't work for you.   

Try finding anther agent to get on your power team before you dump the current one.  Have both of them pull comps on a property and compare what comps they pull, being truly objective about them when you compare.  Talk to them about the comps, why they pulled those particular comps.  Do they meet the criteria of being in the same subdivision, etc.?   I recommend doing this on a random property before you land the next contract you're going to wholesale.  You'll save time, headache and heartache if you know you're getting the best comps you can.

I disagree, and agree with @Account Closed.   Yes, there are a ton of wholesalers in Dallas.   Just as there are in Houston, Austin, San Antonio and any other city.  Yes, there are a ton of amateurs who have no idea what they're doing.  Yes, intelligent business people adapt to the times and changing market.  

I do not agree that wholesaling is too competitive in this market.  The pre-foreclosure list is still active.  Drive around and you WILL find vacant homes.  People die every day and that opens up probates.  If you're not finding houses to wholesale, you're not looking.

Becoming a Realtor is a viable option for some, if you can afford the courses, the license fee, the National Association of Realtor dues, the state association of Realtor dues, the local association of Realtor dues, the MLS fees, and still have money to market yourself because your broker isn't going to do it. Sure the broker may throw you a lead every now and then but the actual marketing is up to you. However, being a licensed agent is not all that bad. You now have MLS access for both your Realtor leads and your wholesaling/investment leads. You don't have to refer non motivated sellers anymore, you just take the listing. There are other perks as well. There are also some caveats. If someone decides to go this route, please contact me first. There are some major pitfalls if you don't do things right and it can cost you a LOT of money!

FYI...I've been a licensed agent in California, Texas and Florida beginning in 1998.  California license is valid but not active (first licensed 8/24/1998).  Texas currently expired but the CE is done and can be activated at any time (first licensed 1/1/2007), and I let the Florida license go completely (2012-2014).  

@Brett Goldsmith Thanks!  That's a bit more of the info I'm looking for.   Any idea which one's are more apt to call it?