All Forum Posts by: Aaron McGinnis

Worst I've seen was a house with a sinking foundation... thought it could be fixed, turned out there was a underground stream running through the middle of the house.

Don - My target goal is something like this...

After everything is paid for, including myself, the post-tax, cash on cash ROI should be somewhere in the 15-20% range.

Bear in mind that I look at myself as a hired project manager servicing the company I have set up to do the flips. In other words, I view myself as a cost driver rather than a receiver of revenues.

Financeexaminer -

My answer to your question is absolutely sure to give most leverage-based investors a hissy fit, and cause most traditional finance guys to give me the hairy eyeball... but it is an approach that I like to apply to looking at leveraged deals.
(With the caveat that I don't use leverage, so my view here is basically hypothetical)

So if you don't like it when people make up metrics out of the blue, stop reading right here. Hah.

In your situation, I'd tend to use something that I have completely made up. Absolutely pulled out my butt. I call it "Return on Exposure"

Basically, I'd go into the deal with the presumption that I'm really exposed up to $100k... so I'd use that like a cash-on-cash number to determine what my, ahem, ROI is.

My rationale for this is that if the deal goes really south, I'm still on the hook for the rest of the cash.

So looking at that, and considering a 6% commission as a selling expense, plus 3% in closing costs, plus what I try and pay myself off a flip... I'd say that the deal looked a bit thin for me to really want to go after it. Of course, there's all kinds of other factors involved here, but on the whole... I'd be looking for something with a bit more padding on it.

Not to say I haven't taken deals that thin (or thinner, even) when the buy-side market has been harsh and not a lot of opportunities abound (And I've got cash sitting in a bank account, with opportunity costs piling up...)

Now if you're asking me what my ROI on my time is... I'm a cheap sonuvagon who doesn't pay myself a whole lot. I'd much rather see the profits be pushed back into the flipping company. A view my wife sometimes laments...

As a flipping entity, you may not want all profit and loss to pass through to you. You may want it to stay in the company instead to allow for better autonomous evolution.

To put this in another way - an S corp has no retained earnings. This may make building a capital base challenging. Yes, you could continue to buy stock every year with the income passed to you on a K1 statement in order to increase the value of the corp... but that may look wonky to an outside entity if you ever want to, say, get a credit card, surety bond, or line of credit.

A C-corp allows you to bring in other people who may want to buy stock but not have the profit/loss pass through to them every year. (And may not want dividends every year either)

Better idea -

A C corp to handle the business of flipping houses. You own it via stock and run it as the CEO. You take a smallish W-2 as an officer.

An S corp that gets paid by the C-corp, which then flows through on a K1 to you. You take a small W-2 from this company as well... as an officer.

Maximum liability coverage. Minimum tax burden. As an added bonus, you get to laugh in the face of the IRS at the end of every year.

I try to factor taxes into my calculations, based upon historic taxes and my projected net for the year.

On a related note, setting dollar minimums for a flip is, IMO, a very silly approach. I much prefer to set minimum ROI percentage tolerances.

Do you really want to make business strategy decisions... which may potentially make, or lose you tens of thousands of dollars, based upon a free website which mindlessly dredges all available public records with very little meta or sorting?

The banks don't. They shell out good money to get BPOs and appraisals... and even those can be wrong or misleading.

Now go pay a good agent $50 for a BPO or an appraiser a few hundred bucks for a desktop appraisal.

ARV can make or break your deal. Don't risk your business and your money on dubious data.

I second J's statement... you need a closer approximation of resale value.

Assuming your Realtor (Realtor. Not Realator.) is right about the value being 35k, you may be in a world of hurt at 12k. Windows, HVAC, roof, cabinets, flooring, bathroom rehab, etc. can all add up to $30k+ in a big hurry.

If you haven't already closed, pay a General Contractor to come take a look and give you a bid... also find a competent Realtor or Appraiser and pay them to give you a closer number for the ARV.

Then you'll have a better idea if you want to close or not.

Luis,

Give us the adjusted values... but I can tell you already that your problem is comp #2. Get that one dropped, or better, replaced, and this problem will go away.
(Feel free to send me the appraisal and I'll take a look... but I'm certain that comp #2 is the problem)

One way to fix this is to call the appraiser and tell him something like, "Hey, yeah, I saw that house before it was sold... man, that place was a total wreck. It is by no means a fair comparable."

Dovetail that statement with, "The house over at 123 Main St. is a much better comp. I know it's outside the neighborhood but it is in a very comparable neighborhood nearby and the house was very close to the subject here."

My guess is that the rest of your comps adjust to meet your sale price, but once the 4 comps are averaged out you're getting dragged down by #2.

This is actually not that huge of a deal. One comp throwing things off is much easier to deal with than having every comp on the list needing to be erased and for the appraiser to start over.

MOST LIKELY what happened here is that the appraiser popped open redlink (Or is it redlist? redbook? Whatever it is that they use) and did a quick neighborhood study and picked the 4 most recent sales, then plugged and chugged without thinking too much harder about it.

Give him the data, explain the error in logic, and you should be golden.

But... do make sure that comp #2 is the problem by reviewing the rest of the appraisal.

First of all - call me and let's go get some lunch sometime!

Second, you're speaking my language. I haven't had an appraisal yet that I haven't had to fight tooth and nail.

The broker needs to challenge the appraisal and request a 2nd evaluation. Because this is an FHA loan, moving to another broker won't help. Basically, this appraisal has to be right or you're really SOL.

Have you agent draw up a very professional looking BPO. Don't skimp on the written details, but don't give the appraiser a word-wall that he won't have time to process.

Give him the BPO and also give him a cost breakdown for the rehab. He's already going to assign a rehab $$ number for himself, and it's probably way too low. So make his life easy and give him the number.

The BPO is, in my experience, very important. Lay it out like you would for a standard bank BPO and make it really easy to follow. You're basically doing his job for him.

Get in touch with him. If possible, of course, meet him at the second evaluation. Be very friendly and consider simply saying, "Look bro - the contract price is XXX,XXX and you're $5k low on the appraisal.

Don't ask him to come up, just let him know what the contract price is... most likely, he doesn't know unless someone has told him. Put a number in his head and let it fester.

If the rehab you have is permitted, pull down permits or lack thereof for the comps and use that as leverage. (I've made that argument with some success in the past)

Above all, don't beg, don't whine, and don't come off as desperate. (I know you won't, you're too good a negotiator for that)... simply state facts and back yourself up with a slew of facts and figures that simply cannot be argued with.

Of course, getting the mortgage broker on your side is a big deal...

The answer is... No, and yes.

If the asset manager sees more than one offer, they won't care if one of the offers is a hundred times higher than asking price - they will still ask for highest and best. Every. Damn. Time.

Reason for this? The high bidder doesn't know what the other guy bid. Nobody knows what anyone bid... so the high bidder, in his desire to get the property, may go even higher. Or the low bidder may have been trying for a one-shot deal, but is actually willing to go far higher than even the high bidder.

To put it in another way - the asset manager has no compelling reason NOT to ask for highest and best... it is literally win/win from their perspective.

Of course, for those of us trying to buy desirable, underpriced property... you will realize pretty quickly that the bidding process is basically a game of grab-***. Shoot them your best offer the first time, with the best possible terms you can offer, and hold your breath.

(And for the record, I have yet to buy a property under the list price. The highest I've gone is about double the list price, and I've lost those bids too.)