All Forum Posts by: Jared Garfield

@Jay Hinrichs, thanks so much for pointing that out.  For new investors looking to buy, renovate and refinance, doing it themselves, this can be a major landmine!  I once had a client who didn't want to use our rehab team because we were $2,000 more than a quote they had for a $25,000 scope on a duplex.  They instead used a disreputable contractor that I warned them not to use.  He ended up embezzling the money, not completing the work, and they came back to us to do the rehab.  Fortunately we had sold them the property with about $30,000 equity so they still made about $3,000 when the property sold (I listed it for free and our contractor did the job at cost to save them).  Buying out of state on your own is much more risky than having a proven team that may be able to do it cheaper than you could yourself.  The important thing is to get a copy of the full rehab scope that was done on a turnkey property, as well as a home inspection.  That way you know what deferred maintenance items you might be dealing with.

We started buying and renovating income producing buy and hold/wholesale properties as well as flips back in 2000.  After doing over 3,000 doors as a team, there are so many things that need to be taken into consideration to ensure project success.   Here are Ten Takeaways that I hope will make your success more sure, but I hope you will add to this list so that this post becomes highly authoritative and worth sharing!

1. Covey said "Begin with the end in mind,"  you must know what the after repair comps are, and keep the equity position you want to maintain in mind from the beginning.  Your rehab scope must fit the strategy, whether rent or flip, and it must fit what the buyers or tenants in the market are looking for.  Plan to renovate better than your competitors to rent or sell faster!  Finishing a property half way between flip and rent doesn't work, it has to be fully one direction or the other to be successful.  Don't renovate to the standard you would live in if it's a rental, and if it's a flip, make sure you understand what the market demands in terms of amenities, colors and styles!
2. Always hire licensed, bonded contractors who have liability insurance and workers comp.  Handymen may be fine for patching a hole in a wall, but if someone is getting on a ladder, working with electricity, or doing roofing, workers comp is a must.  It will cost a little more, but not having that coverage could bankrupt you or ruin you financially for a very long time.  Get a copy of all of this before work begins.
3. Get lots of references, before and after pictures, make sure that you get multiple quotes and scopes, especially when you are first starting out and are unfamiliar with pricing.  Angie's List is a great way to get standardized pricing of what can be expected in your market, but they are often high if you are doing volume work.  Asking the prodesk at Home Depot which general contractors order the most materials and do good work is a great hint.  Rather than just trusting advertising or a friend of a friend, there is probably a good reason the top purchasers of materials from Home Depot or Lowes do so much business.  Stay loyal to your contractors that do a great job, repeat business and volume are key to keeping your pricing low.
4. Get a signed contract, in many states this is the only thing that holds up in court.  Make sure that this contract requires dates for completion and for each draw.  Each portion of the work scope should be broken down within the draws so that things are done in an orderly fashion, and you should only pay for work that is completed and has been verified in person by yourself or your trusted appointee (who should have construction experience and be independent of the contractor).  If a portion of the work hasn't been completed, don't pay for that portion.  You need to always have more work completed than you have paid out.  If the contractor walks off the job, it's more expensive to bring someone in to finish off a job that is half way through and you need to be prepared to do that in worst case scenario.  Make sure there is a daily penalty for each day the project goes over deadline.  
5. Any additions to the scope must be approved in writing, and any latent defects must be verified with before, during and after pictures.  Receipts for work performed by other professionals should be provided before work is paid.  Specify that latent defects are to be done at cost.  Always make sure that the contractor knows in writing that they can not do additional work without written permission.
6. Find out what the standard construction warranty for parts and labor is in your area, and try to get at least that.  We recommend trying for a year, and six months should be a minimum.
7.  If you can get a contractor to complete the work and take payment upon completion that is great, but this may be more expensive.  If you are dealing with out of state or construction from a far distance, consider using an attorney's escrow account, and hire an independent building inspector to inspect each draw before payment is made.
8. Upon completion make sure that the general contractor and any other contractor or sub that works on the house signs a lien release waiver.  This ensures that they can't later claim that they were not paid and lien your house, causing title problems that may prolong or prevent the sale of your property.  Often you will have paid the general contractor but they may forget to pay the subs.
9. Have written standards that detail what the completed product should look like.  This should be very detailed and have before and after pictures.  Use standardized materials so that your product is consistent.  
10. Make sure that  all utilities are turned the day you close the property (provided electrical and plumbing are inspected and in good and safe order).  Not having this done can really cost you time.  Having a detailed construction plan well in advance will save a lot of time and money.

@Jay Hinrichs not disagreeing, just telling you what Waypoint, Reven, 643 Capital and other panelists had to say at the IMN conference.  Knowing how they think and plan is a strategic advantage.

David, 

You make some really great points, and I sold a lot of properties to these funds too, and am glad for the role they played.  Most of them have really slowed down.  At the conference I'm at right now, listening to their panels it seems they are selling off several thousand homes in packages of homes in packages of 20-50 for accredited investors.  They are offering them at 10-15% below full retail value, thinking people will be happy with stabilized 9-10% cash on cash returns.  They consider these assets similar to A class apartments.  Many of the funds are here to stay and hopefully that leads to less disruption.

@Dru Bennett,

Good Question, I am at the IMN conference in Miami right now with all of those big funds, and those numbers came from the panel that had all of their CEO's on it.

@Kami S.,

MLS is fantastic for knowing days on market, concessions by sellers, absorption rates, and what a property might sell for. If you are trying to find deals there you will want to do the following:

+ Search for nice homes that have been on the market a very long time.  Find from tax records what they owe, don't be afraid to make very low offers.  

+ search key words like motivated seller, must sell, bring all offers, divorce, short sale.  

+ Remember that short sales have much less competition because many won't deal with the hassle, so you can do well there.

+ Find HUD properties that have been on the market a long time, they will accept significant discounts after 120 days. Submit a 25% lower than list price offer and the system will counter you with the lowest acceptable net to HUD offer.

+ Check CraigsList for motivated sellers that don't realize what their home is worth because they are to cheap to hire a professional, or are so motivated that they don't care that you are getting a deal.

@Marcia Maynard,

I'm pretty new to BiggerPockets and didn't know I could post to BiggerPockets Blog?  I posted it on my personal blog, but don't think many people see it there. I'm glad you liked it, thanks for the kind words.

From 2008 to 2013 it was easy to have a really nice run of buying red hot distressed single family homes in the Atlanta market. Homes built from 2000-2007 that had sold from $150,000 to $170,000 and cost $135,000 to $155,000 to build were selling for $30,000-$50,000. Due to the newer age of the homes the renovations only averaged $8,000 to $10,000 in mostly cosmetic repairs, and returns were through the roof! It wasn't uncommon for investors to make 35-45% Cash on Cash Returns. (For Newbies That's the percentage of your down payment you receive back each year after taxes, insurance, vacancy, maintenance, debt service and property management. Divide the annual net cash flow after these expenses by the down payment and you'll have your Cash on Cash Return).

When Warren Buffet said, "Buy when the blood is in the streets and everyone is running..." and then went on to buy Prudential and turn it into Berkshire Hathaway Home Services, while also buying up a ton of single family homes, he set off a Wall Street frenzy. Behemoths like Colony Capital and Blackstone soon started gobbling up billions of dollars of single family homes. Competing with small mom and pop investors with 30 and 100 Billion (with a B) dollars, it wasn't real possible to compete for the same houses, because they would accept much lower returns. They had to put their money into play because their funds required a return, and they didn't require 25-30%!

When The Biggest Kid Always Wins The Marbles...Go Play Somewhere Else!

Having sold homes by the dozens to these funds, I know a lot about how they work. They needed primary markets, with huge volumes of homes. It had to be scalable, the homes had to be a certain age, and so far from the center of town. There were a lot of requirements that had to be met, and a snowball effect of ever larger appreciation from the laws of supply and demand took over. I believe that an artificial appreciation took place initially, but fortunately this was a good thing as consumers took the time to rebuild their credit, they could come back and buy the same homes (only now more renovated) in three to five years. It helped a great deal with the market recovery as these Wall Street funds provided a role that the secondary loan servicing market was unable to perform for a few years.

For the primary markets like, L.A., Las Vegas, Orlando, Tampa, Miami, Atlanta, Dallas, Houston, Phoenix, Boston these hedge funds sped up the recovery at a rapid rate. The economies and population growth trends made these cities very attractive. High growth secondary markets also performed very well, like Charlotte, NC and Nashville, TN. However, if you were an investor in these markets it was really hard to compete!

The smart kid who doesn't want to loose all of his hard earned marbles has to play somewhere else. For me that meant researching secondary and tertiary markets like Milwaukee, Oklahoma City, Montgomery, Kansas City, and St. Louis. It meant travel, research and team building. However, it meant that one could still get 10-15% Cap Rates and 25-30% Cash on Cash Returns on C+ to B assets.

(An example of a B+ home in a tertiary market that was purchased for $82,000 or so last year and rents for around $1,200 per month - not for sale, illustrative purposes only).

You see these markets don't have enough inventory for the big boys to have critical mass, they are not scalable. Also, they recover more slowly, yet they will also bring really great returns, and as long as they are not rust belt states losing jobs and population in a major way, they can be very stable.

Going further out from primary cities is also a great way we kept our marbles. Many large towns 45 minutes to an hour outside of primary markets had cheaper deals a lot longer, the funds weren't in those markets nearly as much either. As USRDA unloaded their inventory of foreclosures, the deals could be really sweet at times!

Who's Scared of the Big Bad Wolf? Don't Be!

I know a lot of people thought the game was over and went into different fields when they thought the downturn was over, or thought they couldn't compete any longer. For full time professional investors who have made a career through the up and down cycles, that wasn't an option!

The top 3 Multi-Billion Dollar Hedge Funds only own 130,000 homes, the top 18 combine to only own 198,000 homes out of the total single family housing inventory of 17,600,000 that is only a combined 1.13%!

There is so much opportunity for investors! You just have to decide whether your market is a flip or cash flow market, get some education, find some funding, and get to work! There are plenty of people here willing to teach you at no charge and I'm one of them! Follow people, send connection requests and reach out and ask for the help you need!

Eric, getting the right context and building your power teams is a great start.  What are your first goals?

Carol, 

For many people real estate isn't a passion, for a few of us who are fortunate enough it is.  If you get the right team members in the right markets you can make your involvement almost totally passive.  I say almost because you still have to get enough education to make sure your team is doing the right things.  If you don't inspect, don't expect.  Passive income can help you pursue your real passion, but who knows, you may become passionate about aspects of real estate:  providing jobs, improving communities, the big checks, the tax savings, or the travel?