All Forum Posts by: Jared Garfield

One of the first deals I did in college was a house I bought for $10,000 using a car loan against a Pontiac TransAm with a really cool T-top that I bought at auction.  It was a tip I learned from a Carleton Sheets course that I paid $199 for (with LOL VHS tapes).  The house appraised for $60,000, so it was a no-brainer, right?  So many times new investors love to jump onto a "deal" because it is so cheap!  There really is a lot more to success than buying low and selling high!

The town had about 4,900 people and was in the middle of nowhere 50 minutes from anywhere (It's since lost 10% of those people).  It was really hard to find reliable contractors, there weren't many full time professional agents and property management was impossible.   Very few people had credit for this price range of house, it was too old, too small and there really wasn't a lot of a market.  Remember the number one rule of real estate is:  Location, Location, Location!  How small of a town is too small, and how do I decide where to draw the line?

Since this first learning experience as a team we've done over 3,000 homes in 5 states, and learned from mistakes and successes.  I hope these tips help you avoid the mistakes I made on my first deal:

• What makes you think it's an ideal candidate for a flip? It may be outstanding, but give us some numbers? Is it at least 40% below market value? What do comps say the after repair value will be? How much money will have to be put into renovation to net what kind of profits? After real estate commissions, holding costs, and closing costs, what will you net? What will the ROI be on that flip?
• Get access from a realtor to MLS data regarding absorption rates. How many months supply are there, what is the average days on market that it takes to sell? What percentage of asking price are they getting and how will your after repair condition compare to theirs? How much in concessions/closing costs are sellers paying? How many housing units are selling per month, and what would your competition look like? What is the average age and square footage of the homes that are selling, and how do those compare to yours?
• What is the availability of credit in the area, is the home at or below the median home cost or no more than 20% above median. You want to appeal to the largest cross section of demand.
• what is driving the economy, is it a one horse town? Who are the main employers, are they diverse or tied to one industry? What is the population growth of the area, the unemployment rate? What does the one year and ten year population growth trend look like?
• If it's a small town that is a bedroom community for a much bigger town within 30 minutes that might not be too bad, but if it's isolated be careful. Are there new roads being developed that will grow the area? What does household formation look like? How many new building permits are there per month? Are new schools being built? How are schools in the area?
• How many foreclosures are there in the area, will people decide to buy one of them and fix it up themselves instead of paying you a nice profit? Are there a lot of do-it yourselfers?
• Are there at least two or three good property managers that are succeeding in renting homes? What is the demand for rental housing, and what will the house rent for if you can't sell it immediately? Will you cash flow at a good return if you can't flip it?
• Lastly, who is your target for this flip? What are the demographics of this town age and income wise? Is this most likely to be sold to a baby boomer, a millennial? Older generations might want main level living and small yards, values are different among different generations, so you need to know what the market demands.
• You need to know the finish work required to sell and be nicer and better than your competition. The last thing you want to do is do an underwhelming job on the renovation so that people don't quite get it. Will this small town have affordable and quality construction crews? The wrong crew can really mess up a great flip!
• Prepare to sell at 10% below market unless it's a hot sellers market. Selling quickly to make a little less profit might be worthwhile. If you decide to flip, make sure you have a good lender to get potential buyers pre-qualified, make sure you have a top selling realtor who really knows how to market and gives you accurate expert information.

If I can ever be of assistance, please don't hesitate to reach out! Happy Investing!

Kory, 

Here are some things you might consider that will help you avoid heartache!  We've done over 3,000 homes as a team in 5 states, and learned from mistakes and successes.  I once bought a home in a one horse town of 2,000 people while in college, it was a nightmare.  I hope these tips help:

• What makes you think it's an ideal candidate for a flip? It may be outstanding, but give us some numbers? Is it at least 40% below market value? What do comps say the after repair value will be? How much money will have to be put into renovation to net what kind of profits? After real estate commissions, holding costs, and closing costs, what will you net? What will the ROI be on that flip?
• Derek makes good point, get access from a realtor to MLS data regarding absorption rates. How many months supply are there, what is the average days on market that it takes to sell? What percentage of asking price are they getting and how will your after repair condition compare to theirs? How much in concessions/closing costs are sellers paying? How many housing units are selling per month, and what would your competition look like? What is the average age and square footage of the homes that are selling, and how do those compare to yours?
• What is the availability of credit in the area, is the home at or below the median home cost or no more than 20% above median.  You want to appeal to the largest cross section of demand.  
• what is driving the economy, is it a one horse town?  Who are the main employers, are they diverse or tied to one industry?  What is the population growth of the area, the unemployment rate? What does the one year and ten year population growth trend look like?
•  If it's a small town that is a bedroom community for a much bigger town within 30 minutes that might not be too bad, but if it's isolated be careful. Are there new roads being developed that will grow the area? What does household formation look like?  How many new building permits are there per month?  Are new schools being built?  How are schools in the area?
• How many foreclosures are there in the area, will people decide to buy one of them and fix it up themselves instead of paying you a nice profit?  Are there a lot of do-it yourselfers?
• Are there at least two or three good property managers that are succeeding in renting homes?  What is the demand for rental housing, and what will the house rent for if you can't sell it immediately?  Will you cash flow at a good return if you can't flip it?  
• Lastly, who is your target for this flip?  What are the demographics of this town age and income wise?  Is this most likely to be sold to a baby boomer, a millennial? Older generations might want main level living and small yards, values are different among different generations, so you need to know what the market demands.
• You need to know the finish work required to sell and be nicer and better than your competition.  The last thing you want to do is do an underwhelming job on the renovation so that people don't quite get it.  Will this small town have affordable and quality construction crews?  The wrong crew can really mess up a great flip!
• Prepare to sell at 10% below market unless it's a hot sellers market.  Selling quickly to make a little less profit might be worthwhile.   If you decide to flip, make sure you have a good lender to get potential buyers pre-qualified, make sure you have a top selling realtor who really knows how to market and gives you accurate expert information.

If I can ever be of assistance, please don't hesitate to reach out!  Happy Investing!

Nadine, 

We have started using land trusts quite a bit in our acquisition model.  I'd love to chat some time and compare notes.  Perhaps we can find some synergy in networking.  I was in Long Beach last week and find myself in your area once a month for three or four days.  Soon I'll be moving to the L.A. area, so it would be fun to find out more about what you are doing!

Kyle,

Great questions, I've coached over 1,000 investors through these types of issues, working for three years with Robert Kiyosaki which was like drinking from a fire hose as people faced these kinds of issues.  Let me see if I can help:

1. Talking to an expert who knows a lot about reverse mortgages is a good start.  Mark Schow is a friend of mine who was the head of his state mortgage association, he did thousands of investment loans for "Rich Dad, Poor Dad" clients and was one of the largest reverse mortgage brokers in the country.  He will give you some free advice and will know the rules.  Inbox me and I'll give you his email and phone number if you would like.
2. Depending upon your father's financial situation, and the equity that is in the home, I don't know if a refinance would be possible?  This might mean you wouldn't have to sell in such a timeframe (although market indicators for California say that the next year is a great time to sell).  This only becomes important if the two of you don't have the ability to come up with the renovation funding.
3. Private/Hard money lenders who might be willing to go into a second position to give you the renovation funds to be able to get the house into top shape would be an option to check into.  While these types of funds may carry high interest rates, it's often not a bad solution if its for short term and you can afford the carrying costs.  I know of one such lender with interest rates in the high 6's for CA borrowers. 
4. Even more desirable, could you get a home equity line of credit on your home, or even a car loan against a paid off car to be able to have funds that could be used?  You could have an attorney draw up a promissory note that your father signs (keeps things from getting difficult if other family members are involved), and then put the money into the renovations with a commitment that you receive a portion of the upside for helping....everyone wins!
5. Look at the comps with a realtor that does flips, see how much value would be gained commiserate with the renovations required. This will tell you whether you would likely want to sell without doing renovation or not.  Removing wallpaper, painting, taking up carpet to reveal hardwood floors in good shape, updating lighting, door knobs, front doors, and landscaping are all good investments that pay back a great deal, and might not cost nearly as much as you think. 
6. Certainly you can shop the house to investors, check Zillow, get two or three realtor opinions, and with the feeding frenzy that exists, someone else may see upside in being able to make a profit for putting in the efforts, and might pay you a retail price for the current condition.  This "Buy High, Sell Higher" philosophy is risky in my opinion, but when inventory is low and capital plentiful, there are people out there ready to take the gamble.  This option doesn't give you the opportunity to learn as an investor, and you are giving someone else the opportunity to make a handsome profit for saving three or four weeks of work and figuring out the capital side of the business.  (If life is really hectic it might be worth it). 
7. Call House Buyers like HomeVestors.com -  They may low ball the heck out of you, give you a really low offer that will almost make you mad, but in the CA market they might come back with something bordering reasonable.  They have great systems, are very good at pitching and convincing people to sell to them, and you can probably learn a lot by watching their approach.  (You might not want to try this approach if you are a soft sale because they will be very good at what they do, and they are a good option for people desperate to sell who want to offload a problem).
8. Partnering with an expert is not a bad idea if they have a proven track record, can sell the property without paying listing commissions (they will need to be licensed) and if they will put the renovation money up and manage it.  You would partner only on the upside potential that is achieved after you receive the value of the property in the current state.  They get their invested capital back and the upside potential is split.  (We are licensed and have capital - so we could talk about options if you like).
9. Holding the property for rental in a market that has had a very strong upward trend for several consecutive years might not make sense.  Many experts feel that California and many other markets in the country are so much higher than where they were before the last crash, that there may only be a year or two of growth before a market correction.  It's likely that your family equity in this home is only going to earn 1-3% so if you elect to go the cash flow route, selling the property and rolling from 1 property into 10-15 properties that earn 15-25% Cash on Cash Returns and up to 5x the income might be the better route.  I've helped friends in CA go from $18,000 per year income to $120,000 income on the same equity, so if income is what you want, consider professional property management on turn key, fully renovated properties.  It's eggs in a lot of baskets instead of one, and provides income while still maintaining equity and tax advantages.
10. Lastly, if your Dad hasn't reached the maximum lifetime exemption, he may be able to sell this home without having any taxation on it if he has lived in it 2 out of the past 5 years.  Get with a good CPA to find out the rules.  Please remember that for many people, if an asset isn't sold before 2 years prior to needing to engage Medicaid/Medicare for nursing homes that assets can be seized to handle these costs.  Hopefully, your Dad is a long ways away from that, but if you do hold onto the home, placing it in a Trust might be a wise thing if declining health could make that possible in 3-10 years?

I hope this helps, and if I can assist further, connect with me and I'm glad to talk and share local resources that might provide solutions, whether it's lenders, realtors or contractors.

Happy Investing.

Leland,

Our team has done 3,800 properties over the last 15 years, and this is a great question.  It really depends a great deal upon what's standard for the area.  In some areas garage conversions are really popular, and the appraiser will give you quite a bump in the value if the space is finished to the same standards of the rest of the home. 

• This means that the house must not look like a conversion, make it look like it was part of the original construction.  Hint:  You don't want to use vinyl siding or hardiboard to enclose a framed over space where the door used to be.  Putting a door right in the middle will really add to tackiness!  Putting a window in tastefully, and doing hard coat stucco that ties into the rest of the house could really make it a winner, and if the home is brick, stucco could work great if you paint the brick the same color with masonry paint. 
• There are heating and cooling units similar to what you see in a hotel that can be low profile from the exterior.  Try to put it on the side of the house where it will be less noticeable.  Depending upon the roof truss's sometimes it's not real expensive to run duct work into the garage (but in this case it sounds like the existing hvac won't make that work). 
• Look at the comps and see how well homes with converted garages sell, how do the days on market compare to smaller homes that have the garage.  Most likely in an expensive area like California your cost per square foot will really make this conversion worthwhile.
• Lastly, if you are going to take the gamble, make sure that in worst case scenario that you will at least recoup at least the same amount of money you put in, and that the house will sell faster.  If you don't get additional profit, but at least net the same, but sell quicker,  you've added to your experience and haven't lost anything!

Best of Luck, and I hope this deal makes your pockets bigger!