Encouragement
I just want to let everyone know a little bit about how I got started and how I finally stepped up and bought my first house.
I started reading up about real estate investing back in June of last year; my knowledge of real estate was zero before that. I relied on Internet as my research library and allot of how to articles. I kept updating my wife about the material I was reading since I in general likes to consume articles in areas that interest me; I eventually started to look at HUD sites in my area (Miami) and I was lucky enough to get in contact with a broker that I now have formed a very good relationship with.
I found a house and I told my broker about it, they were asking 109K for it and he came back telling me that it would sell for 135K. We decided that we were interested enough to get a lock box code to the house and take a look at it; we went out and took a look at it and it was a complete war zone. The guy living in there was basically sleeping in dirt, collecting dirt, and keep different automotive parts in the house. However, the back yard was huge (12K sq ft); this was our first home that we took a look at and it was hard for us to see beyond all of the crap. We called up the investor holding the property and I started to negotiate with him; we finally ended up coming to an agreement of 89,9K for the property. At this point my wife (partner) and I decided that we were going to give it a trial; we contacted our mortgage broker (before we had access to hard equity) and financed the entire deal (100%); we only had to come up with closing money (6K).
We then started to look for some people that could help us restore the house; here is a warning for everyone. We ended up spending 4.5K on a contractor that was recommended to us but they did not do anything right and they just wanted more money. We finally told them to take a hike; we also learned that we will not pay anyone in advance for something that they have not done; additionally, we also learned to look at the dates on the homedepo receipt given to us by the contractor (he collected every possible receipt from the ground trying to get money for material). We ended up having to go to the house every day after work and work on the house for the next month; this was a good lesson because we learned allot from that. Despite this bad experience we ended up having a great time working on the house and we eventually ended up renting it out to an older couple. This couple is now asking us to tell the house to them and we have agreed to do so at a price of 165K; we put 20K into the house (that includes the 4.5K lost to contractors). We are selling this one by our self so there is no commission, we should net about 45K.
I have since September (when we bought our first house) purchased 5 more houses and I am currently working on selling them with an average net of 30K. All I can tell everyone that is out there still thinking about doing their first deal is to do your home work, network with a good broker so that you get a little bit of a security in your first couple of deals. You will eventually become efficient enough in your area that you will most likely end up doing a couple of deals without your broker or potentially a couple of deals together with your broker.
Don’t walk in blindfolded but also don’t let your self be so cautious that you end up never buying a house. Investing is a little bit of a risk taking but you can cut down on the amount of risk you are taking if you just do your due diligence first. Make sure that you feel that the numbers work and always expect repairs to cost more then you thought they would. In the beginning of your rehab career you will (just as I do) fix more then need to be fixed and that will cost you more but you will eventually start seeing what needs to be replaced and what only needs to be fixed or repainted. Instead of going in and smashing up the entire kitchen, stop and think, can I just repaint the doors or should I just replace the doors and keep the frame.
I have worked with computers for over 20 years now and I always thought that I was going to make it big in computers (I am making good money but not near the money I am making with real estate); however, I have seen that with less effort in real estate one can make a bundle of money and one can get allot of freedom with it. Both my wife and I are getting closer and closer to ending our day jobs and start doing this full time. WOW, that feels good.
Good luck to everyone and keep up the good work.
Here is what I worked out with my broker in the even that you want to use the same argument.
We have worked it out in the following way now, he gets all my houses and I only pay him a commission of 4.5%. For this he has to give me information about how fast he can sell the house (inventory level), at what price he can sell the house. This will help me understand if the deal is good or bad and I feel a little bit more secure about the deal.
Your experience was very inspiring to me. I am getting back into real estate investing. I too have been working in the computer field for many years, and I have come to realize that my future WILL be in real estate investing, and not in the computer field. Thanks for sharing your experience.
HAHA....What is it about people in computers wanting out! I am also in the IT industry, and am looking to invest in real estate some how. I am leaning towards rehabs, wholesaling what I can't rehab, and maybe keeping a couple for cashflow. This was encouraging to me as well!! I have been on this site for months now and am up to my ears in learning materials.I am ready to make a move.
Thanks for the article!!
Chris G
The great book that will help novice rehabbers is "Buy it, fix it, sell it - profit!"
No mistakes like that will ever happen to you if you read that book.
Olga, I am not sure there was a mistake; I would say that anyone can come across bad contractors whether or not you read a book.
Bad contractors are something that won’t disappear just because you read a book; I would encourage everyone to make sure that you know how you are dealing with if you can. In my case the contractor that I hired came highly recommended and that still didn't help.
Use caution, and always remember that participating in fixing a house in the beginning of your investor career will make sure that you gain the understanding for what it takes to fix a house.
It will become easier and easier for you to estimate how much it is going to cost to fix a house. I believe that it is important that as a beginner in rehab you participate in fixing one of your first houses so that you know when you are buying a house how much it is going to cost you and you will know when a contractor is blowing smoke up your alley.
/Chris
Well said, Chris!
Chris,
I re-read my comment and - yes - it sounds like I meant that YOU were not prepared enough, before you got into rehab investment. But no, I did not mean that at all. This was just a reference for new rehabbers to a good book that helps a lot. I should have said "ONE should read the book" instead of "YOU should read..." I am sorry for misunderstanding.
I am about to buy my first rehab property as well. Hope it works out well, just like in your case.
who is the author of the book called by it fix it sell it profit?
Kevin Myers
Good article cwittusen.
I am curious about your financing. Do you and your wife both have good credit? How did you get 100% financing on the deal?
If you had gone to a 65% LTV hard money lender you would have only gotten about $87,7k based on the ARV of $135. Have you used different methods of financing for your other rehabs, have you dealt with a hard money lender?
You mentioned that you have 5 properties right now. Is that a lot to manage at one time? How were you able to get financing for so many at the same time?
Thanks,
wayne
Wayne:
Yes, both my wife and I have a good credit but it wasn't without having to work at it for the past 2 years.
Additionally, we knew that if we wouldn't receive 100% financing we would have put in a little bit more or gone with a hard equity lender.
All of my other properties are done with hard equity money; I am getting charged 2% up front and 14% on the loan with a minimum of 2 month holding of the mortgage.
My first house gave me the ability to work with other properties because I took a regular line of credit on the house (50K) it allowed me to put money down when ever my hard equity guy didn't cover my entire purchase price. I am now working on a couple of other deals and I will now have a 12% loan instead of 14% and I will be charged 2% up front still but I don't have to hold on to the mortgage for more then one month.
Having 5 properties at the same time is not that much of work and it is pretty easy to manage; since my crew is working on all of them at the same time. I am able to get hard equity money from the same guy over and over (I have properties amounting to over 800K right now) and the reason I have been able to do that is because I have been finding good deals and my hard equity lender knows that if I go belly up (which I am not) he is sitting on a fantastic deal. I have bid on all of my properties right now and that tells me that I have managed to get good deals. This is all because I managed to get into a good relationship with my broker and he does some of my homework in exchange for selling the property. Additionally, I from time to time p***** up deals to him so that he can go in and make some money too but that is mainly when I am having too much on my plate or if I am running dry on money.
In of the houses that I bought, I only had put a new roof on it and a new kitchen and I'm selling it on Thursday. The buyer is so eager to buy it that they didn't want me to finish (because it would cost them more to buy the house) that we made a deal that I would only put a new roof and a new kitchen and that is it. I am walking away with about 57K on that deal.
I will post this as a regular post also so that everyone can see the reply.
In response to Wayne.
Wayne:
Yes, both my wife and I have a good credit but it wasn't without having to work at it for the past 2 years.
Additionally, we knew that if we wouldn't receive 100% financing we would have put in a little bit more or gone with a hard equity lender.
All of my other properties are done with hard equity money; I am getting charged 2% up front and 14% on the loan with a minimum of 2 month holding of the mortgage.
My first house gave me the ability to work with other properties because I took a regular line of credit on the house (50K) it allowed me to put money down when ever my hard equity guy didn't cover my entire purchase price. I am now working on a couple of other deals and I will now have a 12% loan instead of 14% and I will be charged 2% up front still but I don't have to hold on to the mortgage for more then one month.
Having 5 properties at the same time is not that much of work and it is pretty easy to manage; since my crew is working on all of them at the same time. I am able to get hard equity money from the same guy over and over (I have properties amounting to over 800K right now) and the reason I have been able to do that is because I have been finding good deals and my hard equity lender knows that if I go belly up (which I am not) he is sitting on a fantastic deal. I have bid on all of my properties right now and that tells me that I have managed to get good deals. This is all because I managed to get into a good relationship with my broker and he does some of my homework in exchange for selling the property. Additionally, I from time to time p***** up deals to him so that he can go in and make some money too but that is mainly when I am having too much on my plate or if I am running dry on money.
In of the houses that I bought, I only had put a new roof on it and a new kitchen and I'm selling it on Thursday. The buyer is so eager to buy it that they didn't want me to finish (because it would cost them more to buy the house) that we made a deal that I would only put a new roof and a new kitchen and that is it. I am walking away with about 57K on that deal.
Thanks for your reply cwittusen.
The way you are going now sounds exactly how I would like to start off. Your information has been very helpful.
I have not started on my first rehab yet, but I have talked to a few contractors. Each of them want 50% down.
Does your Hard Money Lender workout the payments to your contractors through an escrow account or do you handle that?
Is 50% down common practice in your area?
My thoughts are it does make sense especially when working with a contractor that you don't have a solid relationship with yet.
From reading your article it seems like the next contact I may want to make is a good broker. Any suggestions from your experience in good questions to ask of one?
Thanks,
wayne
Wayne:
Finding a good contractor is the hardest thing to do; I have come across contractors that wanted 50% up front and I told them that I would not do that because of the same reasons as I would not pay for a car that I have not seen and that I don't get to drive for the next 2 months to 2 years depending on when they deliver the car? Same thing with a contractor; they will tell you how fast they are and how good they are but until they have done one deal with you, it will be something that is going to cost you and not them.
Sure you can tie them up in contract and sue them if they don't deliver, but if you sit on a hard equity loan you will find that this is going to cost you more then you can afford and you are therefore better of continuing to shop around until you meet someone that will work with you on your first deal. You can run a $50 ad in your local news paper saying something like "Investor looking for rehab crew, call xxx". You will be receiving allot phone calls and just make sure you meet with the ones that agrees to listen to your requirements. Tell them that you will work with them and get them material money up front or you will go and buy the material with them the first time, you will then cover their expenses after 25%,50%,75%,100% of labor is done.
My contractor works on my houses without any money down, I buy the material for him to start and I give him 25% when 25% is done. I sometimes give him an additional 25% extra after the first 25% because I know I can trust him and that he will do what I need him to do.
I have also created a special program with my contractor; when we walk a building together I ask him how long time it is going to take to fix the house. I tell him if he can keep the schedule I will reward him when I sell the property with a bonus. The bonus amount varies between $500 - $1000 but it’s worth it because I get his complete attention and he works as long as it takes to get the house fixed.
My hard equity lender will work with my contractors if I ask him to because he now also know them; however, I try to only use my hard equity lender for the purchase of the house and then just focusing on getting him the money back as soon as possible.
As for finding a good broker; start looking for local real estate agents/brokers, call them/email them and explain to them that you are an investor and that you are looking for pre-foreclosure/foreclosure/bank owned/corporate owned properties and that you want to get their help in assessing each property that you bring to them in exchange for them getting the listing. You can tell them that you are willing to give them 4% in commission for properties that you find and that you will give them 5% for the ones that they bring to you. You meet the right one and you will get access to allot of good tools.
/Chris
Olga:
That is ok; I have not read the book but I trust you that it is a good book and I think that it is a good idea to read up about as much as you can but always be prepared that the book will not cover every possible scenario (unfortunately). I have studied allot in real estate the past 9 months because it is a new field for me and I still read allot and I don't think I will ever be done.
I wish you the best on your first deal and if you need any help please feel free to contact me.
Regards,
Chris
Thanks for the thoughtful reply Chris. I wish you luck in your future investments.
Do you already or are you thinking of also buying some rental property for cash flow?
.
I most likely will buy some rental properties; however, I will not do this until I have built up enough of a capital base so that I can handle locking up money for some time.
What I really want to do (kind of rental, good cash flow), is to provide owner financing.
You buy a house clean with your own money, you fix it up and you then sell it but you are the provider for the mortgage. You take 15% down and you charge about 10% on the note and you will have a steady flow of cash and besides that; the house that you sold for 100K will actually give you more since your buyer is paying 10% interest on your money. If they default on payment, then you evict them and put another buyer in there. This is excellent cash flow.
/Chris
I know I might have simplified this a little bit too much but owner financing is something that I am looking to do.
Rental is great if you can find good deals and where you are actually making money instead of putting out money just to get the appreciation on the building.
Your comments on owner financing is simplified, but that subject is an article in itself. (there was one submitted just before yours about owner financing)
I have read on owner financing and it does look somewhat appealing. The particular author I read suggested owner financing in order to broaden your market of buyers instead of having a market only designated to those who qualify for a loan.
If you sell your note there is a discount and I am not sure if I like that. It doesn't seem like you would ever want to owner finance then sell the note unless you really have trouble selling.
Do you forsee any problems selling these properties? Are you using your broker to sell on every property?
I definitely would not have a problem sliding 4-5% my brokers way if he is constantly supplying me with solid leads.
I look forward to hearing how the deals on your other properties go.
-wayne
Wayne:
When I get to the point of doing owner financing, I will not be selling my note. In my eyes it is a great way of building up steady cash flow and you are selling something for 100K but you are getting paid 180K (interest); that is appealing to me.
I have used my broker for most of my deals so far; however, I am looking to do some of the sales my self so that I can increase my profit a little bit more.
My broker from time to time finds good deals for me but most of the time I find a house and I run it by him to make sure it is a good deal.
I will let you know how all of my other houses comes along.
Hi Chris,
Another question:
Are you concerned at all about holding time?
Are you looking to sell these 5 properties? If so how long are you expecting it to take before you sell on average?
If they don't sell having you considered lease optioning them? If you have to lease option are you already made sure that you can get a positive cash flow?
Investors in my area are telling me that it's buyer's market. They have had to change their strategy to rehab and lease option or rent.
How is the market in your area?
Thanks,
wwayne
Well, I have two properties under contract, one is being closed tomorrow; the second one is closing on 3/29. My third house is being sold in June (because I don't want to sell it until then). The other two houses that I have right now is being worked on; one of the remaining two houses is being looked at by buyers all the time so I don't think I will have a problem selling it (actually thinking about moving in there my self). My last house is being fixed next week and I don't see a problem selling. However, I am playing with the idea of doing an option to buy on the house with a person that is very interested in it.
If I do an option to buy, I will charge $12,000 up front and a monthly payment of $1200 and a purchase price of $207,000 at the end of the first year (bought it for $130,000). If they don't buy it after the first year I will then consider evicting them and putting in someone else that is ready to do an option to buy agreement (keeping my $12,000) or if they have been good tenants/buyers, ask them for an additional 5% down and another year with purchase price of $215-220,000. The house is appraised at $212,000 right now and it is before I have fixed it.
If it is a buyers market in your area (where are you located) then you might have to consider option to buy agreements. Additionally, I don't know if you have section 8 in your area but I think they have come up with a new program where the government would help section 8 tenants (with good records) to buy a house.
/Chris