Good Morning:
Over dinner last night, it was requested by Jimmybtx wife that I write something about how I do residential deals or would do them if I were still doing them, and yes, I still do them, but only on luxury homes.
If I know someone such as a friend of mine is looking to buy a luxury property I will negotiate a good deal, get it under contract and sell him the contract, but is that an everyday thing? no it really is not.
If I were going to buy a residential property, here is what I would do. The steps are as follows:
1. I would begin by looking for a realtor who is young, aggressive, has been a member of the million dollar club and I will explain that in a moment, and who has been selling less than 7 years.
note: In NJ, there is a club for realtors called the Million Dollar Club. This is a special group of realtors who sell a million dollars worth of real estate annually for a certain amount of years.
2. I meet them for coffee, I never meet in their office. The reason for this is it loosens up the realtor. In an office enviroment, there is a certain business like mindset that needs to be kept up, and since I am looking to do things a certain way, meeting outside is better.
3. I begin the meeting by explaining what I am looking for, the price points, and I lay out the entire strategy. Why am I doing this? because than no one can ever accuse me of not being upfront. If a realtor was to say you never said that in the beginning, your were not upfront with me, I can repeat exactly what I said and then say, I told you this from the start, in the beginning of our meeting, so I was very upfront with you.
4. What am I looking for? 3 bedroom, 1.5 to 2 baths, the usual other things like good size kitchen, bathrooms, living room, front and back yard, two car garage, etc.
5. For price point, depending upon where I am buying, we will take Middlesex county, NJ, Edison is the city for example. I know that the price points on homes in this area are between $234,000.00 and $339,900.00 retail.
I then make it known that I never pay retail for a property, and since this limits my selection, I will then say that I am looking for a handyman special. In NJ, this means properties that need repairs, it doesn't necessarily mean a complete knock down or huge rehab.
6. I then tell them that I do not make low ball offers, this is important to understand and pay attention to when dealing with realtors. Once you say the phrase "I am a Investor" they automatically change their tone from very helpful to synical. They believe from prior experience or having heard stories that you, mr or mrs investor wants to steal a property and will offer a low ball price, and this is not true for the most part. Always remember, unless the realtor works for you, they work for the seller and it is their job to get the best offer and sometimes what they fail to understand is that your offer may be that very best offer. This is why you must, must, must always work with a realtor who understands investment real estate.
7. Once the realtor understands what it is you do and will be doing, the ice is broken. I then ask to see four properties that meet my needs.
Note: Realtors do not usually handle properties that need rehab and most do not want to deal with these properties so in the MLS, there are tons of these properties listed. Remember that a realtor is obligated to take a listing but not obligated to actively show it, I mean they are expected to but not obligated.
Their obligation as a listing agent is to take the listing and place it in active status on the MLS system and that is it and they will then sit back and move onto a nice property that they can readily sell to the masses who are retail buyers, meaning they want to live in the property.
8. Ok, so now the phone rings and it is the realtor who to no surprise says, I actually found eight properties that meet your needs, and in reality, they probably have found alot more than that, they just won't say it and here is why.
They know that a investor will not jump at just any property and it may take showing twenty properties before a investor will make an offer, and it may not take more than two but if your an experienced investor, you won't jump at the first thing you see. And because they want to have you as a long term buyer, they will have already set aside twenty to forty listings or the amount they have found, in an effort to keep doing business with you. They want you to believe that they are aggressive.
9. So now you I meet them at the first property and much to their surpise, I've shown a real interest. I am not looking to buy ten properties this week, just one. So the first thing I do is look at the curbside appeal, if there is such, I will take a digital picture and do a walkaround the outside, and I make notes, even if there is nothing wrong, I will still note that.
Then I prepare to move inside. I will always begin with the living room. If there is an average amount of furniture and the room looks crowded, I will note that the living room is small, maybe too small for a good size family. I then move along throughout the entire property. I make notes of everything.
Then once I am done, I begin to take pictures of all the rooms, then I will go back to the outside and I will take a picture of the side, back and the street.
Now, I will take no more than 15 minutes to do my initial walk through. Remember, this is just a meet and greet for the property. As I am walking through, I have already decided what I want to do with the property, what it's best use is and I will tell the realtor that I would like to schedule a walk through with a contractor and when can we do it and I tell them it must be within three days.
10. Now once the appointment is set, I take out a blank purchase offer, blank addendum and a blank promissory note. These are all available at any Staples, Office Depot, and possibly through this site. I fill out the Purchase offer form first. I then do the Addendum form, and on this, I put in the clause, "Formal Offer To Be Made Subject To Walk Through With Contractor or Partner Acceptance Of The Deal". Then in a second paragraph, I write in the following statement: "Earnest Money Deposit To Be In The Amount Of $500.00 or whatever figure you choose to input, And Is Due And Payable At The Signing Of The Formal Purchase Agreement By All Parties".
Note: What does all that mean? it means that you have until the time the actual agreement for purchase is drafted and signed by both seller and yourself. You should also have a end buyer lined up to buy from you, so your earnest money deposit is never in jeopardy or you can use the end buyers earnest money.
11. Now the follow up walk through takes place. I have either a contractor and/or partner walk through. The contractor is there to give a actual cost to cure accounting and he himself may be the end buyer and if my so called partner is there, they are they actual end buyer.
12. If it is a go, then we move to close and sell or assign the deal.
Note: Some of the things I do once I have the physical street address is to do a google earth search. I want to see what the aerial view looks like.
I will also drive the area, usually a three mile radius in all directions. I need to see big box retailers such as Wal mart, Target, Sams. I also need to see grocery stores, a mall is a plus. One of the things I also need to see if this is a potential rent property or lease to own property, I need to see public transportation.
Some people will say, I will never take that, well what happens when your car doesn't work or your job is downtown and it costs money to park everyday, such as in New York City? Los Angeles? Chicago?.
I will use this in a court of law if I have to foreclose if they say well i couldn't keep working, no way to get there or if they lose a job and don't get another. This kind of thing occurs all the time, where they say, I couldn't find another job, no way to get to work.
This is how I do a residential deal. As for my pricing formula, I take the asking price, multiply that by 70%, then I back out the actual cost of repairs, then minus my earnest money deposit, then minus my closing costs, then minus $5,000.00 as my assignement fee, then I make my offer based upon the outcome.
Why 70% and not 65 or 50 or some other number? the reason is that most investors or rehabbers who I could assign this deal to will find a 30% profit in this economy to be great, so by using 70% from the start, I am already factoring in that profit. And when you take the actual purchase price offer and add back in all these figures, you still end up with a 30% profit. Also by using actual costs to repair and not estimated, I am making a sound offer to purchase that is based upon real numbers and not guestimates.
If you or I use estimated numbers, and we are off by say 5%, then that throws off the profit picture and could cause the deal to be passed on.
Let me ber very direct right now with those who are getting into wholesaling and getting ready to do your first deal and please don't take this personally.
You have no business trying to figure costs to rehab when you have never done a rehab or repairs unless your a contractor and have experience. Do not try to guess. Just because the 22 year kid at Lowes or Barneys Building supply says yes, you can put in a new door for $500.00, well unless your going to do it yourself, you better realize that the door probably costs $500.00, then you may have to remove and install a new door jam, and that costs about $275.00, then you need to pay someone and that could cost you $400.00 more, so what you thought costs $500.00 because someone told you it could, it in reality could cost you $1175.00. Now try to recover those costs in a deal? next to impossible.
This is why I use actual costs and not guesses. You never want to learn a lesson at the expense of a investor or contractor.
Good Morning:
Over dinner last night, it was requested by Jimmybtx wife that I write something about how I do residential deals or would do them if I were still doing them, and yes, I still do them, but only on luxury homes.
If I know someone such as a friend of mine is looking to buy a luxury property I will negotiate a good deal, get it under contract and sell him the contract, but is that an everyday thing? no it really is not.
If I were going to buy a residential property, here is what I would do. The steps are as follows:
1. I would begin by looking for a realtor who is young, aggressive, has been a member of the million dollar club and I will explain that in a moment, and who has been selling less than 7 years.
note: In NJ, there is a club for realtors called the Million Dollar Club. This is a special group of realtors who sell a million dollars worth of real estate annually for a certain amount of years.
2. I meet them for coffee, I never meet in their office. The reason for this is it loosens up the realtor. In an office enviroment, there is a certain business like mindset that needs to be kept up, and since I am looking to do things a certain way, meeting outside is better.
3. I begin the meeting by explaining what I am looking for, the price points, and I lay out the entire strategy. Why am I doing this? because than no one can ever accuse me of not being upfront. If a realtor was to say you never said that in the beginning, your were not upfront with me, I can repeat exactly what I said and then say, I told you this from the start, in the beginning of our meeting, so I was very upfront with you.
4. What am I looking for? 3 bedroom, 1.5 to 2 baths, the usual other things like good size kitchen, bathrooms, living room, front and back yard, two car garage, etc.
5. For price point, depending upon where I am buying, we will take Middlesex county, NJ, Edison is the city for example. I know that the price points on homes in this area are between $234,000.00 and $339,900.00 retail.
I then make it known that I never pay retail for a property, and since this limits my selection, I will then say that I am looking for a handyman special. In NJ, this means properties that need repairs, it doesn't necessarily mean a complete knock down or huge rehab.
6. I then tell them that I do not make low ball offers, this is important to understand and pay attention to when dealing with realtors. Once you say the phrase "I am a Investor" they automatically change their tone from very helpful to synical. They believe from prior experience or having heard stories that you, mr or mrs investor wants to steal a property and will offer a low ball price, and this is not true for the most part. Always remember, unless the realtor works for you, they work for the seller and it is their job to get the best offer and sometimes what they fail to understand is that your offer may be that very best offer. This is why you must, must, must always work with a realtor who understands investment real estate.
7. Once the realtor understands what it is you do and will be doing, the ice is broken. I then ask to see four properties that meet my needs.
Note: Realtors do not usually handle properties that need rehab and most do not want to deal with these properties so in the MLS, there are tons of these properties listed. Remember that a realtor is obligated to take a listing but not obligated to actively show it, I mean they are expected to but not obligated.
Their obligation as a listing agent is to take the listing and place it in active status on the MLS system and that is it and they will then sit back and move onto a nice property that they can readily sell to the masses who are retail buyers, meaning they want to live in the property.
8. Ok, so now the phone rings and it is the realtor who to no surprise says, I actually found eight properties that meet your needs, and in reality, they probably have found alot more than that, they just won't say it and here is why.
They know that a investor will not jump at just any property and it may take showing twenty properties before a investor will make an offer, and it may not take more than two but if your an experienced investor, you won't jump at the first thing you see. And because they want to have you as a long term buyer, they will have already set aside twenty to forty listings or the amount they have found, in an effort to keep doing business with you. They want you to believe that they are aggressive.
9. So now you I meet them at the first property and much to their surpise, I've shown a real interest. I am not looking to buy ten properties this week, just one. So the first thing I do is look at the curbside appeal, if there is such, I will take a digital picture and do a walkaround the outside, and I make notes, even if there is nothing wrong, I will still note that.
Then I prepare to move inside. I will always begin with the living room. If there is an average amount of furniture and the room looks crowded, I will note that the living room is small, maybe too small for a good size family. I then move along throughout the entire property. I make notes of everything.
Then once I am done, I begin to take pictures of all the rooms, then I will go back to the outside and I will take a picture of the side, back and the street.
Now, I will take no more than 15 minutes to do my initial walk through. Remember, this is just a meet and greet for the property. As I am walking through, I have already decided what I want to do with the property, what it's best use is and I will tell the realtor that I would like to schedule a walk through with a contractor and when can we do it and I tell them it must be within three days.
10. Now once the appointment is set, I take out a blank purchase offer, blank addendum and a blank promissory note. These are all available at any Staples, Office Depot, and possibly through this site. I fill out the Purchase offer form first. I then do the Addendum form, and on this, I put in the clause, "Formal Offer To Be Made Subject To Walk Through With Contractor or Partner Acceptance Of The Deal". Then in a second paragraph, I write in the following statement: "Earnest Money Deposit To Be In The Amount Of $500.00 or whatever figure you choose to input, And Is Due And Payable At The Signing Of The Formal Purchase Agreement By All Parties".
Note: What does all that mean? it means that you have until the time the actual agreement for purchase is drafted and signed by both seller and yourself. You should also have a end buyer lined up to buy from you, so your earnest money deposit is never in jeopardy or you can use the end buyers earnest money.
11. Now the follow up walk through takes place. I have either a contractor and/or partner walk through. The contractor is there to give a actual cost to cure accounting and he himself may be the end buyer and if my so called partner is there, they are they actual end buyer.
12. If it is a go, then we move to close and sell or assign the deal.
Note: Some of the things I do once I have the physical street address is to do a google earth search. I want to see what the aerial view looks like.
I will also drive the area, usually a three mile radius in all directions. I need to see big box retailers such as Wal mart, Target, Sams. I also need to see grocery stores, a mall is a plus. One of the things I also need to see if this is a potential rent property or lease to own property, I need to see public transportation.
Some people will say, I will never take that, well what happens when your car doesn't work or your job is downtown and it costs money to park everyday, such as in New York City? Los Angeles? Chicago?.
I will use this in a court of law if I have to foreclose if they say well i couldn't keep working, no way to get there or if they lose a job and don't get another. This kind of thing occurs all the time, where they say, I couldn't find another job, no way to get to work.
This is how I do a residential deal. As for my pricing formula, I take the asking price, multiply that by 70%, then I back out the actual cost of repairs, then minus my earnest money deposit, then minus my closing costs, then minus $5,000.00 as my assignement fee, then I make my offer based upon the outcome.
Why 70% and not 65 or 50 or some other number? the reason is that most investors or rehabbers who I could assign this deal to will find a 30% profit in this economy to be great, so by using 70% from the start, I am already factoring in that profit. And when you take the actual purchase price offer and add back in all these figures, you still end up with a 30% profit. Also by using actual costs to repair and not estimated, I am making a sound offer to purchase that is based upon real numbers and not guestimates.
If you or I use estimated numbers, and we are off by say 5%, then that throws off the profit picture and could cause the deal to be passed on.
Let me ber very direct right now with those who are getting into wholesaling and getting ready to do your first deal and please don't take this personally.
You have no business trying to figure costs to rehab when you have never done a rehab or repairs unless your a contractor and have experience. Do not try to guess. Just because the 22 year kid at Lowes or Barneys Building supply says yes, you can put in a new door for $500.00, well unless your going to do it yourself, you better realize that the door probably costs $500.00, then you may have to remove and install a new door jam, and that costs about $275.00, then you need to pay someone and that could cost you $400.00 more, so what you thought costs $500.00 because someone told you it could, it in reality could cost you $1175.00. Now try to recover those costs in a deal? next to impossible.
This is why I use actual costs and not guesses. You never want to learn a lesson at the expense of a investor or contractor.