Into this new year of 2006 we are now seeing the bad decisions made by pretend real estate investors from 2005. There are too many untrained or poorly trained real estate investors in the marketplace today. January 4th 2006 we inspected 3 homes in pre foreclosure or foreclosure that were purchased by investors from the bank in 2005. These were all good money deals for knowledgeable real estate investors but not these guys. Deal #1, Investor buys a house for $112,000. The bank foreclosed on the property for $91,000 two months prior. We passed on the deal our highest offer was $84,000 a big difference from $112,000. Heres why: ARV is $135,000 Our profit is $20,000 notice we take our profit out first Repairs were $19,000 Carrying & Sales Cost $9,900 Miscellaneous $2,100 Highest Offer $84,000 Pretend investor pays $27,900 too much, and now is trying to unload his mistake at pre foreclosure for $149,000 on a poorly finished and under funded house. Deal #2, Investor buys a house for $172,000. A pre foreclosure deal we didnt even see this one coming. It was a good deal the ARV is $295,000 plenty of room to make a good profit. The problem is this investor had too many deals in process at the same time. 3 other projects underway when he picked up this deal used the same bank on all 4 deals and personally signed each note and took title in his and his wifes names. I dont know how the other deals fell apart but this one could have been flipped for a small profit ($10,000 to $15,000) to another investor and maybe save the others. Mistakes on top of mistakes never take title in your own name use a separate land trust, an LLC or a Corporation for each property. Never personally sign a note on an investment property to a bank. Use hard money lenders, use private lenders, use your Roth IRA, use your wifes Roth and kids educational IRA these will fund your retirement or the kids education. Deal #3, Investor buys a house for $28,000. His first investment with an ARV of $65,000 and repairs of $11,000 the plan was to rehab, refinance, hold, and rent the property. Rental rate in this area for a 2 bedroom, 1000 sq ft houses is about $575.00 a month. Which is a small monthly income to cover your cash flow or cash on hand for your family and your business but there is more to this problem. Here with $11,000 in repairs the investor tries the cheap way to complete the job. He hires a part time general contractor who takes over 3 months to mostly complete the project. The contractor left some supplier bills unpaid and work incomplete before he quits because he wasnt paid on time. After hiring another contractor to finish the job and paying all the bills the final cost of repairs is $19,500 and 4 months work. At first glance it doesnt appear to be a major problem but with a closer inspection we find; The hard money loan works as planned. At 65% of the $65,000 ARV minus 4 points and minus miscellaneous cost of appraisal, survey, title and closing leave him about where he expected to be. $65,000 X 65% $42,250 - 1,690 4 points 40,560 -950 miscellaneous cost $39,610 Investor cash for project $28,000 Purchase cost $11,610 Rehab money fits the plan but the actual cost of $19,500 hurts. He started out on plan but now hes $7,890 in the hole on a project where the income when he rents the place is $110.00 a month. It will take almost six years to break even without any other consideration. The hole gets deeper when the bank will only refinance this home at 70% of the appraised value. $60,000 appraised value @ 70% is $42,000. Plus the miscellaneous cost of application fee, new appraisal, review fee, attorney, and closing costs total $1,750 not added into the loan but must be paid at closing. Now $9,890 down and after another 2 months of no tenants the slide goes fast. He decides to sell at $65,000 but is on the edge of the war zone and a 2 bedroom home is not the most desirable home in any area. Learn the real estate investment business. There are hundreds of seminars, books, tapes and gurus to show you the way. Join your local REIA go to the meetings talk with everyone. You just might learn something. |
