Projected vs. Real Profits when Flipping Houses

If you read my posts for BiggerPockets.com then you already know my distaste for reality shows about fixing and flipping houses (see Property Wars Distorted View of Reality). A big reason for this scorn is the producers of these programs gloss over the details and guesstimate at profit earned.

Why do they do that?

Because it can take anywhere for 2 to 6 months for a rehabber to acquire, fix up and sell a property. Most reality shows don’t have that kind of time to wait around to see what the end result will be. It’s easier to throw out some numbers and move on to the next shoot. Who cares if the audience is fooled or not right? It’s all about entertainment, not accuracy.

In this video I explain the difference between projected profit and real profit. The truth is no fix and flipper ever projects a loss. But, that’s precisely what happened to me on one of the six deals I highlight. In all, I net $94,000 on six flips, or about $15,000 in profit per deal. Not bad, but I was hoping for $20,000 per deal.

If you’re willing to devote about 5 minutes of your time I’ll tell you why I was wrong on all of them, and why reality show projected profits aren’t very realistic.

 

22

02 2013

The iPhone – A Tool Every Fix and Flip Investor Should Have

The carpenter has a hammer. The plumber has a plunger. And the real estate investor has an iPhone 4s or 5?

Why of course. Watch this 4 minute video and you’ll see that the panorama camera feature makes the iPhone 4s or 5 a must have tool for the fix and flip investor, Realtor and real estate investor.

11

12 2012

Why I Love Do-It-Yourself Homeowners

Everyone has a weakness. For Superman, it was kryptonite. My business partner, Manny Romero, can’t handle the smell of cat urine (I know this because we walked through an REO house once that reeked of it and he had to make a fast exit after just two minutes). As for me, I get turned inside out for the new, shiny, techy stuff like iPhones and flat screen TVs (the new iPad with retina display is on my Christmas list).

Occasionally, I’ll stumble across a property with a do-it-yourself owner that had a weakness for awful decorating. This guy transforms his house into a shrine of tackiness. I’ve seen everything from cultured stone interior walls to living room floral murals.

As a fix and flipper I love writing offers on do-it-yourself properties because while the so-called “upgrades” may seem heinous to the untrained eye they are actually quite inexpensive to change.

Take a look at this gem I found yesterday:

Clearly this homeowner thought painting the cabinets would add a certain Martha Stewart-like appeal to the kitchen. Instead, it frightened off every retail buyer within 30 miles.

But for under $2,000 my project manager can buy cabinets off the shelf at Home Depot and replace these eyesores. For around $1,000 I can get a good painter to cover up the grapevines (that’s what they look like to me).

So I say long live do-it-yourself homeowners! They help keep us fix and flippers in business.

 

04

12 2012

The Anatomy of a “Subject To” Deal

There’s a lot about the 80’s I don’t miss. Take parachute pants, for example. They were expensive, uncomfortable and difficult to clean. And who in their right mind ever thought the mullet haircut looked good, or that 25 years later some people would still have them?

As for the 90s, I’m certainly glad the whole purple and teal color scheme didn’t last. It seemed like everything from family room carpet to ski boat hulls contained those awful shades of grossness.

When I look back at the 2000s I can’t really think of anything that I’m glad is gone. However, there is something I’d like to come back– the “subject to” real estate deal.

In a “subject to” transaction the distressed seller signs the title of the property (usually a Quit-Claim Deed) over to the investor. However, the deed of trust remains in the original homeowner’s name. The investor brings the loan current and makes payments on the mortgage until the property can be sold. Of course, if the investor doesn’t make payments the original owner is still responsible for the note.

Why would a seller agree to do something like this? Three reasons:

1. The seller can’t afford to make the payment.
2. The seller is about to lose the house to foreclosure.
3. The buyer gives the seller some cash in exchange for the deed.

From 2004-2006 I acquired more than 100 properties using this “subject to” acquisition strategy. It required no credit and little cash. All I needed was a few bucks to bring the loan current and pay the homeowner for the deed. I purchased exclusively from sellers in foreclosure within 1-2 weeks of their trustee’s sale. Best of all, every one of these properties had substantial equity so I knew I’d make money on the flip.

Nowadays, locating a homeowner with enough equity to do a “subject deal” is difficult. However, I stumble across one occasionally.

A few weeks ago I contacted a seller in foreclosure in who I thought owed around $110,000 on his mortgage. The after repair value of the property was $160,000. Not a bad deal. We agreed to wait on writing up a contract until after the payoff came back from the bank and I’d had a chance to inspect the property. Below are some photos and as you can see it’s in pretty bad shape.

I elected not to do the deal. However, it had nothing to do with the repairs. I got the payoff from the bank and it was $119,000. Apparently the seller hadn’t made a mortgage payment in almost two years and the bank had just finally gotten around to starting the foreclosure. With an additional $9,000 in arrears there was no way the numbers would work.

Boy do I sure miss the 2000s.

30

11 2012

Fixing & Flipping Real Estate: Strategies for the Post-Boom Era

“Have you ever considered writing a book?”

Jeff Olson, Executive Editor for Apress Publishing called me back in April after reading this blog. He wanted to know if I ever considered writing a book about fixing and flipping houses. I told him that the thought had crossed my mind.

Naturally, I was a little skeptical. Was this some sort of scam? Was this Jeff Olson guy full of it? It’s not every day a publisher calls out of the blue and offers me money to write a book. So I checked out Apress online and found Jeff on LinkedIn. Both were legit. By the end of May I had signed a contract with Apress, written the book’s outline, table of contents and first three chapters.

Over the summer I dogged it a little too much and fell behind, so much so that I missed my August 15th deadline. Luckily, Jeff was patient. He gently nudged me to get the book done by mid-October. I put everything on the backburner for two weeks and got it done.

I’m proud to say that Fixing and Flipping Real Estate: Strategies for the Post-Boom Era is now available to pre-order through Amazon or Barnes and Noble. It will be released December 5th. In it, you’ll learn everything I could possibly remember about fixing and flipping houses, including:

  • Acquisition
  • Rehab
  • Sales
  • Raising Capital

How is this book different than other books about fixing and flipping?

Well, as best I can tell, it’s the first of its kind to be written since the real estate market crash in 2008. I’m sure you’d agree that much has changed since then. I had to completely revamp my business in 2009 and Fixing and Flipping Real Estate: Strategies for the Post-Boom Era has what you need to know to make money in today’s ever changing market.

Order your copy today. Consider it an early Christmas gift for yourself, or stocking stuffer for the aspiring real estate investor in your life.

 

 

09

11 2012

America – The Land of Subjectivity

As I sit here this morning and sift through my Facebook timeline and Twitter feed I can’t help but wonder – where did America’s sense of objectivity go? Or is it possible the citizens of this country were always this hopelessly subjective and the big mouths like Rush Limbaugh, Sean Hannity, Bill Maher and Rachel Maddow just poured fuel on the fire by building a broadcasting business of out polarization?

Did our sensibilities become corrupted by the endless spin cycle of MSNBC and Fox News? Or has everyone really leaned that far left, or that far right, since the beginning of time? What ever happened to thinking for yourself rather than relying on an obnoxious TV talk show host to tell you how you should think about issues?

Last night’s debate felt less like a debate and more like a “liar, liar, pants on fire” elementary school playground argument between a couple of fourth graders. During and immediately following the presidential dust up in New York, fact checkers from the USA Today to the New York Times were busy compiling the list of all the misrepresentations, untruths and bold face lies. After reviewing several of these articles this morning it’s obvious to me that both candidates told their share of whoppers. But for some reason that doesn’t stop either side from shouting “did not, did too!”

There’s an old joke that goes like this – How can you tell a politician is lying? His lips are moving. Well, whether you’re a Romney supporter or an Obama supporter, I have some startling news for you – both twisted, bent, distorted and fibbed last night about the facts because they want to win the election. This should come as no great shock. The next time you’re shopping for a new car go to a Ford dealership and Chevy dealership and ask the salesperson about their competition. Do you honestly believe either of them will give you a truthful assessment about the other’s product?

Lance Armstrong, doped, cheated and lied for over a decade in order to win 7 Tour De France titles. So what’s the harm in a couple of presidential candidates taking a little liberty with the truth in order to reach the highest office in the land? It’s part of the unsavory process. As enlightened citizens we must take what both of these men have to say with a grain of salt.

What does continue to surprise me is all the people who, either out of naivety or ideological blindness, kick and scream when the candidate they don’t like distorts the facts. Or flat out lies. It’s as if their choice for president is beyond reproach.

Well, don’t pee down my leg and tell me it’s raining. In the end this election, like all elections, isn’t about choosing which candidate was the most honest in a debate or campaign ad. And contrary to what either of these men may say on the campaign trail, it’s not about which will make you better off over the next four years.

The inconvenient truth is that all elections are about choosing the candidate that will do you and your family the least amount of harm. It doesn’t get any more objective than that.

17

10 2012

Lightning and Thunderhill Short Sale

You’ve probably heard the phrase “catching lightning in a bottle”. It’s used to explain an extraordinary event – when an elusive energy is captured and subsequently harnessed to achieve the unachievable. Sports coaches and managers often use “catching lightning in a bottle” to describe an unexpected victory. It has become part of their vernacular, a cliché utilized almost as frequently as “we have to take it one game at a time”.

I often wonder why no one ever talks about “catching thunder in a bottle?” For my money, thunder is way cooler than lightning. A big, powerful, ground-shaking explosion will scare the pants off the toughest male or female human. When someone sees lightning they usually go “ooh and ah” like they’re watching a fireworks show. But, a loud crack of thunder will send everyone running for cover.

Last month, I managed to catch lightning in a bottle on a short sale deal. Ironically, it was located on Thunderhill Drive. Here are our numbers on the flip:

Retail Sales Price

269,900.00

Acquisition Price

200,000.00

Commissions/Closing Costs

16,300.00

Holding Costs

6,500.00

Repairs

19,600.00

   
Net Profit

27,500.00

My acquisition to closing time was 50 days and it went under contract in 4 days. I can live with those numbers. Hopefully, lightning will strike twice, or about 20 more times this calendar year.

Below are some pictures of the property. Enjoy.

02

10 2012

Celebrating 10 Years of Being My Own Boss

It was a proud moment. Not quite like getting married, or seeing my baby girls born, but a proud moment nonetheless. As Chief Photographer for KPHO Television in Phoenix, I was responsible for hiring photojournalists to videotape and edit daily stories for the morning, afternoon and evening newscasts. Over the course of three years, from 1997-2000, I had assembled one of the most talented staffs in the country.

On a warm summer night in June of 2000, I stood on stage at the Hyatt Gainey Ranch Resort in Scottsdale with five of these photojournalists to accept an Emmy award for our collaborative work on a piece we called ‘Showdown’ - (click to watch.) It was a video narrative about one of the oldest rivalries in college football – the Arizona State Sun Devils vs. the University of Arizona Wildcats.

In all, 13 of the 21 photojournalists on the staff contributed to the story. Each of them added a unique shot, sound bite or angle to the 3-minute masterpiece. The night it aired on TV several of us gathered at a local microbrewery to celebrate our accomplishment. I was certain my team would remain together for years, piling up these awards and basking in Emmy gold glory.

But here’s a funny thing about the television news business that only a few people know – it’s not very glamorous.

As a matter of fact, it’s downright demanding. Even the most successful and tenured veterans of the industry often work evenings, weekends and holidays. The pay isn’t great either. Which is why, after less than two years, the ultra gifted group of photojournalists I hired started leaving for greener pastures. I quickly learned the downside of hiring bright, creative, ambitious people – they are constantly seeking new challenges and better compensation.

Putting Down the Camera Forever (Sort of)

Before long I realized that, like the many talented photojournalists on my staff who had left for more rewarding work, I too wanted something more. A confluence of events led me to put down the camera forever (sort of, more on that in a few paragraphs).

In case you didn’t know, it’s hot in Phoenix. I can remember one particular summer scorcher in 2001. I stood outside a long stretch of yellow crime scene tape in the middle of a residential street with my camera and not an inch of shade for three-square miles. An armed gunman had barricaded himself inside his house (no doubt an air conditioned house) just around the corner (why is it the bad guys always get to stay where its cool?) After nearly four hours of waiting, with the soles of my shoes slowly sinking into the soft hot asphalt, I couldn’t help thinking – damn it’s hot and damn this job really sucks.

Yes, it was bad. Not as bad as digging ditches for a living, or cleaning toilets, but still, a crummy way to earn a living

Then there was the Rodeo-Chediski fire near Springerville, Arizona. This 500,000 acre brush fire burned the entire month of June, 2002. I was dispatched, along with several other KPHO reporters and photographers, to cover the blaze. It was a big story – national news organizations like CNN were there too.  After two straight weeks of 14-hour days, sleeping in a tiny hotel room with three other cameramen and eating fast food for every meal, I decided enough was enough.

Needless to say, when I got back I started applying for jobs outside of the television news industry. Unfortunately, no one was interested in hiring a 30-year old cameraman that had no marketable skills in the corporate business world. Apparently, none of the hiring managers I applied to were impressed I could drag 100 lbs. of equipment over ten city blocks in less than a half hour.

Right around this time, through the help of a Realtor friend from high school, my wife and I bought our first rental property. I knew nothing about real estate investing so I decided to get educated. One of the first books I read was ‘Rich Dad, Poor Dad’ by Robert Kiyosaki. After finishing it I decided that real estate investing was the best way to achieve time and financial freedom.

In September 2002, just three months after the Rodeo-Chediski fire, I quit my job and started a real estate investment business. Things started out slow like most businesses do. But eventually, through good fortune and a lot of hard work, I started to figure things out. By 2006, I owned over 65 properties and had a net worth of $8 million.

Of course, the real estate market crash wiped me out two years later. Still, it was a fun ride. Through the process I learned failure is a right of passage for most successful business owners. Few escape going broke at least once in their lives.

The last four years I’ve been busy rebuilding my business. It hasn’t always been easy. At one point my wife and I were burning the furniture to stay warm (yes, it does get cold in Phoenix occasionally). Ironically, I even picked up the camera again. My past experience as a photojournalist has helped me with creating videos of my fix and flip deals that can be viewed by real estate investors on YouTube all over the world. I had no idea when I quit my job in 2002 that these skills would be so valuable.

I’m grateful that for the past 10 years I’ve been able to do things on my terms and schedule. I get to escort my daughters to the bus stop in the morning and pick them up in the afternoon whenever I want. I take them to karate and swim practice and I’ve never missed any of their birthdays. My wife and I can go on vacation without submitting a formal request to management.

And when it gets really hot outside I don’t have to stand in the middle of the street with the soles of my shoes sinking into the hot pavement.

27

09 2012

The Pros and Cons for Hiring Licensed Contractors

I like to fix and flip houses. I also like to save money, which is why I’m always conflicted when it comes to deciding whether or not to use licensed or unlicensed trades for my rehab projects. There are pros and cons to both.

Licensed tradespeople are required to carry insurance, which protects me, the property owner. If a licensed plumber burns my house down with a blowtorch then his insurance covers the damages. If a licensed painter falls off his ladder and gets hurt then his insurance will cover the medical bills.

Those are the pros for using a licensed trade. The biggest con is the cost. Licensed trades usually charge more for their services because they have the costs associated with being licensed, as well as the insurance expense.

Unlicensed trades, on the other hand, have no insurance costs so they can charge much less for the same quality of work. However, if an unlicensed roofer breaks his back falling off a ladder at your house then I could be on the hook for the hospital bill.

It’s important to note that just because a contractor is licensed doesn’t mean he or she is good, and just because a contractor is unlicensed doesn’t mean he or she is bad. Over the years I’ve employed both in my fix and flip business and have settled on this criteria when deciding whether or not a trade should be licensed:

Trades that must have a License:

  • Plumbers
  • Electricians
  • Roofers
  • HVAC (air conditioning and heating contractors)
  • Painters (it depends)

Trades where a License is Optional:

  • General handyman work
  • Flooring (carpet, tile, hardwood)
  • Pool maintenance and repair
  • Landscaping maintenance and repair
  • Painting (it depends)

As you likely figured out, for the big, mechanical stuff I like to use licensed trades. Many investors I know also insist on using licensed painters. Why? Painters use tall ladders and are prone to fall off of them from time to time. Currently, the painter I use is unlicensed. However, he’s fast, inexpensive, reliable and good so that trumps the risk exposure. I’ll take my chances on any ladder mishaps.

The licensed vs. unlicensed trade question all boils down to comfort level. Are you willing to pay more for piece of mind or would you rather roll the dice on using an unlicensed, uninsured trade that saves you thousands on the project?

If you’re like me you’ll probably settle on using a combination of both.

29

08 2012

How to Bid at an Auction in Maricopa County, Arizona

They say that truth is stranger than fiction. If this is really the case I wonder why the producers of the new reality show ‘Property Wars’ on Discovery Channel blatantly staged, reenacted and otherwise artificially created drama when it wasn’t necessary (if you’ve never heard of the show click here for my full write-up on BiggerPockets.com from August 3rd, 2012).

‘Property Wars’ pits four investment groups against each other for properties sold at the Maricopa County Courthouse steps. Known as trustee’s sales in Arizona, these foreclosure auctions often have as many as 20-30 bidders competing for a single property.

In the show these investors yell, scream, and pace on their cell phones while standing in the driveway of the properties they are bidding on. As you’re about to see from the series of videos below, none of this behavior is necessary, or ever really happens.

Why? Technology.

Companies like AZBidder.com have automated the bidding process so that investors in Phoenix never need to drive by a house or pace around aimlessly on a cell phone to place a bid. Their website is easy to navigate and is very inexpensive.

Watch these 8 videos and you’ll see how it works. I recorded them last year so the fees they charge have increased. However, the information and service AZBidder.com provides is incredibly valuable. And for what it’s worth, I don’t get a dime from them for this post or any other referrals I send their way. I just like the way they do business.

 

 

23

08 2012