Four Flippin Boxes - 9 12 12

Four Flippin’ BoxesFour Flippin’ BoxesArizona Academy of Real Estate9/12/12Arizona Academy of Real Estate9/12/12

Marty BoardmanMarty Boardman

• Owner and Chief Financial Officer of Rising Sun Capital Group, LLC – Gilbert, AZ, licensed Realtor since 2007

• Real estate investor since 2002 and principal in over 250 single-family transactions in Arizona, Texas, Illinois and Wisconsin.

• Accredited instructor for the Arizona Department of Real Estate and national contributor to BiggerPockets.com real estate news website.

• Author of Fixing and Flipping Real Estate: Strategies for the Post-Boom Era (not completed).

• Husband to Linda and father to Allyson and Audrey.

• Owner and Chief Financial Officer of Rising Sun Capital Group, LLC – Gilbert, AZ, licensed Realtor since 2007

• Real estate investor since 2002 and principal in over 250 single-family transactions in Arizona, Texas, Illinois and Wisconsin.

• Accredited instructor for the Arizona Department of Real Estate and national contributor to BiggerPockets.com real estate news website.

• Author of Fixing and Flipping Real Estate: Strategies for the Post-Boom Era (not completed).

• Husband to Linda and father to Allyson and Audrey.

Marty BoardmanMarty Boardman

marty@risingsuncapitalgroup.com

602-319-5391

@martyboardman linkedin.com/in/martyboardman

marty@risingsuncapitalgroup.com

602-319-5391

@martyboardman linkedin.com/in/martyboardman

Four Flippin’ Boxes

Choose Your Own AdventureChoose Your Own Adventure

• No two rehabbers are the same.

• Successful rehabbers do have:

– Drive to Succeed

– Integrity to Build a Solid Brand

– Discipline to Make Good Decisions

– Mindset to Work Hard and Work SMART

• No two rehabbers are the same.

• Successful rehabbers do have:

– Drive to Succeed

– Integrity to Build a Solid Brand

– Discipline to Make Good Decisions

– Mindset to Work Hard and Work SMART

What to Expect from this ClassWhat to Expect from this Class

• This is NOT a plan for creating real estate wealth.

• This is a blueprint for developing your own plan.

• This is NOT a plan for creating real estate wealth.

• This is a blueprint for developing your own plan.

Begin with the End in MindBegin with the End in Mind

1. What do you want?

2. 1-3-5 year plan

3. Cash chunking

1. What do you want?

2. 1-3-5 year plan

3. Cash chunking

“The problem is we are consistently inconsistent.”- Larry Martel – KPHO TV5 Reporter“The problem is we are consistently inconsistent.”- Larry Martel – KPHO TV5 Reporter

Box #1: Acquisition

Acquisition TopicsAcquisition Topics

1. Strategy (Niche)

2. Analyzing Deals

3. Writing Offers

4. Common Mistakes

1. Strategy (Niche)

2. Analyzing Deals

3. Writing Offers

4. Common Mistakes

Strategy (Niche)Strategy (Niche)

• Target Property

• Target Neighborhood

• Target Price Point

• Target Rehab

• Target Property

• Target Neighborhood

• Target Price Point

• Target Rehab

My NicheMy Niche

• Single-Family detached homes only

• Minimum 3/2/2

• Tile Roof – Stucco Exterior

• Valley-wide

• $120,000 - $350,000 acquisition price

• Light to advanced cosmetic rehab

• Single-Family detached homes only

• Minimum 3/2/2

• Tile Roof – Stucco Exterior

• Valley-wide

• $120,000 - $350,000 acquisition price

• Light to advanced cosmetic rehab

Analyzing DealsAnalyzing Deals

• Every investor has their own “rules” for evaluating a deal

• Most tools are built to help determine the investor’s Maximum Purchase Price (MPP)

• A common rule is The 70% Rule:

MPP = (ARV * 70%) – Rehab Costs

• Most successful investors want something more detailed to help avoid potential losses

• Every investor has their own “rules” for evaluating a deal

• Most tools are built to help determine the investor’s Maximum Purchase Price (MPP)

• A common rule is The 70% Rule:

MPP = (ARV * 70%) – Rehab Costs

• Most successful investors want something more detailed to help avoid potential losses

THE FLIP FORMULATHE FLIP FORMULA

MPP = ARV – Fixed Costs – Profit – Rehab Costs

• ARV is the conservative resale value

• Fixed Costs are all the fixed costs you incur

• Profit is your desired profit on the deal

• Rehab Costs are the costs to renovate

MPP = ARV – Fixed Costs – Profit – Rehab Costs

• ARV is the conservative resale value

• Fixed Costs are all the fixed costs you incur

• Profit is your desired profit on the deal

• Rehab Costs are the costs to renovate

Example: 4708 E. ThunderhillExample: 4708 E. Thunderhill

MPP = ARV – Fixed Costs – Profit – Rehab CostsWhat is our MPP?

ESTIMATING ARVESTIMATING ARV

MPP = ARV – Fixed Costs – Profit – Rehab Costs

Estimating ARVEstimating ARV

• Do it like an appraiser would

• Three approaches to analyze property value:1. Sales Comparable Method

2. Income Method

3. Replacement Cost Method

• For residential property, stick with Sales Comparison Method

• Do it like an appraiser would

• Three approaches to analyze property value:1. Sales Comparable Method

2. Income Method

3. Replacement Cost Method

• For residential property, stick with Sales Comparison Method

What Is Sales Comparison?What Is Sales Comparison?

• Value based on what similar properties in the vicinity have sold for recently.

• Vicinity = Preferably same subdivision or ½ mile.

• Recently = Preferably past 3 months.

• Similar = Age, Style, Size, Condition, etc

• Value based on what similar properties in the vicinity have sold for recently.

• Vicinity = Preferably same subdivision or ½ mile.

• Recently = Preferably past 3 months.

• Similar = Age, Style, Size, Condition, etc

Here’s What I Know:Here’s What I Know:

• 4 bedroom homes are more valuable than 3 bedroom homes to most buyers.

• 3 car garages are more valuable than 2 car garages to most buyers.

• Homes with pools are more valuable than homes without pools to most home buyers.

• Single-level homes are more valuable than two-level homes to most homebuyers.

• 4 bedroom homes are more valuable than 3 bedroom homes to most buyers.

• 3 car garages are more valuable than 2 car garages to most buyers.

• Homes with pools are more valuable than homes without pools to most home buyers.

• Single-level homes are more valuable than two-level homes to most homebuyers.

Here’s What Else I Know:Here’s What Else I Know:

• Normal Sales - $112.38 $/SF

• Short Sales - $76.58 $/SF

• REOs - $78.42 $/SF

*Source – Cromford Report, 9/12/12

• Normal Sales - $112.38 $/SF

• Short Sales - $76.58 $/SF

• REOs - $78.42 $/SF

*Source – Cromford Report, 9/12/12

Here’s What I Don’t Know:Here’s What I Don’t Know:

• How much more value will a homebuyer and/or appraiser see in a property with these desirable features?

• How much more value will a homebuyer and/or appraiser see in a home that’s not a short sale or REO?

• How much more value will a homebuyer and/or appraiser see in a property with these desirable features?

• How much more value will a homebuyer and/or appraiser see in a home that’s not a short sale or REO?

Estimating ARV – An Inexact ScienceEstimating ARV – An Inexact Science

• Lack of supply

• School District

• Family

• Busy Streets

• Barking Dogs

• Lack of supply

• School District

• Family

• Busy Streets

• Barking Dogs

Step 1: Specs on 4708 E. ThunderhillStep 1: Specs on 4708 E. Thunderhill

Year Built 1993

Condition Excellent

Square

Footage1,951

Beds 3

Baths 2.5

Parking 3 Car Garage

Pool Yes

Levels 2

Subdivision Desert Breeze

Step 2: Find CompsStep 2: Find Comps

Valuation Adjustments:Thunderhill 13402 38th 13223 38th Bighorn

Year Built 1993 1988 1988 1993

Condition Excellent Excellent Excellent Good

Square

Footage1,951 2,204 2,204 2,145

Beds 3 4 4 4

Baths 2.5 2.5 2.5 3

Parking 3 car garage 3 car garage 3 car garage 2 car garage

Pool Yes Yes Yes No

Levels 2 2 2 2

Step 3: Compare SpecsStep 3: Compare Specs

Step 4: Normalize Values & AverageStep 4: Normalize Values & Average

Adjusted Values:13402 38th 13223 38th Bighorn

SALE PRICE $285,000 $300,000 $242,000

$/SF $129.31 $136.11 $112.82

SF Difference: - 253 - 253 - 194

Adjustment $252,363 $265,600 $220,272

Average Value (ARV): $246,078

Low Value (ARV): $220,272 ARV Range

Step 5: Factoring DemandStep 5: Factoring Demand

• How many active listings for sale in the vicinity?

• How many active listings like this property are for sale (i.e. normal sale, 3 car garage, pool, excellent condition)?

• How many like listings are pending?

• How long were these listings active before they became pending?

• How many active listings for sale in the vicinity?

• How many active listings like this property are for sale (i.e. normal sale, 3 car garage, pool, excellent condition)?

• How many like listings are pending?

• How long were these listings active before they became pending?

Step 5: Factoring Demand (cont.)Step 5: Factoring Demand (cont.)

• NO active listings for like properties in the entire zip code of 85044

• Only one PENDING listing for like property in the entire zip code of 85044, $275,000 after 19 DOM

• NO active listings for like properties in the entire zip code of 85044

• Only one PENDING listing for like property in the entire zip code of 85044, $275,000 after 19 DOM

Example: 4708 E. ThunderhillExample: 4708 E. Thunderhill

MPP = $270,000 (ARV) – Fixed Costs – Profit – Rehab Costs

ESTIMATING FIXED COSTSESTIMATING FIXED COSTS

MPP = $270,000 – Fixed Costs – Profit – Rehab Costs

Categories of Fixed CostsCategories of Fixed Costs

Purchase Costs Inspection CostsClosing CostsLender Fees

Purchase Costs Inspection CostsClosing CostsLender Fees

Selling CostsCommissionsClosing CostsHome WarrantyTermite Treatment

Selling CostsCommissionsClosing CostsHome WarrantyTermite Treatment

Holding CostsMortgage PaymentsProperty TaxesUtilities Insurance

Holding CostsMortgage PaymentsProperty TaxesUtilities Insurance

Marty’s Typical Fixed CostsMarty’s Typical Fixed CostsPURCHASE COSTS:  Inspection Fee 155Closing Costs 1000Lender Fee 900

Total: 2055

HOLDING COSTS:  Mortgage Payments 5400Property Taxes 600Utilities 450Insurance 300

Total: 6750

SELLING COSTS:  Commission to Buyer's Agent 6750Commission to Listing Agent 4050Closing Costs 3400Home Warranty 400Termite Treatment 325

Total: 14925

Total Fixed Costs: 23730

DETERMINING PROFITDETERMINING PROFIT

MPP = $270,000 – $23,730 – Profit – Rehab Costs

How Much Profit?How Much Profit?• Profit Trade-Off:

– Too much, unlikely you’ll get the deal at your MPP

– Too little, introduces risk and lowers your income

• Most investors tend towards 10-20% of resale price, with a minimum

• Marty’s Criteria: 10% of ARV, 15K Minimum

• Profit Trade-Off:– Too much, unlikely you’ll

get the deal at your MPP– Too little, introduces risk

and lowers your income

• Most investors tend towards 10-20% of resale price, with a minimum

• Marty’s Criteria: 10% of ARV, 15K Minimum

ESTIMATING REHAB COSTSESTIMATING REHAB COSTS

MPP = $270,000 – $23,730 – $27,000 – Rehab Costs

Rehab CostsRehab Costs  INTERIOR      

Trade Task Labor Materials TotalDemo Basic cleanup 100 100 200Electrical Lights, Fans 150 600 750Plumbing Kitchen Sink 100 100 200Paint Walls only 1400 100 1500Cabinets Refinish 900 300 1200Countertops Granite 400 1500 1900Flooring Clean carpet, tile in bathrooms 300 300 600HVAC Maintenance 150 0 150Appliances Install appliances 200 1100 1300Supplies Blinds, door hardware 200 1100 1300Cleaning House cleaning 200 0 200Staging Kitchen, master bath, pictures 300 0 300           INTERIOR TOTAL: 4400 5200 9600

  EXTERIOR      Trade Task Labor Materials Total

Roof Repair back patio 200 200 400Paint Repaint exterior 1400 100 1500Landscaping Cleanup, plant shrubs, trim 300 0 300Garage Paint garage floor 50 175 225           EXTERIOR TOTAL: 1950 475 2425

TOTAL: 12025

PUTTING IT ALL TOGETHERPUTTING IT ALL TOGETHER

MPP = $270,000 – $23,730 – $27,000 – $12,025

MPP For 4708 E. ThunderhillMPP For 4708 E. Thunderhill

MPP = $270,000 – $23,730 – $27,000 – $12,025

MPP = $207,245 = 77% of ARV

MPP for 4708 E. ThunderhillMPP for 4708 E. Thunderhill

Sales Price: $269,900Acquisition Price: $200,000Fixed Costs:• Commissions $10,800• Mortgage Payments $ 5,100• Utilities/Insurance$ 700• Closing Costs $ 5,000

Rehab Costs: $14,700Total Profit: $33,600

Sales Price: $269,900Acquisition Price: $200,000Fixed Costs:• Commissions $10,800• Mortgage Payments $ 5,100• Utilities/Insurance$ 700• Closing Costs $ 5,000

Rehab Costs: $14,700Total Profit: $33,600

Acquisition StrategiesAcquisition Strategies

1. Short Sales (MLS)

2. Bank-owned

3. Auction

4. Unlisted pre-foreclosures

5. Other motivated sellers

1. Short Sales (MLS)

2. Bank-owned

3. Auction

4. Unlisted pre-foreclosures

5. Other motivated sellers

Writing OffersWriting Offers

5 Decisions Prior to Writing Your Offer:

1. Cash or Financing

2. Purchase Price

3. Earnest Money

4. Closing Costs

5. Contingencies

• Due Diligence Period

• Financing Contingency

• Appraisal Contingency

5 Decisions Prior to Writing Your Offer:

1. Cash or Financing

2. Purchase Price

3. Earnest Money

4. Closing Costs

5. Contingencies

• Due Diligence Period

• Financing Contingency

• Appraisal Contingency

Short Sale Offers That Get ApprovedShort Sale Offers That Get Approved

• Days on Market Doesn’t Matter

• The BPO (broker price opinion) is key

• Provide BPO agent with comps

• Document repairs

• Days on Market Doesn’t Matter

• The BPO (broker price opinion) is key

• Provide BPO agent with comps

• Document repairs

REO Offers That Get AcceptedREO Offers That Get Accepted

• On the market less than 3 days or more than 3 months

• Offer at least 80% of list price

• $5,000 minimum EM deposit

• Need at least 5K in repairs

• Low due diligence (3-7 days)

• Have an agent on your side (either Buyer’s Agent or Listing Agent)

• On the market less than 3 days or more than 3 months

• Offer at least 80% of list price

• $5,000 minimum EM deposit

• Need at least 5K in repairs

• Low due diligence (3-7 days)

• Have an agent on your side (either Buyer’s Agent or Listing Agent)

Buying at the AuctionBuying at the Auction

• The MPP formula still applies

• Use a bidding service

• Check title

• Drive Report

• Don’t get emotional

• The MPP formula still applies

• Use a bidding service

• Check title

• Drive Report

• Don’t get emotional

Unlisted Pre-ForeclosuresUnlisted Pre-Foreclosures

• Direct Mail

• Door knocking

• Website

• Voicemail

• Direct Mail

• Door knocking

• Website

• Voicemail

Common MistakesCommon Mistakes

• Clouds on Title (Auctions)– Assessments– Federal Tax Liens– Deed Transfers

• HOA Issues

• Getting Financing in Order

• Clouds on Title (Auctions)– Assessments– Federal Tax Liens– Deed Transfers

• HOA Issues

• Getting Financing in Order

Box #2: RehabBox #2: Rehab

RehabRehab

1. First Steps

2. Team Building

3. What to Fix

4. Estimating Costs

5. Cost Control

6. Common Mistakes

1. First Steps

2. Team Building

3. What to Fix

4. Estimating Costs

5. Cost Control

6. Common Mistakes

First Things FirstFirst Things First

1. Secure the property.

2. Get insurance.

3. Turn on utilities.

4. Meet with trades.

5. Determine repairs.

1. Secure the property.

2. Get insurance.

3. Turn on utilities.

4. Meet with trades.

5. Determine repairs.

Team BuildingTeam Building

OPTION #1 OPTION #2

GC Electrician

Plumber

HVAC

Carpenter

Painter

Flooring

Cabinets

Landscaper

Glass/Window

Handyman

What To FixWhat To FixCosmetic Repairs:

Paint

Carpet

Appliances

Lights/Fans

Sinks/Faucets

Door Hardware

Outlets/Switches

Advanced Cosmetic:

Cabinets

Countertops

Doors

Windows

Roof

Gutters/Trim

Major Trim/Design

Mechanicals:

HVAC

Re-Piping

Re-Wiring

Advanced:

Foundation

Mold

Structural / Moving Walls

Make It PopMake It Pop

• Air fresheners

• Appliances

• No caps

• Lots of Lighting (no caps)

• Staging

• Air fresheners

• Appliances

• No caps

• Lots of Lighting (no caps)

• Staging

Under ImprovingUnder Improving

• Cheap fixtures (sassy brass)

• Worn carpet

• Vinyl

• Dead grass

• Cheap fixtures (sassy brass)

• Worn carpet

• Vinyl

• Dead grass

Over ImprovingOver Improving

• Flooring – Tile• Appliances• Landscaping• Granite

Countertops• Door Hardware

• Flooring – Tile• Appliances• Landscaping• Granite

Countertops• Door Hardware

Controlling CostsControlling Costs

1. Paint

2. Carpet

3. Supplies• Light Fixtures• Ceiling Fans• Blinds• Door Hardware• Appliances

1. Paint

2. Carpet

3. Supplies• Light Fixtures• Ceiling Fans• Blinds• Door Hardware• Appliances

Contractor Negotiating TipsContractor Negotiating Tips

• How Much?

• How Long?

• How Much?

• How Long?

Common MistakesCommon Mistakes

1. Taking too much time

2. Paying too much

3. Sub-standard finished project

4. Attention to detail

5. Over Improving

6. Under Improving

Box #3: SalesBox #3: Sales

“Coffee is for closers” – Alec Baldwin, Glenarry Glen Ross, 1992

SalesSales

1. Marketing the home

2. Contract Analysis

3. Talking with Lenders

4. Influencing appraisals

5. Low appraisals

6. Settlement Statements (HUD)

7. Common Mistakes

1. Marketing the home

2. Contract Analysis

3. Talking with Lenders

4. Influencing appraisals

5. Low appraisals

6. Settlement Statements (HUD)

7. Common Mistakes

Marketing the HomeMarketing the Home

1. Find an agent with investor experience.

2. Not an REO or Short Sale

3. Quick Response

4. Staging

5. Agent Bonus

6. Furniture

1. Find an agent with investor experience.

2. Not an REO or Short Sale

3. Quick Response

4. Staging

5. Agent Bonus

6. Furniture

Contract AnalysisContract Analysis

• Purchase Price• Closing Date• Down Payment• Closing Costs• Type of Financing• Title Company• Home Warranty• HOA

• Purchase Price• Closing Date• Down Payment• Closing Costs• Type of Financing• Title Company• Home Warranty• HOA

Talking With LendersTalking With Lenders

1. Do you know this is a flip?

2. Bank?

3. Loan type?

4. Have you done many of these before?

5. Buyer well qualified?

1. Do you know this is a flip?

2. Bank?

3. Loan type?

4. Have you done many of these before?

5. Buyer well qualified?

Influencing AppraisalsInfluencing Appraisals

1. List of Improvements

2. Comparables

3. Meet appraiser at the home.

4. Leave comps at the home.

1. List of Improvements

2. Comparables

3. Meet appraiser at the home.

4. Leave comps at the home.

Low AppraisalsLow Appraisals

• Cash to cover the difference

• 2nd appraisal• Lowering closing

costs• New bank• Cancel

• Cash to cover the difference

• 2nd appraisal• Lowering closing

costs• New bank• Cancel

Settlement Statement (HUD)Settlement Statement (HUD)

401 – Contract Sales Price

509 – Credit Closing Costs

511 – County Taxes

703 – Commission

1102 – Closing Fee

1304 – County Taxes

1305 – Additional Exhibit

401 – Contract Sales Price

509 – Credit Closing Costs

511 – County Taxes

703 – Commission

1102 – Closing Fee

1304 – County Taxes

1305 – Additional Exhibit

Common MistakesCommon Mistakes

• Assessments

• HOA Dues

• Federal Tax Liens

• Assessments

• HOA Dues

• Federal Tax Liens

Box #4: Raising CapitalBox #4: Raising Capital

Create a Track RecordCreate a Track Record

1. Leverage the success of your mentor/partner.

2. Raise your own capital.

3. Build your own real estate investment business.

4. Attract other investors and/or partners

1. Leverage the success of your mentor/partner.

2. Raise your own capital.

3. Build your own real estate investment business.

4. Attract other investors and/or partners

Building TrustBuilding Trust

• Promote the system

• Schedule a field trip

• Provide financials

• Be authentic

• Promote the system

• Schedule a field trip

• Provide financials

• Be authentic

Where is the Money?Where is the Money?

• Warm Market

• Networking

• Social Networking

• Work – School - Church

• Warm Market

• Networking

• Social Networking

• Work – School - Church

PartnersPartners

• Joint Venture Agreement

• LLC with operating agreement

• Prom Note

• Joint Venture Agreement

• LLC with operating agreement

• Prom Note

Self Directed IRAsSelf Directed IRAs

• $3.7 Trillion in IRAs• Anything allowed

by law• Membership

interest in an LLC• Prom Note• Grows tax free

• $3.7 Trillion in IRAs• Anything allowed

by law• Membership

interest in an LLC• Prom Note• Grows tax free

Hard MoneyHard Money

• Property serves as collateral

• 25-30% Down• 12-18% interest• Monthly interest

payments• Personally

guaranteed

• Property serves as collateral

• 25-30% Down• 12-18% interest• Monthly interest

payments• Personally

guaranteed

Managing ExpectationsManaging Expectations

1. What kind of ROI are you looking for?

2. How much do you plan to invest?

3. How long can you keep your money invested?

1. What kind of ROI are you looking for?

2. How much do you plan to invest?

3. How long can you keep your money invested?

Four Flippin’ Boxes

FlippingPhoenixHouses.com

Marty BoardmanMarty Boardman

marty@risingsuncapitalgroup.com

602-319-5391

@martyboardman linkedin.com/in/martyboardman

marty@risingsuncapitalgroup.com

602-319-5391

@martyboardman linkedin.com/in/martyboardman