Fix-n-Flip Wealth Builder

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1 The Numbers When you have a property that you are interested in and you go to take a look at the property make sure you take along a property analysis form, like the one we provide you in our system. This will act as a guide to assist you in going through the property systematically. Later on this same form will serve as a reminder of what the properties pluses and minuses are. This sheet can also help you later when you begin to estimate repairs for the property. When doing your property analysis form make sure you are also taking photos and doing a detailed video during the walkthrough to help you make sure you re not missing anything. You don t need to do this before you make an offer, but it is a good idea. Having a good idea of what the repair budget will be can help you in determining what your offers need to be. Also, don t expect to remember what a properties pluses and minuses are or even what the property looks like without this. After just looking at a couple of properties it is extremely hard to remember one property from another. Before making an offer on the property, drive the neighborhood and call on all for sale and for rent ads or signs to see what they are asking. You need to know what the rent rates are where you re buying. Next, using a Realtor, Redfin, Zillow, RealtyTrac, Epraisal, or other websites to see what has sold in the last 90 days in that neighborhood. Try to be specific to your target house s neighborhood if you can. Write down the closest comps (Comparables) to your house by square footage. We use +/- 10% of the square footage as a good comp. Compile those figures and houses because you re going to use that information and pictures of the property to create a Flyer of the property. The three critical aspects to buying a home are what you pay for it, accurate calculation of the repairs and holding costs, and what it will be worth totally fixed up, or the after repair value (ARV). The most critical figure is what you buy it for! Therefore, your negotiation skills are very critical. Just asking the seller, Is that the best you can do? can greatly increase your profit. When you know what the after repair value (ARV) should be, and the repair costs, then you can calculate your cash offer, maximum allowable offer (MAO). Never offer MAO, always start lower and if you are planning to wholesale it, start well below MAO. Remember, he who mentions price first loses, so ask them how much they think their house is worth. Ask them, If I give pay all cash and close quickly, what s the lowest amount you ll accept for your property? If they say, well how much are you willing to pay. Reply, I don t feel it s right to price your product and pause. If you get a price then

2 you have a starting point. If not, then start below MAO and justify your offer with solid comps, the estimation of repairs from contractor bids, the risk involved, and so on. When you analyze comps be aware of the house s conditions. Beautiful houses that are sold give the best ARV estimates. Distressed or dated houses tell you what the low end houses will bring. Use these examples to justify your offers to the seller and your investors. If able, present your offers in person and not with . The negotiating must be done in person and it must simmer and never be rushed. We negotiated 8 months on a Subject-to deal before we closed on it so don t be in a hurry. Keep following up. If your offer is not accepted initially, it may be in the future. Keep negotiating and follow the houses you made offers on to see what they sold for so you can tweak your skills. Wrap your package, dress well, but not slick, more on that later. Set expectations on what you intend to do, establish rapport, talk about them and their family. It s all about them. What s in it for them? They don t care about your needs. When you know their wants and needs, then you can solve their problem for a win-win solution for both parties. Calculating the Maximum Allowable Offer (MAO). MAO=(ARV x 70%) - Repairs Wholesale Fee=(ARV x 65%) - Repairs (Good BallPark Figure) More on wholesaling later. Example ARV=$200,000 Repairs=$50,000 MAO=($200,000 x 70%) - $50,000 = $90,000 (Offer no more than MAO) Don t do a deal just to do a deal, you will lose money. Properties that you walk away from can t bite you. Start around $80,000 and work your way up slowly in $500 increments. Is that the best you can do? What will you say yes to? Let s say you paid MAO for the house and sold it at your ARV. What is your ballpark profit? Sale Price $200,000 Purchase Price $ 90,000

3 Commissions 6% $ 12,000 Holding Costs 6% $ 12,000 Repairs $ 50,000 Profit $ 36,000 Now that you have the numbers, let s get it funded with little to none of your own money and regardless of your credit. Photo by Freddie Collins on Unsplash Private Money Contact people you know with money or wrap your package and start to network with people that have money. Private money lenders are easier to work with and tend to, have lower rates and little to no fees. Offer them a rate of 6-10% if they want monthly payments or 8-12% if they want to be paid after the house is sold.

4 Create a credibility kit with references, pictures and the numbers of any projects you have done. The internet has great examples of credibility kits that you can download. An example is also available as a download in your course. Put before and after pictures and the numbers that go with the projects you ve done. If you have not done any, say my partners and I have done over 100 transactions and I thought you d be interested in doing this deal. You can offer private lenders or partners 50% of the profit if they put up all the money. Fifty percent of something is better than 100% of nothing. If they ask you how much money are you putting up? You say, I have several projects going and can t use my money for all of them. I m offering this deal to you first because I don t want to lose this smoking deal. Remind them of what they are earning in interest in the bank or on CDs and the volatility of Wall Street and the stock market in the past. You don t use banks because they are too slow to act. Use OPM (other people s money) otherwise known as equity partners, if you don t have cash or you can t qualify for financing. With an equity partner, you don t have to pay back the money contributed but you do have to share profits. Typically, this will cost you more in the long run than using a hard money lender. The good news is that you already know potential equity partners including relatives, family, friends, neighbors and acquaintances, doctors and others who have money they would like to safely invest at higher than average rate of return. You will find the property, do all of the rehab work and you split profits according to how you negotiated your partnership or tenants in common agreement. Your partners can either actively participate or be non-participating. It is best to spell out these roles in your agreement with each other. Because it is their money invested and at stake, they may wish to oversee the project and have input. While this may sound uncomfortable to you, be sensitive to the fact that they have a lot more to lose than you do if the deal goes bad. You may only have to do one or 2 deals with a partner before you ve made enough money to be able to do deals on your own. If you need money, make your deal on a one-time basis, property by property, deal by deal, instead of setting up a long-term partnership where your partner shares profits on all deals done by the partnership. If you are both contributing money to the deal, you should share profits on a prorated and equitable basis after some fee is paid to you for managing the project. Five percent to eight percent (5%-8%) of the ARV is a reasonable fee for your efforts. After

5 deducting this fee, you and your partner(s) should share in the profits according to how much you each contributed to the deal. For instance, if you each put up half of the money, you should each get 50% of the profits after your fee has been paid. On the other hand, if you re not contributing any cash, your equity partner may want to structure the deal differently. Charge your investors a fee to use their money. Why? People are used to paying a fee to invest their money. Their financial advisors do it, their stock brokers do it, this is pretty much the industry norm. The benefit to charging a fee is suddenly you are taken more seriously, because you have decided to run your business like a business. The other reason you need to start doing this is because you must get in the habit of paying yourself first. If you don t believe you are worth it, why should anyone else. Why would you invest your money with someone who doesn t take themselves seriously enough to want to get paid for their hard work. You will want to charge a $5,000 to $10,000 project manager fee. This can be structured as a way to pay you if the net profits of the project exceeds some predetermined amount. If it does not then you collect a fee of $3,000. For example, if you both agree that that ARV is $300,000, then you should earn $5,000 if the property ultimately sells for this price but only $3,000 if it does not. Additionally, if your partner is putting up all of the money and therefore taking all of the risk, he may want to be compensated for the added risk of guaranteeing the loan. Your equity partner wants to invest with someone who takes themselves seriously enough to want to get paid for their hard work. For example, If splitting the profits 50/50, the equity partner will put up all of the money. You then charge him $10,000 for acquisition costs and to run the investment from beginning to end. It s a lot of work to run a flip. This is why you need to get paid up front for all the work that goes into finding sellers, negotiating with all the players in this business, handling all paperwork, dealing with contractors and agents, running the rehab, and so on. Value your time. When meeting with potential investors or equity partners it is crucial to be professional and highly organized. You need to show them that you ve put a lot of thought, time and effort into this. They want to know that you re reliable, trustworthy and that you know what you re doing. You may need to do this over the span of 2 separate meetings.

6 Make sure you video everything you do and capture testimonials on video and in to add to your credibility. After a short time, you ll find 4-5 solid private money investors that will fund all your deals and people will be seeking you out. When presenting a property to a private money source you will need to package the property or at the very least you will need to create a flyer to showcase your deal. This should also be done if you are going to wholesale the property. First put in a few nice pictures of the property, usually the best three. You will want a picture of the front of the property main living areas and either kitchen or master. If someone is interested in your property and they want to see more pictures, have a link setup for a dropbox so they can see more pictures of the property. That link should have about another fifty pictures of the property. Make sure your flyer lists the address, or at the very least just the street and city. Include a minimum of 3-5 good comps on the flyer. These should be comps that are similar properties, in the same neighborhood and are properties that have sold in the last three to six months. Try not to include for sale properties instead of solds. This is often seen as an amateuer move and seasoned investors will want to see what has sold. You may include one or two comps of properties that are either pending, under contract or for sale along with the the properties that have sold. Make sure you attach a list of what repairs need to be done and estimated cost of these repairs. If you can get a contractor bid that would be best. If you have gotten an appraisal on the property include what the appraiser has said the property will be worth all fixed up or as an ARV appraisal. These appraisals tend to be quite long so you may not want to include the entire appraisal in your flyer but have it in the property dropbox folder. Put all your numbers on the flyer as a projection. Hand out the flyers at your local Real Estate Investment Club, at foreclosure auctions, etc. Tenants in Common Agreement When splitting deals with other investors or an equity partner, it s a good idea to have a Tenants in Common Agreement (TIC). TIC is just one way to hold title in real estate to property by two or more individuals. This term has nothing to do with tenants or rental properties. There is no limit to the number of individuals who can hold title to the property. A property held by TIC can be owned by two owners or 100+ owners. This document spells out the deal. Who is in the deal, how the profit is divided and when. Who is responsible for what and when. Who can and cannot make decisions, and It provides protection from each other s liability. It also provides a record that you and the investor are involved in the deal in case something happens to either party. A

7 partnership, however, can make you liable for acts committed by the other party. You don t want that. When you approach a lender with a property that has a TIC agreement, it is very likely the lender will require the signatures of all of the parties in title or on the TIC. This is to protect the lender. If a lender made a loan to only one party, only that person's portion of ownership would be security for the loan and not the other parties. Lenders want to be able to seize all of the property in the event of default, not just part of it. On the other hand, if 3 people held title as tenants in common and one person stopped contributing to the mortgage payment, the remaining two would most likely still be liable for the loan to prevent default. For this reason make sure you choose your TIC wisely. The four things to remember in a TIC are as follows: 1. Tenants in common can be between two or more persons who are related or who are unrelated. The relationship between the parties, if there is any, makes no difference to the agreement. Husbands and wives can hold title as tenants in common, just like two business partners. John Smith, Jane Smith, Steve Johnson and Margaret Jones can hold title together as tenants in common. 2. Ownership can be held in equal shares or unequal shares. For example, John could hold 50% ownership, Jane 25% and Steve 15% and Margaret 10%. It just needs to be spelled out in your agreement. 3. Co-tenants have the right to possess the property by one tenant or by all the tenants. Margaret can live in the property by herself or share the property with John and Jane. Neither tenant can exclude the other. 4. Upon death, the interest of the deceased co-tenant will pass to the co-tenant's heirs. If Margaret died, John would still hold 50%, Jane would own 25%, Steve would own 15%, but Margaret s 10% would pass to whomever she designated in her will. Ironclad agreements like TIC and solid operating agreements between parties can save a lot of time and money. Draw them up while you re still friends. Use your attorneys, they are not a waste of money. What may be obvious and seem ok in reality, may be totally the wrong thing to do legally. Run all of your contracts, agreements, and applicable paperwork through attorneys, title agents, and accountants.

8 Photo by Aidan Bartos on Unsplash Hard Money And Banks Hard money lenders (HMLs) are either individuals or groups of individuals who have pooled their funds to loan money secured by assets like real estate which can be reclaimed and sold to repay the debt if the borrower fails to pay or defaults on the loan. Hard money lenders are usually average people from all walks of life. The majority are middle class, working people, business owners or retired individuals who have saved money they would now like to invest to earn a higher than average return on their money. Hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower s credit rating. Issues on a borrower s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan. The amount of money the hard money lender will lend is determined by the ratio of loan amount divided by the value of property. This is known as the loan to value (LTV). Many hard money lenders will lend up to 65 75% of the current value of the property.

9 Some lenders will lend based on the after repair value (ARV). The ARV is the estimated value of the property after the borrower has improved the property or made all repairs. This creates a riskier loan from the hard money lender s perspective, because the amount of capital put in by the lender increases and the amount of capital invested by the borrower decreases. This increased risk will cause the hard money lender to charge a higher interest rate. There are some hard money lenders who will lend a high percentage of the ARV and will even finance the rehab costs. This may sound great from the borrower s point of view, but these types of loans have a much higher risk involved for the lender. As a result the interest rate and points may be MUCH higher. Expect 15 18% interest and 2 6 points when a lender funds a loan with little to no down payment from the borrower. Here is an example of how one hard money-lender structures a deal. You buy a home for $60,000, the ARV is $130,000 and the lender says they will go up to 70% ARV on the property. The hard money-lender will loan up to $91,000 on the house ($31,000 more than purchase price) based on the ARV. Most hard money-lenders want bids or estimates for repairs. Most lenders will pay out the money for the repairs like a construction loan. They will pay 25% of the repairs needed at closing, and the other payment will come in 25 percent increments as the repairs are completed. Some lenders won t charge you any interest or points until you sell the home and then you pay them one large payment for the loan principal, interest and points. While others will require you to make monthly interest only payments. When you make these payments none of the money goes towards principal pay down. To recap; a hard money loan is simply a short-term loan secured by real estate. These are non-owner occupied properties. Meaning, the investor is NOT allowed to live on the property. The terms are usually around 12 months, but the loan term can be extended to longer terms such as 2-5 years. The loan usually requires monthly payments of only interest with a balloon payment at the end of the term or when the property is sold. Hard money is available from a wide variety of sources, but the terms are usually a lot less favorable than private money from financial friends and family. Hard money lenders charge higher interest and they have fees and points associated with their loans. You would pitch the deal the same as you would if talking to a private money lender. Hard money loans are ideal for situations such as: Fix and Flips Land Loans

10 Construction Loans When the buyer has credit issues When the buyer needs to act quickly Banks Dealing with private money lenders and real people is the way to go. Banks ask you for too much proof and documentation. And when you give them all the stuff they ask for, in a short period of time they ll ask you for the same items again. They are too slow and they sabotage deals. They charge too many fees and are not very flexible if you re an investor or self employed. Avoid the banks, it s worse than a dental visit without Novocaine.