Real Estate Articles

R.E.I. How-To (Unit 3) | By: Chris Hake and Randy King

This installment is part of a multi-unit primer to get you started in real estate investing.  We can't address everything you need here in these short tomes, but you will get a flavor for this stuff to help you make a decision to move forward with more aggressive training or coaching.
Welcome!  Class is now in session.  In this multi-unit primer, we drill down into the hows and whys of Real Estate Investing specific to South Central Wisconsin and, even more specifically, what's happening right now.  Because markets shift so quickly, some of this information may not be totally accurate 6 months from now, but it will surely be enough to give you a solid footing.
What this is about.  At the Madison REIA, we provide people with critical information pertinent to doing this work in our area of the country.  We go deeply in-depth with our 7-session live and recorded training, but let's first focus on the foundational stuff in these training articles; more on the formal training later.
The Texts.  We'll be using three textbooks in this work; you can purchase them on Amazon or sometimes find them at Half-Price Books or other outlets.  The three books are:
•  The Millionaire Real Estate Investor, by Gary Keller and Dave Jenks.
   (Amazon Link)
•  FLIP: How to Find, Fix, and Sell Houses for Profit, by Rick Villani and Clay Davis.
   (Amazon Link)
•  HOLD: How to Find, Buy, and Rent Houses for Wealth, by Steve Chader and Jennice Doty.
   (Amazon Link)
(Note - if you are registering for an upcoming live multi-week evening course The REI Blueprint - Rehabs to Rentals, A to Z then DO NOT buy these books - they will be provided to you.)

We've gotten some response to these instructional articles, which we continue to update and augment.  It's really satisfying to know that we can make a difference because, well, that's our mission at the Madison REIA.  Here's what one person told us...
I have read a lot of material on this subject online and many resources claim to offer great info where I am mostly left feeling like they gave nothing of value.  Just wanted to say I learned more from this one email [Unit 2] than anything else on marketing.  Granted I have only been looking at investment for a couple months now but still, great resource.  Will be attending your class and looking forward to more great stuff from the REIA.   Thanks!
Unit 3 - Flipping
Let's get down to it, shall we?  You know, it occurs to us that the closest most people will ever get to flipping is what they'll be doing if they end up working at McDonald's or Wendy's.  No, not Burger King because we would place the burgers on a chain-like conveyor to be flame-broiled in a special unit.  Um...
So what's this "flipping" thing anyway?  We prefer to call it "rehabbing" because the connotation of "flipping" is that you buy a property and just flip it over to someone else while jacking up the price.  And people get a bad reputation for doing that.  Where's the 'value-add' in that equation?
Well, that process is actually called wholesaling and we'll completely explain its value later AND why rehabbers love wholesalers and are happy to pay them $20,000 for "flipping" a house their way.
You'll be pleased to learn that there are really only 3 steps to rehabbing, and they are as follows:
1)  Acquisition.  This is where you buy the house.
2)  Rehab.  This is where you fix the house.
3)  Re-Sale.  This is where you re-sell the house.
That's it, thanks for reading and we'll see you for Unit 4.  Now go out and do some rehabbing.
Oh, wait a minute - that's kind of what the "gurus" do when they fly into town, unless you drop $25,000 with them, then you can come to a 3-day "boot" camp where you get basically what we're giving you here, and then you get "the boot".  Hence the name.
OK, ok, that's an exaggeration.  Many of these guys do a really good job educating people, and give them a great understanding of what's involved in doing this work.  It's clear, it's concise and, remarkably, it's fairly complete.  So why do you see us rolling our eyes and doing the forehead dope-slap when we talk about them?
Well, it's like this.  You can register for med school and go through 4 or 5 years of intense education in anatomy, endocrinology, pathology, pharmacology, microbiology, immunology, hematology, oncology, cardiology, nephrology, gastroenterology, neurology, and gynecology.  After doing all that, we're still not letting you cut into us.
No, of course not - you're not cutting into anything living and human until you've mentored with an attending physician during your internship.  The reason is simple enough - for all the book knowledge that you may acquire, there are things that just "happen" where someone who has been in the trenches can show you how to respond properly.
And, we're not trying to equate surgery with rehabbing, although some would argue the point.  By the way, all those "ology" words?  That root word from the Latin simply means "study of".  Note that nowhere in those words do you see the words "mastery of".  That comes much later.
But once again, we digress for reasons explained in earlier units.  Let's get back to rehabbing.  It's only 3 simple steps, and each of those breaks down into a series of steps and procedures.  Let's look at them in detail.
1.  Acquisition.
In Unit 2, we talked about marketing.  Let's assume that you've done some good marketing and you've gotten someone that just wants to be "done with it", so he or she is motivated.  We also learned that there's lots of motivating factors for people like death, divorce, loss of income, and a whole lotta stuff in between.
The first thing you're going to do is to go look at the property.  When you do, you'll have your handy-dandy Rehab Repair Estimate Worksheet that walks you through every single thing you need to look at, and lets you estimate what it's going to cost to do the rehab.
The Rehab Repair Estimate Worksheet is at the core of your rehabbing practice.  It forms the basis for what you can pay for a property with complete confidence that you're making a good, sound decision.  Of all the things that we do for the acquisition of a property for rehab (or wholesale) this worksheet is the defining document.  Yep, it's the holy grail.
What would you expect to pay for this worksheet?  $50?  $500?  $5,000?  Well, you'd be well-served if you paid $5,000 and you'd make that back in no time.  But guess, what - we're going to give that worksheet to you just for reading this unit.  Yup, no kidding, just keep reading.
Oh, and if you're going to participate in the REI Blueprint Series, no need to scramble and save this worksheet today because it, along with dozens of other key forms, is available in the online section of the series and will be discussed in detail in class.  Just chill out now.
So here's the worksheet - it's a PDF file, and the best way to use it is to print it double-sided, doesn't need to be in color.  Then just follow the instructions on the sheet and you'll have a rock-solid repair number.
Download The Repair Estimate Worksheet.
We update this sheet at least twice a year, sometimes more - depending on the market prices for materials and labor.  In the future, we will have an online sheet that will be automatically updated, so when you go to use it, you'll always have the right numbers.
So you go through the Rehab Repair Estimate Worksheet, and let's say that your bottom line is that you need $43,200 to cover the cost of repairs.  And the worksheet includes everything from materials to labor to permits to general contractor fees and even the infamous "whoops" amount.  More on that later.
Now what?  This is where your REALTOR partner comes in.  By working with him or her and educating him or her on how you operate, he or she will find the fixed-up sale price of the house that we call the After Repair Value, or ARV.  He or she will find that number by doing what we call "pulling comps" - finding comparable properties that sold in the last 6 months to a year.
OK, now you've got 2 things: the ARV and the Repair Estimate.  Let's say that your ARV came in at $223,500, and here we go with the magic; it's called the 70% ARV Rule.
ARV = $223,500 (multiply that by 70%)
70% = $156,450 (now subtract repairs)
REV = -$43,200 (your repair estimate value)
MAO = $113,250 (this yields your Maximum Allowable Offer)
Ta-daaa!  That's it; you can offer up-to and including $113,250 for this property.  If you get an accepted offer on that, you'll have no problem creating a profit from doing this rehab.
Coupla things to point out about this... Thing 1:  Notice that we are NOT low-balling, we are using a formulaic method to arrive at a sane number.  you can show all your calculations to the seller, too.  Thing 2:  The 30% that we held back (70% ARV) covers all of your "quiet costs" and your profit.  Quiet costs are your eventual closing costs and project holding costs.
TIP 1:  If your number comes out like ours above, when you make your final offer, it should have exactly that number.  Showing all the digits makes it look calculated because, well, it IS calculated.  And we like to start the negotiations at about 95% of that number or, in this case, $107,587.
Tip 2:  If your 95% number dips slightly below a major threshold like $100,000, you can raise your initial offer slightly above to look better and not create shell-shock.  And remember, you can show the seller exactly how you arrive at your numbers!  Be transparent, engender trust.
Now, - here comes another major tool.  It's called the Seller Net Sheet.  First of all, the seller knows exactly what he's getting from you, right?  Do the math: $113,250 (MAO) - $83,257 (balance of his mortgage) = $29,993.  Not a windfall, but also not negative either.
So you show the seller this little thing called the Seller Net Sheet and, here for your viewing pleasure, is one that uses our scenario to show the seller something magical.  First, take a look at it: Seller Net Sheet Example.
See that bottom number?  That's what the seller might get if he goes the conventional route using a REALTOR - $40,834, which is $10,841 higher than what you're offering.  Remind the seller that he'll get 95% of ARV if the place is in great condition and it shows well, then you ask if he thinks that $10,000 is a fair price to pay to (a) get it done NOW, (b) without a single repair, (3) without months of showings, (IV) without REALTOR contracts, and (E) without the worry that the buyer's loan will fall through.
It usually doesn't take long for someone to think through that, especially if they are motivated to git 'er done yesterday.  Thinking about all the painting, cleanup, and repairs that they would have to do (and pay for) is a pretty strong motivator to come to your side of the fence.  All of a sudden, he feels like he's cheating YOU for only paying you $10,000.
THERE IS NO MAGIC HERE, NO SLIGHT OF HAND, NO LYING OR CHEATING. In this scenario, you will earn over $30,000 - with an emphasis on "earn", and all parties are satisfied and happy.
It just doesn't get any better than that.  Well, actually it DOES get better than that because at some point, you'll be forced to look at the balance of your savings account and after doing 4 or 5 of these, you should be well into 6 digits.  No fantasy, no shenanigans, no taking advantage of anyone.  Just good business - providing value.
Don't you just love that word, shenanigans?  Sounds like it should come from Ireland or Scotland or somewhere out there, but - NO - it's an American word from about the 1850's.
OK, back to it.  Do you like it so far?  Feeling better about this stuff?  Do you see now why and how you are offering a valuable service to someone in need?  If you don't, go back and re-read.
2.  Rehab.
We can only touch on this subject here because it's one of those things that you have to work with for awhile with your mentor or coach, but we'll give you all the processes involved in structuring the rehab.
So the first thing you have to do is to determine how MUCH of a rehab you really need to do, and it varies wildly.  When you did your Rehab Repair Estimate, you did the "best scenario" because it was an estimate.  Now, as you come back through with your mentor and other people you trust, you're going to take a good, hard look.
For example, you might find that you estimated to replace all the inside doors because they were beat up, so you budgeted for that.  But then someone points out that these are turn-of-the-century (the last one, not 2000) solid-core hardwood doors and, even though they are beat up, they can be sanded and repaired.  Why would you do that?  Well, if you're in an historical neighborhood where that kind of thing is cool, you'll score huge points for having the original doors.  HUGE.
So this is the kind of thing you do - an analysis of the neighborhood coupled with market conditions dictates what you need to do for rehab.  Certain things, however, you have to do.  If the roof is bad, you have to replace it or you'll get ding'ed when you go to sell it, because there will be an inspection - one that takes about 4-6 HOURS to do, by a professional house inspector.
Of course, you'll likely want to paint EVERYTHING, and either clean up (refinish) floors or replace them.  Here's another real estate hint for you:  If this is a couple buying your finished product, the woman makes the decision, and she's going to look at (1) kitchen, then (2) bathroom.
Oh, no - not because she's planning on cooking so much (he may be Le Chef de la Maison) but because she knows all of her friends are going to gauge her purchase on how impressive the kitchen is.  Just sayin'.  You will want to base your rehab on this.
This does NOT mean you ignore the man-cave or the garage; best to have a carrot to toss out to everyone.  And don't even think about leaving the house empty, you need to stage at least some of it with furniture because most people cannot conceptualize furniture in an open space.
And there's another ton of information on rehabbing, not the least of which is determining WHO is going to do the rehab and how you hook up with them (some of our peeps actually do some or most of their own work), and the timeline, but we just cannot bleaughffff all over you with all that detail here.  We'd never get this thing done if we did.  Suffice it to say that we have the ability to help you with ALL of this.
3.  Re-Sale.
This is the easy part, really.  Actually, this is the FUN part.  If you've followed the structure and plan we described above, the re-sale falls into place.  And you will be working closely with your listing agent to determine all the things you need to do.  He or she will handle all of that work, and may even have a team to make it happen for you.
Sure, you could save yourself some money by doing a FSBO, but that does not make good sense.  For the $13,000 you would save in commissions, you will have to do a lot of work, you won't have professional advice and, most importantly, you will not be forming/strengthening a key team member relationship.  So, don't even think about it, you're wasting time and future money.
So Randy rehabbed a house in Stoughton and his sweetie Beth was the listing agent.  She set up the MLS and did some other marketing, then scheduled an open house on a Sunday.  Then she had an opportunity to go to a conference in Chicago on that day that she really did not want to miss.
No problem, Randy could handle it, so he got some snacks put together with lots of cheese and crackers (sounded like an open-housey thing to do), but then when he went out to put the open-house signs in the ground, it was ROCK HARD.  After several futile attempts, he came back and just put the single open house tent-sign in the driveway, hoping that people would see it and come in.  Beth would kill him for not getting more advertising out, but it was too late.
But then again, it was really tight market at the time, inventory was low, and houses were being snapped up quickly.  Not only that, Beth had posted some really great pictures of the finished product on the MLS.  Abiding by the principle rehab rule set forth above, here's a photo of the finished kitchen taken from the exact same spot...
Beth said that he should expect about 4 couples or about 10 people to show up because the market was hot.  As it turned out, there were 63 people at that open house and they got an accepted offer 11 hours after it was listed that was $29,500 above the ARV calculated in the worksheet.  Bam.
It does happen.  The only question unanswered at this point is "will it happen for YOU?"  We've shown you exactly how, NOW you can (a) do nothing,(b) proceed slow and cautiously, or (c) step off the curb and get to work.  Your choice.
Oh, and in case you were wondering, that cheese was gone in about 15 minutes.
Chris & Randy
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