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Wholesale properties
I am continually asked about the volume of business I do flipping and wholesaling homes which I intentionally have kept close to the vest for a number of years. This weekend, however, I was convinced by an old friend to divulge some details of my business with the intention of expanding my social media reach to potential bird dogs, sellers, private lenders and the such in addition to elevating the knowledge base of who I am to those who don’t know me in the market.
Since I already bombard you guys with my wholesale properties on social media, I figured I would spread out the information for everyone, so over the next couple of weeks or so I will be sending out the details of each individual wholesale deal, flip under construction, flip on the market and flip under contract I have going on. The numbers are constantly changing however here is a snapshot as of this morning of my current activity which I will be sending out in more detail over the next couple of weeks:
Current Inventory as of 7/18/16
- -7 wholesale properties under contract to purchase or wholesale prior to COE.(two were put under contract this morning)
- -7 wholesale properties currently in inventory which I have purchased over the last 2 to 3 weeks
- -8 wholesale properties under contract to sell either via assignment or double escrow(Prior to COE) or under contract to sell after I acquired them.
- -17 retail flips under construction currently between Denver and Phoenix.
- -7 retail flips listed on the market
- -5 retail flips under contract set to close over the next 30 days
I want to be VERY CLEAR that the intent here is not to establish a platform to teach or educate. I am NOT AN EDUCATOR! I do however pride myself on being the biggest and best wholesaler and flipper in the Arizona Market which I feel is the most difficult market to have success flipping in the entire country. I am the guy all the educators, social media experts and gurus claim to be. I don’t drive a Lambo or wear Lois Vuitton shoes, I wear shorts and flip flops most days to my little office in Chandler and I haven’t worn a suit in years. I have been doing this for close to 16 years, and I could not even guess the number of homes I have wholesaled or flipped. I have also lost more money than most make in a lifetime and likely made more mistakes than anyone else in the business, but that is what put me where I am at today. Whenever I have fallen, I have always just picked myself back up and gotten right back to the grind, and failure is something that still happens to this day. I lose money on about 1 in 18 deals…BUT I make money on the other 17.
A primary intent of this campaign is to also set myself apart from a number of my competitors in the wholesale market, and to create a knowledge base for people to deal directly with the biggest buyer of SFR’s/Townhomes/Condos in AZ. As you can see by my inventory snapshot, I actually close deals. I do not tie things up to try to wholesale the property only to bail at the last minute if I can’t wholesale it. The network and marketing campaigns I have developed along with a number of local bird dogs, sellers, wholesalers etc…know from the word go that if I commit to the deal I will close and close fast. From their perspective the deal is done the minute I say I will take it, which allows them to focus on finding deals and making more money rather than wasting time trying to find a buyer. Regardless of what is represented by my local competitors there is no one else in my market who can close on every deal they are presented that pencils or is profitable enough to fit their model. Since I am the one who makes the final decision, I can underwrite a property faster than anyone in town, which allows me to say yes or no sometimes in minutes but never longer than a couple of hours. (I take my laptop everywhere) Therefore if you have a wholesale deal you would like to sell or know a distressed seller who needs to close quickly. Please send it my way either by PM or email me at jmay@win-wintransactions.com.
A couple of tips to new or up and coming real estate wholesalers
Happy Tuesday to you all this morning!
This morning I would like to provide a couple of tips to new or up and coming real estate wholesalers. This would likely apply to a lot of wholesalers with considerable experience as well.
In my opinion, to become a successful wholesaler with any longevity, it is a necessity to focus on volume and velocity rather than focusing on maximizing the profitability of a single deal. I know a lot of wholesalers and educators out there that will give examples of huge deals with huge profit margins and say it is a typical profit margin on a wholesale transaction. This isn’t the case in most scenarios, and even if it is, that wholesaler likely only does a handful of transactions per year. Although there will be an occasional deal that you will hit a home run with, if you do any substantial volume, the profitability of wholesale will vary widely.
I believe it is more important to focus on building long term relationships rather than making a huge margin on a handful of deals. Your client base is your life blood. You can have a huge database of investors who won’t buy your deals because there is not enough profitability in them, or you can move hundreds of properties per year by building up a small buyers list of real buyers who you feed a continuous stream of deals to that fight over themselves to buy your deals, because you are providing them with real value in the form of real deals.
I also believe that when analyzing a newly acquired property or contract, it is important to establish an acceptable wholesale margin for that deal and stick to it. Whether that margin is $500 or $50,000, it is important to keep in mind if it is marked up too much no one will buy it, and if it isn’t marked up enough, 100 people will be banging down your door to buy it.
There is the fine line which needs to be walked as a wholesaler when setting for price, however I feel very strongly that to play in this sand box you need to stick to your asking price. If you send out a deal at $110,000 and 20 people call within 15 minutes to buy it, you likely sent it out to low. You likely made a mistake setting your price. Learn from the mistake and move on to the next deal and apply the knowledge you gained on future deals. I don’t agree with some of the so called wholesalers who turn that situation into a bidding war. I will walk away from that wholesaler and that scenario every time, and I will not buy from them again. There is something extremely valuable in having a buyer who can move fast and commit fast. These are the buyers you want to be building a relationship with. Set your price and stick to it. Work on a first come first serve basis. If you turn it into a bidding war and multiple offer situation, you will very likely sell the deal however many of those buyers will not come back. If you give the deal to the first person who committed, you will create a sense of urgency and on the upcoming deals all those buyers and more will come back, and they will learn to move faster to commit and buy your deals. This creates the velocity and deal flow to build on.
Lastly, I suggest you don’t go hunting elephants and keep in mind how many work hours you put into a deal when you face a scenario that you may have to accept a small profit margin on a deal.
Chasing big deals is appealing however you will likely chase that deal for months with nothing to show for it. There is big money in big deals but they most take a lot of time especially if it is your first deal. Focusing solely on these transactions is short sighted and will result in large spans of time with no deal flow which means no income. It is interesting to me to watch new or even seasoned investors work to find a deal and they will only focus on big deals with big margins. I can’t tell you how many times I have talked with or chatted with a brand new wholesaler/investor who tells me they have never done one deal, yet a couple of weeks later they are blasting out some package of 119 homes for some ridiculous amount of money. Or…the wholesalers who constantly work on big priced homes to get big margins and fees. If you are in this business for any sustainable timeframe the big deals and the big margins will come, however they will likely fall in your lap with little effort when you are jamming through smaller deals.
If you want to build a sustainable, consistent, long term, profitable wholesaling business. Look for deals and pass those deals onto the most important aspect of your business…your buyers. Plain and simple. It doesn’t matter the price range and it doesn’t matter the margin. Work in volume and velocity. For every deal I wholesale, I rarely spend more than a full day of work on each property. In most cases I spend much less than that on each deal. However when I wholesale a property, the hourly rate I could allocate to each deal is astronomical. Keep this in mind when you have a deal that doesn’t seem to have enough margin. Focus on the law of averages not hitting that home run every time. If you have an opportunity to make a couple of hundred dollars on a deal which otherwise would be a dead deal, take the money and move on to the next. There will be deals you scrap your teeth on and then there will be deals you knock it out of the park. Focus on volume and turnover and don’t get hung up trying to hammer a deal through. It will hold you up from moving onto another deal that might be your biggest one yet.
I hope you find this informative. Have a great Tuesday!
Stayed tuned for tomorrow’s post regarding how to set your wholesale prices by reverse engineering the flipping equation!
John May
President
Win-Win TransACTIONs, Inc.
Strategies for new or even seasoned investors on how to dial in and control your construction costs when rehabbing homes
As promised today I would like to discuss some strategies for new or even seasoned investors on how to dial in and control your construction costs when rehabbing homes.
I would like tell you a story about the first couple of properties that I flipped. It was over a decade ago, I was young and had the full intention of completing my first few rehab projects completely on my own. I rehabbed an 1100 sf condo in Mesa and it took FOREVER and there was a ton of trial and error! I installed the cabinets three times, relaid the tile at least twice, and had a hell of a time with the popcorn ceiling and drywall texture. I ended up holding it as a rental and then selling it for profit a couple of years later. I did the same with a Scottsdale property next and I learned a number of things from these experiences.
First, I learned this was definitely NOT the best use of my time. Second, I learned there are a lot of very skilled people out there that can do this kind of work much better and much faster than I can, and I truly appreciate their skill set now. Third, I learned about the time and effort it took as well as the true cost of the materials needed to complete a job. I learned the cost of thin set, the cost of appliances if you deal direct, the cost of tile if you shop for deals, the cost of the wood and drywall and the amount of time it takes to frame build a closet, etc… There are definitely some excellent managerial approaches that need to be implemented when flipping and renovating houses, but I advise others to start from scratch, get their hands dirty at least a couple of times so they can truly understand what it takes from not only a cost of material standpoint but also from a labor hours standpoint. This will allow you to be able to analyze a bid from another contractor with some precision. This will also help you identify areas on a contractor’s bid which are overestimated.
I believe it is fair to pay a licensed, bonded and insured General Contractor or sub around 20 to 25% mark up above the true cost for managing or completing a project. Again, this is not the best use of my time, so if they are good at what they do, it saves me a ton of time and headaches. The problem is that contractors, and the construction industry in general, are experts at skewing the line of what the true cost of a project is. Did you know that construction wholesale suppliers will give their General Contractors pricing that is sometimes upward of 50% less than what they sell to the general public. This means that if you are pricing out a Delta Faucet at Lowes, and it comes in at $189. A contractor can likely get that for around $100. Now most don’t pass than discount on to their clients and almost all of them will mark up the price 20 to 25% off of the $189, not their price of $100. So instead of making 25%, they are actually making around 100% mark up or more. What is even worse is that these wholesale vendors will actually provide an invoice with full retail pricing for the contractors to show their clients and mark them up.
Although it is very difficult to protect against this kind of thing, what you can do is always have your contractors provide bids that separate the material and labor and have them also separate their mark up as a separate line item. If they are charging $90/sf for granite you are getting screwed. If they say it will take 40 man hours to remove the existing tile flooring you are getting screwed. I can go on for hours with examples of this type of thing.
Always work on a cost plus basis! This means have your contractor provide a bid that separates the material and labor costs as line items and then add a fee for management based upon an agreed upon percentage. You will get some serious resistance from a majority of them and this resistance is due to their inability to skew the numbers to their benefit if you require them to do this. This approach can be applied to an individual sub such as a granite installer or it can be applied to a General Contractor doing a major addition.
It is also very important to stay on top of the current pricing and deals out there. Just last week I took almost an entire day, and drove around town with a brand new General Contractor we just started working with to price out and pick out selections for a remodel I am JV’ing with a partner and we just started. His initial bid was $32,000 for the project. My response was “let’s go price these out and pick out some selections”. It was funny to see his face when I drove us straight to a couple of direct wholesale suppliers in town rather than going to Lowes or Home Depot. It was even funnier when I demanded that we get, and they show me, his contractor pricing on everything. Needless to say the $32,000 bid was adjusted down to $20,055 as ofTuesday morning, and that includes a 20% mark up for management. My JV partner is obviously appreciative of my involvement in the deal.
Now it will obviously be more difficult to decipher through the line items of doing a 1500 sf addition but the more you do it and the more you research things the better you will get at being able to accurately estimate and negotiate your construction projects.
I hope you find this helpful. Make sure you are signed up for my wholesale buyers list by going to www.win-wintransactions.com and sign up in the top right hand corner or PM me your email and I will have you added.
Thanks and make it a great Thursday!
John May
President
Win-Win TransACTIONs
The Two MOST important Things You Need To Know To Be A Successful Home Flipper or Wholesaler
Good morning all,
This morning I would like to discuss “The Two MOST important Things You Need To Know To Be A Successful Home Flipper or Wholesaler”.
I have done a considerable amount of research on the educational programs that are being sold in the market, and most of them have some really great information about marketing, how to get seller leads and how to build a buyers list, how to negotiate, etc…
However….I have noticed that a majority if not all of them do not spend much time on (and some spend no time on) what I feel are the TWO most important things to become a success in this business.
Flipping homes or wholesaling for that matter comes down to a very simple equation.
After Repair Value (ARV) – Purchase Price – Repairs costs/Holding Costs = Profit or Loss.
To insure the last part of this equation is a profit and not a loss as well as an acceptable profit margin, you need to be able to accurately determine a couple of very important things….Repair costs and your after repair value. Determining these two factors are the most important and basic tools you need in this business. It is also very important to be able to do this with ninja quick speed.
You can put up thousands of bandit signs or mail thousands of yellow letters and have hundreds of seller leads coming in, however if you can not accurately and quickly determine the ARV along with a rough estimate for repairs you will constantly spin your wheels chasing deals with no real target and minimal success. Conversely, if you can quickly assess a property, its value and the cost to repair, you can very easily determine a price to offer or whether or not the seller wants too much for the property or even better if they are asking way too low. If you are able to identify a screaming deal quickly you will not only be able to fully commit with no hesitation, but you will have wholesale buyers fighting over themselves to buy your property for a huge mark up and give you a non refundable cashiers check with a close of escrow within days.
Therefore, before you all start working on building your multi million dollar wholesaling empire. I suggest you start with a grass roots approach and really focus on understanding how to estimate the retail value or ARV as well as understanding your construction costs.
I have been a certified residential appraiser for over 13 years, therefore I have an ability to value a property with Ninja quick speed and accuracy. I have also trained dozens of other appraisers and investors in the community on how to evaluate and assess the estimated retail value of properties. If you go to my blog at www.win-wintransactions.com/
“Blueprint For Determining a Retail Value For Your Flip”
This will give you a good basis of knowledge to understand how underwriters and appraisers think and approach valuing homes.
Stay tuned…tomorrow I will be going in depth into estimating your rehab and how to strategize to gain a good solid knowledge base of the construction industry and costs.
Thanks and have a great Hump Day!!!!
John May
President
Win-Win TransACTIONS
Economics and Benefits of Leverage in Flipping Homes
Good Morning All!
I wanted to run through some of the economics and benefits of leverage in Flipping Homes this morning.
When I started flipping houses over a decade ago the financing options available were very limited. I basically needed a minimum of 20% down and I also had to pay for all the improvements out of pocket. There were only a few options in town and both charged a $900 doc fee and charged 18% annualized and both had very similar terms.
This meant that when I bought a house to flip at the courthouse steps for $100,000 that needed $18,000 in improvements, I would need approximately $45,000 to flip that house. This amount would cover:
-The down payment of $20,000
-Improvements of $18,000
-$900 doc fee
-$6100 to cover interest, utilities, insurance, etc…
If I purchased the property to fit my own underwriting requirements, we would ideally sell the property for $150,000. This would mean we would make a return of around $16,000 after all the selling costs were accounted for.
$16k return on an outlay of $45k. Not a bad cash on cash return especially if you do that 3 to 4 times per year.
What is great about flipping houses in todays market is that our lending options have evolved to much more beneficial terms than a decade ago. Due to my experience and background along with my track record, I have developed relationships with two separate hard money lenders who will lend up to 90% of purchase as well as up to 90% of rehab in AZ and CO. They charge 2 points and only charge a 10% to 11% interest rate.
So we can clearly understand how this affects our ability leverage capital, here is the same scenario as the flip highlighted above:
-Down payment on purchase of $10,000
-Down payment on improvements of $1,800
-Points on the loan $2124
-$5,000 to cover interest payments, utilities, insurance, etc…
Therefore to flip that same property today utilizing my contacts and relationships would require approximately $19,000 capital investment, whereas the same property would have required over twice that amount of capital when I started.
What is even better is that the profitability of both of these examples essentially stay the same, therefore the cash on cash return increases dramatically.
To review, the use of these financing options allows you to increase volume as well as return, and increase your return on investment substantially.
Both of these lenders will provide these financing options to properties I either sell wholesale or properties I personally take down in Joint Ventures with partners.
If you are interested in my wholesale properties or JV opportunities. Make sure you are on my buyers list by signing up at www.win-wintransactions.com or PM me your email or questions.
Have a great Monday and get out there and take some ACTION!
John May
President
Win-Win TransACTIONS
Let’s make some friends this morning!
A quick message to new and struggling real estate investors out there:
As the saying goes beware of wolves in sheeps’ clothing. However I suggest that a more suitable phrase for our industry is beware of wolves in wolves’ clothing. I warn you all that we are all working within small confines full of the most unscrupulous sharks, thieves, man eating lions and any other form of nastiness you can think of. As you are sitting in the hyped up-“your going to be a millionaire with no work or effort” seminars just keep this in mind. This is a fact they conveniently omit from their seminars.
Heck one of them may be standing in front of you trying to get you to unload your checking account or max out your credit card to pay him or her to learn the business. If you hear the phrase “you will make it all back on your first flip” I would rethink it.
This is a one of the most cut throat businesses out there and there are people in the industry that will cut your knees out from under you at the drop of a hat. There are a lot of well financed, very smart, very savvy, very evil individuals and groups who do not want to see their competition increase. Even the ones educating have a tendency to hold back the best tips and information for themselves. They are very Clever in their delivery of information.
Ironically the better you are, the better you get, the more savvy you become at this business the more attention you will receive from the worst of these individuals. The business is too profitable. They don’t want more competition, and they will go to great efforts to run you out of the business.
I have been in this industry for over 1/3 of my life. I have not only battled through the worst financial and real estate crash since the great depression, but I have also personally partnered with, been screwed by, beat back, sued, been sued, and fought with some of the worst of these types. I have deep scars to show for the battles I have lost, but I have always gotten back up to fight the good fight. After it all I am still standing strong and kicking ass, but I don’t want anyone to think this ride is smooth and easy. I have also learned from every fight, failure and fall. This education has not been cheap, and to the chagrin of two especially nasty individuals, I am here to stay regarding of their best efforts.
This business can be unbelievably profitable and there is plenty to go around for everyone, but I tell you BEWARE!!!! Do your due diligence on anyone you are thinking of partnering with, getting a private loan from, lending money to, or thinking of paying to learn the business. If their attorney shows up on the FBI.gov/memphis website for being indicted for fraud you probably want to steer clear.
I have been approached by every show in town about teaching and getting in the education business, and I have passed every time. I tell you all this, because I am not interested in selling you a dream or getting paid $30,000 to teach you this business.
I will however sell you a wholesale property. If you are a new, old, or struggling investor, I will meet you at the home. I will go over the comparables with you. I will walk you through the property and suggest renovations, I will set you up with a contractor and tell you how much everything should cost so you are not taken advantage of. I will set you up with a hard money lender or help you set up private money lenders, and I will line you up with a listing agent to sell it for top dollar.
I will also buy your wholesale property. If you have a deal you can’t get funded or closed send it to me and I will give you an answer asap. Sometimes within minutes, and I don’t care how much you make. If the deal makes sense, I will do the deal.
I am the fulfillment of everything the educators teach. I create Win-Win Transactions.
If you are a realtor contact me about my upcoming flips so we can get your clients into exactly what they want.
I was provided a friendly warning earlier this week that I will likely be banned from most of the real estate forums for my posts. Well…So be it. Send me a friend request as I post these on my page as well as my company page Win-Win Transactions.
Have a great Saturday!
John May
President/CEO
www.win-wintransACTIONs.com
I just hired a new listing agent
I just hired a new listing agent. The process is always an interesting one. It is times like these when I get very frustrated with the sense of entitlement within the real estate agent community. It is the only industry in which someone will show up for what essentially boils down to a VERY high paying job interview looking like they just rocketed out of bed with minimal to no preparation at all.
To give you an idea of the potential opportunity I was interviewing for, I will let you in on the volume of business which was at hand. I have averaged over 75 retail sales every year for the past three years. These are not my wholesale flips which are sold through my marketing platform and my site. These are just the full retail remodels that were sold through an agent on MLS. I have set a goal to exceed that this year. The sales prices of this body of work range in price from a $35,000 condo to a $2.1 mm home in Paradise Valley and everything in between. To put it lightly we are talking about a potential for a considerable income stream solely on my business.
I was utterly shocked at the lack of preparation, presentation and unprofessional approach taken by a majority of the candidates interviewed. This was not only evident within the interview but also the aftermath when they were informed that they didn’t get the job. I had one agent show up in workout clothes and a baseball cap. Another agent actually told me that I am a pain in the ass to work with yet still put on the full court press to close the deal. Another agent simply responded “Yeah I will take it” when told the address of the potential listing. My response was “You will take what”. I also received a couple of insults when I told a few of them that they didn’t get the listing.
This initial listing will be priced at over $700,000, so even if it were just this listing I feel it would be worth putting some effort into getting the business.
The agent who was awarded the listing and the potential for all my business moving forward has quietly worked his ass off for the past few years and has worked his way into the top five in total volume last year out of over 25,000 listing agents in the state. He has a substantial reach in the market, a great team behind him, and a top notch marketing approach. We have done deals together for over 4 years. Over that time he has sent me deals that I have made huge returns on and I have sent him deals that he made great money on as well. He also flips houses himself and therefore understands the risk taken when flipping homes. He also understands the urgency to not only get a property sold but the importance to make sure my partners and I make the maximum profit on each flip with the quickest turnover. He doesn’t blast all over Facebook about the money he is making, the trips he is taking or the shit that he is buying. Everyone around him knows he is doing well….VERY well. He showed up to my office 15 minutes early for our appointment first thing on a monday morning. He was dressed professionally, gave a top notch presentation and laid out his marketing plan. He knocked it out of the park, and therefore was rewarded with the job.
Keep in mind in addition to numerous other deals this agent handed me 7 properties I bought from a hedge fund he worked with at the end of 2012. My partners and I wholesaled all 7 homes within 3 weeks and made over $200,000 on the package without even touching one of them. If there is anyone in this industry who would have a justified sense of entitlement from me it would be him, however he showed up and represented himself as if we had never done one deal together.
I tell you all this for multiple reasons.
First, I want to provide some advise to any new or up and coming realtors. This is a business. It is a professionals’ business, and the ones who truly succeed are the ones who approach it with that mindset. Don’t dress like a bum. Act professional and be professional. AND be willing to actually work. You can be vastly successful and there is relative no ceiling on the income you can make, but you will have to work for it. It may be easy to tell that client that their house is only worth $200,000 when you know if you actually worked at it you could sell it for $250,000. It may be a quick and easy check for you, however the difference in your commission is only a couple hundred dollars, but to mom and pop smith or John Q Investor your complacency is taking huge amounts of $ from their bottom line on the HUD. I am a unique client as I have been a certified appraiser for over a decade. Unfortunately I can’t be misled on the real value of my homes. There is nothing more infuriating to me than an agent lowballing an client or investor on their list price so they can make their commission with little work or effort.
Second, if you are just getting started in investing in real estate. Don’t use your partner to list your house. You need to have the ability to fire them if they are not performing and if they own the house with you it will be very difficult to do so. Don’t use your buddy who happens to have his license and he will discount his commission for you. Don’t use a family member either. Same concern….In addition, interview as many candidates as possible. Trust me I know it may be difficult to find a realtor who treats the interview like an actual interview. However you have to find that bulldog of a negotiator, marketing guru and hustler. It will make all the difference in the world to your success. They are out there but it is only about 10% of the industry. The rest like to sit around in the pajamas and throw a sign out in front of your home and wait for the calls or emails to come in. (I actually had a agent tell me that one time….I don’t like to get dressed up. I like to work at home in my pajamas). LOL
I hope you enjoyed the input. I am sure I will piss off a few with this one today. Have a great Friday and a great weekend and get out there and take some ACTION.
Three Aspects of Analyzing a Potential Flip
One of the first things I ask any potential wholesale buyer or investor is what kind of return they want to make on a Flip. Their response usually is a good indicator of the detail of their equation to analyze a potential deal. If they respond with “I want to make $X amount of money on the flip”, it may indicate they haven’t thought through the response. Someone who says they want to make $10k or $15k on every deal may change their mind when it comes to buying a $500,000 flip.
In my opinion, the return should be based upon the risk and amount of total investment. Depending upon the competitiveness of the market, a good net return on a flip should be around a 15% to 18% return on the total outlay of capital. This net return should be calculated after all acquisition costs, improvement costs, holding costs and interest on loan are paid. In my experience it is important to have an equation rather than hoping for a flat number when analyzing potential flips.
This equation consists of three factors. These factors are: after repair value or ARV, the costs of rehab/holding costs and the acquisition price. I prefer to work backwards when determining my acquisition price or final offer price for a potential flip. There are multiple factors that go into this including the condition of the home, age of the property, as well as price point. However, I usually start by estimating the retail or ARV of the property. I then deduct the closing costs, estimated rehab costs, and the estimated holding costs. I then calculate an offer price based upon the target return and these numbers. This number can change if paying cash vs. servicing debt as well. At this point, I have a hard number to offer for a home. If I can get the property at that number or below it will likely be a profitable venture. Remember….you make your money on the buy.
There are obviously many factors that go into this process and analysis, and the quicker you can get to a final number the more deals you can likely move on. Fast money and fast answers always win in this business. Keep an eye out for future blogs going into more detail of this analysis and let me know if you have any questions.
Thanks
John May
Blueprint For Determining a Retail Value For Your Flip
I have begun networking quite a bit more over the past couple of months within the real estate investor community, and a consistent question is posed regarding how to value a property. I consider my ability to do this an incredible competitive advantage in my business, and it has allowed me to see and take advantage of multiple opportunities over the years. This blog will shed provide an overview of my approach to determining the retail or after repair value of a potential flip.
When I began buying at the Trustee sales again in 2011, it shocked me to realize how many investors (my competitors) were using Automated Valuation Module’s (AVM’s) such as Zillow, Redfin or Eppraisal to determine the after repair or retail value of the properties they were purchasing. These valuation models are a decent baseline, however they compute value simply on a data in-data out basis, and therefore are reliant upon the data input to spit out a number. They are simple and easy to pull up, however they are grossly inaccurate a majority of the time. When the competition is using inaccurate information for the most important factor of the flip equation it creates an opportunity to do a little more leg work and due diligence to have a substantial competitive advantage over your competition.
We are going to go over a step-by-step approach to analyzing and determining retail or after repair value for a property. This will give you the ability analyze a majority of all potential deals you will are presented or come across; however it will not cover 100% of them. I would need to write a textbook to cover every single scenario possible. Leave the really difficult ones for me to pick up.
I would like to first go over a few philosophical points as well as some preliminary topics to get warmed up.
Market value of a property is defined as the most probably price a property will sell for in a competitive and open market.
Market value is also relative to the current market conditions and timeframe. A home, which was worth $400,000 in January 2007, was likely worth $180,000 in December of 2009 and is likely worth around $275,000 today.
For the purpose of lending, underwriting and buyers who are getting a loan, market value is based upon historical data. This means it will be based upon the comparable sales over the past 3 to 6 months. A cash buyer is likely to be more focused on the now. In my primary market, Phoenix Metro area, the inventory is so low and the competition is so fierce there are a number of market segments in which the market value is based upon not what is sold but what is available. There are hedge funds, private equity funds, individual cash buyers who all want the same type of property. They are all paying cash and they are buying whatever is available, sometimes at prices well over the historical sales in the area. This is a good example of the law of substitution. If you don’t buy this, what can you buy? If the rest of the homes on the market are $10,000 more than the one you are buying, yours is a deal even if it is $5,000 over the highest sale.
Now let’s get to the meat of the topic…. How to determine a retail or after repair value of your flip.
First and foremost, get MLS access and learn how to navigate it or how to direct your realtor to navigate it. Whether this is your own access or you directing a realtor on how to search, you need this to determine an accurate value. I have flipped many homes outside of my market and each time I directed my realtor to provide me with the data I needed to determine the retail value and it was never from Zillow.
Next let’s discuss what we are looking for. When researching comps for a renovated flip, we want to eliminate Bank owned homes, short sales, HUD homes or pre-foreclosures. These homes are non arms length transactions. They are considered distressed sales, and they do not represent an accurate indicator of retail value for renovated properties in the area. We also want to eliminate run down non-renovated properties from private sellers (however we may want to make an offer on those). There is a definitive difference in value between these types of homes and the renovated/turn key homes we want to utilize as our basis of value. This is the major problem with the AVM’s I discussed earlier. Zillow and the like have no way to separate these out. Therefore their numbers get skewed.
To determine the market value of a home we need to have an acceptable amount of data to come to a conclusion. This amount of data differs from case to case, however it traditionally would be acceptable to have 3 to 5 sales, 2 to 3 pending sales and 2 to 3 active listings that are as similar as possible to what your flip will be after repairs are complete.
When looking for viable indicators of market/retail value, we want to ideally find as many homes as possible which have sold within the past 3 to 6 month that are as similar to what our property will be as possible. In most new communities this is usually quite simple. You simply need to look for properties in the same subdivision, built by the same builder and have the same floor plan. (these are called model matches to your property) You then adjust for any minor differences such as a pool, garage count or lot size, and you have your ARV.
****Always remember to be conservative with your adjustments. This will keep you from over adjusting and possibly over valuing your flip.
If there are no model matches that have sold, then you should look for properties in the same subdivision, built by the same builder that are similar in square footage. Make adjustments for the differences and you have your value.
Be careful though, there are subdivisions which are called master planned communities which have multiple builders. Make sure when you are researching a master planned community that you do not use a superior builder’s home similar in size to compare to your property.
After searching to that point you do not find any viable comparables, you need to now expand your search to include the surrounding market areas. This may mean going outside the subdivision, however although we are going outside the subdivision, we do not want to cross any major roads or thoroughfares. We also want to stay within a one mile radius of the subject property. We also want to be aware of any school district boundaries as these can have a substantial affect on the value of properties.
If at this time we do not find an acceptable amount of data, we now want to simply search for similar properties within a one mile radius of the subject. At this point, our search will jump over major roads and school district boundaries. We are simply looking for a similar home to ours. If needed we may need to go 2 to 3 miles out to find viable comparable sales. This would be the case for a unique luxury home or a horse property on large acreage in the middle of nowhere. At that point, I would shy away from the deal due to the complexity, however that may also be an opportunity that no one else wants to take the risk on.
Keep in mind, these searches need to be implemented to a point where there is enough data or sales to accurately determine value. The only reason you would expand the search or continue searching is if there was a lack of acceptable data to determine the value. If you have four model match sales in the same sub, you can stop there. Those will be the primary indicators of market/retail value for your property. There would be no need to continue your research. However on the other hand, if there are no sales at all within the subdivision, and there are no homes within the same square mile that have sold, and there are no homes within a mile radius….then you would continue to expand your search until you found a good amount of data or sales to determine your value.
Once you have determined your value, you need to implement you flipping equation to determine what you are willing to pay for the property. This will be in our next blog.
Keep an eye out for our upcoming blogs and make sure you are on our buyers list. You can subscribe on our website at www.win-wintransactions.com .
Thanks and have a great day!
John J May
President
Win-Win Transactions, Inc.