Wealth Strategies Investment Series Part 2

Creating WealthBy Bill Rodriguez, Loan Consultant Cherry Creek Mortgage Company 303-877-6323 

            Thank you for joining me for this month’s edition of Creating Wealth. In the last article, I discussed the current climate of the Colorado Real Estate market and its impact on investors who employ either a fix-and-flip or buy-and-hold investment strategy. I have talked many times in previous articles about becoming a team player and bringing value to your clients as a market expert who offers sound advice. For some of you, your market expertise helps you find the right property for investors and land for developers. This is one level of service, but in order to really distinguish yourself and truly add value, you need to step in and develop success strategies with your clients and help them execute on these strategies. This month I am going talk about 2 of the 4 phases of successful fix-and-flip and development strategies. Welcome to Part 2 of the “Wealth Strategies Investment Series.”

 “I love it when a plan comes together…” 

            The most successful investors have a plan and a particular approach that they use over and over to ensure success. In the development of any plan it is important to break down a task into its smaller parts to understand how each piece fits together to form the whole. In the case of fix-and-flips there are 4 phases that an investor needs to be aware of in order to fulfill on his/her end goal of making a profit. The same applies to development projects. The 4 phases are: Market Research, Negotiation/Acquisition, Construction and Marketing and Sales. An in-depth understanding of each phase is crucial to the success of a project and as a realtor you maximize your potential to become a valued member of this team when you can help your clients understand the intricacies of each of these phases.

 Phase 1: Market Research 

            The market research portion of this process is the foundation for all other decisions concerning the project. This process is much more than simply selecting a neighborhood to buy in and understanding the overall health and condition of the market. This process begins with a question: “Why would someone want to live here?” For instance, your client’s desired target audience is willing to pay $400,000 for the purchase of their new home. You as the realtor have found two potential investments: Home 1 is in an up-and -coming urban neighborhood and the market value after repairs is $400,000 for a 1,000 square foot house.  Home 2 is in a suburban neighborhood with good schools and has the same after repair value but is 2,000 square feet. Both are great homes for a specific type of buyer. One type of buyer is a working professional who works downtown. He wants his house to be in close proximity to work while having easy access to the night life when the mood arises. Since he does not have a family, having a place where he and his friends can hang out is more important than additional bedrooms. But take this same buyer a little later in life. He has since settled down with a wife and a child going to school and another one on the way. Suddenly that house in the burbs is looking like a better fit for him. Whoever you choose as your target audience will dictate the location you choose, have an impact on the design, layout and your level and quality of finish. This is just one example of many so make sure you have addressed all of the needs of your audience properly. Oh, and by the way, trends change so make sure you’re up to date!

            Another important detail is to make sure that you have firmly established your after-repair value with comps that are the same as the subject property. If you have a hard time finding a 2 bedroom home in a neighborhood where everything on the market is a 3 bedroom, 2 bath, then you might have a problem property. Don’t think that just because it is cheaper than everything else in the neighborhood, it is a good deal. You also need to account for the “number of days on market” and seller concessions. “Days on market” will dictate your holding time and impact your financing strategy. If necessary, you should be pricing in concessions as part of your marketing and sales expense, which affects your bottom line as well.

 Phase 2: Negotiation/Acquisition 

So, you have selected your buying segment and done your due diligence on researching the comps in the neighborhood. You even have an idea of costs associated with the project based on hold times, concessions (if any) and grade and level of finish. Now it is time to go to bat and talk about the acquisition costs associated with the property. Costs vary depending on the condition and financing used to acquire the property, but your bottom line is what’s important. Here are some tricks of the trade:

 

The Magic Number: My magic formula for successful fix-and-flips is 80% of the after-repair market value minus cost of repairs and seller concessions. Example: after-repair value is $200,000 – 20%= $160,000 – $20,000 in estimated repairs and 3% in seller concessions for a total of $26,000. My bid price is $134,000.

Supply and Demand: Foreclosures are an obvious source for properties that are worth 70 cents on the dollar, but have you thought of estate sales?

On Your Mark…: Your ability to pick up the good deal is based on how ready you are to pull the trigger. It is easiest when you can pay cash because it constitutes a stronger offer over someone with financing concessions. If you don’t have the cash or lines of credit, make sure to speak to your lender before going on the hunt.

Let’s Make a Deal: As you walk through these properties, keep a watchful eye for repair issues. This will help you estimate the cost of repairs as it relates to your bottom line. Also identify items that you can use to further reduce the price on inspection resolution. Tip: If the house was built before the 1960’s, pay to have someone inspect the sewer line. Also always ask the seller for the market retail value of repairs. He doesn’t need to know that you can get it done for cheaper!

 

Need more information? Feel free to contact me at any time @ brodriguez@ccmc-net.com or (303)-877-6323. You can also access information online @ www.investtaxfree.wordpress.com.