I’ve been looking for a new project house. Walked through a fizbo (for sale by owner) yesterday. For sale by clueless would be a better sign for them to have in the yard. This is certainly a house in need of “TLC”, but they have it priced as if it were already renovated.
1970’s appliances (stove/fridge, no w/d). 1940-50’s furnace. 1970-80’s AC unit. Needs a new roof and gutters. Needs all new wiring. Bathroom needs gutting (I like pink tubs as well as the next guy, but this one is sinking into the floor…and tub and toilet are leaking). A previous owner had enclosed a patio for living space. Big step down from the kitchen. Looks like they just put vinyl over the concrete slab (gee wonder why its peeling up?). Go out the “patio” door to the driveway and there is NO difference in height…its the same slab. When they enclosed patio, they used vinyl siding…but just on that one room. The remainder of this small bungalow has its original asphalt/asbestos shingles (which the owner painted yellow to match the vinyl on the patio-enclosure). She also said it was 1130 sq ft, but I would guess it was about 900.
And I took my secret weapon along with me: Mom. She keeps the owners busy while I inspect the house. She is the friendly type that likes to chat…and just keeps talking, working information out of people. For instance, the owner had started off by saying that the basement was tight and dry. chat, chat, chat… “oh, well we left the hose on one day and it infiltrated in that corner”…chat chat chat..”Oh well the sump pump got unplugged one day and there was a little water in the basement”… chat chat chat..the ‘little water’ was 3” across the entire basement…chat chat chat… “and occasionally the water purculates up through the floor”.. chat chat chat… “and during heavy rain, water leaks down the south wall and runs to the north side where the sump is” (leaks in at the sill by the look of it). I should rent Mom out. She is an expert and extracting info out of people all the while carrying on a friendly conversation. I tend to be a heck of alot more abrasive. When someone tells me there’s never been a problem in the basement and I can see 2-3″ patch marks running from one corner to halfway across the wall and down (covered by a layer of paint), I know that something isn’t right….especially when its on 3 walls out of 4. I would expect some basement issues in a 50+ yo house..but don’t LIE to me about it!
The lady kept talking about all the work they’d done to the house, but all I could see was that they slapped a coat of paint on it and pulled up some carpet (tack strips still in place, watch where you step). So basically these folks have lived in this house for 8-10 years and have done NOTHING but slap some paint on it as they left and pull up what must have been nasty carpet. Based on the area and the amount of work it needs, I’d estimate that it would be worth 50-60% of what they’re asking.
Replies
I've read that FSBO are frequently way overpriced because the owner doesn't have the expert evaluation of a local realtor to help them price it. Most people don't do the proper homework so they could price it properly themselves, and everybody thinks their house is worth more than the market does.
>>and everybody thinks their house is worth more than the market does.
DW is a real estate agent and when we sold our last house we did it through a real estate agent, not DW. See the point?
Edited 10/6/2004 12:17 pm ET by TOMCHARK
That's how I'll sell mine, when the time comes - through an agent. Not to do so reminds me of the adage " A person who represents himself without a lawyer, has a fool for a client."
In defense of FSBO, we sold our last house that way and it was an interesting experience. Mostly good.
Part of the reason was the fact that we had a 12 year old akita whose health was failing. I HAD to be there for any showings to deal with this old dog who thought she was still a puppy.
We had also had a few bad interactions with agents. Frankly, I didn't trust them.
Having said that, we paid an agent to price our house. This was critical. We also paid a buyer's agent fee. I made up flyers and put together a nice webpage for all the local real estate agents. They were all very positive and happy to work with me. In the end, it was a real estate agent who referred our house to another non-local agent that sold our house.
We closed with the buyer about 8 weeks after we put it on the market. I believe that we walked away with more money in our pocket than if we had hired an agent. But, best of all, we didn't have to deal with an agent and for that I was very happy.
Sorry for all the negativity regarding real estate agents. After this experience, I ended up liking them more. I think that the agents that were willing to work with us were just looking for the best house for their clients. They were happy to work with us for that end. Our FSBO house "rooted" out the good ones. I will certainly use one of them if we ever sell our current house or look for additional property.
My friends fall into the FSB clueless. They've just listed their house for probably 70K more than it is worth. The thing needs some SERIOUS work and they have it priced as though it were in the parade of homes. However, they overpriced it because they weren't ready to move yet. Bad move if you ask me. People shy away from houses that have been for sale for too long. I don't know why they didn't just wait until they were ready to move, then price it appropriately.
>>I don't know why they didn't just wait until they were ready to move, then price it appropriately.
Here is the reasoning. It's like bidding high on a job that you don't really want to take but if somebody is willing to pay what you quote, the extra cash compensates for any of the negatives.
I am not sure if I want to open my house to scrutiny if I am not ready to sell though. Just hate the thought of rubber-neckers wading through my house.
Ugh, rubber-neckers. We sure had our share of those. I think that is the biggest downside of FSBO....realizing that there were plenty of people out there perfectly willing to waste your time. It really was a good learning experience for me.
If anyone is thinking about FSBO, take some time to figure out how to screen these people out. I got to the point that I could pretty much tell. Luckily, the photo-rich website satisfied most people's curiosity and saved me a lot of wasted "showings"
Tom, I know what you mean about pricing a bid really high, but I think that any agent will tell you that a "stale" house is hard to sell. At least with most high bids, you don't have to worry about the appraiser coming along with a reality check like you do with a home sale! LOL!
Paula
No joke, I wouldn't want a bunch of strangers poking through my house until I'm ready for them. Not to mention that once you put the sign up, you've got to keep the dang thing as spotless as you can! jt8
My wife and I almost bought a Fizbo, and were just about to close the deal when I started getting a little nervous about some of the stuff we were learning. I guess the sellers let their guard down when they thought we were on the line.
it was minor stuff we learned, like how long they owned it, if it had ever been rented, the extent the property line. They started contradicting themselves and it looked fishy to me.
The best part was when my FIL asked about a house at the end of the street, he said "what's the deal with those people? They've got an old tractor, a rusty boat and what looks like a pile of broken cement blocks. It's really an eyesore."
The sellers just smiled and nodded. We found out later that THAT was their house, and this was just something they were fixing/flipping to make a few bucks.
6
we looked at a house a coupla months ago ...
needed lotsa work.
was priced at $130K. I was gonna offer $85K.
when my agent gave the price ... he was told another offer was already in ....
found out it sold for $90K.
just drove down that same street to check on it ... see what the new owners did to it ...
saw a "for sale sign" ... checked things out .. unoccupied .. walked around and peeked thru the windows. New exterior paint ... middle of the road job.
Replaced all the windows with the cheapest replacements I've seen.
did some concrete work. torn off the old falling down deck and put up an equally bad new deck.
same kitchen. hardwood floors looked to be refinished.
all in all .... probably abour $30K worth of work ....
called the number on the sign ...
asking price ..... $190k!
they paid $90 ... put in about $30 ... and want to make $70K off it?
when we were loking the first time ... the highest price home on the street sold for $145K ... was much bigger/nicer.
I'm thinking let it sit ... maybe around Feb call and offer $125K.
worst part ... most of the new work .... I'd have to tear out and do it nice.
should have called right after they bought it and offered $5k to paper shuffle it into our name!
definietly watching it now .... manybe they know something I don't?
More power to them if it sells even close to their asking .....
Jeff
Maybe they're hoping for one of Barnum's people ;)jt8
Was this house the only one for sale? Free market means you're free to walk away to a better deal. Look for a better deal. Tyr
Was this house the only one for sale? Free market means you're free to walk away to a better deal. Look for a better deal.
Absolutely. I was polite the entire time (polite for me at least) and I wish them luck. If they can find a sucker, then power to them!
But based on what similar houses are selling for in that area (houses in fairly good condition), they aren't going to sell the house to anyone with any idea of what the area is worth. There are probably 3 or 4 for sale within 3 or 4 blocks, so it isn't like its the only house in the area.
My WAG would be that they will eventually have to list it with a realtor, and the price will drop at that time. My original estimate that it was worth 50-60% of their asking price doesn't mean that someone who really liked the house wouldn't pay 70-80% of the asking. Of course by the time they've brought in a realtor, they're going to lose another 7%. But some times its worth the expense.
jt8
Wife and I have been househunting for 6 months. Looked at a FSBO last week. Owners purchased the house in January 2004 for 500K and had it for sale in September for 750!
Didn't do a single thing to the house! I pulled the tax records on the house, printed them out and brought them to the "showing".
The husband got to talking about how great the house was to them and how they hate to let it go, etc, etc...
I pulled out the tax record and showed him the ownership history, what he paid, when he bought it, etc.
The question I asked was, "What justifies the $250K increase in price in just 8 months?"
His answer, "Don't blame us if we're savvy investors".
I told him to go piss up a rope and we left.
2 weeks later, the house was listed with an agent for the same price. Good luck, creep...
What are prices for similiar houses in the immediate area selling ( and being bought )?
*Is* the house worth $750K or closer to $500K? Houses on Long Island have gone crazy in short periods.
Houses in the area range from 500k for a 50yo cape to $2mm+ for historic homes or new construction.
This house is on a busy road, wetlands in the back yard, needs total updating, etc.
Not to mention, there's a couple of neighboring houses with outdoor couches, junk cars, etc.
From my house I cannot see that neighborhood :-) , so I don't know if that description for that area is *worth* $750K. It may very well be. If someone buys it for somewhere near $750K then it is worth it.
"I told him to go piss up a rope and we left.
2 weeks later, the house was listed with an agent for the same price. Good luck, creep..."
So, let me get this right. In a free capitalistic society someone buys something and decides to try and sell it at a profit, at a level you don't agree with, and they are told to "go piss up a rope" and called a creep?
If you had told me that in my house I would have considered bodily harm.
Amazing to me that just because you think its too much money that these people are suddenly crazy. What if he sells if for say 700k? You going to go back and tell the people who bought it what AH they are because they gave more for it than you thought it was worth? Or that the facilitated the owner making too much money?
Value is in the eye of the beholder. You don't want to pay it? Then don't. But don't make yourself believe that people who try to make more money than you think they should are crazy. Maybe its just a simple lack of motivation on your part.........? DanT
Agree with every word you said but don't you think you came down a little too hard on him?
Well, may be because he didn't say that in my house.
>>Value is in the eye of the beholder.
Worth is what the next guy is willing to pay for it.
I thought the level of my message matched what I percieved as the level of the message he was conveying.
The "piss up a rope" and took the tax records to the viewing and calling the guy a name just seemed extremely confrontational so I read that as how I should respond.
Maybe you are right. I guess I just get tired of hearing people complain that someone is making too much or asking too much or wanting too much just because they don't. I guess I am just a "more type" personality. DanT
I wouldn't have told the guy to "piss up a rope", but I probably would have been thinking it (as I smiled and said something along the lines of, "we've got another couple houses to look at").
Sounds like ron may have liked the house. That is a tough spot to be in when you like a property, but the current owner is trying to 'get rich' on it.
Personally, I'd just like to be able to AFFORD a $750k house... or even %500k!jt8
I'm with you on this one DanT.
Most folks don't understand that real estate investing is a business. They get annoyed when they think someone is going to make a buck.
But lets analyze the numbers a little bit.
The guy buys at 500k and offers it at 750k. He knows he's gonna get beat up a little and probably will settle at 700 or maybe even 650K.
The 700k represents a markup of 40% BEFORE EXPENSES.
What are the expenses? Selling costs, carrying costs (property taxes, insurance), loan servicing.
What about the risks? If it doesn't sell in two years, thats ton of carrying costs.
Then, if he does sell it, he will be paying taxes as ordinary income, not capital gains. If he is in the higher bracket, coupled with the self imployment tax, Uncle sam will take about half of his profit.
So.....that 700k is shrunk down considerably. If he netted 180k, he'd owe about 90k on the profit. That would leave about 90k....or a net gain of about 18% after taxes.
I don't think 18% qualifies as excessive especially considering that if it doesn't sell, the entire profit could easily be eaten up by loan servicing.
Of course, when you calculate the R.O.I. (return on investment) the numbers get much rosier.....
blueIf you want to read a fancy personal signature... go read someone else's post.
blue, sounds like you're going to explain to me why paying $20 for a 12oz can of Pepsi is perfectly reasonable ;)
You sound like a developer or a realtor. Unless Mr. $750k is completely hapless, he is not going to be suffering on the deal (if it actually sold somewhere in the neighborhood of his asking price). You had the 'worst case' scenario running a 18% profit. Meanwhile, the 'best case' scenario sees a 50% profit. Sounds pretty hefty for 8 months worth of speculation.
Does that mean he'd really make 50%? Nope, he sure won't. But if that house sits for more than a few months, he will probably drop the price or get some renters in there.
We don't really have enough info to know what the situation is. I think Ron’s strong disapproval triggered knee-jerk opposite responses from those who have been on the other side of the table.
But just as I say, "good luck" to the owner who triggered my original posting, I say "good luck" to Mr. $750k. If he can turn over 30-40% on the deal, then congratulations to him for some good finance. Meanwhile he reinvests it to avoid capital gains and makes even more $$ next year. That is how some folks wind up paying cash for $2million homes.
But I can also feel for Ron. I haven't been in Mr. $750k's shoes, but I have been in Ron’s.
jt8
"blue, sounds like you're going to explain to me why paying $20 for a 12oz can of Pepsi is perfectly reasonable ;)"
I don't think $20 is reasonable for a can of pepsi. But I have every right in our society to try and sell it for that and that is my point.
And it really gauls me when I sell a can for $20 that there are so many who will stand back and say..........lucky bastard, or man that buyer was a sucker and the seller a crook, or that is wrong!
Look if a guy has 20 million in the bank and he is thirsty and wants to pay that price for a can of pepsi then it is not a big deal to him.
But my point is simply that if you don't want to pay it fine, don't. But to make a big issue out of it, go into name calling and be rude simply because you don't like the price is pointless. DanT
And the amazing thing is, it seems like the higher priced properties are more likely to sell for 50% profit than Joe Blow's $80-100k house would.
You would think someone who could afford a $750k house would be more savvy than a $100k buyer.
But as I keep saying: if he/she can find a buyer at that price, more power to them.jt8
JohnT8, I am not a realtor.
I might be a developer (small deals) depending on your definition.
I am a real estate investor (novice) and a carpenter contractor (since 1980 or so).
Actually striving for a 50% gross profit does not sound hefty at all to me. In fact, I've met investors that wouldn't touch a property unless they were purchasing it at 60% of Fair Market Value (the repairs are included in that 60% price).
So, using the simple 100k property, the numbers look like this: 60k out, 100k in, that's 40k gross profit on a 60k investment. That's a gross 66% markup!
Remember, they WON'T touch any deal unless the numbers fall into that range.
Thats only one way of many, many, many of doing the real estate investment business.
I really didn't focus any of my thoughts on the "knee jerk" responses. I think Ron was just making a point with his piss up a rope comment and the others are just making the point that all profit is not necessarily evil.
Personally, I chimed in to this topic because I've been involved in the business for the last severaly years in varying ways and having varying degrees of success. Basically, I'm still serving my pre-apprenticeship.
I'd like to point out one small mistake in your last paragraph. I think the basic idea that your portrayed about parlaying profits into $2mill is correct, but in the case of this transaction, I don't know of any way to quote "reinvests it to avoid capital gains and makes even more $$ next year". The way I understand the tax laws is that this property has not been held long enough to do a 1031 tax exchange (generally, one year minimum). Even if the guy reinvests all the net gain, he'd still be liable for the taxes on that gain...either as short term capital gain, or as ordinary income.
I'm going to go further into this topic farther down here in response to another post in this thread.
blue
If you want to read a fancy personal signature... go read someone else's post.
But lets analyze the numbers a little bit.
Yup, that's a good place to start.
The 700k represents a markup of 40% BEFORE EXPENSES.
Remeber cost doesn't really matter in selling anything that's already in your possession.
What are the expenses? Selling costs, carrying costs (property taxes, insurance), loan servicing.
What about the risks? If it doesn't sell in two years, thats ton of carrying costs.
Oh yes, these are the killers.
Then, if he does sell it, he will be paying taxes as ordinary income, not capital gains. If he is in the higher bracket, coupled with the self imployment tax, Uncle sam will take about half of his profit.
Exactly. That's why I don't invest in real estate anymore.
Of course, when you calculate the R.O.I. (return on investment) the numbers get much rosier.....
That's why I have problem with R.O.I. in investing in real estate. Even when you have a 25% down your leverage is 4:1, just to think about the risk. Try to tell a stock broker that you are a conservative investor and you want to margin 75% on the bluest of the blue stock.
Tomchark, it sounds like you ran into some trouble dealing in real estate....would you care to share your experiences and numbers?
blueIf you want to read a fancy personal signature... go read someone else's post.
Forgive me if I sounded like I was picking on your post, I was merely voicing my personal feeling on investments in general. Investment is something that strikes my interest.
Hats off to you on your insight in the taxation issues regarding investments.
Before I share with you my experiences and numbers, I want to tell you a true story. (Of course when somebody says they want to tell you a true story, just take that with a grain of salt.) :)
A young accountant just passed his exam and got his license came to his father to see if he needed his help to get his finaces in order. The old man replied. "No need son, I had it all figured out. I got off the boat forty years ago with only a shirt and a pair of pants. Now I have a lovely wife, a house, two cars and three kids, one of them is a doctor, the other a lawyer and you an accountant. And I don't have to worry about food on the table for the rest of my life. Aren't those all the numbers?"
No, that old man is not me but anyway may be I should but I don't really keep track of my numbers. Since you asked, my best estimate is my only gain in my real estate experience is my principal residence and the rest was a wash.
I have been and still am involved in real estate as proprietor, in limited partnerships, in partnerships, and as shareholder in a private corporation. Mostly due to poor timing (the location location location thing is wrong) I had never been able to make the 50% profit consistently. Mind you the best I'd ever made was 100% in three months but that was just plain luck, and the averages caught up on me. As you said you'll first have to cover the carrying cost, commission, taxes, legal fees etc. before you get anything in your pocket.
Sound investment strategy requires diversification, geographically and in different sectors of the economy. A small number of real estate properties can easily take up a large chunk of my investment capital so I wouldn't have much left to diversify. The other thing with real estate is liquidity can sometimes be an issue, and usually you have to deal with intangibles to come up with a FMV and even then you have to deal with the spread in the asking price and the offered price, which can be quite substantial at times.
For me? I would rather go online, hit the button and get my transaction almost instantly and know exactly where I stand.
Regarding historical rates of return, depends on who did the study or who you talk to, I am sure somebody here would have a different experience or point of view. The latest I read, don't hold me on the details, in a long term study over something like 40 years, the rate of return on North American real estate market (can't remember if it was only residential or the market as a whole) was 1.7% pa after inflation.
By the way there is a new and easy way to invest in residential real estate. You can buy indexes of markets across the country and they are traded on an exchange. You can get you feet wet with a minimun of outlay, diversify geographically, pick you own locations, completely liquid and minimal commission. How do you beat that?
Just another of MHO. When they come out with an innovative investment vehicle like that, watch out, the market is peaking.
Those indexs are called REITS (real estate investment trusts).
I too am interested in real estate. I've done a considerable amount of research....just toted another few books home yesterday. I've "dabbled" in different arenas of the game too. I do agree that you can very easily tie up too much investment capital.
Managing cash flow is actually the most critical area. I didn't do a good job on my largest venture. The appreciation is good, but I've learned that appreciation is not cash flow. I'll soon be free from my mistake...will pocket about 50k and move on...smarter and wiser.
I have vowed to never buy another piece of property using my own credit. Also, the property must have a positive cash flow and I will never take more than $1000 out of MY pocket to buy another property.
Using that criteria, I think I'll do much better.
blue
If you want to read a fancy personal signature... go read someone else's post.
Those indexs are called REITS (real estate investment trusts).
Blue, the indexes I mentioned are not REIT's. REIT's have been around for a while now. They evolved from the original open-end real estate mutual funds. Remember in the mid eighties where every widow and orphan was buying those open-end real estate mutual funds for the seemingly unending NAV increase? Only when the market came to a screeching halt that everybody was trying to redeem his units that the fund manages ran into the liquidity problem.
Oh yes, I forgot to mention REIT's as an indirect way of investing in real estate as well. REIT's are pooled funds that are traded on exchanges, they actually hold real estate properties to generate rental income to pass them onto investors. They can be quite diversified geographically and they can speciallize in commercial, industrial, recreation, residential or various mixes of properties. As you have mentioned cash flow is important in any real estate investment and when you evaluate REIT's that's the first thing you look at to make sure that they can make their distributions. By the way cash flow is important in investing in oil and gas too but that's another story.
The indexes I mentioned are something new, should be coming out very soon. These indexes track the residential markets in the States. For example you can buy or sell the NYC market if you think the market may make a significant move either way in the near future, or you can just buy and hold for long term gain. You can do straddles say to buy NYC and sell SF if you think the market in NYC will do better than that of SF. Eventually they may even have futures contracts on these indexes. Now are these investments or speculations? Like a lot of other investments it's up the the individuals who play these markets.
Tomchark, I have never heard of these indexes. I don't play in the day trading stock market. I'll be interested in learning more about them.
I'm trying to remember the mid eighties and your open end mutual fund stuff. I don't really know about that either.
I do remember reading about the real estate bust. I thought that happened in the early eighties as a result of the change in tax laws reducing passive tax loss shelters. In the run up, huge buildings were being built with no tenants simply to sell tax shelters. I thought it was Reagan who put a stop to that, much to the chagrin of the right, but it was the right thing to do to stop the tax shelter abuse.
I might be wrong about the dates....maybe I'll go find that book....
blue
If you want to read a fancy personal signature... go read someone else's post.
Gees yous guys are still going at it here?
The indexes I mentioned is quite innovative. I don't remember how they back up the shares though. For stock indexes they can use the actual stocks or future contracts but in this case I have no idea.
I can only remember this much. The starting index for a particular location is contructed by using the market price of an average house, not the average price of transactions during a particular period or the median price as a lot of real estate report would use. If you think about it a house is a slowly depreciating asset, a house ages like everything else, needs maintainance, upkeep and repair, renovation and rehab. All that will add to your capital cost. So if you track the market price of a particular average house (actually would be a representations of similar houses) you get a truer picture of how the local market is doing. So then the index won't be skewed by the price of all the new houses on the market or the change in proportions through out the price range.
Say for example you buy an index today in the Bronx, the FMV of the representative house is $X and you sell it five years from now when the FMV of that house is $Y, then your profit/loss would be $Y-$X times the conversion factor of the index.
As I mentioned before, eventually if they can make this fly they will probably introduce options and futures on the index then developers and builders or even homeowners or would-be home owners can hedge their positons like what they can do with other commodities.
I do remember reading about the real estate bust that you mentioned. I thought that happened in the early eighties as a result of the change in tax laws reducing passive tax loss shelters. In the run up, huge buildings were being built with no tenants simply to sell tax shelters.
Yeah I remember that. I think you are right that it happened in the early eighties in the States. At that time here in Canada we had limied partnership tax shelters structured to buy buildings in the States and as you said some of those buildings ended up being mothballed for years.
Regarding those open end real estate mutual funds, it happened in the late eighties when our market went from boom to bust. These mutual funds basically held commercial, industrial and residential units for rental income and appreciation. I remember they were only valued once a month (think about the prospect of evaluating all your buildings once a month) and with the hot market everybody saw their gain month after month. But because they were open end funds they had the obligation to honor redemption from the unit holders. Typically they kept a few % of the asset in cash for that purpose.
Then the sh?t hit the fan so to speak, everybody wanted to redeem their unit and you can see the problem with the fund managers. They couldn't sell enough properties overnight to raise cash (especially in a down market) to meet the redemption. So they applied to the governing body to remove their obligation to honor redemption and those funds were basically frozen for years before they changed themselves to close end.
Then came the REIT's and royalty trusts about 10 years ago and the REIT's basically replaced the close end real estate funds.
You make some really good points. I am an investor and have been for 20 years. I believe real estate is a good investment and a solid one that given proper timing will almost always have a positive return.
But.........I think investments are just that. And there are a lot of them. And I think it is important to pick one fitting your personality and your desire for level of involvement.
I think real estate, primarily rehab of older homes, is one of the few good investments you can make using sweat equity and start out with little or nothing. And it is a nice field as there are many different directions you can go with it based again on your personality, level of risk and personal goals. And you are really correct in the fact it is not a really liquid investment especially in a slow economy. DanT
DanT, what style of investing have you done? Your post implies that you've rehabbed. Do you hold any for passive gains?
Actually most contractors and tradesmen in here possess the skills that real estate investors would kill for. I was at a real estate investors round table discussion. The experienced local guru was giving aways secrets. He was asked about which contractor that he uses to do his rehabs. He replied: "good contractors that are affordable, that can do rehabs are so scared, I'd rather give you my wife or dog than to give you my carpenter's name!"
One of the fellows that used to post in here ScottR, of Fenton, MI took my advice and started hanging out at real estate investors club meetings. Here's an excerpt from an email that he recently sent me when I couaght up to him again in a real estate investment forum:
I've been busy, in the process of selling my second rehab and on the hunt for more.
I've thought about you more than a few times. You were the one that turned me on to the Dealmaker forum... It's been a nice resource. Also you are indirectly responsible for a ton of business and some fabulous connections.
I don't know if you remember this but you posted a thread about Wendy Patton on Breaktime. I think we may have spoken about Wendy when we met at the Oakland REIA meeting. Well since I had heard about her (through you) I found she was speaking in Flint at the Genesee landlords meeting so I got my way in, front row. To make a long story short I met Wendy that night and have since done a ton of work for her and her "new" husband Michael. Wendy has also been the source of a lot of referrals as well, which a couple have turned out to be excellent connections.
So I believe I owe you a big thank you. How about lunch?
Personally, I'm not into rehabbiing, but I would buy (subject to) a fixer and lease option it to a homeowner/rehabber with marginal/good credit.
blueIf you want to read a fancy personal signature... go read someone else's post.
I buy, rehab and rent typically. I sell one once in awhile when I run out of tax advantage, have one that irritates me or lately we have been selling one or two a year as I plan to be out of the business in 5-7 years.
We have bought some pretty rough stuff through the years for little money and used sweat equity. In the last 7 years or so we have more cash so I don't work as hard at it. And with my company I can pay someone to go fix stuff I would rather not.
So it has kind of evolved from having no money but a lot of energy and some skill to having money but little energy and still some skill, lol. Been a good business for us. The first one we did in 1983 was a duplex and we had to get at least one unit done so we could rent it as I didn't have the money to make even the first payment. Worked right at 100 hours the last week (including my job) to make that happen. DanT
Dan, I like your approach because it's very close to mine. I've not been doing it as aggressively as you though. I'm almost opportunistic on my purchases. Try to get them as close to nothing as I can and put the work in. Hire when needed but mostly I've been luck enough to seldom have to that. Plus, it's just very theraputic to do as much as you can yourself.
I have made the 'mistake' of spending more of my time to do something that I could have hired done cheaper in the long run. But I learned something and, usually, had fun doing it. Taught my kids a few things along the way. They might think a few things not to do would be more like it. Can't think of anything really better to do with your kids than have them out working with you on a rent property. Except fishing when you get through with work.
Blue has a good approach there also. I have thought about 'parterning' up with a carpenter and buying the property, he can live there and work on it and we divide it up later but it just seemed to be to complicated to keep track of everything.
My main regret has been selling. I hate to sell. What I've sold I wish I hadn't. The money may have seemed good at the time but when I see it now wish I had kept it.
What I a looking for now is a nice older building in a downtown area in a small town to fix up for leasing out. I'll have to hire out the structural work I know but if I find the right one it should be a ton of fun.
My main regret has been selling. I hate to sell. What I've sold I wish I hadn't. The money may have seemed good at the time but when I see it now wish I had kept it.
Well, you know what they say, buying is the easy part and selling is always the most difficult in any investment.
Tx, as an investor there shouldn't be such thing as regret. Actually there shouldn't be such thing as regret in life. 'Regret' and 'should have' have no place in my vocabulary. Once you have sold there is no looking back, just move on to other better things. Wasn't that the reason you sold in the first place?
I agree with you on the regret part. That's why I've decided I just won't sell anything anymore.
As long as they will lease in their current state, ok. When they won't, tear 'em down and do something else.
Well, I don't want to sound bigger than I am. I currently hold 10 units. I typically only buy 1 a year and a couple of years I have bought 2. I too am more oppurtunistic in my approach. We have had as many as 12 at one time but 8-10 works well with me having a business and my wife being the career person she is.
I buy them, rehab, and deal with any confrontational issues with the tenants. She has a warm fuzzy personality so she deals with the month to month and renting them. Works well for us. If a tennant sees me it usually is because something is wrong, maintenance or you haven't paid rent.
Using this system we have only had 6 evictions and probably an equal amount of tennants we wish we hadn't rented to. And by going through them at each tennant change we average less than a maintenance call a month. DanT
Tex, a lot of people partner up in real estate for various reasons. It's not that bad, but here's the only deal I would accept.
If I was putting up the money to a carpenter partner, I'd be leery about letting him live in it. I'd prefer to deal with a carpenter that already was stable enough in his trade to have a home. In my travels, I've found that most skilled tradesmen that don't have houses, don't have them becauase of a flaw in their work ethic.
There are always exceptions (divorce,etc).
Next, If I was putting up the money (or the credit), I would stay in control of the money.
Last, and most importantly, if I was partnering, I would form a separate LLC for that property. I would make it a member managed LLC and I would be the sole manager.
blueIf you want to read a fancy personal signature... go read someone else's post.
Sounds like very good advice. Thanks.
Tx, it took me probably 10 years to finally learn the lesson that it is better to sub out some work rather than try and do it all myself. Rather than spend 100 hours (or more) doing something, call in a professional and have him do it in 20, and then use your 100 hours more productively working on other parts of the house.
Typically that is money well spent. Not only from a time-table point of view, but also from a 'steam' pov. Those projects better sub'ed out typically are the ones that really suck a lot of steam off your progress/enthusiasm. I guess in a big way its a matter of either knowing your limits, or knowing your speed on things.
I've had lots of "learning experiences", and many setbacks, but I'm really at the point of wanting to kick it in the butt. I think I need a couple more houses under my belt (to get more capital) before I can settle into a renting scheme. It will probably take me 10 years to be at DanT's level, but if I keep at it, I think I can get there.
jt8
I realize that you are exactly right about subing out certian jobs; and I do it. Usually.
Are you primarily in residential rentals? That has been my area because it just seemed easier to get into. Are you finding that getting good tenants is more difficult now days?
It seems like it to me. I have one littel house that is the smallest in a very nice neighborhood and never had any trouble keeping it rented. The kind of place that your old tenants's friends are standing in line for when they move out. Nothing really extra nice just good location and a neat older house, shady yard, wood floors, large rooms.
Now I just went thru it after the last tenant and did some up grades, replaced an entry door at the back, complete exterior paint, some landscaping, new cookstove, etc. Still empty after about three months. Not because I went up on rent. Not because they look and don't like it. Just haven't had any one interested. Have done the same thing to advertise as before.
I know I'll rent it and do alright; just not as quickly this time.
My belief is that the pool of good renters is dwindling due to the government programs that give 'first time buyers' a "grant" for their down payment, etc.
We'll probably be buying some of those houses to rehab later.
I only do residentials. I'm trying to build up some capital, so right now I'm selling, not renting.
Although I have seen a couple rentals that were REALLY tempting. For instance a 1200sq ft bungalow in a somewhat-shakey neighborhood. Needed about $15k (less if I can do it all) and they were asking $32. In a decent neighborhood (around here) it would be an $80-120k house. In its current neighborhood, it is probably just about breaking even around $65k
BUT... the CO has been renting it. Gawd, they've got the little bungalow split into two rentals! The upstairs is one unit, downstairs the other. Potential rent income of $700/mo, which would more than pay for the property (1 renter had just left, the other had been there for several years).
BUT.... while it has potential to pay for itself with a bit left over, I really need some operating capital, so need to find one to fix and resell. Down the road I can start looking at renting.jt8
Dan, sounds like you're a few years ahead of me, but I like to pick up rehabs, fix them and sell them. With a VERY restrcited budget, I have to sweat equity much of the work myself.
I'm looking for a new one now. I just missed bidding on a rehab property. It was a Queen Anne built in the 1890's. About 3-4k sq ft. In hindsight, I'm glad I missed the sale, because it was really more than I wanted to deal with on one house... or more to the point, it needed more work than the neighborhood could have supported at resell time. But gaaawd, the purchase price was right and the house had a lot of potential (leaded glass, stained glass, gorgeous woodwork). Hate to see gorgeous houses in bad neighborhoods.
But anyway, it is encouraging to hear from folks like you who are basically doing what I'm trying to do.jt8
I try to stay away from houses that are too big, too many square feet. Takes too much time to keep 'em up. IMHO, the tenants you get in a big house are not always desirable. Big families, lots of kids, lots of problems and wear and tear.
Also big house sometimes tend to attract people who like to have big parties.
Just my observation.
I like smaller individual homes in nicer neighborhoods. Word of mouth advertising is best.
I try not to rent to friends, relatives, or friends of either.
I agree, but from a slightly different perspective. The big houses can take a HECK of a lot longer to turn around! I might be able to push a 1200 sq house out in a year or so, but a 3-4k sq could stretch out to well over 2 years or more. And since I'm a rehab-sellit person, there isn't any income during the rehab phase.
For me its better off to concentrate on the 900-1500 sq ft houses that are in reasonable neighborhoods. Buy them cheap, put time/money into them, and then sell.
I could also maximize earnings by selling it myself, but for now I'm satisfied listing it with a realtor (assuming a buyer doesn't come up to me while I'm rehabing) and having them take care of that part (so subtract 7% off the top).
One foot at a time and hopefully the train will pick up speed :)jt8
Sounds like you are just selling them on a new loan? Not carrying anything yourself?
How have you found the houses you bought?
There are supposed to be good deals on foreclosed property and tax sales. I've never done it. Know some people who claim to have done well with it though.
Have you ever tried a foreclosure or tax sale?
Tx, foreclosures can be bad, or good, depending on a lot of factors. Tax sales are ther result of foreclosure but most of them bought are redeemed is there is any equity to protect. Then, the investors are simply looking to make a certain level of interest.
Tax sales can tie up a considerable amount of money but the returns can be very good and if you actually end up with the property, you might be paying only pennies on the dollar to actaully end up with something.
I might have already said this.....there are a lot of ways to make money in real estate.
A lot of people are chasing the foreclosure market and that makes it tough on the investors, but...like anything else....if you work it, you'll succeed.
One of the most midunderstoof aspects of real estate investing is how to find those foreclosures. The easiest way is to have people in preforeclosure find you.
I haven't done any marketing to enter into the preforeclosure market, but that is very high on my list. I'm going to become one of those "I buy house" guys.
blueIf you want to read a fancy personal signature... go read someone else's post.
Sounds like you are just selling them on a new loan? Not carrying anything yourself?
I'm borrowing the $$. Using my current place and the purchase place as collateral. I actually burn my capital just making the monthly payments. Currently I try to stay out of high property tax areas (good schools help with resale, but kill you during renovation). The repairs are split between my $$ and loan money. Depends on the loan. Typically the lender has pretty good control over the purse strings.
I would like to build up my capital enough that I can buy the houses outright and just get loans for renovation.
Ran into my loan officer a week or two ago and he was telling me about a new loan they were thinking about covering. I didn't have time to get many details, but it sounds like it is a variation on a short term loan they've had before.
They send in an appraiser to the property and he estimates what the place would be worth if renovated. They then authorize you a line of credit for up to that amount (probably just under that amount). I would imagine its another 'tight purse strings' type loan, but that's ok as long as you can get the $$ you need to make the repairs.
Tell ya what, I'll holler at him and see if I can get some more details. It sounded like this new loan is covered under mortgages, so your interest rate should be lower. They might require the renovated house to be your primary residence, but that isn't a problem for me, cuz I'm only doing 1 or less houses a year.
How have you found the houses you bought?
Oddly enough, so far its been word of mouth, but those are few and far between. Get your wife and/or your Mom to keep their ears open (or if you're a good networker, you can to). At church or talking to a neighbor ... or whereever. Gabby women can find these. Especially gabby women who notice details. Such as when a house isn't being maintained as well as it used to (could indicate the residents have moved to a nursing home or otherwise). New nursing home resident could mean cosmetics and updates to resell the house.
But I've been in need of a new project house for a while now. I guess I need to resort to one of the more popular ways. That big queen anne that I didn't really want... but would have bid on if I'd been there... would have been my first venture into foreclosures. I just haven't had any leads on a 'word of mouth' lately. There was a pending foreclosure I found out about early in the summer, but the house needed too much work.
And I didn't act fast enough on another one. A farmhouse about 10 miles outside of town. The old boy had passed away, and the kids (in their 50's) didn't want to split up the ground, so they just auctioned off old boy's stuff and did a demolition auction on the farmhouse (planning on having the volunteer fire dept burn down whatever didn't sell). All told, they got maybe $5k for the bits of the house. Geeze, if I would have been THINKING, I would have talked to them prior to the auction. I could have offered them $5-10k for the house with the stimpulation that I move it. The house wasn't in bad shape. The biggest problem with it was the basement, and that problem would have disappeared if I'd had it moved.
So figure $10k to buy it. Another $10-25k to move it (keeping it rural to simplify the move). $5-20k for ground to put it on, and then foundation and hookups (vary depending on where you're at... maybe $25k-ish?). It needed maybe $5k in cosmetic crap, otherwise it was a fairly clean house. It had 6" Al siding, which isn't as fashionable nowadays, but it was in good shape, so I would have left it. Add another $9k for realtor fees and its sold. $69-94 invested in a house that should bring $120k-ish. Now granted there are always unexpected things crop up, but it was doable. And I'm small scale, so clearing $20k on a house with limited work is acceptable (and probably could have been done in 6 months).
My feeling is that better deals can be had if you can find them prior to them going public. Foreclosures/tax sales are in the paper, so they'll draw more people and typically higher prices (I'm guessing here, I don't know it for a fact). But currently my word of mouth isn't landing anything so I'll have to try something else.
Financing is a bit tougher with foreclosure/tax sale. Gotta talk to Scott again and see what the numbers are.
jt8
Have you thought about having your DW get a real estate license? Or you?
Normally, the listing broker (ie. you or the DW) get 1/2 of the commission and the selling broker gets 1/2. That might be a good way to cut down that 7% commission you are paying on those resells.
There are some costs and time involved but once she gets into the MLS membership she can also spot some deals for you, maybe.
I've been a broker for about 15 years and the DW has been for about 20. It's helped on several commissions. Even when you are buying. If the property is listed and you do it under your DW's R/E license she puts 1/2 the commission in her pocket at closing.
I had been talking with a lady who had been a rental manager. She seemed to think that the local rental market had really tightened up in the last 5 years or so. Must be the same syndrome you mentioned earlier. But anyway, she had suggested the same thing with the realtor licence. So that you could get half of your 7% back when you purchased rentals. She used the $$ to pay closing costs and misc.
But noting the tightening rental market, she has nearly gotten out. I think she said she had 1 or 2 rentals left, and doesn't manage properties for other owners now (she works for a lawyer now...blech).jt8
It's going o have it's ups and downs. I've owned rental property for over 25 years.
I can't see owning real estate to be a negative in the long run.
You can have too little or you can have too much of the wrong kind at any given moment.
There is a fine balance between being over extended and having the right mix for the market.
Couple notes/questions for you guys if you don't mind...
Pool of renters is definitely decreased in my area(Boston, MA) on the apartment side as the rents are right about what you'd pay for a mortgage payment for a slightly smaller condo. House rents remain high as houses are astronomically priced here, seems like everyone wants to be in real estate so I see ridiculous bids on fixer uppers and two family homes that are not proportionate to their value...cash is from people having lots of equity on their current homes to play with and large immigrant families who are pooling their funds. On the plus side, some larger properties are available for rehab that are obviously beyond the capabilities of a non-professional.
How are you guys swinging your financing? Are you mortgaging your investment properties? Buying them outright? Applying the 33% rule for the guaranteed mortgages(generally you can get a mortgage with 33% down anytime). The cheapest rehab property that I've seen come by me this week was $297K and that's not something I can afford out of pocket.
-Ray
Your first paragraph is dead on. One thing I throw in is that with interest rates so low when the CD's mature a lot of people will rather put it into real estate. That is driving the price up. The immigrants,too, drive it up because they will get the whole clan together and they'll pay $100,000 for something most people would not pay $50,000 for. But, they don't like dealing with banks so they want you to finance it and they don't like interest. They will show up with the money, lot of times cash and after they are there sometime they'll have the place looking better than it was.
As for financing....just a good banker.
One tip I'll advocate.....some think I'm stupid, is use your CD's for collateral. You'll only pay 2% more than what the bank is paying you. After a while and they feel comfortable they'll let you have almost face value. Now, you got to have the cash but if you do....it's best. Starting out anyway. I'm old fashioned.
Hey Tx, your're right about people with low paying CD''s. Keep in mind that these same people might be very glad to meet a carpenter that could put their money to work in win win deals.
blueIf you want to read a fancy personal signature... go read someone else's post.
Raybrowne, it sounds like you are trying to get started in the rehab market in the wrong market and with no training.
If that 279k property, will have a "fixed up market value" of 465k, then you certainly could afford it "out of pocket". YOu might not be able to afford it out of your pocket, but always remember...if you don't have it, someone else does.
Those figures represent buying the property at 60% of fmv. If you found one of these properties, and put it under contract, you would easily be able to "flip" it to a more established rehabber for 70% or so. That would mean that you could pick up 25 or 30k.
Most investors start out with much smaller projects. There must be some bread and butter neighborhoods in or around Boston.
blueIf you want to read a fancy personal signature... go read someone else's post.
And I think it is important to pick one fitting your personality and your desire for level of involvement.
Can't agree more. As I mentioned I like to diversify so I always keep my eyes and my mind open to all kinds of investments.
I think real estate, primarily rehab of older homes, is one of the few good investments you can make using sweat equity and start out with little or nothing.
I envy your position to be able to provide the time and the involvement and that's something that I really like to do but I just don't have the resources. Remember your sweat equity is part of your cost.
"Remember your sweat equity is part of your cost."
I have heard this quote for 20 years. And I agree with it to a point.
But I have never met anyone who got ahead working 40 hours a week. And I would not have the real estate investments I have if I had not been willing to work a few extra hours to get them done and keep costs down.
That being said I think if you could otherwise be making money doing something else or need to spend some time doing the family thing, or simply need a break from the action then taking time from these issues is costing you. But most of the time the people who gave me this quote (and I am not speaking of you as I believe you meant it in a purely business manner) once they said it they went back to there house and opened a beer and turned on the tv. That time cost me nothing as I wouldn't have done anything with it anyway. DanT
>>once they said it they went back to there house and opened a beer and turned on the tv. That time cost me nothing as I wouldn't have done anything with it anyway.
I have no problem with people drinking beer and watching tv all day, that's just not my style. If we have more people like you we'd have a better world.
Go check out post 48586.1
"Then, if he does sell it, he will be paying taxes as ordinary income, not capital gains. If he is in the higher bracket, coupled with the self imployment tax, Uncle sam will take about half of his profit."
No SE Taxes. This is investment property. It is capital gains. Short term CG so it goes at the ordinary rates, but still CG.
Now if he had done a signicificant amount of work on it then then it will cross over into the business income inwhich there are SE taxes.
Bill, I don't think we have enough information to make a determination that this property would be classified as "properties held for productive use", which is the criteria for applying the capital gains laws.
This very well could be just that, but there is always the danger on these "flips" that the IRS will not agree and decide to call this investment "dealer property".
This quote is taken from "Flipping Properties" by William Bronchick and Robert Dahlstrom: A "dealer" is one who buys with the intent of reselling rather than for the investment. There is no magic formula for determinin who an investor is and who a dealer is, but the irs will balance a number of factors, such as:
*the purpose for which the property was purchased
*how long the property was held
*the amount of sales by the taxpayerin that year
*thoe avount of income from sales compared to taxpayer's other income
*How many deals the taxpayer made in that year
*The amount of gain realized from the sale.
The IRS does not make things easy. Just because the couple lists it as "investment" property, doesn't mean the IRS won't audit them and reclassify the transaction.
blueIf you want to read a fancy personal signature... go read someone else's post.
its too much money that these people are suddenly crazy
Have to agree, there are more factors than meet the eye. My house's tax appraisal went up to what I paid for it the same year I bought it (five years later, the tax appraisal has gone up $12K from purchase price). Similar house in my market are up $25-30K from when I was buying.
So, there's more than meets the eye.
If I put what the buyer thinks is an inflated price on the house, then the buyer ought just walk away. Buyer & Seller are just not going to find an eye-to-eye in that situation.
When I was buying, I looked at a fsbo. It was a former rental, and the owner was all proud of the renovations he had made--right up to rental unit quality. That was fine; he was $6K over my budget in asking price. I told him I was looking for a home, not a rental unit. I told him that I'd want to do about $15-20K worth of work on it, and that offer would be just too low for him, and there was no reason for either of us to be cross about it. So thanks, but no thanks.
Occupational hazard of my occupation not being around (sorry Bubba)
As an investor I often look at 30-50 houses a year. And few are ever close to the price I can pay as an investor. And lots of times they sell for more than I think they were worth investor or not. Doesn't make me angry or put off. Just some folks see more value in something than I do.
I also look at tax records and purchase price so I have an idea of what is owed on the property to give me background in order to make the lowest offer possible with some success. I don't use it as a sword to hack away at someone because they have the audacity to want to make more money than I think they should. DanT
If you knew all this before you went in, why did you bother going at all? Did you expect them to say "Oh boy, you really got us! I'll give it to you for what we paid for it."
You are the creep who should piss up a rope. Don't hate someone because they took a chance and might actually profit from it. Tell you this much, if I let you in my home and you started verbally abusing me, you wouldn't be leaving in the same condition you came in.
With regard to the $750,000 asking price, do you know the terms surrounding the previous purchase. Was is a post foreclosure sale, a distressed sale, a motivated seller, etc.? Did he buy it from an estate, with removed beneficiaries motivated to unload the property? Maybe he really did get a good deal on it. If it is truly overpriced, it will not sell for $750,000, because it is above what the market (i.e. all active buyers/sellers) will bear.
The market sets value through what truly comparable properties are selling for. Listing/sale prices of similar properties in a market can be misleading, and numerous adjustments typically need to me made to reconcile two list/sale prices for somewhat similar properties.
It is very possible that this seller is misinformed and listed the house for too much. However, it is just as possible that you are misinformed on local RE values, terms of the previous purchase, etc. Far too often emotional values are attributed on behalf of the sellers, and the buyers immediately assume that the seller (especially in a FSBO) is our to screw everybody and retire on one investment. My experience (as a real estate appraiser and investor) is that working with reputable realtors is advantageous for typical buyers/sellers without considerable real estate experience. In that case, the realtor, who has a vested interest in the deal, can protect the interest of their client. Most realtors, like contractors, are honest and reliable. It is usually easy to spot the bad apples. For those with real estate experience, buy/sell yourself and save the commission.
Not trying to give anyone a hard time, just offering a different perspective.
Excellent post Summerwood.
The asking price might very well be a "testing of the market". The market will usually let the sellers know how much the property is truly worth. I'm testing the market right now on some resort property that I own. My feelings aren't being hurt by others that think I'm overpriced. I may very well be overpriced.....I won't find out until I offer it!
On the other hand, if the property does sell for 750 despite market value estimates, doesn't that simply reestablish a benchmark?
blueIf you want to read a fancy personal signature... go read someone else's post.
So, ron they had it for 8 months and didn't do anything to it?
Want to make a profit? That makes 'em a creep?
Sounds like to me what really pissed you is that they came on like it was the old family home. When you really knew they had it only a short time. Maybe you did like the house and were disappointed that you did not buy before they did.
If so, why didn't you just level with them that you had an indication that they only paid so much ( I say that because your information may not have been totally accurate) and then make an offer based on what you wanted to pay?
If they accepted or you got into negotitations and a deal worked out, great. If not then they could have, politely, declined.
I've always regretted the properties I didn't buy more than the ones I did.
>>For instance, the owner had started off by saying that the basement was tight and dry. chat, chat, chat... "oh, well we left the hose on one day and it infiltrated in that corner"...chat chat chat.."Oh well the sump pump got unplugged one day and there was a little water in the basement"
I hear that often when the HO tags along, often word for word.
For the first two corners and "excuses," I just describe what I am seeing and the evidence for repeated moisture intrusion.
I wait until the third corner, and then, before the HO says anything, I turn to him or her and say "Before you give us your story for this corner, I'll talk about what I can see has happened."
In a couple of cases, I've told HO's "I suggest you stop talking, you're making my client too nervous with your stories."
God never gives us small ideas.
Sojourners: Christians for Justice and Peace
Yet another reason some people are better off using a realtor. Then they're not around to tell lies or stick the foot in their mouth when people are walking through.
jt8