How to Analyze and Buy a Property to Rehab, Part I

The other day, a new investor asked me, “What are the steps to buying a property to rehab?” I immediately let her know that there’s no simple answer to this. This is a huge subject that entire boot camps have been devoted to. But I decided to give a stab at answering her question. So today I’m going to give you a skeleton outline of how this whole thing works. I didn’t have time to type it out, so I spoke my answer into a voice recorder and had it transcribed. So if this seems sloppy, just understand that that’s just how I talk!  From the transcription…

If you plan to buy a fixer upper, one option you have is spending a lot of money on marketing trying to get sellers to call you, whether you’re advertising on the Internet or you’re sending postcards to, let’s say, out of state owners.  Or the simple way that works well for most investors is logging onto myhousedeals.com and pursuing the wholesale deals and motivated seller leads in the member’s area. You can call on these properties to buy them. You can get a free trial at www.myhousedeals.com/freetrial.

If you plan to fix and resell these properties there’s one set of steps, and if you plan to wholesale these properties there’s a different set of steps. Today, I’ll just cover rehabbing. When you see a property you like on the website, you’ll want to pull comps either on your own or through a Realtor to determine what the after repair value really is. Don’t just go by whatever the seller says it is.

Now, on to repairs. If you’re looking at a deal on myhousedeals.com, pay attention to the the pictures. If the house is falling down and they say it needs $3,000 in repairs, then you can save a lot of time by marking that property off your list and moving on to the next. Pictures often say a thousand words.

You also want to look at their repair comments to see what they’ve indicated the repairs really are. If you’re still interested in the property, you’ll want to call that investor. Let’s assume it’s a wholesale deal. Schedule to meet them at the property so you can look at it. Or sometimes they’ll give you a lock box code for you to go at your own convenience and look at a property.

Now when you’re at the property, you’re trying to assess the actual cost of repairs. And you’re also looking at the neighborhood. But you’ll spend most of your time on the cost of repairs. And if you’re inexperienced at estimating repairs, have a contractor meet you there to help you do that.

After you estimate these repairs, go back to your office or home and calculate an offer price. Your offer price should be based on a formula. The formula goes like this. Take 70% times the after repair value based on your comps minus the cost of repairs. So let’s say, you think the after repaired value is $100,000. Take 70% of that. So you’re down to $70,000. And if you think the cost of repairs is $10,000, subtract $10,000 from the $70,000. So you’re down to $60,000 as your maximum offer price.

If you’re planning to hold this property as a rental, then it’s much more acceptable for you to make an offer more in the range of 80% of the after repair value minus the cost of repairs. So long as it still cash flows.

You want to make this offer to the seller either verbally or in writing. It’s up to you. I’ve always made offers in writing. Make a lot of offers and get a percentage of those accepted. It’s really a numbers game. Even if they reject your offer up front, a lot of times they’ll even come back to you later and accept your offer.

Once you’ve come to an agreement with the seller, either you or the wholesaler will complete a full sales agreement. You can often get these from your state. They will vary from state to state, although there are some generic sales agreements that are available. And a lot of those are available in books and tapes that you see that different gurus sell.

Once you find a sales agreement, here are 2 or 3 things to make sure to put in there. Number one is to give yourself a 10-day option period so that you can further inspect the property during that time to make sure that you really want to buy this thing. And during that period, not only will you further inspect it, but your inspector will. If you’re new especially, pay an inspector a couple of hundred dollars to go look at it for you because he can save you thousands if he or she finds a problem that you overlooked.

With motivated sellers you can put down as little as $10 earnest money. Often wholesalers will want more because they’re a little more savvy and they want to make sure you close on the deal. But it’s very common for motivated sellers to accept $10. And in the special provisions, put that your purchase is subject to inspection so that if you have to back out of this deal, you can indicate that it’s because you found additional items in the inspection that you didn’t initially see.

And as a buyer, put your name or your company and/or assigns.  That way, you can assign your contract to another buyer later if need be. And for a closing date, it’s typically best to put a date anywhere from 20 to 30 days out unless the wholesaler specifies the closing needs to take place sooner.

At this point, you actually have this contract and both parties should sign. Make sure that both you and the seller have a copy of the contract. And then fax a copy of the contract to the title company or attorney’s office, depending on which state you’re in.  Make the earnest money check out to the title company. And deliver it to the title company either the day of or the day after you execute the contract by having both parties sign.

Now the title company will open title. This takes about one week. By opening title I mean they need to check with the court house and make sure that the seller really does have the right to sell and that there are no other liens or judgments on the property that were unexpected…

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Well that’s all for now. We’ll pick up on Part II of this topic next week. In the meantime, get a 30-day free trial to myHouseDeals.com at www.myhousedeals.com/freetrial, and get on your way to rehabbing your first or next property.

Happy (and profitable) investing!
Doug Smith
President
myHouseDeals.com

The Nasty Truth about Finding Deals on the MLS

A big THANK YOU to everyone who emailed Elise over the last few days. She is recovering slowly and appreciates all of your encouragement!

Now back to real estate this week.

Other top investors and I agree that these are the most effective ways to find good deals in today’s marketplace: 1) Wholesalers, 2) Vacant Houses, 3) The Internet, 4) Referrals, 5) Out-of-State Owners, and 6) Pre-Foreclosures.

Notice that the MLS is not on the list. Here’s the hard-hitting reality…

If you’re looking to spend several hours driving around analyzing and inspecting over-priced ugly houses and making offers that never get accepted, then be my guest, and pursue properties listed on the MLS (Multiple Listing Service).

The bottom line is that when it comes to finding bargain-priced properties, myself and some of the top investors in America consider “MLS” to be a dirty word … or acronym … depending on how you look at it.

Way back in the day, this was a pretty good way to find properties. Now, it’s one of the WORST ways to find deals. It went from good to bad because in today’s market everyone and their dog has access to view the listings on the MLS. And when that many people have access to the deals, the prices get bid up too high. That’s exactly what has happened with the MLS. It’s called an efficient market. And efficient markets aren’t so great for real estate investors.

And if you plan to have Realtors comb the MLS for you, think again…

I advise that you don’t waste your time calling Realtors telling them that you buy houses and that you want a “good deal” and you want them to pursue listings on the MLS for you. If they don’t laugh in your face, they will when they hang up the phone. They get calls like this all the time. And they’re tired of getting burned by other investors who never bought a thing.

Listen, you can still get deals from the MLS. In fact, I still own a rental that I bought from the MLS. It was a bank-owned REO property. It was an OK deal. Nothing too great. But I could have bought 3 houses for the amount of time that I spent finding this one. It’s just a matter of using your time wisely. Remember, time is money!

While we’re on the subject of bashing the MLS, let’s talk about HUD foreclosures and VA foreclosures because these properties are on the MLS, too. Same problem. OVER-SHOPPED! Stay away. Save your time and energy. Let the rookies buy them up. Move on to greener pastures.

Some folks like to mail to expired MLS listings to convince these people to sell to them. But the problem is that almost all of these listings expired because the seller wanted too darn much money. Do you really want to pursue deals from folks who wanted too much money in the first place? I don’t. Tough crowd.

Do yourself a favor and stay away from the MLS when it comes to buying properties. But be sure to have a Realtor put your property on the MLS to sell it. It’s a GREAT place to sell! So yes, I do love the MLS after all, but just for selling.

Until next time, happy (and profitable) investing!

Doug Smith
President
myHouseDeals.com

P.S. Do you lack the time, money, or energy to find bargain priced properties on your own? Or do you simply want a wide array of investment properties to choose from? Then sign up today for a FREE Trial at www.myhousedeals.com/freetrial and get dozens of wholesale deals and motivated seller leads delivered to your computer screen each month.

Going to Prison is as Easy as 1-2-3!

Finally, something real estate related! Let’s get started…

One easy way to go to prison is by defrauding a lender or conspiring to defraud a lender. This is known as mortgage fraud.

There are many types of mortgage fraud. But one scheme in particular is more prevelant among real estate investors. And that scheme is described in the hypothetical scenario below.

Pay special attention to this story so that you’ll know to RUN when you see this in real life.

THE STORY

It all starts when Sammy Seller posts a wholesale deal on myHouseDeals.com with the following numbers:

ARV: $150,000
Asking Price: $100,000
Cost of Repairs: $20,000

After receiving a few calls, Sammy Seller decides to flip the house to Bobby Buyer. They agree on a sales price of $100,000. Sammy Seller is excited because that price is $10,000 more than anyone else offered.

Seems innocent so far. But then things make a turn for the worse when Bobby Buyer states that there are 3 conditions to the purchase. Sammy seller must…

 1. Write down $150,000 as the sales price on the contract.
 2. Give Bobby Buyer $50,000 “off the record” after the closing.
 3. Write down Cathy Credit as the buyer’s name. Cathy Credit is Bobby Buyer’s “associate”.

Sammy Seller agrees because the net result for him is the same and “whatever Bobby Buyer does on his end is his own business.”

Sammy Seller reasons that he will still get his $100,000 from Bobby Buyer. He just gets it in a different way … by collecting $150,000 at closing and then giving Bobby Buyer $50,000 after closing.

Bobby Buyer wants to structure the transaction this way because he can get a significant amount of “tax free” money from the lending company when he BUYS the property.

Bobby Buyer decides to get the loan through a friend named Billy Broker. Billy Broker is a mortgage broker who works with a few different lenders that you’re familiar with … Bank of America, Chase, Countrywide, etc.

But the loan won’t be in Bobby Buyer’s name. Bobby Buyer’s “associate”, Cathy Credit, will be the borrower. After all, Bobby Buyer doesn’t like to put his own credit at risk.

Bobby Buyer and Cathy Credit have a side agreement that Bobby Buyer will give her a $3,000 “thank you gift” for using her credit after closing. She’ll be a “credit partner” — also known as a “straw buyer” — in this case.

Billy Broker knows that to get this deal done and collect his processing fees, he must get a high appraisal … an appraisal for $150,000, even though the property is worth $130,000 or less in its current condition.

So Billy Broker calls up his buddy Andy Appraiser to do the appraisal. He says, “Hey Andy. Go appraise this property. I need it to come back at $150,000. Make it happen.” And Andy, says, “Sure thing!” because he doesn’t want to disappoint Billy Broker and cut himself off from future business.

The appraisal comes back at $150,000 as expected. Bobby Buyer catches wind of the appraisal … and smiles an evil smile. He sees green in his future.

Now it’s closing time…

The loan is for 90% of the purchase price on the sales agreement. Based on a purchase price of $150,000, that’s a $135,000 loan. Bobby Buyer brings the extra $15,000 of his own cash to complete the purchase. It’s funneled through Cathy Credit’s account, since she’s the buyer on the paperwork.

Bobby Buyer then gets $50,000 from Sammy Seller after closing. So, Bobby Buyer walks away from the deal with a loan balance of $135,000 (in Cathy Credit’s name) and $35,000 in cash. ($50,000 minus the $15,000 that he put down.)

Then, Bobby Buyer gives his “associate”, Cathy Credit, a $3,000 thank you gift for getting the loan in her name. And Bobby Buyer promises to Cathy Credit, “I’ll never miss a mortgage payment, so your credit is ok.” Bobby Buyer has now “profited” $32,000 ($35,000 minus $3,000.)

Bobby Buyer can use this $32,000 to do the repairs and make the mortgage payments. But he doesn’t. Instead, he keeps the $32,000 and doesn’t make any repairs or payments. A few months later, the house gets foreclosed on. This hurts Cathy Credit’s credit, not Bobby Buyer’s.

Bobby has since spent the money on a new Lexus IS. Bobby Buyer’s buddies (and his lady friends) think he’s cool, just like he wants. Little do they know he’s a loser/criminal/scum bag who steals from mortgage companies and ruins the credit of unsuspecting victims like Cathy Credit.

By this time, Cathy Credit has done several “deals” with Bobby Buyer. So her credit starts getting pounded with negative items from several loans. Bobby Buyer doesn’t return her calls. In a desperate attempt to get revenge on Bobby Buyer, Cathy Credit casts a voodoo spell on him. But that’s beside the point.

In the meantime, all of these defaulted mortgages under Cathy Credit’s name throw up red flags at the mortgage company. And more red flags go up when the mortgage company sends a Realtor or Appraiser by her (Bobby’s) properties to assess their values. And the values come back much lower than the appraisals from a few months ago.

The mortgage company decides that there was conspiracy to defraud the mortgage company. They don’t have time to deal with it, so they hand the investigation over to their attorneys.

And the attorneys come after Cathy Credit. And then the Attorney General gets involved. Cathy Credit eagerly points to Bobby Buyer. And then a simple title check shows that Sammy Seller was involved as the seller. Now he’s in this mess. And before you know it, the appraiser and mortgage broker get thrown into the mix, too.

By the time all is said and done, the seller, the buyer, the credit partner, the mortgage broker, and the appraiser lose money, their reputation, and in some cases, their freedom. And it’s all because they got greedy and ignored broke law.

In layman’s terms, here’s why they were in trouble…

Bobby Buyer had full knowledge of and actually coordinated the “off the record” transactions of $3,000 to Cathy Credit and $50,000 to himself. He was the mastermind of the whole scheme.

Cathy Credit purchased the property with the sole intention of getting $3,000, handing over control of the property to Bobby Buyer, and never making payments. She also had knowledge of and actually received one of the “off the record” payments.

Sammy Seller gave money to Bobby Buyer outside of closing. This was money that was not on the paperwork at the title company. So he knowingly hid information from the mortgage company and thus helped to defraud them.

Billy Broker had knowledge of Bobby Buyer’s actions and conspired with the appraiser to get an inflated appraisal.

Andy Appraiser knowingly appraised a property too high, which led the lender to believe they were making a secure loan when, in fact, they were not. Conspiracy to defraud the lender!

I won’t go into the details of the punishments for these crimes. All you really need to know is to stay clean and operate within the law. And don’t shuffle money pertaining to the sale between parties “outside of closing”.

To learn how to do deals the LEGITIMATE way, sign up for a free trial at www.myhousedeals.com/freetrial, and I’ll take you through a series of free members only teleseminars that show you how to make money in real estate, LEGALLY.

Until next time,

Happy (and profitable) investing!

Doug Smith
President
myHouseDeals.com

P.S. Go to www.myHouseDeals.com/freetrial now .