Re-Habbing Secrets Revealed!

Knowing When To Hold ‘em

and When To Fold ‘em

...Sometimes the best ‘Tool’ is a Bulldozer!

I get a dozen calls a week from “investors” who want to buy “fixer-uppers” so they can do the repairs and then re-sell them for a profit. While the idea is a great one; the reason I put those two words in quotation marks is because if you don’t know what you are doing, you are likely not an investor and if you don’t know what to buy you’re liable to buy a property that ought to be “bull-dozed” rather than “re-habbed”.

Unfortunately this is a topic that is too broad to provide all the answers I know in one article, but I can share some ideas, a couple warnings and a formula that will at least, help you steer clear of trouble or at best, direct you toward profitable projects that will fit your strategy for personal success.

Speaking of strategy; that’s a great place to start. What is your investment strategy? Are you looking for single family homes under $35,000 that you can invest $10-15,000 of repairs and re-sell for $60-65,000 and net a $10-15,000 profit? Or do you want to work in a more affluent market? Or are you interested in buying multi-family property, improving it and then holding it as rental property? Or is commercial property really the thing you have in mind? Do you see yourself developing a run-down strip center into a vibrant piece of revenue generating real estate? One of the quickest ways to lose my interest in helping or partnering with you is to say “yes” to all the above. My first tip: “Pick a horse and ride it!”. Figure out what interests you and then put blinders on. Focus on that and that only. Stay focused! Become the best you can at this specialty! Remember, Specialists get rich while General Practitioners just make a living.

If I just hurt your feelings; that may be good. At least a good segue. Emotional behavior is for amateurs. This is my first warning to you. Do not get emotionally involved in a project. In fact you should always have a figure in mind for what it would be worth to you to walk away today. And, as much as you may like to see a project to the end, you need to be willing to do exactly that! What’s your ‘walk-away-today’ price? If you find yourself unable to part with a deal at any stage of the deal; you are in trouble! Seek help. Get an experienced professional to consult with or partner with you. It’s worth saying again. Do not get emotionally involved in a project.

Formula for success. Now that you know you need to be focused and approach your deals with an “It’s not personal, it’s only business” attitude; the key is to have a simple formula that will allow you to do an initial evaluation of a property. You can adjust this formula to fit your strategy. For now, I am going to ‘adjust’ it to specifically target the type of re-hab project I am most often asked about: the “single family homes under $35,000 that you can invest $10-15,000 of repairs and re-sell for $60-65,000 and net a $10-15,000 profit” strategy that I mentioned earlier.

Begin with the end in mind. For this you will either need to know the market yourself, have access to the courthouse records or to a real estate agent that knows what they are doing and is willing to help. Know (a) what the property will logically sell for in a short time on the market (preferably 30 days or less. This will be a longer period if you are working with higher priced homes, multi-family or commercial property). From this subtract (b) your marketing costs. (I would use 5 to 10%). Now you have (c) the amount you believe you can net from the sale of the property once it is repaired. From this, subtract (d) what you estimate the repairs will run. (If you don’t have an eye for this, you will want to either partner with someone who does, hire an inspector or work with an agent who knows what they are doing.) Also subtract (e) the amount you want to make on the project. The answer, (f) is the maximum amount you should pay for the property as it sits. So, the formula looks like this:

(a - b) = c - (d + e) = f

Providing that you have accurate market information, realistic repair estimates and have approached this; a project that fits your target strategy, with a non-emotional business-like attitude; you now have a solid idea of what to offer. Due to the nature of real estate, I would suggest offering slightly less than you are willing to pay. This will allow the seller to present a counter offer or two and feel like they have done their best.

Don’t be scared! Two fears that keep want-to-be investors from becoming investors are: 1) “What will the seller think if I offer such a low price?” and 2) “How do I know that I can do those repairs for what I estimated in my formula?” First, this is America and in America real estate is truly a free market product. It is worth what someone is willing to pay. No more. No less. Second, if you know what you are doing or are working with an agent who does, you will protect yourself in your contract with contingencies, such as “Contingent upon acceptable property inspection by buyer and/or buyer’s representatives”. (For more on this, see the “Real Estate Articles” section at Middle Man Magazine’s web site: www.Commercial.4T.com)

The key is to stick to your formula, your strategy and your business. If another “investor” is willing to pay more than your formula says a property is worth; let them! There are plenty of deals. Plenty!

Do not get caught up in a bidding war with emotional buyers. The winner will be a loser.

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Randy Lee is the author of the best selling text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.

How To Avoid Taxation and Maximize Profitability
by Randy Lee

I am surprised at how few real estate agents and investors know about the rules that allow for avoiding taxation involved in repeat real estate transactions.

Certainly most investors take advantage of any legal deduction available from expenses and depreciation. However, there is a way to roll from one property to another without incurring taxes. Many wise investors are not taking advantage of the 1031 exchange rule.

What is a 1031 exchange?

A 1031 exchange allows you to sell investment property and defer capital gains and depreciation recapture taxes, assuming reinvestment of 100% of equity into "like kind" property of equal or greater value. Any property held for investment purposes or for productive use in a trade or business generally qualifies as "like kind" property for 1031 exchange purposes.

A 1031 exchange is also referred to as a tax free exchange, tax deferred exchange, tax exchange, or Starker exchange.

1031 exchange rules generally require an investor to identify up to three investment properties within 45 days of the close of escrow of the relinquished property and to successfully complete the acquisition of the replacement investment property, or properties, within 180 days of close.

The Section 1031 exchange is really a sale and a subsequent reinvestment. The deferred exchange is the most popular form of exchange. It involves four parties:

1. You as the owner (seller) of the property being relinquished.
2. The buyer for your property.
3. The seller of the property you want to acquire.
4. A qualified intermediary.

The qualified intermediary is an individual or entity with whom you have not had a business relationship of any sort within the last two years. Therefore, your accountant, lawyer, or real estate sales professional will not qualify as an intermediary.

The intermediary makes the exchange work. Think of exchange money as "radioactive." You may not touch it. Your buddies (like your accountant or lawyer) may not touch it. If you or your buddies touch it, you destroy the exchange and trigger taxes.

The qualified intermediary handles the money and holds the sales proceeds from your property in interest bearing accounts. Then, the intermediary distributes the money as needed to purchase the replacement property.

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Randy Lee is the author of the best selling text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.

An excerpt from the upcoming book

"Rehabbing For Dollars" by Randy Lee

Begin with the END in mind: What will we sell?

Now that we know that the keys to our Fix & Flip deal are 1) Quick turn-around and 2) Ready supply of (preferably captive) buyers, it is time for us to determine WHAT is the best type of property?

In the markets that I most frequently operate, the best Fix & Flip properties are single family, free-standing houses with at least three bedrooms and two full baths. In other parts of the US, there will be different specifications.

The fact is that the Fix & Flip concept can even work with commercial or industrial property, providing you can turn it around quickly and there is a supply of willing, qualified buyers.

If you are brand new to this - or if you just want to bolster your belief in your plan, you can acquire supporting evidence from these three basic sources:

Other Investors: The fact is there is only so much time in a day and there are generally more deals to be done than any one investor would have time to do them. I recommend (read more in later chapters) that you join your area REIA (Real Estate Investors Association). Visit http://www.creonline.com/ for a list of groups all around the US. There is likely one near you already! In REIA's you will find fellow investors of all levels of experience. Many will be willing to share their knowledge and some their resources and contacts! This is such a vital tool to your success as a real estate investor that, if there is not one in your area, I strongly recommend you consider starting one! (For more on this see Chapter 19) Once you are involved and feel comfortable with some of your fellow members, start asking questions. Learn what sells fastest and why. Learn what doesn't and why not. Get as much input as possible though. When a pattern starts to form, you are likely on to something. ...By the way, if you don't already have your teammates, such as your REALTOR(s), Mortgage Professional(s), Appraiser, Property Manager, Handy Man, Attorney, Accountant, Plumber, Electrician, etc. ; this is a great place to get referrals. Again, look for a pattern.

Real Estate Agents: The boom years of real estate sales, combined with the numerous years of favorable interest rates, has created an over-saturation of licensed real estate agents in most parts of the US. This can be a benefit or a curse. The curse comes from agents that don't do their homework and/or are not looking out for their client's best interest; resulting in over-bidding and emotionally driven buyers competing for your deals. The benefit is, due to all of the competition, you can find some quality agents willing to help you - providing you are willing to be loyal to them (see more on this very important point in Chapter 13). A great way to discover whether or not a prospective (for your team) agent is knowledgeable and hungry is to conduct a telephone survey with them regarding Fix & Flips!! This can truly "kill two birds with one stone"! You'll learn more about your market while screening prospective team members!! (More in Chapter 13).

Mortgage Professionals: This group includes employees of Banks who originate mortgage loans and self-employed mortgage brokers who originate loans using the resources of many lenders. Again, these folks are going to want to know you are likely to place some of your business with them once you have a deal under contract. Like real estate agents, all or part or their income is dependent upon deals closing. If they feel you are a good investment of their time, they can provide much valuable information. Through their contacts, they may know of deals that are not available to the public - such as owner financed properties, as well as other insider tips. In addition to hoping to finance your deals when you purchase (assuming you are not paying cash), the mortgage pros want to finance your deals when they go to market as well. Forging mutually beneficial, relationships with these folks will garner you a valuable ally when it comes time to market your property! If you team with the right ones, they will be looking out for your best interest each step of the way - with their eyes on the flow of repeat business that you represent. ...Don't forget, there needs to be a carrot at the end of your stick.

...Please check back from time to time for more excerpts. See more at my publisher's web site today. Visit: http://www.purpose.4t.com/

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Randy Lee is the author of the best selling educational course for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.