I am going to buy a house this month, here's how

I get it now. If I may suggest somethings, I think you can make your offer more attractive by offering a higher EMD, and excluding the inspection contingency. I only say that because in my local market the biggest competitor is not other investors, but the owner occupant that pay’s list price or higher with no contingencies since they have already done their homework.

Also, don’t you think that 5,270 is a little high for marketing for a 100K+ home? Wouldn’t it be better to list it with a realtor? I wouldn’t want to spend my time showing the house over-and-over when I can be out looking for deals. Im sure that the more sucessfull agents have a system in place to get buyers and can start showing you house to buyers immediately.

Normally I give seller only $10 as earnest money. I do this because I place offers on multiple houses each month, which would add up really quickly if I make offers on 10 houses and they all get accepted. Getting more than $500 from me is not going to happen.

In regards to competition, I am looking at ugly houses; most home buyers won’t touch them, so my only competition is other investors with cash or hard money, not a lot of folks.

I always try to squeeze out as much as possible from the seller. If I really want a house I would reduce the inspection period, but never the inspection contingency.

I allow my self at least 6 months to sell a house, so I always plan for than much in marketing expenses. I use a flat fee listing service to get the houses on MLS and have staff that runs my ads, places the signs and sends out the direct mail. I never show houses as I use the auto pilot method where the buyers can only get to me after going thru a series of steps which only allows them to call me once they are in front of the houses; at which point I pre screen them over the phone and give them the lock box code only after I hear responses that make sense.

Why would I want to give up 3 to 6% of the sales price of my houses in commissions for what at most is only about 5 hours of work each month?

I did a little followup with all the realtors that hold the listings for the REO’s that I am interested in. So far none of the banks that own the properties have said “NO” to my offers; they are considering them. This could be a problem; maybe I have bid too high. I’ll find out sometime next week what they want to do.

In the mean time I really need to get some private lenders secured. I presented my case to several people at a couple of events last week and maybe have one or two good contacts. I have to step it up or when my offers get accepted I’ll have to use my money and credit to fund the deals, which is the last thing I want to do, as it will limit my ability to handle new opportunities and issues.

On the next post, I’ll layout that plan for you.

Sorry for the delay, but I had to spend some time setting up my money for february and march. Ok, got responses from the banks as follows:

  1. Sunderland:. asking price $33,900, my MAO 29,280, my orig bid 24,888, bank countered at 31k, I up my offer to 26k

  2. Exeter: asking $54,900, my MAO 37,350, my orig bid 31,748, bank countered at 48k, I up my offer to 33k

  3. New Castle: asking $55k, my MAO 21,415, my orig bid 18,203, bank countered at 45k, I up my offer to 19k (might not get this one)

  4. Burnt Leaf: asking $60k, my MAO 35,299 my orig bid 30,004, bank countered at 48k, I up my offer to 32k

  5. Cherie: asking $59,900, my MAO 21,940, my orig bid 18,649, bank countered at 56k, I up my offer to 19,500

  6. Trenton: asking $59,900k, my MAO 29,330 my orig bid 24,931, bank countered at 31k, I up my offer to 26k

  7. Downs: asking $59k, my MAO 37,500 my orig bid 31,875, bank countered at 58k, I up my offer to 33k

  8. Blacksmith: 3 bed 2 bath, asking $60k,my MAO 33,495 my orig bid 28,471, another investor has it under contract

  9. Marbut: asking $85k, decided to pass on this one as the neighborhood has gone to pot

I’ll keep you all informed as we go forward. In the mean time I have not been as successful as I had hoped in finding private lenders; none of the ones I saw as potential lenders panned out. One thing that I have noticed is that I have been spending too much time networking at events where real estate investors frequent, causing me to run into the same folks over and over again. What it also means is that I have been presenting deals to folks that have become tone deaf to offers as they have been approach multiple times by other investors with similiar deals to pitch.

What I’m going to have to do is expand my circle of networks to potential lenders that haven’t been exposed over and over again to real estate and private lending. This means that I have to find a couple of professional and social organizations to focus on. We shall see…

btw, now that football season is over, what exactly are we supposed to do on sunday afternoons this winter? Guess I’ll break out the old golf clubs again…

Still nowhere close to buying a house and it has now been five weeks. Anyone on this forum can make a bunch of low ball offers and wait for the banks to counter or reject them. You make it all sound good but your execution is way off. Good luck in your continued pursuit.

Kind of harsh, Brockovich! I’ve enjoyed following the thread because I can follow Hassan’s thought process. It seems he’s a deliberate and careful person. Anything I’ve bought I have not analyzed nearly as thoroughly. He’s probably getting better deals therefore, as he needs that cushion. I hang on to my houses.

Brockovich, how about starting a new thread with your game plan. We know you are an active and skilled investor.

Furnishedowner

I agree … much too harsh. As an active realtor/investor myself, I’ve really enjoyed reading this thread! With the huge inventory to choose from, taking one’s time seems the wise move.

Ok, back to work…As much as it pains me, i’m about to go out tonight to the monthly REIA meeting at the Atlanta chapter of the Georgia Real Estate Investors Association GAREIA.org to do some networking.

I’ll pass out some flyers and just socialize. Hopefully I’ll find a person or two with some cash to invest as either a buyer or a private lender; even though I don’t expect to find many, I know that all I need is to secure one from his event to assist in my goals. Since I’m also a loan officer, I’ll also be passing out flyers on loan products as well.

cya

Kinda shows the reality of a newbie or semi newbie. Early, i.e. 5 weeks ago, you commented how easy it would be to get lending. Now you seem to be struggling. I was wondering how you were able to even offer. I guess the loan officer angle plays here. Must not play too well or you’d use that instead of chasing rainbows with the private lenders. I can’t figure if this is B.S., like Brokovich thinks or not.

You know, five weeks I ago I did think that it would be relatively easy to find a private lender. That assumption was based on how easy it was for me when the market was hot and money was a lot more freely flowing. I guess I was wrong in that assumption. Fortunately I have been able to find and secure private lenders in the past to fund my deals and I know the process. What I must do now is make the right amount of adjustments for today’s reality.

The goal here is to show how the process works in todays market when the buyer is NOT using a bank loan or their own money. If i wanted to I could use my own cash and or credit, but that’s not the point; it would also tie up my ability to manage the other projects that I am doing at the same time, risking a major situation if things go wrong. Try to bear with me a bit longer and continue to make comments. Try to gives some input as to what has been working for you and what hasn’t.

As for being able to make offers to banks, all one needs is a copy of an earnest money check and a proof of funds letter. Also if you dont make the mistake of offering too much too soon, you wont have to worry about all offers being accepted at once. If one or two are accepted prior to my securing private funds, I have escape clauses for the ones I really dont have high on the priority list and have a credit line for the ones that I do really want.

BTW. I went to the reia meeting tonight and found 1 potential lender. Will have lunch with her sometime next week.

As I mentioned in the last post, I have to broaden the scope of the potential lenders that I pitch my deals to. At the reias most of the people that attend the events are a bit too educated or experienced for me work with, as I 'll need to have as much freedom as possible to manage what I’m doing.

That said, I have created a list of 50 social and business networking events to go to where I can start to build new relationships. I’ll be targeting events where professional people with extra money, that are not deep into real estate will be attending. Places like the local accounting, business, stock investing, doctor, dentists and engineer associations. I’ll plug in some time to go to their events to listen and to just talk. I won’t push what I’m doing, I’ll just find away to get around to discussing the potential of what I do.

This is going to be a busy couple of weeks…

Thanks for the comments, even you brockovich :biggrin

I have found this to be very interesting!
Thank you for sharing.

I’ve been looking for my first deal for a couple of months now, but nothing seems a sure bet yet.

I’d love to see how some other investors go about evaluating their deals! Does anyone have another thread going?

Hassan, why are you not using the source in which you got the POF from to fund your deal?

Actually I sent the sellers a copy of my bank statements as POF. But I don’t want to use that money. AS you know, once I spend it, it’s gone. The best way to invest is to use other people’s money or credit, never your own. That’s why I am focusing so much attention on trying to find a couple of private lenders, so that I keep what I have in the bank available for contingencies.

I disagree, using your own money gives you flexibility to do a deal quickly and without complication. It usually nets you more profit as well. I make “as is” cash offers with contigencies of any kind and state I can close as soon as the bank is ready. I include a $1,000 earnest check and POF. This gets a bank’s attention. This is why I am a cynical about this thread. You question the logic of paying a realtor 3-6% but you will pay a private investor 10-15% for their investment? The hell with that I will keep that 4-9% for myself. You say you will offer $10 earnest money to the seller? If I was the seller(including the bank) I will tell you to quit wasting my time so I could talk to a serious investor. I never would dream about putting 10 offers in any given month as I am not that big yet. I pick them, buy them, rehab them, give them to a realtor to market and sell, and close them. That’s it. I usually know when I walk into a house, how much I can spend, how much I need to spend and what my exit strategy is. The numbers either add up in my head or they don’t. For single family homes, it is always to sell. You cannot, I repeat, you cannot generate sufficient cash flow from holding single family homes. In my opinion this is a losing investment strategy. I don’t consider appreciation. I consider cash flow and unless you are picking up houses routinely for 15-25K(that require no work) it is tough to get them to cash flow sufficiently. I’m modest in terms of risk and I will take 12-20K of return without sharing it with everyone. All my houses are designed to be in the sub 100K sell price category so I can attract 1st time home buyers. Why? because the financing options are favorable and most importanatly they do NOT have to sell an exisiting home. This is critical. I will not accept a contingency at all if they need to sell a home before they can close on mine. I bankroll my own rehabs, I have a great team that I work with every time on a house. My contractor is even an authorized cardholder on my HD account.(I wouldn’t recomend this obviously until you have an established working relationship that you can trust. I don’t do any of the work myself. I’m too busy looking for new deals and working a full time job. I can call my contractor and he will ask when he needs to start. From there he manages 80% of the job. It does take time managing the books and bill paying. I don’t get rich from what I do with flips but it provides a nice supplemental income. This is the strategy that works for me. There are many ways to be successful , again this works for me. Find what works for you. Very few people will ever do a deal if the adopt the strategy touted in this string on the subject. Harsh or reality? I’ll let others be the judge.

Using your own money and credit to fund a deals is just nuts, here’s why.

Number one, I tried that approach when I first got into real estate investing and slowly got into trouble as I quickly began running out of cash and then credit; forcing me to get creative. The issue is the fact that not only are you dealing with the financial situation of the project, but also your personal financial situation as well. I have had projects that at first looked like a simple $5k cosmetic job, that turned into $15k termite infested, structurally damaged challenge. This led to the project taking twice as long as I anticipated for the rehab and delaying the marketing and resale of the home by at least 6 months. That translated into an additional $7k in repairs plus $8K in holding expenses. This increase in expenses had to come from somebody’s wallet (mine).

What also happens while you are running a project is life. For example, on the day that I thought I was to pocket a nice sum on a simple wholesale (to be used to buy me a new (used) vehicle, my at the time 16 year old son wrecks my wife’s car; chewing up half of my profits to repair it (how exactly does a person break an axle without hitting another car?).

You have to remember that your personal and family expenses are competing with the business expenses at unpredictable rates; meaning that you will burn thru cash a lot quicker than you think if you self fund. In addition, in today’s economy you can not count on your credit lines (like bank of america) being there when you need them. I have had wholesale deals that looked like they were going to close crash at the last minute due to the fact that my buyer’s credit lines were cut by a 2/3 becuase the bank didn’t like the fact that he was using his credit lines. Fortunately for him they cut the credit lines prior to the sale, because if they cut them after he closed, he would have been stuck with an unsalable house needing more in repairs than he could afford to manage.

The other issue is leverage. If I have $100k in the bank, and all of my deals run about $30k, then the max number of deals that I can do is about 3, with only a $10k cushion. That’s unacceptable. I would rather borrow from a private lender at 10% and keep my cash and credit free for contingencies and my family than lock it up for God knows how long in a project (regardless of what anyone tells you, there is no way of knowing when you’ll get your cash back until it does).

Lets consider the following situation:

Lets say that you will be buying a house for $30k that needs $10k in repairs, with an estimated value after repairs of $120k (assumed as the resale price as well). Based on your market you budget 12 months to get it sold and will have $2k in closing costs (appraisal, attorney, inspections, etc), plus $500 per month in marketing expenses ($500 x 12= $6k). The numbers look like this:

If I were to use my cash to fund the deal (with a resale starting price of $120k)

Resale starting price $120k

Less

Purchase price $30k
Rehab cost $10k
Misc expense (things that pop up) $3k
Closing costs $2k
Total acquisition cost $45k

Gross profit = 75k

Less
12 month marketing budget $6k.
4% Closing cost assistance to buyer $4,800
3% Buyers agent (it happens) $3,600
Your closing costs $600
Total selling expense $15,000

Total buying and selling expense $60K
Net profit $60k
Return on investment = 50%

Looks good, however you have also tied up $60K for 12 months, which is a huge hidden opportunity cost that is lost. You have to ask your self what else could I have done with that $60k? You also have to have at least another $60k in cash available to offset the risk of not having that cash available for the other things in life and business that pop up over that 12 month period.

If I borrow that cash from a private lender, it’s a much better situation. You still have the same overall level of costs, Except the opportunity cost and a new cost which is interest expense. In this case if would even go as high as a 12% rate of return to my private lender on the amount borrowed, $61k which is the total acquisition cost ($45k), plus marketing expense ($6k), plus a little early profit for me ($10k).

The math:

Total acquisition cost $45k
marketing expense $6k
Early profit $10k
Total borrowed $61k (51% LTV)

Add the other selling expenses to it
4% Closing cost assistance to buyer $4,800
3% Buyers agent (it happens) $3,600
Your closing costs $600
Interest expense $7,320
Total selling expense $16,320

Total buying, selling and funding expense $77,320 less early profit ($10k) = $67,320
Net profit $52,680

Yes, that’s a bit less than using my own cash, however when you factor in the fact that your total cash cost is just $7,320 then your Return on investment = 720%. I typically never make monthly payments on the cash I borrow, I let it accrue until I have the place sold or refinanced. So actually the roi is infinite. I have protected both my cash and my credit, plus I get a higher return on my investment.

The most I’ll pay for earnest money is $500 - $1,000, and that’s only to a bank. Contrary to your statement, I never in this post mentioned that I would put up just $10 to a bank, that would be dumb as they would ignore it. $10 does however work for a privately held property, so I will use it in that case. BTW, the average seller just wants to get a deal done, so the amount of earnest money doesn’t prove anything.

I manage my own marketing to sell houses and use a flat fee listing service to get the houses on MLS. It makes no sense whatsover to pay a realtor 3%-6% just to put the house on MLS, place a sign in the yard and an ad in the paper; however I will pay 3% to an agent that brings me a buyer from (the natural result of having houses on MLS). Most of my buyers come as the result of the signs, Ads and post cards that I put out in the market.

I also look at the cash flow as well when getting into a house. I normally target a slightly higher market than you do, Brockovich, so my price points and rationale will be different from yours.

Thanks for the comments, and good luck

I don’t like to share I guess so I fund myself. I sold 4 houses in 2007 and five houses in 2008. Yes, even in this market I sold five houses last year. My most recent one, I bought on a Friday in late Sept 2008, it was condemned by the city. No gas on the place for 6 years, no electric for 3. Sat condemned and empty three years. Worst shape of any house I have ever done. But it was in a great area right across from a park. Hit the ground running the following Monday. I had it rehabbed in 7 weeks. On the market Nov 14, had an offer within a week of it being on the market. The buyer came from an open house the realtor did which rarely ever happens, and I closed on Dec 22nd. 3 months, start to finish. Bought for 25K, put 37K into it, sold for 83K with 2K back on closing plus realtor fees. Virtually no carrying costs. Netted 76K and had 63 into it. 3 months 13K. Reinvest this cash back into the business & repeat. Don’t make it more difficult than it needs to be. I understand not everyone can fund with cash. This is why you really need stellar credit to be successful in my opinion. Work with local banks, wholesale a few houses or bird dog. Find a mentor, go to REI meetings but do something to reach you REI goals. Don’t over analyze, your numbers will never come out perfect anyways. That is what a contigency is for.

what market are you in?

do you buy your houses within an LLC to limit liability?

Western Ohio, and yes I use an LLC on the purchase contract.

Hassan,

To start I would like to say thank you. Your post has proved a great inspiration to me. I’ve taken the majority of the past year off due to personal situations and lack of trust in the market and after reading through your process have been able to notice the flaws in mine. Going through your posts it helped to see someone utilizing the formula’s and verifying the process many of the moderators on this forum used to preach back when I started posting. Because of this I’ve already sent a couple text messages to friends of mine that are agents to pull up properties in my area. Good luck and I look forward to following your progress.

Newbies-Take note of this, even if you don’t follow it word for word there’s a lot of good techniques and ideals to take note of. Good luck.