PLEASE ADVICE - REI TRANSACTION

General Real Estate Investing
1

Hello All,
My name is Christian B. O’laarte, I have a B.S. Degree in Business - 2005 and I have been reading/studying about REI for some time. I found a potential terrific REI deal. Here is the info so far:

I found this potential fixer in Southern California. This is a rare fixer because the property is empty and is located in one of the best places to live in the country. There’s always a big demand for housing in the area. Here is the property info:

  • 3BR/2BA
  • 1,250 SqFt
  • Built in 1963
  • Estimated current value is $300,000. However, the property is in bad
    shape, a total fixer, so I’m sure the price can be negotiated to a real
    bargain.
  • Similar properties in the neighborhood sell for $400,000 and up!

This could be a terrific opportunity and I’m sure neighbors would love to see this property getting a face-lift! The estimated value is current before any rehab or repairs, which is around $300,000. However, the property is empty and it seems like it needs a lot of work. I estimate that a RE Investor can acquire this property for around $200,000 to 250,000 after negotiations. Similar homes occupied in good condition have estimated values of around $450,000! This seems to be a solid investment. There are no other property fixers in the block or neighborhood as well. I have done some research and
the property needs a new roof. However, I still think this is a good REI.

The owner does not live in the property anymore. He has about $100,000 left in mortgage pmts. No other outstanding mortgages. He wants to sell the property as is, but he knows that he won’t get the current market price of $300,000. He’s also behind in mortgage pmts. The property needs a lot of work inside and out, new roof, etc. However, there are no structural damages such as foundation, soil, fire, floodings of any kind. My questions is what would be a reasonable price for this property “as is”. I would think that a reasonable price would be around $200,000 to $250,000 for a REI. This is my first REI Deal so here are the following scenarios:

  1. Refer/pass this property to a REI for a “finder’s fee” of around $2,500

  2. Work with another REI that specializes in “Contract Assignments”. He claims we can both split the profits after the property gets assgined under contract to another REI. He claims that the assignment fee can be of around $25,000. Is this legal?. It seems like we will be like brokers or middleman to pass on this property to the actual REI Rehab. In this case, can we call ourselves REIs? The other REI that will help me do this deal will do all the paperwork and transactions to get the REI Deal done.

  3. Do the “Contract Assignment” on my own and pass it to the REI Rehab for the assignment fee of $25,000. I have also read cases where people have done Contract Assig. with fess of as much as $50,000! How much or is there a limit on an Assig. Fee? I know if I do this on my own, I would have to do all the paperwork, transactions of my own. Honestly, I’m not very familiar with all these steps, but I’m not afraid to get it done on my own for max. profits! I have read that in California this is completely legal? Not sure.

Options No 1 & 2 are the fastest and safest for me. Option No 3 will take more time and carefulness. How long does it typically take to do a transaction like options 2 & 3 before I see any checks? I would appreciate any feedback and thank you very much for your time. God bless you all!

Regards,

Christian B. O’laarte

2

Hi,

There is only one "Fair Market Value" (FMV) for any property, it will be the price established by Comps (Comparable Market Analysis) for that size home in that area which is established by looking at 3 recent sales within 1/4, 1/2 or 1 mile and preferable less than 3 months old, although it may be necessary to look out 6 months.

As an investor a fair purchase price will generally be 30 to 35 percent below FMV for a pristine, updated move in ready home with no required repairs or deferred maintence. For any other home this rule 30 to 35 percent below FMV minus (-) fair market construction cost to bring the house into pristine, updated move in ready condition.

So if FMV is $400k then pristine purchase price is $260K to $280k with zero repairs, deduct repairs and construction costs to update into great pristine condition the actual purchase price may need to be below $200k, also keep in mind you may need to buy at 35 percent below FMV before deductions to allow room for your profit as I as an investor look to puchase from other wholesalers for my fix & flips at 30% below FMV before deducting repair / rehab cost’s.

To a cash buyer you can sell with any mark up, with a buyer using conventional, FHA or VA financing you can only get about 6 percent for an assignment fee as the assignment has to be paid in cash, can not be included in the loan and is not part of the HUD 1.

My guess if your wholesaling this is you could reasonable make between $15k and $20k as an assignment fee, don’t get greedy as the whole idea of wholesaling is to turn properties and go to the next one, remember reputation is everything and you want this to be good for you and good for your buyer! (Win / Win)

A finders fee is much like 'Bird Dogging" as you make a little something to pass it on!

Splitting a deal with another investor is fine as long as you actually get the contract in your name and don’t sign an assignment form until money is on the table, if you get another investor to partner with you you need to be sure there is an agreement between the two of you and that you still get the contract in your name as unfortunately there are a few unscrupulous investors out there that give all of us a bad name who will take a deal from you and cut you out of any returns for your time!

The problem with some FSBO properties is the owner wants retail and you as an investor want to buy wholesale and the difference is to much to reconcile an agreement between seller and you as the investor!

                   GR
3

Thanks a lot for your input. I really appreciate it.

Regards.

4

Hi Gold River,

How often do you find property in a great neighborhood that sells for 70% FMV? How many in a year?

It’s just sound like a myth to me, I know it happens, but it must be so rare.

5

Hi,

 Every single "Single Family Home" 1 - 4 unit's I have ever bought in 33 years, I have bought for at least a 25% discount below fair market value minus fair construction cost for remodel / rehab!

Remember purchasing a home means 2 to 2.5% buyer closing cost, potentially 1 to 3 points for hard money, 2.5 to 3% for re-sale closing cost’s to the end buyer and possible depending on market conditions an average 6% realtor fee! Then normally in a quick (Less than 1 year turn around) Property taxes are due on the property and property insurance must be paid in order to purchase and close!

It could cost an average 13 percent just to own and turn the property and this does not include carrying cost’s, maintence or utilities! A 25% discount used to be the norm about 20 years ago for purchase of a property for retailing, today we want to buy at 30% below FMV to retail or close to 35% below FMV if were going to turn this and wholesale it to a fellow investor!

Remember the reason real estate investors only participate in less than 2 million single family property purchase transactions per year out of 6 to 6.5 million single family home purchases is because we look to purchase our property at a 30% to 35% discount!

It’s actually not rare at all but you have to look at sources outside of listed properties with realtors! REO’s, Short Sales, Auctions, Bankruptcy’s, Foreclosures, Estate Sales, etc. as your not going to get Mr. and Mrs. Jones to sell their pristine single family home which is listed at a retail FMV price through a realtor for a wholesale 35% below FMV price!

                         GR