Potential investment program...

hi All:
New to group,and RE investing. Ground zero actually!!
This past wednesday at our monthly REI meeting, an
idea was put forth to see what amt. of interest in would generate. Here is the general gist of it, and being ever the skeptic i am, trying to get some feedback from those in the know, so to speak. Here it is!!!
Being as most newbies hold off for so long actually getting into their first piece of RE, is for the lack of capital
in sufficently large enough amounts, this idea was put forth. There are 2 contractor individuals, who have a rather large amt. of capital (upwards of 1/2 mil.) they are willing to invest in RE in this way to…1. make fair amt.
of interest on their money, in realitively short amt. of time, and 2. would be large help for beginner investors.
They propose that they would be willing to purchase large blocks (20+) of REO homes, in various stages of
disrepair. Then they would on a first come first served basis,
be willing to “option” 1 house each to a new investor for the sum of $250.00 for a period of six(6) mos. for a price
to be determined per house based on it’s current cond.
at a profit margin determined by them for their investment. Their promise to the group is to NOT buy houses in areas that will NOT sell, and the promise NOT to gouge investors with their rate of return on their money. To purchase houses that require as close as possible to the $5,000.00 rehab number(investor doing own work). And placing new investor profit margin between 10-20,000. Certain members of the group know the individuals personally, and swear by their integrity, honesty, knowledge of RE, and knowledge of local area. They have been building contractors for yrs., know rehab costs, know local RE market extremely well, and have personally bought and sold over 600 properties.
To this newbie at least, the concept sounds like a win-win . For the 6mo. option, we have full control to do whatever we have to and can to turn the house into our profit, i.e. rehab n flip, hold n rent, sell our option, flip as is, etc. etc. O.K. so for those of you in the know, does this sound first…feasible, doable, and if you had the chance, would you be a part of it(as a new investor)?
It really sounds like a no brainer, even tho all the i’s and t’s have yet to be dotted and crossed. Thanks to all in advance. I’m looking for ?'s to ask at next month’s meeting. Sorry this soooooooooo loooonnngggg.

What area are these investors lending in?

Central New York state!!!

Hi judd:
Good point. But apparently they are building contractors and developers, this has been their life and livelyhood at which they enjoy, and incidentally, let’s just suppose that they add 20% profit margin on to the largely discounted price they obtained these REO"S at, let’s do some quick math. Just example #'s. REO house…30k…20% profit to me…36k…5k rehab…Arv…53/55k. Got to admit, that’s a pretty good rate of return on their money for 6 mos.
And for me to be able to use that money for 6 mos. for $250.00 option consideration is also a win(for me). Now remember, they’re buying teses houses in blocks of 15/20. At the above numbers, 12/15k in 6mo. or less isn’t
to shabby either. Also, think about it, they are doing “none” of the work, just using their money and getting great return. Even if i didn’t excersize my option,
i’d just lose my option money, and they would re-option it to a more experienced investor who would turn it in short order. All of the in and outs have not been worked out yet, but at least to me, it seems like a no brainer for a newbie investor. But that is exactly why i wanted to post it here and get feed back from more experience. Just rechecked my #'s up there, and just not to be confused, their 20% to me makes their pm 6k. Thanks for the reply,
hoping to get more feedback on this possible scenario.

Do they do this in any other state? Can you tell me who they are and maybe a phone #?

Hi “whatsagirltodo”
Sorry i thought i posted that info. in my first post, but upon ck’ing i see i did not. So, to ans. your ?, no, i personally do NOT know who they are. The proposal was put to us by the chairman of the club, who knows them very well, and some of the members know who they are also. The chairman of the club and his associate met with them for lunch prior to our last monthly meeting, and this idea was discussed between them. And supposedly the contractors said they would be willing to devise plans and invest as i laid out, “IF” there was enough interest
generated. Because it would only be worth their time and money if enough people would participate to make their profit margin worthwhile. And out of approx. 100 members there that night, roughly half showed great interest, even those alot more experienced than i, which leads “me” to conclude that it must be a “no brainer”.
The reason i posted the scenario here is two fold. 1. Being a newbie at ground zero, & 2. ever a skeptic of something sounding to good to be true, i thought it wise to get feedback from experience outside the club from
people with no conflict of interest. I was hoping that this would draw out some info. or questions from more investors in here than it has, and give me some better idea what to ask about this at our next meeting so perhaps i wouldn’t…1. sound to stupid, and 2. not jump into something to quick and end up being sorry. “NO” they only proposed the concept here in this area mainly i guess because, this is where they work and live, and ultimately, this housing market and amt. of REO’s and bank familararity is best known to them.

I see commercials for programs like this on the weekends and at night. There are two really heavy advertisers in my area for this, one being URB. They require you to be able to afford $5000 to rehab a home and they send you listings of homes in need of TLC or outright overhauls.

My son’s father was involved with a couple and he has asked me to look at a few with him and go over numbers.

One house they listed turned out to be a burned out frame that barely even resembled a house anymore. Half of the second level was just gone. The garage was half burnt as well. This house was being offered for $54K and the area houses were going for about $75-80K. The house didn’t need to be repaired, it needed to be REBUILT. Even following the first little piggy’s straw-and-mud plan $5K wouldn’t have put a dent in the work that needed to be done. Other houses on the list were in equal or better shape, but few of them of them could have been rehabbed for the amount they claim you can do it for. Being one of those sticklers that prefer your houses NOT to fall down on top of you, I had a hard time figuring how this deal would realize any profits because the “discounted” price was not deep enough. I had him call the company with his concerns and to ask if they were flexible on the price. They told him they needed to make a profit too, so no, the price would stay as it was. Also they told him that if he “did it right” the $5K should cover his rehab costs but if he “got stuck” they’d gladly give him a “sweet deal” on the work.

I encouraged him to just go find a house on his own, REALISTICALLY figure his repair costs (he is a jack of all trades, but you know what they say about them), then negotiate his own price. It was not as simple as yanking a list from the fax machine, but he did find a good spot and did a great job rehabbing it. In fact, he did such a great job he ended up keeping the rehab and selling his own house!

So from that experience I feel that programs like these sound good. However, they choose such poor houses to begin with (I know they promise not to buy houses that won’t sell, and they keep that promise–when they sell it to you), set their selling prices so high, and are very unrealistic about how much it costs to do a rehab, even if you are doing all the work. A less than scrupulous group might use this to get you roped into a project, and after the investor is overwhelmed because of the amount of work required after your $5K budget is used up, they will can swoop in and hit you with all these other charges to actually get the house up to par.

I must add that the last time we went to look for a house was in late 2004, so things may have changed since then.

If you are going to do something like this hejamada, I would strongly recommend that you get realistic repair estimates on your own before you commit to any property. Even if the option money is modest, you don’t want a dime tied up in something that isn’t going to work for you in the near or distant future.

Hi DW…Appreciate your taking time to ans. Input such as yours is what i was looking for. Not because it appears to make what seems to good to be true, in all probability, to good to be true. But it relates to someone’s prior experience with a program such as this.
I do have just a couple of ?'s though. 1. The 2 investors you speak of, were they someone who lived, and worked in the same town/county that they were buying their houses from “local” banks to sell to other investors? It just seems like that scenario would make it a little tougher to be offering such shoddy deals as you mention.
Being as local investors(newbies & not so newbies) would have the ability to do some pre-screening of the properties before they put up their money. Just as an observation, even i, being as inexperienced as i am, wouldn’t put up 54k for a house half burnned down. Knowing the price of one sheet of plywood at the local HD i’d know 5k sure wasn’t gonna even come close.
As stated above, some of the more experienced investors of the group that know who they are, do speak very highly of their integrity. I just wished i knew them “that well”.(I don’t know them at all). well, our next’s month’s meeting should generate some more info. as to how the program is progressing(if at all), and you can bet i’m going to be all ears, and try not to miiss a word anybody says. Again, Thanks for your input…and keep it coming group, cause Lord knows
i need all the help i can get(and then some)!!!

Hi there…The group he worked with bought properties from several sources, so I can’t say if all of the ones we saw were bank-owned or not. I can say that I have seen some pretty shoddy pieces of bank-owned properties myself, so it is possible even if they only buy from banks.

Like I said earlier, the program is good in theory. [edit] But there are some extreme newbies whose lack of knowledge coupled with the appeal of high return on investments might still jump on something like this.
Hopefully this group you are considering will look at some of the practices of the companies out there as examples of how NOT to operate.[edit]

I look forward to hearing what else you learn. If they have a really tight program working, maybe it will become a model for other groups to work from.

Good luck :D…d