Ask tommy2 about Real Estate

[tommy2]

[ QUOTE ]
what is an approximate buy price percentage for foreclosed properties (relative to similar re in the same area)? and the average build up costs to bring it within spec? i know this question has a lot of dependencies, but i'm trying to establish a gap between buying legitimate vs. foreclosures.

are there resources available to identify foreclosures since they aren't the kind to be listed in the mls site. will this be a cold calling the banks effort?

and finally what is your feeling about foreclosure rates on the coasts specifically Cali and the NE? sharp increase? seeing as how the bubble has primarily effected these areas.

[/ QUOTE ]

I'm no expert at all on foreclosure margins. I have heard that it is a business of specialization (you really have to know a submarket cold to do well in it)...but beyond that no real ability to answer you initial question. There are resources to find foreclosed properties, but I don't know what they are (just hear about them in passing) since we don't do them. Someone here probably knows, though.

More foreclosures coming--NE, Cali and everywhere.

[DeezNuts]

Tommy,

I'm an RE newbie, my close friend sent me an email for an investment idea. This would be done on the outskirts of LA County.

Here is his email(tl;dr, I know):

Here are some general notes:

- We are trying to bid on a property in the upcoming San Berrnardino Tax Sale (mid may). .
- We will buy it, fix it as necessary, rent it, and then sell it in less than 14 months. State tax laws state that we must hold it for 1 year before we sell. But our intentions are not to hold any longer than necessary past the 1 year mark.
- We will form a SBF (San Bernadino Fund) LLC and a SBF bank account. In the LLC, you will get company shares proportional to how much capital you put it. However, everyone will be silent partners (no voting shares) except me and xxxxx (we will make all operating decisions equally). all the voting and non-voting shares have equal financial value.
- We will draft an Operating Agreement which will dictate roles, payout schedules, general scheme of maneuver etc
- Title to the property will belong to the LLC. that way, we have all the legal documents to prove anyone part of this fund are legal owners of the asset.
- A minimum gross profit will be used to determine the maximum purchase price (will use online real estate sites like zillow and trulia to estimate selling price)
- We're looking to spread the risk over many people. I only want to put it 15-20k. xxxxx only has 5-10k. we have another investor that wants to put in 10k. There is one guy that is willing to put in as much as 50k but he is still unsure and we are still talking to him. the four of us could buy a smaller piece of property but a little bit extra could put us in the range for 3bd, 2bath, which will be easier to sell.

Risks:

- This is our first time doing this. xxxxxx works for a commercial developer and has experience with this stuff on a commercial level (more of buying land cheaply and developing) but hasn't done it with residential property. But this type of flipping is nothing new or revolutionary.
- Why doesn't everyone do this? You need to put down cash usually after the winning bid or within 1 week. Most people don't like to fork over 60k-150k on the spot.
- This is different than a foreclosure sale. Foreclosures... there is less risk... the banks fix it up, trying to recoup most of their mortgage loan (our purchase price would be much higher). In a tax auction, people defaulted on their property taxes and the gov't is only looking to recoup their taxes. So that is the minimum bid. Whatever we purchase is the final selling price (no mortgages required) However, there is more research on my part prior to the auction to make sure the house is in relatively good condition and requires only minimum or cosmetic fix ups.
- We can't sell the property. The real estate market is not good right now because of the collapse of the sub-prime market but our goal is to reach a low enough purchase price point so we can aggressively sell the asset once we can put it on the market. We can price it at well below market value and still turn a profit.

I know we're all trying to find passive, side income. if anyone is interested in, let me know and i can give you more information.

[tommy2]

[ QUOTE ]
This is more of a "Getting Started Gameplan" I would like an opinion on.

In my area (southern WV), houses are very cheap these days. I am looking to buy a 1200-1500 sq ft home that needs some work (I have several on my list that I'm looking at right now). My plan is to move from my current home and move into the house. I would then proceed to do most of the work on the house myself over the course of 2-3 years (enough time where any capital gains would be tax free). Then I would try to sell the home for a profit.

Meanwhile, my existing mortgage on my current home is really cheap. I could rent it out and have a positive cash flow the entire time.

Would you recommend this gameplan for someone just dipping their toes into the real estate game?

[/ QUOTE ]

It sounds like it could work. The guys I know who do this a lot are honest with themselves as to what their time costs. If you buy the house for 100K and sell it net for 140K and put 20K of materials into the house, your profit is only 20K if you put no value on your time. If you put 200 hours of time into the property and you generally earn $40 per hour its actually 12K.

Otherwise your strategy seems sound so long as you have some cash reserves to cover 6m of morgage on your current house in case you can't rent it.

[illmatic]

You talked about the divergence between a/b class properties and c/d class. I agree with that -- how does that affect the moves you are making now? do you invest in the a/b property to ride the wave, or are you bottom fishing with the c/d?

later,
illmatic

[tommy2]

[ QUOTE ]
You talked about the divergence between a/b class properties and c/d class. I agree with that -- how does that affect the moves you are making now? do you invest in the a/b property to ride the wave, or are you bottom fishing with the c/d?

later,
illmatic

[/ QUOTE ]

PErsonally, I am a bottom fisher. There are just more ways to win that way. Actually, what we do is try to find properties that exist between 2-10 million and fix them up to the point where the institutions will buy them.

[tommy2]

From a PM (my response to follow):

hey tommy,
I've been reading your real estate thread. I'm almost 20 years old, live in San Diego, and me any my business partner each have about 20k saved up from a business we started last year. I had another 15k that I used to purchase an investment house in houston texas last year, its going ok and I plan to hold it for a long time an eventually pay it off.
Anyway, in one part you said "There are so many other ways to get into RE than flipping. Honestly, I think this is one of the most dangerous RE plays out there. Even guys who are professional General Contractors lose more often than they win at this game. If I were just starting out, I'd go the syndication route. Get 10-20 people together who have 10-20K each and buy a small retail or light industrial building through an LLC. Keep your leverage reasonable (less than 75%) and you can make a ton of money if you are cautious and patient. Give your partners back small checks on a regular basis and maintain your integrity at all times. Others will flock to you to repeat."

I also read your follow up to this where you list your steps how to do it. How much money can you make doing this on average per year? Can it be done in San Diego or nearby areas?

And can you expalin this further please? "Try to hit a single or double on your first deal. Look for a deal that has a 5-7 year IRR of 10-12%, with leverage of no more than 70%. Don't blow yourself up with debt no matter what everybody tells you"

If you'd rather post your answer in the forum post, thats fine, jsut let me know.

Thanks,

[tommy2]

[ QUOTE ]
From a PM (my response to follow):

hey tommy,
I've been reading your real estate thread. I'm almost 20 years old, live in San Diego, and me any my business partner each have about 20k saved up from a business we started last year. I had another 15k that I used to purchase an investment house in houston texas last year, its going ok and I plan to hold it for a long time an eventually pay it off.
Anyway, in one part you said "There are so many other ways to get into RE than flipping. Honestly, I think this is one of the most dangerous RE plays out there. Even guys who are professional General Contractors lose more often than they win at this game. If I were just starting out, I'd go the syndication route. Get 10-20 people together who have 10-20K each and buy a small retail or light industrial building through an LLC. Keep your leverage reasonable (less than 75%) and you can make a ton of money if you are cautious and patient. Give your partners back small checks on a regular basis and maintain your integrity at all times. Others will flock to you to repeat."

I also read your follow up to this where you list your steps how to do it. How much money can you make doing this on average per year? Can it be done in San Diego or nearby areas?

And can you expalin this further please? "Try to hit a single or double on your first deal. Look for a deal that has a 5-7 year IRR of 10-12%, with leverage of no more than 70%. Don't blow yourself up with debt no matter what everybody tells you"

If you'd rather post your answer in the forum post, thats fine, jsut let me know.

Thanks,

[/ QUOTE ]

This can (and is) done in every city in the US. This is the standard non-stitutional, but professional, way to be a real estate investor. Many, many of the high flyers have partners in such a syndicated format, they just choose not to mention them.

Not sure about your second question. If you are in the RE game the big $$$ comes as you go up the learning and relationship curves. The first deal (and probably the first few deals) won't be home runs unless you get lucky. Way too many sharks in the ocean. But, as you get known as a serious player and (maybe more importantly) a good RE operator, more and more RE oportunities will come your way.

What does it mean to be a good RE operator. Basically, your two groups of clients (investors and tenants) are happy. Investors want the returns they were promised (and probably more--its all about a) finding the right kind of investors (patient and realistic) and b) managing (then exceeding) expectations. Project a 12% return if you think you can do 13-15% reasonably. Tenants want to be left alone, not nickled and dimed, and have you keep the property in good condition without spending too much of their money (if they are paying for the Common Area Maintenance--CAM and/or taxes).

Being a good operator is as important or more important than being savvy at finding opportunities and creating your financing stack.

[Big Bend]

Hi Tommy,

My uncle/aunt bought a 500 acre ranch near Salida Colorado. They then subdivided it into 30 acre mini ranches, added in roads and utilities, and sold off the lots for huge profit. In todays market is this still a viable investment strategy, and if so what are some of the issues involved in finding the right property/location/profit potential. And what are some good ways to raise capital for a project like this.

Thx.. BB

[DrewDevil]

[ QUOTE ]
Hi Tommy,

My uncle/aunt bought a 500 acre ranch near Salida Colorado. They then subdivided it into 30 acre mini ranches, added in roads and utilities, and sold off the lots for huge profit. In todays market is this still a viable investment strategy, and if so what are some of the issues involved in finding the right property/location/profit potential. And what are some good ways to raise capital for a project like this.

Thx.. BB

[/ QUOTE ]

The best ways to make money are...

Buy liquor by the bottle, and sell it by the shot,
Or land by the acre, and sell it by the lot.

[tommy2]

[ QUOTE ]
Hi Tommy,

My uncle/aunt bought a 500 acre ranch near Salida Colorado. They then subdivided it into 30 acre mini ranches, added in roads and utilities, and sold off the lots for huge profit. In todays market is this still a viable investment strategy, and if so what are some of the issues involved in finding the right property/location/profit potential. And what are some good ways to raise capital for a project like this.

Thx.. BB

[/ QUOTE ]

Yes. This will be a good strategy forever. How do you find projects like this? Well, its part art and part science. Start by thinking about where people are moving and living in your area of the world. Then think two or three steps ahead. Follow interstates and growth patterns; invest the time to learn about your area. Talk to the municipalities and ask to see their 2020 projected population.

As for $...if you have a good idea, or a good product, in RE there is never a shortage of capital. You may have to schlep a bit to find it, but there is a world of people looking for predicatble 15%+ investments with mitigated risk.