four flippin boxes 8 22 12
TRANSCRIPT
Four Flippin’ Boxes
Arizona Academy of Real Estate8/23/12
Marty Boardman
• Owner and Chief Financial Officer of Rising Sun Capital Group, LLC –
Gilbert, AZ, licensed Realtor since 2007
• Real estate investor since 2002 and principal in over 250 single-family
transactions in Arizona, Texas, Illinois and Wisconsin.
• Accredited instructor for the Arizona Department of Real Estate and
national contributor to BiggerPockets.com real estate news website.
• Author of Fixing and Flipping Real Estate: Strategies for the Post-Boom
Era (not completed).
• Husband to Linda and father to Allyson and Audrey.
Four Flippin’ Boxes
Choose Your Own Adventure
• No two rehabbers are the same.
• Successful rehabbers do have:
– Drive to Succeed
– Integrity to Build a Solid Brand
– Discipline to Make Good
Decisions
– Mindset to Work Hard and Work
SMART
What to Expect from this Class
• This is NOT a plan for
creating real estate
wealth.
• This is a blueprint for
developing your own
plan.
Begin with the End in Mind
1. What do you want?
2. 1-3-5 year plan
3. Cash chunking
“The problem is we are consistently inconsistent.”
- Larry Martel – KPHO TV5 Reporter
Box #1: Acquisition
Acquisition Topics
1. Strategy (Niche)
2. Analyzing Deals
3. Writing Offers
4. Common Mistakes
Strategy (Niche)
• Target Property
• Target
Neighborhood
• Target Price Point
• Target Rehab
My Niche
• Single-Family detached
homes only
• Minimum 3/2/2
• Tile Roof – Stucco
Exterior
• Valley-wide
• $120,000 - $350,000
acquisition price
• Light to advanced
cosmetic rehab
Analyzing Deals
• Every investor has their own “rules” for
evaluating a deal
• Most tools are built to help determine the
investor’s Maximum Purchase Price (MPP)
• A common rule is The 70% Rule:
MPP = (ARV * 70%) – Rehab Costs
• Most successful investors want something
more detailed to help avoid potential losses
THE FLIP FORMULA
MPP = ARV – Fixed Costs – Profit – Rehab Costs
• ARV is the conservative resale value
• Fixed Costs are all the fixed costs you
incur
• Profit is your desired profit on the deal
• Rehab Costs are the costs to renovate
Example: 4708 E. Thunderhill
MPP = ARV – Fixed Costs – Profit – Rehab CostsWhat is our MPP?
ESTIMATING ARV
MPP = ARV – Fixed Costs – Profit – Rehab Costs
Estimating ARV
• Do it like an appraiser would
• Three approaches to analyze property value:
1. Sales Comparable Method
2. Income Method
3. Replacement Cost Method
• For residential property, stick with Sales
Comparison Method
What Is Sales Comparison?
• Value based on what similar properties in the
vicinity have sold for recently.
• Vicinity = Preferably same subdivision or ½ mile.
• Recently = Preferably past 3 months.
• Similar = Age, Style, Size, Condition, etc
Here’s What I Know:
• 4 bedroom homes are more valuable than 3 bedroom homes to most buyers.
• 3 car garages are more valuable than 2 car garages to most buyers.
• Homes with pools are more valuable than homes without pools to most home buyers.
• Single-level homes are more valuable than two-level homes to most homebuyers.
Here’s What Else I Know:
• Normal Sales - $114.65 $/SF
• Short Sales - $77.40 $/SF
• REOs - $75.99 $/SF
*Source – Cromford Report, 8/22/12
Here’s What I Don’t Know:
• How much more value will a homebuyer and/or appraiser see in a property with these desirable features?
• How much more value will a homebuyer and/or appraiser see in a home that’s not a short sale or REO?
Estimating ARV – An Inexact Science
• Lack of supply
• School District
• Family
• Busy Streets
• Barking Dogs
Step 1: Specs on 4708 E. Thunderhill
Year Built 1993
Condition Excellent
Square
Footage1,951
Beds 3
Baths 2.5
Parking 3 Car Garage
Pool Yes
Levels 2
Subdivision Desert Breeze
Step 2: Find Comps
Valuation Adjustments:Thunderhill 13402 38th 13223 38th Bighorn
Year Built 1993 1988 1988 1993
Condition Excellent Excellent Excellent Good
Square
Footage1,951 2,204 2,204 2,145
Beds 3 4 4 4
Baths 2.5 2.5 2.5 3
Parking 3 car garage 3 car garage 3 car garage 2 car garage
Pool Yes Yes Yes No
Levels 2 2 2 2
Step 3: Compare Specs
Step 4: Normalize Values & Average
Adjusted Values:13402 38th 13223 38th Bighorn
SALE PRICE $285,000 $300,000 $242,000
$/SF $129.31 $136.11 $112.82
SF Difference: - 253 - 253 - 194
Adjustment $252,363 $265,600 $220,272
Average Value (ARV): $246,078
Low Value (ARV): $220,272 ARV
Range
Step 5: Factoring Demand
• How many active listings for sale in the vicinity?
• How many active listings like this property are for sale (i.e.normal sale, 3 car garage, pool, excellent condition)?
• How many like listings are pending?
• How long were these listings active before they became pending?
Step 5: Factoring Demand (cont.)
• NO active listings for like properties in the entire zip code of 85044
• Only one PENDING listing for like property in the entire zip code of 85044, $275,000 after 19 DOM
Example: 4708 E. Thunderhill
MPP = $270,000 (ARV) – Fixed Costs – Profit – Rehab Costs
ESTIMATING FIXED COSTS
MPP = $270,000 – Fixed Costs – Profit – Rehab Costs
Categories of Fixed Costs
Purchase Costs
Inspection Costs
Closing Costs
Lender Fees
Selling Costs
Commissions
Closing Costs
Home Warranty
Termite Treatment
Holding Costs
Mortgage Payments
Property Taxes
Utilities
Insurance
Marty’s Typical Fixed Costs
PURCHASE COSTS:
Inspection Fee 155
Closing Costs 1000
Lender Fee 900
Total: 2055
HOLDING COSTS:
Mortgage Payments 5400
Property Taxes 600
Utilities 450
Insurance 300
Total: 6750
SELLING COSTS:
Commission to Buyer's Agent 6750
Commission to Listing Agent 4050
Closing Costs 3400
Home Warranty 400
Termite Treatment 325
Total: 14925
Total Fixed Costs: 23730
DETERMINING PROFIT
MPP = $270,000 – $23,730 – Profit – Rehab Costs
How Much Profit?
• Profit Trade-Off:
– Too much, unlikely you’ll
get the deal at your MPP
– Too little, introduces risk
and lowers your income
• Most investors tend towards
10-20% of resale price, with a
minimum
• Marty’s Criteria: 10% of
ARV, 15K Minimum
ESTIMATING REHAB COSTS
MPP = $270,000 – $23,730 – $27,000 – Rehab Costs
Rehab CostsINTERIOR
Trade Task Labor Materials Total
Demo Basic cleanup 100 100 200
Electrical Lights, Fans 150 600 750
Plumbing Kitchen Sink 100 100 200
Paint Walls only 1400 100 1500
Cabinets Refinish 900 300 1200
Countertops Granite 400 1500 1900
Flooring Clean carpet, tile in bathrooms 300 300 600
HVAC Maintenance 150 0 150
Appliances Install appliances 200 1100 1300
Supplies Blinds, door hardware 200 1100 1300
Cleaning House cleaning 200 0 200
Staging Kitchen, master bath, pictures 300 0 300
INTERIOR TOTAL: 4400 5200 9600
EXTERIOR
Trade Task Labor Materials Total
Roof Repair back patio 200 200 400
Paint Repaint exterior 1400 100 1500
Landscaping Cleanup, plant shrubs, trim 300 0 300
Garage Paint garage floor 50 175 225
EXTERIOR TOTAL: 1950 475 2425
TOTAL: 12025
PUTTING IT ALL TOGETHER
MPP = $270,000 – $23,730 – $27,000 – $12,025
MPP For 4708 E. Thunderhill
MPP = $270,000 – $23,730 – $27,000 – $12,025
MPP = $207,245 = 77% of ARV
Acquisition Strategies
1. Short Sales (MLS)
2. Bank-owned
3. Auction
4. Unlisted pre-foreclosures
5. Other motivated sellers
Writing Offers
5 Decisions Prior to Writing Your Offer:
1. Cash or Financing
2. Purchase Price
3. Earnest Money
4. Closing Costs
5. Contingencies
• Due Diligence Period
• Financing Contingency
• Appraisal Contingency
Short Sale Offers That Get Approved
• Days on Market Doesn’t Matter
• The BPO (broker price opinion) is key
• Provide BPO agent with comps
• Document repairs
REO Offers That Get Accepted
• On the market less than 3 days or more than 3 months
• Offer at least 80% of list price
• $5,000 minimum EM deposit
• Need at least 5K in repairs
• Low due diligence (3-7 days)
• Have an agent on your side (either Buyer’s Agent or Listing Agent)
Buying at the Auction
• The MPP formula still applies
• Use a bidding service
• Check title
• Drive Report
• Don’t get emotional
Unlisted Pre-Foreclosures
• Direct Mail
• Door knocking
• Website
• Voicemail
Common Mistakes
• Clouds on Title (Auctions)
– Assessments
– Federal Tax Liens
– Deed Transfers
• HOA Issues
• Getting Financing in Order
Box #2: Rehab
Rehab
1. First Steps
2. Team Building
3. What to Fix
4. Estimating Costs
5. Cost Control
6. Common Mistakes
First Things First
1. Secure the property.
2. Get insurance.
3. Turn on utilities.
4. Meet with trades.
5. Determine repairs.
Team Building
OPTION #1 OPTION #2
GC Electrician
Plumber
HVAC
Carpenter
Painter
Flooring
Cabinets
Landscaper
Glass/Window
Handyman
What To Fix
Cosmetic Repairs:
Paint
Carpet
Appliances
Lights/Fans
Sinks/Faucets
Door Hardware
Outlets/Switches
Advanced Cosmetic:
Cabinets
Countertops
Doors
Windows
Roof
Gutters/Trim
Major Trim/Design
Mechanicals:
HVAC
Re-Piping
Re-Wiring
Advanced:
Foundation
Mold
Structural /
Moving Walls
Make It Pop
• Air fresheners
• Appliances
• No caps
• Lots of Lighting
(no caps)
• Staging
Under Improving
• Cheap fixtures
(sassy brass)
• Worn carpet
• Vinyl
• Dead grass
Over Improving
• Flooring – Tile
• Appliances
• Landscaping
• Granite
Countertops
• Door Hardware
Controlling Costs
1. Paint
2. Carpet
3. Supplies• Light Fixtures
• Ceiling Fans
• Blinds
• Door Hardware
• Appliances
Contractor Negotiating Tips
• How Much?
• How Long?
Common Mistakes
1. Taking too much
time
2. Paying too much
3. Sub-standard
finished project
4. Attention to detail
5. Over Improving
6. Under Improving
Box #3: Sales
“Coffee is for closers” – Alec Baldwin, Glenarry Glen Ross, 1992
Sales
1. Marketing the home
2. Contract Analysis
3. Talking with Lenders
4. Influencing appraisals
5. Low appraisals
6. Settlement Statements
(HUD)
7. Common Mistakes
Marketing the Home
1. Find an agent with
investor experience.
2. Not an REO or Short
Sale
3. Quick Response
4. Staging
5. Agent Bonus
6. Furniture
Contract Analysis
• Purchase Price
• Closing Date
• Down Payment
• Closing Costs
• Type of Financing
• Title Company
• Home Warranty
• HOA
Talking With Lenders
1. Do you know this is
a flip?
2. Bank?
3. Loan type?
4. Have you done
many of these
before?
5. Buyer well
qualified?
Influencing Appraisals
1. List of
Improvements
2. Comparables
3. Meet appraiser at
the home.
4. Leave comps at the
home.
Low Appraisals
• Cash to cover the
difference
• 2nd appraisal
• Lowering closing
costs
• New bank
• Cancel
Settlement Statement (HUD)
401 – Contract Sales Price
509 – Credit Closing Costs
511 – County Taxes
703 – Commission
1102 – Closing Fee
1304 – County Taxes
1305 – Additional Exhibit
Common Mistakes
• Assessments
• HOA Dues
• Federal Tax Liens
Box #4: Raising Capital
Create a Track Record
1. Leverage the success of your mentor/partner.
2. Raise your own capital.
3. Build your own real estate investment business.
4. Attract other investors and/or partners
Building Trust
• Promote the system
• Schedule a field trip
• Provide financials
• Be authentic
Where is the Money?
• Warm Market
• Networking
• Social Networking
• Work – School -
Church
Partners
• Joint Venture Agreement
• LLC with operating agreement
• Prom Note
Self Directed IRAs
• $3.7 Trillion in IRAs
• Anything allowed
by law
• Membership
interest in an LLC
• Prom Note
• Grows tax free
Hard Money
• Property serves as
collateral
• 25-30% Down
• 12-18% interest
• Monthly interest
payments
• Personally
guaranteed
Managing Expectations
1. What kind of ROI are
you looking for?
2. How much do you
plan to invest?
3. How long can you
keep your money
invested?
Four Flippin’ Boxes
FlippingPhoenixHouses.com
