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.

Marty Boardman

marty@risingsuncapitalgroup.com

602-319-5391

@martyboardman

linkedin.com/in/martyboardman

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

Marty Boardman

marty@risingsuncapitalgroup.com

602-319-5391

@martyboardman

linkedin.com/in/martyboardman