Four Flippin’ Boxes Arizona Academy of Real Estate 10/18/12

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 Costs

What 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 - $112.38 $/SF

•  Short Sales - $76.58 $/SF

•  REOs - $78.42 $/SF *Source – Cromford Report, 9/12/12

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

Footage 1,951

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

Footage 1,951 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

Ø Purchase Costs Ø Inspection Costs Ø Closing Costs Ø Lender Fees

Ø Selling Costs Ø Commissions Ø Closing Costs Ø Home Warranty Ø Termite Treatment

Ø Holding Costs Ø Mortgage Payments Ø Property Taxes Ø Utilities Ø Insurance

Marty’s Typical Fixed Costs PURCHASE  COSTS:      Inspec(on  Fee   155  Closing  Costs   1000  Lender  Fee   900  

Total:   2055  

HOLDING  COSTS:      Mortgage  Payments   5400  Property  Taxes   600  U(li(es   450  Insurance   300  

Total:   6750  

SELLING  COSTS:      Commission  to  Buyer's  Agent   6750  Commission  to  Lis(ng  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 Costs     INTERIOR              

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,  (le  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  pa(o   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

MPP for 4708 E. Thunderhill

Sales Price: $269,900 Acquisition Price: $200,000 Fixed Costs: •  Commissions $10,800 •  Mortgage Payments $ 5,100 •  Utilities/Insurance $ 700 •  Closing Costs $ 5,000

Rehab Costs: $14,700 Total Profit: $33,600

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:

v Paint

v Carpet

v Appliances

v Lights/Fans

v Sinks/Faucets

v Door Hardware

v Outlets/Switches

Advanced Cosmetic:

v Cabinets

v Countertops

v Doors

v Windows

v Roof

v Gutters/Trim

v Major Trim/Design

Mechanicals:

v HVAC

v Re-Piping

v Re-Wiring

Advanced:

v Foundation

v Mold

v 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

Coming December 2012 - Fixing and Flipping Real Estate: Strategies for the

Post-Boom Era

Marty Boardman

marty@risingsuncapitalgroup.com 602-319-5391

@martyboardman linkedin.com/in/martyboardman