David G. Brown - HOW TO REDUCE YOUR RISK IN REAL ESTATE INVESTING

HOW TO REDUCE YOUR RISK IN REAL ESTATE INVESTING

David G. Brown

Table Of Contents

Introduction

Thinking About Investing?

Financing Your Investments

Homes To Invest In

A How-to Guide For Wholesaling

Benefits And Risks Of Wholesaling

A Guide To Flipping Houses

Making Money On Flipped Houses

Home Renovation ROI

10. Protect Yourself From Flops

11. A Guide To Investing In Rentals

12. Property Management 101

13. How To Sell Or Rent Your Investments For The Most Money

120

14. Why Staging Makes All The Difference

126

15. Why Curb Appeal Matters

140

16. Why You Can’t Afford To Invest Alone

144

17. How Agents Help Investors

148

About David Brown Properties operties I have been a licensed real estate agent since 2002 and a broker for 14 years. I currently own and operate David Brown Properties in Pasadena, serving customers in the Greater Houston Metropolitan and surrounding areas. Before obtaining my license, I worked as a custom home builder in Baytown, Crosby, and East Harris County for 14 years, followed by several years as a new home consultant for Beazer and K Hovnanian and five years as a mortgage loan officer. How does my experience benefit you? When I’m helping my clients secure a new home, I use my 40-plus years of experience in the real estate, mortgage and custom home-building industries to guide them to an informed decision. I will help you assess the potential of your new home and give my professional input on its “livability,” current value, resale value, cost of ownership, insurance, mortgage possibilities and any potential repairs/enhancement costs. I will guide you every step of the way and make the process easy for you. Marketing is my specialty - I hold several marketing certifications from the Houston Association of Realtors, among others - so when you’re ready to sell your home, I can offer you the best marketing package available. Professional photography, home digital links and a personal website are just a few of the vehicles I will use to market your home. v

Whether you are buying, selling, renting, or investing, let my experience work for you! I am married to my college sweetheart, Sheri of 49 years. We have three children, Krystal, Derek, and Shannon. We have four grandkids, Max, Kensington, Kylo, and Everly. My youngest daughter and her three babies live with us along with her two dogs. My passions include plying with my grandbabies, travel, working in the yard and building things.

I am at your service, David G Brown 832.605.8349 david@dgbprop.com www.dgbprop.com

Designations SMP - Social Media Pro HCP - HAR Contracts Pro

2EX - Commitment to Excellence C2EX - Commitment to Excellence MRP - Military Relocation Specialist CREN - Certified Negotiation Specialist

CSMS - Certified Strategic Marketing Specialist e-PRO - Advanced Digital Marketing Techniques RCS-D - Real Estate Collaboration Specialist – Divorce Houston Association of Realtors (HAR) - Technology Advisory Committee

Testimonials & Reviews for David Brown Properties operties

"We truly cannot say enough good about David!! To say he went above and beyond and exceeded all expectations is a complete understatement!! We are moving our daughter to Houston for grad school, and he has been helpful in every way possible. He has been 100% responsive and kept us on schedule and meeting all deadlines. On top of that, taken much more of his time to keep us contact and schedule contractors to do work on the house. He is completely reliable, completely responsive, and knowledgeable about everything we asked and needed!! Thank you, David!!" Dana C. “David was simply incredible!!! He earned every dollar he made on this deal, however much that was. I hope it was in excess of &10k. He was knowledgeable about every step and stage encountered. This was my second house built, I’ve dealt with several agents, and all could stand to sit in a class taught by David. For all the knowledge and understanding he has of the industry, it serves his clients well. He was always one step ahead of any obstacle. This guy is outstanding!!!” Tony B. “I have dealt with many realtors in my career and David is the best. I couldn't have asked for better professionalism, market knowledge, negotiating skills, and honestly someone such a pleasure to work with.” Derek B. “David Brown is an outstanding Realtor; he was efficient and provides excellent customer service. I will continue using him whenever I need a realtor. Earlene M” “David Brown was an exceptional realtor who went above and beyond. He was conscientious and paid attention to the details vii

and very professional. He made buying a home in Houston a more seamless process. He was always available and accessible and knowledgeable about the whole process. I would not hesitate in hiring him again and refer him to my family and friends.” Julian E. “David is a great guy but better real estate agent. He took time to explain the process, was patient and thorough during our search, and in the end closed on great deal! I will recommend his services” Chike N.

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CHAPTER 1 Introduction

Have you ever watched one of those house-flipping or income property T.V. shows? They seem to just update what needs to be updated, then sell or rent it — and quickly — at a profit. Sure, there are always unexpected expenses, but it seems to always work out in the end. And it’s exactly that portrayal of real estate investing that draws people in. Who wouldn’t want to do a little work to make a place look more attractive and walk away with thousands (or tens of thousands) of extra bucks in their pocket? I’m guessing you, since you’re reading this book, and I don’t blame you one bit. The problem is that there is so much more that goes on in real estate investment than television can show you in 30-60 minutes of heavily edited content. That doesn’t mean there isn’t potential to earn money this way — there definitely is. It’s just that there’s a lot you need to know in order to actually make this happen. This book will help someone exactly like you: hardworking, intelligent, realistic, and ready to change your financial situation — and your life — through real estate investment. In the following pages, you’ll learn about how to get started in real estate investment, including what types of properties to invest in and how to finance your purchases. (Note: If you’re already an investor, I suggest reading through this section anyway, just in case there are strategies you haven’t tried yet that could enhance your ability to make more money.) I’ll also teach you the different types of real estate investing, 2

which includes resources and tips to succeed in each arena, the real ROI (return on investment) for home projects (i.e., how to spend your money the right way), marketing techniques that will make you and your properties stand out, how to build your investing team, and the benefits of working with an agent.

CHAPTER 2 Thinking About Investing?

Before we begin, I want to point out that this section is geared more toward people who are interested in becoming a real estate investor but want to know more. If you’ve already started down this path, you could theoretically skip this section; however, if you flip through the pages of this section as you move to the next, you might find some new information. Maybe you’ll learn some strategies you haven’t tried yet, or weren’t even aware of. Maybe you’ll just find validation you’re on the right track, or a reminder of you why you got into investing in the first place… What I’m saying is that there’s a lot of good information here, and it can’t hurt to give it at least a quick glance. As for those of you who are looking to get into the real estate investment game, my goal here is to give you all the information you need to decide whether real estate investment is right for you, and then teach you how jump in. So let’s get started!

THE STATS

According to a 2019 article on Investopedia.com, the average commercial real estate investment returns over 20 years are around 9.5%. Diversified and residential investments average around 10.6%. Both of these are higher than the S&P 500 Index, which has an average annual return of about 8.6% over the last 20 years. By the way, all these figures include the housing price burst in the 2008 recession, during which time real estate investment still did better than the housing market as a whole. 4

These stats alone obviously show a great reason to buy real estate. But what do investors hope to get when they’re buying property? According to the 2017 National Association of REALTORS® (NAR) Investment & Vacation Home Buyers Survey, 37% plan to rent it for income, 16% for the possibility that the price will appreciate, and 15% because it was a good deal. This all sounds great, but I’m guessing the main stat you’re interested in is how much you can make. (Am I right?) Well, here’s the answer you’ve been waiting for: According to a survey of real estate investors done by ZipRecruiter.com in spring 2019, investors make an average of $123,937 per year, with the low end at $47,000 per year and the high at $261,500. Most make within the range of $100,000 to 150,000 per year.

CHAPTER 3 Financing Your Investments estments

Now that you know why real estate investment is a good idea, it’s time to learn how to do it. But before we get into the nitty-gritty details of each investing method, let’s address the elephant in the room: To make money, you need to have money to invest, right? Well, yes and no. While you do need money to invest, it doesn’t necessarily need to be your own. If your only reference for real estate information is house-flipping T.V. shows, you might assume real estate investing is all about cash buying. There are many investment deals that transpire throughout the real estate market on an annual basis. The majority are achieved through traditional lenders and institutions such as banks, but some are accomplished through less traditional means. In most cases, it’s because the investor couldn’t raise the capital or didn’t have the credit score to do so. According to the 2017 NAR® Investment & Vacation Home Buyers Survey, 47% of investors financed less than 70%. And more than half — 64% — used a mortgage. So, whether you’re reading this as a newbie or a seasoned pro, you shouldn’t feel bad — not even for a minute — if you don’t have the cash to use. In fact, the ultimate goal for real estate investors is to not use any of their own money at all! This works to every investor’s advantage — those without the funds can still get in the game, and people who’ve been playing for a while can use other people’s money as a way to invest more, which leads to increased income. Obviously, there isn’t a bunch of people out there willing to just hand over their cash so you can invest. This is when having a 6

solid network is important. You’ve got to be clear on whom you access for help and how to best use the help they give you. It’s also to your advantage to have a high credit score. Why does this matter in this business? First, you’ll get more access to working capital, but you’ll also have lower interest rates if you do take out mortgages or loans, which can lead to significant savings versus people with “so-so” or low scores.

WHERE TO GET MONEY

Investing without Your Own Money

The first and most common option is hard (i.e., private) money lenders. In this case, people or businesses loan you money as an investment for themselves. They make money through fees and interest rates, both of which tend to be higher than other types of loans. One way to make sure you still come out ahead in the deal is to use these loans to buy homes at 50 cents on the dollar. Partnerships are another popular way to get funding. These can work in a variety of ways, but you want to make sure that you balance each other out well. For example, if you have a less- than-stellar credit score, make sure your partner has a great one. Perhaps you can be the one to find the ideal properties and your partner can get the financing, which will come with lower fees and rates thanks to that higher score. Keep in mind that you don’t want to partner with someone just because you already have a good relationship. The key to a fantastic partnership is being in sync, such as agreeing on what kind of risks you’re willing to take, determining what short- and long-term goals you have, figuring out who will do what, and deciding what kind of return you’d like.

Investing with Your Own Money

If you don’t have access to private lenders or partners, you can still start your investing career without having all the money on hand. One way to do this without paying any money upfront is through home equity. You can use this by taking out a home equity line of credit (which leaves your mortgage as-is) or rewriting your mortgage and getting a cash-out refinance. Of course, this works only if a) you currently own property; and b) there’s capital in it. Another route is a lease-option, also known as option to buy. In this situation, you would rent the property, but sign an “option to buy” at a later date for an agreed-upon price. This legally binding path to property ownership might take a little longer, but is still a viable option if you have the funds. Seller financing is just like getting a loan through a bank — except you agree to the payback and terms directly with the seller. This loan should include a repayment schedule, interest rate, and consequences, should either party default on their agreement. Often, these agreements include a significant down payment (sometimes higher than mortgages). Many of these agreements also involve the seller holding on to the deed until the buyer has completed all the payments. An option that may or may not work for you is investing your retirement funds. This typically doesn’t work for people over the age of 60 because there’s not enough time for rental income to pay off the mortgages. The so-called “sweet spot,” age-wise, is around 35 to 40. This is because people this age have theoretically been paying into a retirement account for about a decade and might have a fair amount to spend. Also, there’s time to get a good return. Perhaps the mortgage will be paid off in 10 years; after that, the net income after operating costs is all yours.

Your retirement account can be used for purchasing and maintaining properties as well as collecting rent. However, none of that money can go directly to you until you’ve reached the age when you can start withdrawing money out of the account. (Well, you technically can withdraw in many cases, but if you’re younger than the legally allowed age for withdrawal, there might be a significant penalty. This could mean losing thousands of dollars, depending on how much you take out.) Self-Directed IRAs (SDIRA) are traditional or Roth IRAs (individual retirement accounts) that allow you to invest beyond the usual mutual funds, stocks, etc. With an SDIRA, you can invest in precious metals, tax lien certificates, and — most importantly, for our purposes here — real estate. When you use your IRA to buy real estate, there are some important things to keep in mind. First, you’re required to report the value of your investment to your IRA custodian every year. Also, the fee structure can be complicated, so you need to understand what you’ll owe and how that relates to your overall profit. Also, your investment needs to bring in enough money to pay for both regular maintenance and any expenses that come up without you having to add cash. The major benefit of using an SDIRA for your real estate investments comes down to taxes. With a traditional IRA, it’s tax-deferred income, but with a Roth IRA, your gains are tax- free, and the money will also be tax-free when you ultimately withdraw it. If you go this route, you can move funds around from multiple projects without affecting your taxes. (Keep in mind that tax and another financial laws can change at any time, so make sure you keep on top of any changes, and make any adjustments, as needed.) One tax downside is that if your property has a net loss, you don’t get the tax breaks other investors get. You also can’t claim

depreciation.

Another advantage of real estate over traditional retirement accounts is the return. Real estate can net you perhaps an 18-20% return over 30 years, whereas the more common accounts, IRAs, 401(k)s, etc., might only get you 3-6%. Not only that, but you can use compounding to your advantage. If you keep investing your money for the first 20 years, you can leave it for the last 10 and just let it grow. Doesn’t doing almost nothing while still making plenty of money sound great? As with any investment, there are risks to using an SDIRA. You might make a bad decision or get scammed, which is so common the SEC has an investor alert about the scamming risk for SD- IRAs. Other risks include not having enough diversity in your investments (it’s hard when you have limited funds) and potentially not being able to access the money — even once you’re retired, due to liquidity issues. This means you might not be able to take out the required minimum distributions. Again, this is why diversification is important; you need to have enough cash to meet all the requirements. Speaking of “following the rules,” it’s vital you know them all. If you do something wrong, you might accidentally disqualify the IRA, which means you’d owe taxes. This includes not purchasing property for yourself your immediate family members. (You can’t buy property from them or sell property to them, either), but there are many other more nuanced rules, as well.

TAX BENEFITS FOR REAL ES R REAL ESTATES INVES TES INVESTORS

Because both federal change and state local taxes can vary, there’s no specific guidance I can give about that here. However, please understand that the tax ramifications of any kind of real estate

investing will depend on your particular location and circumstances as well as annual changes in the tax code. I strongly recommended that you consult with a CPA or tax attorney before beginning any real estate transaction or investment. With that said, at the time that I write this book, there are some general tax-related benefits for real estate investors that I want you to know about. The first has to do with all the deductions real estate investors can get: mortgage interest; business expenses, such as property management, office, mileage, travel, educational events, etc.; repairs; and improvements made that increase your property’s value. All of these can be immediately deducted, with the exception of improvements, which are depreciated over time. Depreciation of the property itself, regardless of any work done, is also a tax deduction, and it’s done over the course of time. Commercial properties can depreciate over a longer time than residential (currently 39 years versus 27.5 years). The land on which the property resides never depreciates. If you rent out a property, sometimes depreciation can get you a phantom gain. Here, on paper, the numbers look like a loss; however, because of the depreciation amount, you actually come out ahead. A tax attorney or CPA can help you figure out exact numbers for your situation.

1031 Exchange

Another benefit is the 1031 exchange, which allows you to put off paying capital gains taxes if you use your profit from a real estate sale to buy another property. This makes your income essentially tax-free, and you can put all your profits toward the next property, which is called trading up.

A 1031 exchange covers only business or investment properties. In general, vacation or second homes don’t qualify, but you should check with a tax expert to see if there are any exceptions, especially when it comes to the usage test. There are three specific requirements to qualify for a 1031 exchange, and you must meet all of them: • The like-kind exchange. The property you buy must be similar to the one you sold. The purchase price of the new property must be the same as, or more than, the one you sold.There’s no switching from commercial to residential or vice versa; however, you can often exchange property and land. • Time restrictions. You must officially record identifying a new property within 45 days of selling your old one. There are different ways to identify replacement properties: 1. Find three properties, not worrying about their fair market value. 2. Identify as many properties as you can, as long as their aggregate fair market value is less than 200% that of the sold property on the date of the transfer. 3. If the above two rules are exceeded, you can buy 95% of the aggregate fair market value of the identified properties. You also have to close on the new property within 180 days of the previous property’s sale.

• A qualified intermediary. Not only can you not be

directly responsible for the transactions or money, your intermediary must be someone with whom you haven’t worked for at least two years. Let’s use this example from a March 2019 interview that “The Motley Fool” conducted with Thomas Castelli: Let’s say you have a property you bought for $100,000. Ten years pass, and now it’s worth $150,000. You have a $50,000 capital gain. Break it up in between capital gain and depreciation recapture however you want. You’re still going to have to pay tax on that $50,000. So, when you pay tax on that $50,000 of capital gains, you’re going to have less money you can reinvest. What a 1031 allows you to do is invest that entire amount so you’re not paying the taxes today, and you can purchase a larger property. You could continually purchase larger and larger properties and continue to use the 1031 exchange pretty much forever. And if you really wanted to — I’m just going to be honest, as it’s easier said than done — you can eventually leave the property to your heirs and they’ll receive that property at the fair market value on the date of your death by eliminating all of this capital gains depreciation recapture that you should have paid during your lifetime. In theory, you can just keep purchasing larger and larger properties, making more and more cashflow, but never actually paying any taxes on that property. In the interview, Castelli also talked about opportunity funds, a new way to possibly put off or completely eliminate capital gains taxes. Opportunity funds are a way to invest in opportunity zones, which low-income communities’ governors have identified, and the Treasury has approved. The funds come with tax incentives, including the ability to defer capital gains on a variety of capital assets. These include not just

real estate, but also stocks, bonds, and more. A CPA can give you all the specifics. The timeline has the same 180 rollover as the 1031 exchange, but you’re only required to roll over the capital gain, which means you’re free to do what you want with the money you invested.

Castelli gave this rundown of the numbers:

If you hold that capital gain in the fund for five years, you’re going to receive a 10% stepped-up basis in that gain. Let’s just say you have a $100,000 capital gain, and in five years, you receive the 10% step-up; you’re only going to pay tax on $90,000 of that capital gain. If you hold it for another two years for a total of seven years, it’s going to step up [an additional] 5% for a total of 15%, and you only pay tax on $85,000 of that gain. Now, if you hold that investment in the fund for 10 years, your investment in the actual fund itself will be tax-exempt. Just, say, that $100,000 you put into the fund; 10 years from now, it’s worth $150,000. That $50,000 capital gain is completely exempt from tax. Now, this is a little longer-term play. You have to keep your money in there for at least five years to see any benefit from it. I think there’s over $7 trillion or some crazy number of appreciated gains in the United States. So all of those appreciated gains are technically eligible for opportunity funds, and I think the background behind this is they want to take those appreciated assets and move them into low-income communities that need renovation and raise the status of those communities and opportunity zones. Opportunity funds are the way to do that. Castelli pointed out one important aspect of opportunity funds for investors to keep in mind:

Because of the requirements to have an opportunity fund… You

have to substantially improve these assets, which means doubling the property’s basis. Essentially, it’s the building’s basis, but just think about it, I guess for this purpose, as the purchase price. You have to add as much as the purchase price basically in capital improvements, so it’s substantial. Or you have to develop the property from the ground up and you have to hold it for 10 years.

RENTAL TAX SPECIFICS

Rental property owners are open to a variety of benefits, which I’ve listed below. You’ll notice that several are the same as for other real estate investments. Also, as with all properties, if you sell within a year of buying, you’ll be taxed at your income rate. If you hold on to a property for a year or more, as is usually the case for rental properties, you’ll deal with capital gains tax, which is a lower rate. Your overall tax deductions can depend on what type of investment business you have (sole proprietorship, partnership, or corporate entity). And, as always, do your research to make sure you’re up-to-date on all the latest tax laws, as these can, and do, change.

Rental property tax benefits:

• home office, office supplies, computer software • mileage • travel • meals (50%, as long as you’re having a business meeting while eating) • mortgage, unsecured loan, and credit card interest • loan origination fees or points (they’re considered kinds of interest) • utilities, trash, and recycling 15

• property taxes • licensing fees • occupancy taxes

• insurance, including liability, hazard, fire, sewer backup, flood, and loss of income (talk to a tax professional if you have an umbrella liability policy or a landlord liability policy) • maintenance, repairs, improvements, and cleaning • advertising • commissions to real estate agents or property managers who find tenants and renew leases (this is considered part of marketing, not property management) • property management fees, salaries, and benefits (if you manage yourself and your business is an LLC or corporation, you may be able to be employed and have your salary be deductible) • homeowners’ association fees (HOAs), as well as whatever HOA requires, such as specific “For Rent” signs • professional and legal fees, including bookkeeping, filing taxes, and all legal work • any losses incurred up to $25,000 per year; anything over that can be carried over to the next year. Note that your tax savings will be less than you lost • Social Security (FICA) or self-employment taxes (the benefits vary, but can range from about 7.5% to 15.3% of your profit) • second/vacation homes rented out for at least two weeks per year might allow you to write off advertising and rental commission and prorate other expenses • some states have historic tax credits that include both the rental operation and/or any renovations

• incentives from your state or locality to invest in lower- income areas

You’re also required to take a deduction for depreciation. Just know that when you sell a rental property, you’re subject to depreciation recapture. Any gain that has to do with depreciation is taxed at 25% (as opposed to 20% for regular capital gain). The depreciation-related gain is also called unrecaptured section 1250 gain. One way to mitigate this is to always keep track of passive activity losses. While they may not be deductible while you own the property, they are when you sell it, which means the amount you’ll owe will be less. By the way, if you’re thinking, “Well, I just won’t claim depreciation, then,” I’m sorry to tell you that this simply won’t work. The IRS states that the recapture’s calculation is based on “allowed or allowable” depreciation, meaning that even if you didn’t claim it, you’ll still have to pay it. You might as well get the deduction while you can, and perhaps consider setting it aside for when you do end up selling the property.

ALL ABOUT CREDIT SCORES

As I briefly mentioned, credit scores can play an important role in getting financing and the rates you’ll need to pay. I want to talk in detail about what makes up a credit score so you’ll know what you need to do, should you want to improve it. First, your score is a number that tells lenders how likely you are to pay back the money. When you have a higher score, you get better rates, which leads to long-term savings and more money in your pocket. Credit scores are often based on the FICO scoring model. They 17

can range from 300 to 850:

• Bad credit: 300-600 • Poor credit: 600-649 • Fair credit: 650-699 • Good credit: 700-749 • Excellent credit: 750-850

The determining factors and how much weight they carry vary between credit agencies (TransUnion, Experian, and Equifax). However, the following five are the major contributors to your score:

• Payment history: 35% • Outstanding balances: 30% • Length of credit history: 15%

• Types of accounts: 10% • Credit inquiries: 10%

By knowing your credit score, you’ll have a clearer picture of your investment strategy. If your score is high enough, you might be able to get a traditional loan and help with down payments. If your score is lower than you’d like, take a look at the determining factors and see where you can improve — making on-time payments should clearly be a priority. You can also consider paying down balances as you’re able, and not opening up a bunch of new credit cards.

BEWARE OF SCAMS F SCAMS

With so many people out there looking to make money in real estate, it’s pretty much expected that there will be people out there ready to take advantage. The two main types of scams to watch out for are seminar scams and lending scams.

Seminar scams can give some truly helpful tips, but it’s always used as a way to gain people’s trust. Once they have the trust, they’ll offer “limited-time” investment properties or expensive classes. When people fall for the trick and buy a property, they often find that it’s got a lot of issues and is quite likely a money pit. However, signing up for classes can be negative, too. Why? Because people often end up spending thousands of dollars for little to no new information when that money (and their time) could’ve gone toward their investments. To make things even worse, people who get taken in by scammers often sign agreements without reading them through. These documents often include a section that keeps the scammed people from taking legal action against the scammers. So how do you find genuinely helpful seminars? (Yes, they do exist.) Do your research! Look up the organization, the presenter, the properties, and the courses. You can also start by looking up certified experts and see if they offer any educational opportunities. Lending scams are another common scam in real estate. It’s a fairly easy type of scam for real estate investors to fall into because often they’re looking for alternative financing (i.e., private lenders) that doesn’t have the same qualifications required by traditional mortgages. This kind of financing often has a requirement to pay back the money more quickly and tends to have higher interest rates than mortgages. Those things alone don’t mean they’re a scam, though. The problem is that lenders don’t have to be licensed to hand out money, so it can be a bit tricky to make sure the lender’s legit.

So, how do you make sure the lender you’re working for is on the up-and-up? First, you find the lender through one of the following ways: • Through a certified real estate investing website • Through referrals from people in your network who’ve personally worked with the lender Second, you should ask the following questions (and if the answer to any is “yes,” it’s probably a red flag, pointing to a scam): • Does the lender seem to know details about investing and lending, including the correct jargon? • Is there a major upfront fee? • Does the lender seem a little too eager to give you the money? In other words, do they skip asking you essential questions and get right down to the “money talk?”

CHAPTER 4 Homes to Invest In

So now that you’ve got the financing in place, how do you know which homes or properties to buy? There are plenty of factors you need to consider to ensure the purchase makes sense. As the saying goes, you make money when you buy , not when you sell . This is why it’s key to buy the right property, which entails being clear on where you’re trying to sell and who your buyers are. Also, keep in mind this saying: “You don’t have to like the house, just the numbers.” Read on for more details on how to make the best choice, particularly when it comes to flipping homes.

WHERE TO START

The first thing you have to do is choose your market. If you’re flipping, consider looking for the location closest to you that has a population of at least 100,000 people. (Bigger market = more opportunity.) This is considered your local market . Another option is remote investing , which could theoretically be anywhere. However, be sure to choose someplace that’s not only familiar to you, but also a place to which you feel emotionally attached. This might surprise you, as most people have been told that emotions should stay out of these kinds of decisions. I don’t disagree when it comes down to the details, like which specific property to buy, what to fix up, etc. However, in this one case, emotions are important. You’ll be spending a significant amount of time there doing some pretty 22

hard work, and being in a location that you enjoy and feel connected to will help. Plus, you’ll know the area well, which can be advantageous in many ways, as well. Once you’ve decided on a market, it’s time to look at inventory levels . This means finding out how many homes are for sale. Keep in mind that low levels (e.g., few houses for sale) can be a good thing, because it means it’s a seller’s market. Ideally, you want your market to have less than four months of inventory. The following are the different types of markets to look for: • Hypermarket: Less than one month of inventory; little to no competition. Listings tend to sell above asking price after receiving multiple offers. • Seller’s Market: Less than four months of inventory; low competition. You will likely sell for a good price. • Stable Market: Four to six months of inventory. Properties might take longer to sell, and could sell at or below asking (if they sell above, it probably won’t be by much). • Buyer’s Market: More than six months of inventory; lots of competition. Properties take a while to sell, and often sell below asking. I suggest that flippers focus their efforts on hypermarkets and seller’s markets, as these will bring in the most profits. It might be hard to find that initial right property, but it’ll be worth it in the end. In addition to looking at the overall inventory, you will want to look at the average Days on Market (DOM) , so you’ll be able to make an educated guess about how long it will take a property to sell. This is something I can help with by researching similar types of properties that have sold in the previous 30 days.

MAKING THE NUMBERS WORK

The most important thing you can do is to conduct your research about the structure, the land, and the surrounding areas. This includes seeing if there are any new roads or construction planned, ensuring there aren’t any liens on the property, looking at comparable properties, and researching anything else that could affect the value of the property. If you’re just buying land, go over the deed with a fine-toothed comb. After you’ve accumulated sufficient information on all applicable factors, it’s time to decide whether it’s a wise investment. That said, remember that even with the most detailed research, things can change. Maybe the up-and-coming neighborhood takes an unexpected downward spiral, or maybe it up-and-comes more quickly than expected. Unless you’re psychic, there’s just no way to predict what will happen, so making the most well-educated decision you can is the best way to mitigate — but not eliminate — the risk. The most important part of running the numbers is calculating your Return on Investment (ROI) . Here’s how to do that: • Figure out the investment gain . This is the amount of money you’ll make before expenses. So, if you make $500 per month on your rental property, multiply it by 12 months a year, and your investment gain will be $6,000. • Add up all your operating expenses. This should include taxes, insurance, repair costs, and any other expenses you know or think you might have. If you pay $1,200 in taxes, $450 for insurance, and $900 in repairs, your total expenses would be $2,550. 24

• Subtract your expenses from your investment gain: $6,000 - $2,550 = $3,450. • Divide the figure from step three by the price of your investment. So, if you bought the property for $75,000, then $3,450 ÷ $75,000 = .046 • Finally, turn the figure from step four into a percentage. In this case, 4.5%. This number is your ROI. You need to know what your bottom line is, i.e., how much you want to spend and what your ROI should be. If the price of buying and/or fixing up the property is too high and/or the ROI is too low, it’s time to move on and find another property that better fits your goals.

WHICH HOMES TO BUY

While some investors might look at For Sale By Owner (FSBO) properties, many others focus mostly or completely on purchasing bank-owned properties. Some go to sheriff ’s sales or other auctions. But what type of properties should you be looking for? 1) Distressed properties; 2) foreclosures; 3) short sales; 4) and REO/Bank-Owned properties. Let’s take a look at each of these options in more detail.

Distressed Properties

Owners of distressed properties tend to be pretty desperate to sell, which means investors can often get them for less than market value. For these types of buildings, a popular option for investors is to wholesale them. This means the investors get the home under contract, then market it to other buyers for a higher price than their contract, and ultimately assign the contract to another buyer. The investor ends up with the difference between the new contract with the new buyer and their contract with the seller.

For example, if an investor gets a home under contract for $60,000, then finds new buyers who agree to pay $70,000, the investor will make $10,000. A major advantage of wholesaling is that you don’t have to have a lot of capital, and there are many cheap — or even free — options to find them. They can use auction websites, including Hubzu.com, Hudsonandmarshall.com, Auction.com, and Zone.com. Because I have access to MLS (Multiple Listing Service) , I can help locate properties, as well. In addition to my own MLS, I can look through others in the area, which helps to expand your search.

Foreclosures

According to the 2017 NAR® Investment & Vacation Home Buyers Survey, 18% of investors buy foreclosed homes. In order to purchase these properties, investors must go through auctions. If they’re the highest bidder, they have to pay the full amount at that time. They will then get the trustee’s deed once the sale is complete. Foreclosed properties’ prices are determined differently from other properties. Instead of using what the home is worth, the starting bid includes the following:

• How much is still unpaid on the loan • Interest owed from attorney’s fees • Any costs stemming from the foreclosure process

Sometimes, properties don’t even get that starting bid. When this happens, it becomes bank-owned, or Real Estate Owned (REO) property. The loan lender owns the home and will use a real

estate agent to try to get it sold. One thing to note is that these properties are sold as-is, so if you’re looking to buy one, that’s something to keep in mind. There are three main ways to find pre-foreclosed homes. The first is to check with the County Clerk at the County Recorder’s Office. There, you can look up Notice of Default (NOD), lis pendens (“an official notice to the public that a lawsuit involving a claim on a property has been filed,” as defined on Investopedia), or Notice of Sale public records. There’s also a good possibility that you’ll find properties that aren’t yet online. Speaking of online, that’s another good way to find properties. There are national and regional listing services. Most have a weekly fee but offer a free trial so you can get a “feel” for them and how they work. I suggest taking them for a trial run so you can see which site or sites best fit your needs. You’ll likely find out all the important details, including name, address, amount owed, and outstanding loans. Sometimes you’ll even find contact phone numbers. These listing services may also have REO properties, but don’t let that be a factor in deciding which sites to use, as most of these properties will already be listed on their lender’s (e.g., bank’s) website, which you can access for free. The third option is to look through newspapers and business journals. This is because when a foreclosure is filed, the Notice of Sale has to be published. You can look in the Public Notice section for trustee sales to find these notices.

REO/Bank-Owned Properties

The main advantages of buying REO properties is that you can get them at below market value without having to worry about unpaid taxes or liens. The downside is that it can be an intense

process to buy one of these properties, but the ultimate profit is usually worth the effort. Earlier, I mentioned these homes tend to be sold as-is. However, buyers are allowed to have an appraisal and inspection done. The bank won’t make any changes to the property itself, but they will likely negotiate the price down so you can use that money to make the repairs yourself. If you want to buy an REO property, you have to have your financials ready. Lenders set the prices low so properties will sell quickly, and if your finances aren’t in place, you could miss out on a great deal. To prepare, you need to make sure you’re pre-approved and have a letter from your lender. The letter must include the pre- approval total, how much you’ll pay for the down payment, and how to reach the loan officer. If you’re paying cash, you’ll still need a letter from the bank. This will state that you have enough money to cover what you’ve offered. One step that’s different in making an offer on REO properties is that you include an earnest money deposit . Essentially, this is a show of good faith that you’re truly interested in purchasing the property. The deposit will stay in an escrow account, then go toward your down payment and closing cost. These deposits tend to be 1-2% of the full offer, and may or may not be refundable. For example, if you decide not to buy after all, you likely won’t get the money back. However, if the bank backs out of the deal, you will probably get a refund. There are a few ways to find REO properties. A good place to start is by enlisting the help of a real estate brokerage that can search lists the general public can’t access. Sometimes the brokerage has one or more realtors that focus solely on REO properties; sometimes, they have an entire department dedicated to REO.

Second, you can look online at websites like Foreclosure.com, Auction.com, and RealtyTrac.com. Just be aware that you might have to become a paid member in order to search these sites. In addition, you can look at government and bank loan sites, which often list relevant properties. You can search national and regional banks and the government-run sites HomePath.com (Fannie Mae) and HomeSteps.com (Freddie Mac).

Short Sales

The 2017 NAR® Investment & Vacation Home Buyers Survey also looked at how many investors bought properties through short sales: 17%. A short sale occurs when the buyer purchases a property for less than what’s still owed on the mortgage. The lender must approve of the transaction. They usually do this when the seller is going through a hardship (divorce, health problems, job loss, etc.), and the home doesn’t have enough equity to cover the balance of the mortgage, especially when factoring in sale costs. Part of the process of short sales is that sellers must give the bank their financials. What exactly this entails varies between banks, but the process tends to be comparable. Why would lenders be okay with getting less than they’re owed? Because the loss they take in short sales can be less than the loss they’d take if the home went into foreclosure. Plus, they won’t have to deal with marketing and selling the property. Just so it’s clear, this doesn’t mean you’ll get the deal of the century on a short sale. Lenders still want to get the most they can! (Wouldn’t you?) Overall, short sales are good for everyone. Investors get a good deal, lenders get a significant amount of money without having

to deal with the foreclosure/REO process, and homeowners don’t get foreclosed on, which can tank their credit score.

CHAPTER 5 A How-to Guide f o Guide for Wholesaling or Wholesaling For those of you who skipped Part 1, or who simply need a refresher, wholesaling involves an investor putting a contract on a property for below market value, then finding a buyer to buy the contract (called simultaneous closing ) for a higher price and/ or a fee. Another option is for the wholesaler to buy the property outright, then quickly sell it. The wholesaler uses a purchase and sale agreement (also known as a purchase contract , sale contract , or agreement of sale ),which states the purchase price and terms of purchase. Wholesaling can often be one of the faster ways to make money in real estate (sometimes it takes just a few hours!), which is why some investors center their business on this strategy (although many still include other types of real estate investments as well). In order to be successful, you need to learn how to find the great deals before the general public knows about them, which is where a professional like me can be helpful. Real estate agents and brokers can search the MLS for properties. Experts in wholesaling can also help you throughout the process, which varies from a typical real estate transaction. Of course, this process won’t work if you don’t have the buyers, so you need to make sure you’ve got a thorough database complete with buyer names, contact info, and property preferences.

THE WHOLESALING PROCESS

The good news is that anyone can be a wholesaler. There’s no 32

license required, although knowing how real estate transactions work can be helpful. Another advantage involves working with a real estate agent or broker, since they can search the MLS for properties. I can also help you find a title company that’s open to the wholesaling process (not all are). And each company has different requirements for all the parties involved, so I can educate you about that, as well.

Finding the Right Properties

When I’m helping my clients look for properties to wholesale, there’s a specific number to keep in mind: 70. End buyers (think flippers) tend to want to pay 70% of what they can get once the house is fixed up. Here’s the formula to use: fixed-up resale value – repairs – wholesale fee = max offer you should make Here’s an example if you want to make $7,000 on a home that should be worth $125,000: $125,000 (ultimate resale value) – $15,000 (repairs) – $7,000 (wholesale fee) = $103,000 (max offer) If you work through this formula and the deal seems to be possible, it’s time to see the house in person. Of course, there are usually unexpected expenses that come up in renovations, but by seeing the property for yourself, you’ll be able to get a better estimate about potential repairs. After you’ve done this, rework the formula, then figure out an offer. It’s often advantageous to offer less than your max so there’s room to negotiate, if needed. (Or maybe you’ll even get it for that price, which means more money in your pocket!)

Closing

Before I continue, it’s important to understand what exactly happens during closing. The buyer signs closing documents, including papers that allow the money to be released to the seller (which will happen within a few days). Then, the seller signs the deed over to the buyer. The buyer will get a title insurance policy. This proves that the property title is legal. Finally, the County Recorder’s Office will record the deed and other pertinent documents. One option for wholesaling is assigning the contract. In this process, you never actually buy the property, although you do put down an earnest money deposit. Also, not only is the seller aware that you’re selling the property to someone else, but they will also know who that is and what your profit is. The contract with the seller will state your name; however, it will also say “and/ or assigns” for the buyer. You will also assign the contract with the buyer, which means the buyer assumes all of the contractual obligations, not just the purchase price. This contract states your assignment fee, letting the buyer know your profit as well. One benefit to this process is that your assignment fee isn’t used for closing costs, so your profit will be exactly what is written in the contracts. One possible downside is that you’re relying on the buyer and seller to address any problems along the way and to officially close on the deal. You get paid at or after closing, so it can be stressful waiting for that to happen, especially since sometimes deals do fall through, and you have no legal recourse if that happens. However, if you know your buyers, your risk can be significantly mitigated.

Another wholesaling option is a double closing (a.k.a.

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