Monthly Archives: December 2010

A Second Chance at Homeownership this Holiday Season

I just drove by the house you have for sale on Frost Drive – is it still available?  No, I said.  We put it under contract a few days ago.  The voice on the other end of the line then asked, do you have any others like it for sale?  Unfortunately, we don’t I explained.

The caller’s name was Don Price.  A semi-retired engineer, he moved into his dream home – located in a 55+ community – about three years ago.  Not long after that child protective services showed up at his door with his three grandchildren.  Unable to stay in the neighborhood because of the age restriction he was forced to sell.

And here’s where it gets tough – Don was over $150,000 underwater on his mortgage.  The only option for him was a short sale.

As you probably know even with a stellar credit score a short sale will keep you from buying another house for at least three years.  The FHA, Fannie Mae and Freddie Mac won’t do it.  Don Price knew this too.  So he called me when he saw our sign in front of the house on Frost Drive that said NO QUALIFYING – FORECLOSURE – BANKRUPTCY OK.

I told Don we didn’t have any others for sale in the area but we could probably find him a similar home.  As it turns out I didn’t have to – Don found it for us.  He checked on the internet everyday and drove around the neighborhood looking for new for sale signs.

The house he found was owned by Bank of America.  It had been flooded, presumably by the prior homeowner.  We bought the house by partnering with an investor that had a self-directed IRA, remodeled it and sold it to Don using seller financing.  We closed on Christmas Eve.

There are millions of former homeowners just like Don Price.  Their only mistake was buying a home at the worst possible time in American history.  We recognize that this is a crisis but with crisis comes opportunity.

What I like most about seller financing in this marketplace is that it creates a win-win-win-win.  Don wins because he gets a second chance at homeownership.  Our management team and investor partners win because we get an above average ROI.  Finally, the neighborhoods we buy in win too because we put families into homes that were once an eyesore.

Last month, we posted a video tour of the home we bought for Don Price and his family BEFORE we started the remodel.  Check out the amazing transformation in this video we shot after the rehab was complete.

Happy New Year from Free Real Estate Education!


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Buying Investment Property in Arizona – Part II: Buying and Holding

“The investor of today does not profit from yesterday’s growth.”  – Warren Buffett

42,249 – Is that a big number?  I guess it depends.  Aren’t numbers supposed to be relative?  If you’re buying a house in Phoenix $42,249 doesn’t sound too bad.  But if you’re purchasing a Honda Civic it sounds a little pricey.  Approximately 42,249 new U.S. jobs were created in October.  That sounds promising.  But what if told you that on this day, December 16th, 2010, 42,249 homeowners are in foreclosure in Maricopa County, Arizona?

566 – Not a huge number right? $566 will buy you a fancy 40” high definition TV.  A pretty good deal considering I paid $2,100 for mine just three years ago.  However, if 566 people were ahead of you at the motor vehicle division wouldn’t you want to cry?  It just so happens that 566 homeowners were foreclosed on today in Maricopa County, Arizona.  To put this in perspective back in 2005 when I was following auction sales about 500-600 homes were sold a month at the courthouse steps.

So where are all of these homeowners going to go?  Where will they live?  Many of them will move back in with their parents or other siblings.  Some will move out of town.  A small number will rent an apartment.  1 out of 5 of them is an overextended investor so they don’t need a place to live.  What about the rest?  They will undoubtedly look for a single family home to rent, preferably in the same neighborhood they live in now.

Consider this hypothetical scenario for a moment – I’m an investor with $100,000 in a traditional IRA account earning me 7% interest annually.  Unhappy with such an average return I roll the $100,000 into a self-directed IRA account and use the money to purchase a single-family home in Peoria, Arizona.  I rent the house for $950 a month and net $775 after paying taxes, insurance and HOA fees.  That’s a 9.3% cash on cash return.  Not bad.

Okay, I know.  You didn’t come here looking for hypothetical scenarios.  You want real world examples.  Well, here you go – I recently represented an investor that purchased a single family home in Maricopa, Arizona.  It was a bank owned home we found on the multiple listing service.  He paid $82,000 and made $5,000 in repairs.  He put $24,000 down and financed the rest.  He rented the home immediately for $850 a month, netting $400 a month in cash flow.  The cash on cash return is 16.5%.

Here’s the best part.  He’s depreciating the home over 27.5 years earning another $2,500 annually in tax deductions.  This asset serves another purpose as well – an inflation hedge.

It’s a rather simple formula but it amazes me how many investors screw this up.  Renters want single-family detached homes – not condos, townhouses or attached dwellings.  Renters, especially those with families, want at least 3 bedrooms with a den, a two car garage and a finished backyard with grass.  Most importantly, they want to be close to schools, shopping and freeways.

Renters don’t want to commute so stay away from the far out areas like Buckeye, Queen Creek and Maricopa (even though my investor client bought in this area I’m still not a fan.)

So do you feel ready now?  Not so fast.  Do your homework.  Connect with real estate professionals and investors that have similar goals.  Ask questions – lots of them.  And remember what Warren Buffett once said, “A simple rule dictates my buying:  Be fearful when others are greedy, and be greedy when others are fearful.”

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Buying Investment Property in Arizona – Part I: Fixing and Flipping

I was in the presence of real estate royalty.  My brother-in-law, Rich Siegmund, had set up the meeting.  It was 2005 – Austin, Texas.  I had flown there from Phoenix to help him get his real estate investment business off the ground.  Rich arranged the lunch meeting at a Macaroni Grill in northwest Austin.  We would be dining with ‘Joe’ the real estate guy.  That’s all I was told.

When we all sat down Joe handed me his business card.  It had a Keller Williams Realty logo on it and beneath that was his name – Joe Williams – Co-founder.  Needless to say, I was impressed.

I took a page of notes during our visit.  The most memorable thing Joe said that day was “there is no such thing as a national housing market; real estate is a local business.”

When my partner Manny Romero and I started our current fix and flip business model last summer Joe’s words kept running through my mind.  We had to stay local and be strategic.  Our buying criteria would be simple, straightforward and easy to implement:

  • Single family homes – no condos or townhouses.
  • Acquisition price under 200K.
  • Minimum 3 bedroom – 2 bathroom – 2 car garage.
  • Tile roof – wood frame construction – stucco exterior.
  • Cosmetic repairs only – paint, carpet, landscaping, appliances, window blinds, light fixtures only – no plumbing, electrical or roof repairs.

Why be that specific?  Because as of today, there are over 47,000 homes for sale on the Arizona Regional Multiple Listing Service (ARMLS).  As many as 1,000 homes or more are auctioned off on the courthouse steps every day.  There’s a lot of inventory in the Phoenix market.  In order to efficiently sift through the opportunities it’s essential to filter your buying criteria. 

You also need a team, including a wholesaler, Realtor, contractor, Title Company and private money lender

The wholesaler will find you bargains at the auction and a Realtor with experience working with investors will help you locate short sale and REO deals listed on the MLS.  The Realtor will also assist you with market analysis, as well as the listing and sale of the home. 

When interviewing Realtors I highly recommend you ask if they have worked with other real estate investors.  A lot of real estate gurus will tell you that you should never work with a Realtor unless they invest in real estate too.  I don’t agree with that.  Do you want your Realtor focused on their deals or yours?    

The contractor will be your eyes and ears on the project.  A good contractor will put money in your pocket, not take it out.  How?  Speed.  Time is money right?  Our contractor can remodel a house in 4 days or less.

It’s also smart to work with a title company that is comfortable working with investors.  I’ve worked with title companies in the past that have killed my deals because of delays and miscommunication.  That is unacceptable.

Finally, having a reliable private money lender on your team is essential.  What is an unreliable private money lender?  A lender with no money.  We work with a private money lender that has been in business for more than 20 years and has over $60 million in funds available.

Is setting this up a lot of work?  Absolutely.  It takes time, effort and a healthy dose of trial and error.  If you are considering getting into get in the game but don’t want to be this involved I recommend you partner with an investor or investment firm that is familiar with the market and has a system already in place.  You may not make as much money but you certainly won’t lose as much because you didn’t have the right systems in place.  If you decide to go this route I recommend you ask the investor or investment firm for this information BEFORE you get started:

  • Executive Summary
  • Business Plan
  • Pro Forma Financials
  • HUD 1 Settlement Statements
  • Private Placement Memorandum (if dealing with a private equity firm)
  • Website
  • Testimonials

It’s important to note here that even with the right buying criteria, team and systems in place you can still lose money fixing and flipping.  There are external forces at work that can adversely affect any real estate market.

I can think of no better example of this that the federal government’s $8,000 tax credit that expired on April 30th.  Our investment firm was buying heavily in an area of town that consisted predominately of first time home buyers.  We purchased two homes at the auction in May and miscalculated how sharply values would decline in this area after the tax credit went away.  We anticipated a drop of about 10% and it turned out to be more like 30%.

The good news is we earned record profits on the other side town, offsetting our losses and increasing our bottom line.  When this happened I couldn’t help but think of my lunch meeting five years ago with Joe Williams.  Real estate truly is a local business.


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Buying an Investment Property in Arizona

There are 13 different species of rattlesnakes in Arizona, more than any other state.  You may be surprised to learn that the rattlesnake is the only kind of snake that doesn’t lay eggs.  The mother actually gives live birth.  What may surprise you even more is that I, an almost-Arizona native, didn’t know this until about two weeks ago.  I had to attend reading appreciation day at my daughters’ elementary school to learn this interesting fact.

Children’s author Conrad Storad was there and he read his book, Rattlesnake Rules, to the kids.  In this rhythmic, non-fiction tale he explains how all rattlesnakes have rules to live by – just like people.  It was fascinating information.

I moved to Arizona in 1977 at the age of 5.  And with the exception of a one-year stint in Denver, have lived here for most of my life.  I’ve been hunting, fishing, water skiing, hiking, camping and just plain screwing around in the desert for as long as I can remember.  And you want to know the funny part?  The only rattlesnake I’ve ever come across was at the Phoenix Zoo.

That’s why I find it amusing when out of state folks visit here and expect to see a dry, harsh desert landscape with tumbleweeds rolling by.  Arizona is actually a very diverse state.  Our elevation ranges from about sea level all the way up to 11,000 feet.  I once water skied and snow skied in the same weekend.

So when I quit my corporate job 10 years ago and decided to get into real estate investing it made sense to set up shop right here in my own backyard.  Who wouldn’t want to live in a state that has sunshine 300 days a year? 

Okay, I’ll admit the summers are a little intense.  If you’ve never been here just trying sticking your head in an oven set at 180 degrees.  That’s what it feels like.   Luckily, it doesn’t last long.  And it’s a short two-hour drive from my home in Gilbert up to Flagstaff where the temperatures are about 25 degrees cooler.

Historically speaking, there has never been a better time to buy an investment property in Arizona then right now.  I know, I know – this probably sounds like typical real estate investor propaganda to you right?  The truth is I have nothing to gain by sharing this.  I just hate to see people miss out on all the opportunities in the marketplace.  We fix and flip, buy and hold and offer seller financing to borrowers with shaky credit.  Since last July we’ve sold more than 40 properties.  How can that be with all the bad news about real estate these days?

There is demand for our fix and flip properties because of all the distress in the market.  Most of the homes for sale these days are in poor condition.  Buyers don’t have the imagination or the checkbook to fix them up.

What about buy and hold, or rental properties?  There is enormous demand for single family homes in middle class neighborhoods because so many homeowners have been foreclosed on.  These people need a place to live and renting is their only option because of their damaged credit.

And what about my favorite exit strategy, seller financing?  This is like a hybrid fix and flip – buy and hold business model.  We make money from the buyer’s down payment.  We also cash flow when the buyer makes the interest payment every month.  Best of all, we get a lump sum profit check when the buyer refinances the note, usually within 3-5 years, because we bought the house at such a steep discount from the auction. 

There is tremendous demand for this service because so many people have walked away from their homes.  I have a list with over a dozen buyers right now that are waiting for us to find them a home.  We have several performing notes now and you can bet the investors we partner with are pleased with the returns.

Over the next three weeks I’ll go into detail with each of these exit strategies and how they work in the Phoenix market:

  1. Fix and flipping.
  2. Buy and Holding.
  3. Seller financing.

But, unlike most real estate professionals you’ll meet I’m going to share our successes AND failures with you.  If you plan on buying investment property in Arizona soon, or anywhere else for that matter, my hope is that this information will prevent you from getting snake bit.

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