BYTHE NUMBERS
DOING DEALS
time to do some serious, active due diligence. This means re- ally digging in with your contractor to determine how much the rehab that your cold, hard home value indicated you needed is going to cost and, furthermore, how long it is going to take. You need to work with a contractor you trust who will not distract you from your real estate investing business or force you to take your eye off the ball for needless addi- tional improvements. If you buy a property from a larger real estate investment firm or company, you may be able to ask that company for referrals on contractors. Even if they recommend someone, however, you still must do your own research. Interview the contractors and get multiple bids. Find out if the company that is selling you the house will work with you to walk through that property if you need guidance. Some groups will work with contractors to get investors discounted prices, but you still need to be certain you are fully comfortable with your contractor. LESSON LEARNED Your contractor can make or break a deal, so it is worth the time investment to find someone you can trust. VARIABLE #3 THE COST TO EXIT This variable is probably the most difficult to predict with complete certainty because some time is going to lapse between the time you purchase a property and rehab it and the time you sell it or rent it out for cash flow. Three or four months down the line, things can change. Use information from your seller, your appraiser, and your contractor to determine the amount of time the rehab process is likely to take in a worst-case scenario. The cost of holding the property for that time will play a major role in how much money you ultimately make on the deal. If possible, get as much history from the seller as you can on the local market. If you are buying from a company that EXIT STRATEGY: Your exit strategy is the part of the deal where you cash out of the investment. Technically, buying and holding a property as a cash-flowing rental property is not an exit strategy, but a cash-flow strategy. However, as with an actual exit, you must determine how long it will be before the property is in a position to generate monthly rents and also how long it will be before you have a tenant in place once the property is ready.
3Variables thatWill Make or BreakYour Deals NO MATTER WHERE YOU’RE BUYING, THESE 3 FACTORS MATTER.
VARIABLE #1 THE COLD, HARD HOME VALUE When my company makes a loan, we do so based on an appraisal conducted by a trusted, qualified appraiser who tells us both what the property is worth now and what we can real- istically expect it to be worth after specific repairs. We never factor in how much we hope things will improve in a local market between the time we buy and when we complete the project. We do not allow any emotion to tinge the numbers the appraiser gives us. Because we are in business as buyers and for buyers, we must be completely confident about what a property is worth and how much rehab it is going to take to make it worth the after-repair value (ARV). Once we have this information, we can figure out the margin of the deal as it is set by the market rather than by our expectations. LESSON LEARNED Cold, hard home values are not a guaran- tee, but they seldom lie.
by Mark Bloom
A
s a real estate investor, one of the primary determinants of your success will be whether you are able to accurately assess the risks and rewards associated with any given deal. Furthermore, once you have determined that you are comfortable with your assessment, your success will hinge on your ability to evaluate three distinct variables that make or break every single deal you will ever do. As an investor, broker, and mortgage broker myself with an active, broad presence in nine markets, I have a great deal of personal, firsthand experience with these three variables. I have seen many investors respect these variables and go on to
great success in real estate investing, while others, often with more resources on hand than the former, neglected them and ended up with deals that were, well, dead in the water. Investors should think of every market as if they were going to bet money on it, which is essentially what you are doing although in this case, when “the house” wins, so do you! I’ve laid out the three vitally important variables I start with when I evaluate every loan and real estate deal before I move forward with that transaction. I start with these because I know they will make or break my deals, and they will make or break yours, as well.
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Mark Bloom is the president of NetWorth Realty, a full service, wholesale real estate brokerage specializing in the location, assessment, acquisi- tion, and financing of undervalued real estate assets inside the United States. He may be reached at mark.bloom@networthrealtyusa.com.
VARIABLE #2 CONTRACTOR’S COSTS Once you have the appraisal and assessment in hand, it is
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