For Real Estate Investors and Private Money Lenders
By Gary Massari & Ginger Crystal Faith,
Owners of REI Homes – Signature Properties
We are in one of the hottest real estate markets in our time! Deals are hard to find, and inflation is on the raise, so where to we find the deals and how do we know if it is a good deal or bad deal?
We are living proof you can find good deals in any market! The question becomes how can you determine whether the deal is good or not? It may surprise you that 80% of the good deals come directly off the MLS or realtors who work with builders who want to off load their projects. We call this off-market inventory.
Builders or flippers often underfund their projects and run out of money, so other investors are a good resource as well. However one of our major resources is other realtor’s who work with builders and flippers. In fact, we found our last deal through a realtor who brought us an off-marketing deal, and it is a hot deal with an ROI of 16% on a $4,000,000 home.
Because we work with hard money and private money investors we have to make sure our homes appraise and our lenders will do the deal. We look for small homes on large lots in high priced neighborhoods, or vacant lots. We also look for homes that appear to be run down and in poor condition. What we run into is homes that not only need refurbishing, but more square footage. We do additions from 500SF up to 2000SF. On the average of about 1500SF, this usually doubles the value of the home from what we paid for it. So how do we determine the right price?
We use a rule called the 70% rule, that works like this; we take 30% off the top and then deduct the cost of renovations to arrive at a reasonable offer price. The 30% protects our investors from any market drops. In all our years in real estate in our area we never saw the market drop more than 12% in a 12-month period of time. Our projects usually run 9 to 12 months. You may have to check your area to see what the greatest decline in home values were for your area and adjust the formula.
We have an excel program that Gary designed that we use to look at comps and cost that is so simple to use. It is like plug and play. The first sheet looks at your comps off of Redfin, Zillo, or MLS. We use the MLS. Also you can have your title company pull a preliminary report with sales data. Once we determine the price per SF sold of renovated homes we have our average sales price. Then we do an estimate of our repair cost based on similar projects. If you are new we suggest you check with other flippers to see if they will share their cost per SF for a similar home.
Let’s look at the snapshot of our Good Deal Bad Deal analyzer….Here is the comparable analysis of a luxury home deal in a very hot area.
Notice the price per SF of properties on the same street! Obviously the average selling price for a 2710SF home would be $3,583,100.
Now let’s look at our Good Deal Bad Deal Analysis…
The seller was hard on his price of $2,300,000 and with the estimated cost of repair, plus financing and carrying cost we could not make our 10% ROI which would meet the 70% rule, so we turned it down.
Let’s follow the 70% rule…
Step 1 Take 70% of the ARV (projected selling price) $3,600,000 x 70% = $2,520,000
Step 2 Subtract the repairs of $500,000 from $2,520,000 = $2,200,000 our MAO (Maximum Allowable Offer) to make a 10% ROI
As you can see this was not a good deal for us, as the purchase price was $100,000 more than what would safely protect us and our investors should we have a drop in the market.
We are very careful and this analysis takes all of about 30 minutes start to finish to quickly tell us if we should pursue this deal or not. Let us conclude that the number one error Flippers and Builders make is not buying their properties for the right price. The second biggest mistake is under funding their projects, which means cost over-runs.
As a gift Ginger and I are going to give you our free Good Deal Bad Deal Analyzer. Just click on button here:
About Gary Massari & Ginger Crystal Faith
Gary & Ginger are top real estate investors and educators running a very popular real estate investment club called “Make Money Now” where people connect with deals and financing and have a whole lot of fun. What very few people know is Gary and Ginger are both real estate brokers and builders. They own a highly successful multi-million dollar luxury home construction company in San Francisco Bay Area, and work in partnership with other investors for very high returns from their projects. “One of the greatest rewards is being able to invest personally along with our partners to achieve higher than any market returns”, says Ginger! “We belong to several wine clubs in Napa Valley and enjoy outings with our partners, it is so much fun!”
“We would love to meet you and possibly help you to qualify as one of our investors, it is easier than you think,” Gary! We offer a free Q&A or get to know us sessions. You can make an appointment on our website at https://reifortunes.com anytime!
Every week we put out educational fun information about real estate investing and paying off your mortgage using velocity banking, our goal is to show you how to become financially independent by investing and owning real estate debt free…
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