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Contractors – Setting Your Expectations

Contractors – Setting Your Expectations

When it comes to contracting work, there are three things we all want: good, fast and cheap. There’s also an old saying with real estate investors, “You can have any two of these.”

For those of you who don’t quite get it, this means if you want fast and cheap, the quality of the work is probably going to suffer. If you want good and cheap, it’s going to take a longer time to complete the project. If you want good and fast, it’s probably going to be expensive.

Many real estate investors, myself included, want to keep costs to a minimum. It’s natural to do this no matter how big or small the project. However, it’s important to keep in mind what you are ultimately trying to accomplish based on your investing strategy, so you can determine the level of work the project is going to require.

For example, if you are keeping the property as a rental, you may not require the same finish out as you would with a property you are flipping. If you are wholesaling the property, you may need to get an estimate for both rent-ready and full retail sale because your sale price is going to reflect the work required.

Once you know what you are going to do with a particular deal, you can get the appropriate contractor(s) to help you estimate the scope of work. Most do not charge for this but want to get the business. Keep this in mind so you don’t overuse someone. If you decide to wholesale full time and are not quite comfortable estimating the scope of work, you will need to work with someone that you can pay (a nominal amount) to work up a bid for you.

The Key Traits and Behaviors of a Good Contractor

A good contractor, in my opinion, is someone who:

  1. Is full time in their line of business (i.e., general contractor, electrician, plumber, foundation repair, HVAC, etc.)
  2. Has several years of experience (5+)
  3. Is conscious of the needs of his/her client
  4. Can effectively manage their money (or has someone do this for them)
  5. Has the ability to assess a real estate investor’s needs and can quickly put together the correct repair estimate or scope of work
  6. Can manage their client’s expectations
  7. Above all else, is honest

I know that sounds like a lot to ask for, but such contractors are out there, and you need to find them. How? Ask other investors in your network, and/or get referrals from reliable sources. A contractor who meets the criteria above is one who can give you an accurate assessment of the scope of work needed, along with the cost, and do so in a timely manner.

Once you find this contractor, they need to be added to your team, and you need to find two backups/replacements for them. Sometimes deals move fast, and you need an answer right away. You may not have time to get that particular contractor to the property.

Also, contractors can go bad. There may be changes to the people on their team, they may get overextended, or something else may prevent them from either showing up or doing a good job on your project. You get sideways with your contractor and decide–no more! Hopefully, you won’t experience this too many times before you find the right ones.

Once you get to a point where you have experience and have some projects under your belt, you will be able to keep solid, consistent contractors busy enough that they will take your call. And make sure to pay your contractors on time. You will then have added a key member to your team, and be on your way to having success.

If you are a Real Estate Investor, looking for a Hard Money Loan in Texas, contact us today!

Finding Wholesale Deals Part 3 – Direct Mail

Over time, the deals I have purchased with the most equity came from a direct-mail campaign. I could go on and on again here, but instead, let me give you a few quick examples:

Example #1: I once bought a deal for $100 that was worth $85,000. It needed $40,000 in work. With $45,000 in equity and $850/mo in rent, it was a great deal with multiple investing strategies available (could be wholesaled, retailed, or rented). I still have it as a rental.

Example #2: I bought another deal worth $190,000 for $56,000. It needed $63,000 in work. With $71,000 in equity, it made for an amazing deal. I sold it at full market price after I cash flowed it for a few years.

Example #3: I purchased a house for $13,000 that needed $48,000 in work. ARV was $125,000. I cash flowed this property for several years and then sold it for a nice profit.

There are books written on direct mail marketing. Therefore, the purpose of this blog is to illustrate the power of direct-mail campaigns, along with a high-level overview of how they work, and what it takes to have success with them. As you can see from the examples above, direct mail can be an extremely effective tool.

But, it’s important to note, that it’s also a time consuming and expensive method for finding deals. If you decide to execute a campaign, you will need to budget for the cost and make sure you can follow it through to the end. The goal here is to send enough mail, to generate enough call volume, to produce qualified leads that can be contracted.

Direct-Mail Campaigns

As it sounds, a direct-mail campaign involves sending letters and/or postcards in the mail directly to prospective sellers. You might think sending something just to say “We Buy Houses” is a waste of time because no one reads “junk mail,” right? Well, not everyone throws it in the trash. There is something about holding a physical letter or postcard that makes it personal and gets a seller’s attention. Some people do read such cards and will call you, at which point you will need to qualify the opportunity.

Consistency is the Key 

Direct mail requires consistency. It cannot be emphasized enough here that without consistency, you will NOT have ongoing success with direct mail. This means having a series of organized mailers intended to drive call volume from qualified sellers where deals can be made. Remember, it’s not a one-time event.

Before you can send any mail, you will need to get your list from a reliable source. Creating lists from tax records, MLS records, or simply buying lists from other service providers, is where you want to start. Once you have the list, you will need to narrow your criteria for what you are targeting (i.e., owned home for 20 years, specific square footage, year built, etc.).

The most effective way to implement a direct-mail campaign is to mail to the same group multiple times (four to five times) with a different message each time. For example, you might take a list of 5,000 (or any manageable number where you can handle the call volume) and set up a letter/postcard to go out every four to six weeks over the course of five to seven months.

Answer the Phone

Once your campaign is underway and mail is out the door, your phone is going to ring. Be sure your phone is charged and you are prepared to take the calls. Failure to be prepared here is going to cost you leads. Have a call sheet available with questions centered on determining the two most important things: The amount of equity in the property and the amount of motivation in the seller. If you have both equity and motivation, that’s a recipe for a great deal.

Conclusion

You will need to determine what your budget will allow in a direct mail campaign, as you will have better results with a larger volume of mailers. If you don’t have several thousand dollars to invest or the time needed to complete a five-month campaign, utilize the other methods such as driving neighborhoods and getting referrals.

 

 

Finding Wholesale Deals Part 2 – Getting Referrals

Getting deals through referrals can be less complicated and deliver some of the best equity deals you will find. Think about this for a minute: how many things have you received from a referral? You may have found your job through a referral, your clients through referral, or maybe even met your spouse through a referral. So many things in life come from referrals—house deals are no different.

Deals Are Closer Than You Think

Over time, I have encouraged investors to utilize all of the resources available to them when finding deals, and one of the most effective ways, again and again, has been through referrals. So, tell the people in your network that you are looking for a distressed house to buy.

I have had clients find deals in the strangest ways, from their dentist’s mother-in-law to their barber, from having a drink next to someone at a bar, to a Facebook referral. A deal I found a while back came from my exterminator. He was treating my house, knew what I was looking for, and turned me on to a great deal. I could go on and on, but you get my point. Try this for yourself and see what results you get.

Talk to Neighbors 

You will find that as you are working on a house (i.e., performing the rehab/remodel), neighbors may stop by to see what’s happening. I have had several clients of mine find deals on the same street because someone came by and said that they would like to sell their house as well.

Also, there are neighbors who will stop by and walk around inside while work is being done. It’s natural. Don’t get frustrated or upset because you think they are being nosy or trespassing. They may be the person on the street who knows everything that is going on in the neighborhood, and you absolutely want to get to know them. They can check on the house for you when your contractors are not there. They can offer you insight into the history of the neighborhood if they have lived there for a long time. But most importantly, they can tell you who else might be in a situation where they need to sell. This type of neighbor knows those around them and their personal situations. Maybe there is someone getting divorced, moving into a senior center, or had a death in the family. All of these situations can create an opportunity for you as a real estate investor. Take advantage and be proactive. Ask them if they know about any houses that might be worth a knock on the door or other forms of contact.

Conclusion

Imagine you tell people you are looking for a distressed house to buy and nothing more. If they know someone needing to get out of their situation, have them give you a call. Or, better yet, get their number and see if you can contact them after a warm introduction. There are many ways to find referrals and make them work. The potential for great deals is right in front of you.

If you are in the Real Estate business looking for a Hard Money Lender in Houston, contact our Houston office today!

Finding Deals Part 1 – Driving Neighborhoods

Absolutely one of the most underrated methods for buying direct is driving neighborhoods, also known as Driving For Dollars. The reason this can be so effective is that it lets you target the situation/opportunity before anyone else does.

One of the best stories I know is from a client of mine who drove his neighborhood and found a vacant house that looked like it needed a lot of work. He sent a letter to the owner, and after some negotiating, purchased a $279,000 house for $125,000. It needed $65,000 in work. You don’t need a calculator to know this is an incredible deal. The numbers speak for themselves.

How to Drive a Neighborhood 

The best way to do this is to just drive around your target area where you want to buy real estate deals and look for the ugliest houses. They will be easy to spot because they will have one or more of the following:

  • Tall grass and weeds
  • Peeling paint
  • All the lights off all the time
  • Trash or furniture in the yard
  • Uncollected newspapers or mail
  • Or just a general look of vacancy

In the story just mentioned about my client who found the $279,000 house for $125,000, there was furniture on the curb set for bulk trash pickup. If you see one of these houses, do the following as soon as you can:

  1. Find the owner of the record. This is easy to do online either through the tax roll data for the county or some other public records source.
  2. Talk to the neighbors and find out what’s going on with the house. They don’t need to know what you are trying to do. You’d be surprised how many will tell you everything you need to know including how to contact the owner.
  3. Send the owner a letter saying you are interested in buying the house and can close quickly or try to find their phone number and contact them.

Does this sound like a lot of work? Not when you consider it could be worth $67,000 in net profit like what our client made. Set a goal to drive your targeted neighborhood each week for the next 12 months and repeat the above steps 1–3.  Then stay tuned for part two on Getting Referrals.

If you are a Real Estate investor looking for Hard Money lenders in the Houston area, contact us today!

Why Price-Per-Square-Foot Gets Investors Into Trouble?

One thing that confuses new and seasoned investors is taking the price-per-square-foot approach to determining the value. What does this mean? Let’s take a look at the following comps and analyze them:

  • House #1 has 1500 square feet and sold for $145,000 or $96.67/square foot
  • House #2 has 1800 square feet and sold for $150,000 or $83.33/square foot
  • House #3 has 1600 square feet and sold for $147,000 or $91.88/square foot
  • The subject property has 2200 square feet so the ARV should be $199,381, correct?

This is absolutely not correct! How did this happen? This happened because the investor took the selling price and divided it by the gross living area. So in this example, they took the three price-per-square-foot values above and added them together to get $271.88. Then they divided that number by three to get $90.63, which is the average price-per-square-foot of the three comps. When you multiply $90.63 times 2200 you get $199,381. Mathematically, this seems to make sense; however, this is one of the biggest mistakes you can make, and sadly, it happens all the time.

The reason you don’t want to do this is the methodology is flawed. According to Ohio appraiser Mike Armentrout who wrote an article titled “The Reality of Price Per Square Foot”:

“The primary fault with $/SF is that it encompasses every feature of the property and not just gross living area. Only calculating the relationship between size and sales price ignores all the considerations a potential buyer may make. If we were comparing two properties that were identical with the exception of size, then it is rational that the larger of the two may sell for more and thus the $/SF could be an accurate indicator. On the other hand, if we had two identical homes in terms of size but one had a larger wooded lot and sold for more, the equation would not be as reliable. As properties have more dissimilar amenities and features, the less reliable it becomes a function of indicating value. This is simply because other factors are not directly related to the gross living area.” 

I couldn’t agree more with this quote. Also, given a specific market, higher square footage homes generally sell for a lower $/sqft and lower square footage homes sell for a higher $/sqft. Ask yourself the following question: would you pay 33% more (or $50,000 more in the above example) to get 400 additional square feet of living space? Of course, you wouldn’t. Neither would a market buyer. In fact, if there were a buyer like this for some crazy reason, the property would not appraise as the buyer might expect, because there is probably no justification for value this high.

Keep these things in mind when you are evaluating a property. If you need help, just contact us and we will guide you through it. For more detailed information about determining the ARV of a house, read my blog The 12 Steps to Determining the ARV.  And don’t forget oddities like garage conversions! Check out this blog here to determine how they can affect the ARV.