Original message
| Roberto
  |  "Babe in the woods needs advice...."
, Sat 24 Feb 09:18 
I have been a rehabber for about 7 years now and have done 112 properties. While I have made good money, I now realize that I have been missing the boat on the difference between "working for money" and "having money work for me." The latter is why I am so excited about land contracts/wraparounds. I bought Joe Arlt's tape set (awesome! I recommend it to anyone ready to get serious!) and I have Cash Cow on the way.
Despite my years in the business, I feel like a babe in the woods in this area and I would really appreciate all of your input.
My questions are:
1) In my area, the VA repo's have been selling for on average 21% above ask price. In most cases, the price being paid was well above market value. I couldn't understand why until I saw that there had been a recent rule change in regard to the down payment for VA Vendee Financing. The change was that VA would require only $1,000 down no matter what the purchase price was. I believe that the down payment used to fluctuate based on the sales price. Therefore, a buyer's total cash out of pocket is only the $1,000 down, plus closing costs that total around 3 3/4% of the purchase price. For that VA will hold a 30-year note at 7%. Sounded pretty attractive.
Knowing that there is no better teacher than experience, I decided to use this opportunity to do my first deal. Taking Joe's advice, I had lined up 3 investors who liked the cash flow idea. They were fighting to partner with me! Getting out of the rat race appeals to more people than you may think!
Here was the deal: (bought 2 weeks ago)
Ask Price of Home: $65,000
Estimated Market Value: $75,000
Our winning bid: $89,000
Fix up: $1,200 (I know. Joe, if you are reading this, I heard what you said. Having a hard time not fixing up (paint, door locks, faucets, labor). I am used to getting high retail for my rehabs. Hard habit to break!
Cash in deal: $1,000 down
$3,400 closing costs
$1,200 fix
That means $5,600 out of my investor's pocket.
We will get $2,900 down plus first months.
I want to sell at $95,000. Because of my experience in rehab, I feel this won't be a problem because of the terms I will be offering.
The payment to the buyer will be $925 PITI, which will give us a nice cash flow of $180 per month. ROI is a whopping 98%. The rents for a comparable home in this area would be around $800. While the buyers payment would be higher than market rent, there will be no bank qualifying, and in my area there are boatloads of people looking for no bank deals.
My questions are this:
1) Am I going too high on the sales price? Although I feel I can get someone to pay it, what are my risks going that high above market value?
2) How much higher than market price (cost of home)have you guys been selling?
3) Will you only do the deal if the PITI payment to borrower will be comparable to rents in the area? If you will go higher, how much typically is your max?
4) If you are splitting cash flow with an investor 50/50, what do you do in regard to him getting his cash out of pocket back?
From his point of view, he will get the $2,900 plus the first months of $925, for a total of $3,825. He will still be "out" the $5,600 down less $3,825 or $1,775. He is only recouping his money out of pocket at $90 per month, so to break even from a cash standpoint would take ~20 months. What do tell your investors when they bring this up? He understands that he will be entitled to the long term cash flow, but human nature wants it now for the risk. Any advice to help "ease the wound" in their mind would be helpful.
I guess an easy answer to questions 1-3 is if you can get someone to pay it, then what's the problem? Something is just not sitting right with that high a purchase price. Please give me your input.
I am excited because this process can be repeated many times over. I just need some parameters to go by. Please let me know what your experience has been. Once I feel good with this, 50 properties a year would be cake, and then to quote Mel Gibson at the end of Braveheart- "FREEEEEEEEEEEEEEEEEEEEEEEEEEEEDOM!"
Thanks for your help. This board is a godsend!
Rob
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| Joe Arlt
| "Re(1):Babe in the woods needs advice...." , Sat 24 Feb 21:27
Rob:
Sounds like you're making an excellent start. You're right that this is a "cookie cutter" niche. You just figure out a few of the details, make minor adjustments along the way, and just do as many deals as you want.
I agree with Dealmaker on virtually everything he posted. One minor difference in my strategy - when using money partners, the partner gets his net investment back at cashout before we divvy up the profits. I've tried to make my investment alternative to be as comparable to "normal" investments as I could. To me, to calculate returns on investment, you have to get your initial investment back, just like with a stock or a bond. The investor's net investment is his gross investment less his half share of the buyer's move in money. Another point - you take half the move in money!
And as far as the investor having to wait a whole 20 months (or whatever) to get his money back, I think you're presenting it the wrong way. Let's think this through. How long does it take with a 7% bond? About 10 years! And in the stock market, at a historical average (albeit unpredictable) return of around 12%? About 6 years! So a few years with our deals is not so bad. Remember that when structured correctly, our deals have LESS risk than with stocks. And also remember that our partners are not dealmakers. They're passive investors with limited choices. I'm not saying that we should not try to get them great returns - far from it. I'm just saying that passive investors have to be reminded from time to time that they need to be realistic regarding what sort of returns they should expect. If they want Level 5 returns, they need to do Level 5 deals themselves.
Joe Arlt
Super Wrapper
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