Know Your Market And The Numbers...Or Pay A Price

To have staying power in this business you have to know both your market AND the numbers. Knowing your market tells you WHAT people want to buy or sell, and knowing the numbers tells you HOW MANY people can actually buy what they want or sell what they don't want. One without the other is useless.

I hear a lot of this, mostly from residential Realtors: "I really like to work with people and can help them buy the homes of their dreams! I got into real estate to make money by selling beautiful homes to them!"

After talking to some of these people, it is apparent that many have no clue about how their markets and the numbers complement each other in real estate. Many of the residential Realtors I met a year ago now have second jobs at the local Burger King (subsitute your favorite greasy spoon diner here), or are out of real estate completely and working an hourly job somewhere. Most of them know their markets but few of them understand how to apply the numbers to their markets. For example, it is common to most markets that most people want a 3-bedroom/2-bathroom house...BUT...

Only 30% of them have "A" credit and can qualify for conventional loans while the other 70% have to obtain "subprime" loans because of dinged credit and/or low income (ref. Robyn Thompson). These days, because of the mortgage loan mess we're in and the elimination of most subprime mortgage loans, I'm guessing that the percentage of people with "A" credit is even lower than 30% now and there are even fewer retail buyers than ever before. By knowing this, you can quickly weed out the suspects from the prospects and stop wasting your time with people who can't buy any house you have for sale. Also, most Realtors only want to serve that 30% of the population with "A" credit. Why not avoid the fierce competition in that relatively scarce market and figure out a way to serve the remaining 70%? Hint: seller financing.

What are some other numbers that can help you with your real estate business? I give some below. Every time I've violated the numbers, I've been burned. So if you learn nothing else from this post, just learn that if you break the "rules" of this business, you'll eventually pay a price to relearn those rules.

Many gurus sell wholesaling courses and proclaim how "You, too, can become a millionaire by wholesaling 10 houses a month like me!"

There are gurus who have wholesaled their ways to millions but let's look at the numbers (ref. Ron LeGrand, Marko Rubel):

Only 25% of the good deals are "ugly house" deals (rehabs, wholesales) while the remaining 75% of the good deals are "pretty house" deals (subject to's, lease-options).

This tells me that you have to have an a$$ load of marketing to "wholesale your way to millions". I know of one full-time wholesaler in Tampa, Florida (Mike Collins) who said he spends about $8000 per month in advertising to get enough leads to be able to sustain his business. If you are charmed by the wholesaling gurus into thinking that you don't need any cash or credit to become rich as a wholesaler, would this little statistic maybe help guide you to a better plan? I know a person in Augusta, Georgia whose business model involves buying houses "subject to" and then reselling them with lease-options ("pretty house" deals). He owns more than 50 houses this way and has done very well by paying attention to the numbers. His marketing is less than $1000 a month, versus the $8000 a month he might need to maintain his business at the same level as a full-time wholesaler.

A few other statistics that might help you design a more efficient business:

- Over 80% of the people in preforeclosure who manage to stop the foreclosure process by catching up payments, declaring bankruptcy, or other means end up losing their houses to foreclosure in the end (ref. Mark Klee and Caryn McKinney). This tells me not to stop marketing to people in preforeclosure just because they somehow get the foreclosure stopped. They'll be back and probably more motivated than ever to sell you their house. As a caveat, I've violated this rule four times by lending people money to catch up their mortgage loans and it's cost me about $57,000 in "tuition" to keep repeating this class. Hey, I'm a slow learner, so shoot me.

- Most of your buyers will be in the median house price range for your area plus or minus about 20%. If the success of your business model depends on quick resales of the houses you buy, do you really want to buy those $1 million mansions in your market if the median house price is only $170,000? What if you had a short-term, high-interest hard money loan on one of those $1 million behomoths? If you go against the flow with this statistic, just make sure your mortgage loan isn't from Tony Soprano or Don Corleone.

This blog post was part informational and part rant. I hear all the time from Realtors and others trying to get me to overpay for a house by telling me about "how great a deal it is" or how "it has so much potential" (a favorite Realtor phrase). Whenever someone says that to try and get me to buy into a deal, I look at the most important number of all: How much of their own resources do they have at risk in the deal.

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New Lead-Based Paint Rules Take Effect In April 2010

The Environmental Protection Agency (EPA) is enforcing new lead-based paint rules for rehabbers in April 2010. If you rehab junkers, this one could get expensive if you miss it. For the complete regulations, see the EPA's Lead: Renovation, Repair and Painting rule.

A quick summary of the new EPA lead paint rule follows (from the National Association Of Home Builders):

1. Training and Certification

Beginning in April 2010, firms working in pre-1978 homes will need to be certified. Along with the firm certification, an employee will also need to be certified as a Certified Renovator. This employee will be responsible for training other employees and overseeing work practices and cleaning. The training curriculum is an eight-hour class with two hours of hands-on training. Both the firm and Certified Renovator certifications are valid for five years. A Certified Renovator must take a four-hour refresher course to be recertified.

2. Work Practices

Once work starts on a pre-1978 renovation, the Certified Renovator has a number of responsibilities. Before the work starts this person will post warning signs outside the work area and supervise setting up containment to prevent spreading dust. The rule lists specific containment procedures for both interior and exterior projects. It forbids certain work practices including open flame or torch burning, use of a heat gun that exceeds 1100°F, and high-speed sanding and grinding unless the tool is equipped with a HEPA exhaust control. Once the work is completed, the regulation specifies cleaning and waste disposal procedures. Clean up procedures must be supervised by a certified renovator.

3. Verification and Record Keeping

After clean up is complete the certified renovator must verify the cleaning by matching a cleaning cloth with an EPA verification card. If the cloth appears dirtier or darker than the card the cleaning must be repeated.

A complete file of records on the project must be kept by the certified renovator for three years. These records include, but aren't limited to: verification of owner/occupant receipt of the Renovate Right pamphlet or attempt to inform, documentation of work practices, Certified Renovator certification, and proof of worker training. NAHB believes that record keeping will be a major enforcement tool for the regulation.

4. Exemptions

It is important to note that these work practices may be waived under these conditions:

•The home or child occupied facility was built after 1978.

•The repairs are minor, with interior work disturbing less than six square feet or exteriors disturbing less than 20 square feet being exempt.

•The homeowner may also opt out by signing a waiver if there are no children under age six frequently visiting the property, no one in the home is pregnant, or the property is not a child-occupied facility. EPA has proposed removing this opt-out from the rule.

•If the house or components test lead free by a Certified Risk Assessor, Lead Inspector or Certified Renovator

Important Deadlines

December 2008:
Remodelers must start distributing the new EPA pamphlet Renovate Right when working in pre-1978 houses.

April 2009:
Training providers may begin applying for accreditation. Once training providers are accredited, they may offer training courses that will allow renovators to become certified.

October 2009:
Renovation firms may begin applying to EPA for certification.

April 2010:
New rule becomes fully effective. Work practices must be followed.

For more information about this item, please contact Therese Crahan at 800-368-5242 x8211 or via e-mail at tcrahan@nahb.org.

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FHA suspends 90-day seasoning requirements starting February 1, 2010

Folks, great news, especially for those of us doing short-sale/flips. A few key things to note, though, from the press release:

[Begin excerpt]

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

•All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.

•In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.

•The waiver is limited to forward mortgages, and does not apply to the Home
Equity Conversion Mortgage (HECM) for purchase program.

[End excerpt]

The press release and actual HUD "flip waiver" can be read at:

HUD Press Release Suspending Seasoning Requirements

Actual HUD Flip Waiver

One caveat to those who use 24-hour transactional lenders to fund their deals is that same-day double closings are still not allowed since the property must be sold by the "seller of record", which means that there is not enough time with a same-day double closing to have the investor be the "seller of record" when this is checked. More likely, a double closing will take about a week to execute to allow for the investor to become the "seller of record".

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Yet Another Real Estate Blog???

I know you're thinking, "Here we go again. Another blog on real estate and creative finance."

Yes, there will most likely be overlap with other blogs and with what experts, who are much more knowledgeable than me, write about. But while I can't hope to be more of an "expert" than those who are truly paving the way for us common folks, I'll try to combine the best of what I read, see, and hear and just maybe, at times, post some information that truly helps others in this field.

Just to give you a little information about my background, my formal education is as an engineer. I had already owned one rental house in my hometown for a number of years and always had a mild interest in real estate but never saw it as a way to make a living. I wasn't aware of any other way to do real estate except as a buy-and-hold landlord, which wasn't very appealing, so I started studying other ways to make a paycheck from real estate. I came across this strange concept called "wholesaling" and put a classified ad in the newspaper stating that, "We Buy Houses!", and I also started sending out direct mail to FSBO's (For Sale By Owners), FRBO's (For Rent By Owners), and preforeclosure leads.

From my marketing, specifically a bandit sign, I got a house lead that I was able to flip for about a third of my annual salary. This deal took me about 45 minutes of total work, including attending the closing to get my paycheck. After that, I almost immediately quit my job at the research lab where I was working and entered the real estate world full time. I've never regretted that decision and am having a blast as a full-time real estate entrepreneur. Of course, there continue to be hassles to deal with but this is a field where we determine our fates, not some boss who probably doesn't have our best interests in mind.

Anyway, as this blog matures and I learn more about creative real estate and business finance, I'll post what I learn so that someone might benefit.

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