In Part 1 of this series, we interviewed and assembled our team of real estate professionals. These team members aid in locating deals; assist in the buying or selling process; help increase the property revenue and/or the retail value of the property. In Part 2 we discovered ways to put together a list of pre- screened willing sellers and qualified buyers. Let's put these ingredients together and systemize a process which enables regular deal flow, allowing the flexibility of using your own money or not; using your own credit or not, no personal income qualifying, collateralization or incurring any liability should you choose. These choices will depend on what "role" you decide to play in the deal.
The following 2 scenarios are intended to provide more than conceptual thought, but give practical steps to create and structure some deals. You'll see how a person can build a portfolio of income property or make money on shorter term deals simply by joint venturing.
Scenario 1
Strategy: to purchase a buy, fix, sell property and involve "pre-screened" members from your buyer's list as JV partners who will participate as credit partners, money partners or preferably one with both.
Your trusty realtor from your team of experts flags a property that is in need of some TLC. Instead of immediately jumping in the car and driving across town to go see the property, ask the realtor to send you a list of comparables. These are listings of properties in the same area as the subject property which are similar in size and description that have sold either last week, last month or in the last few months. The closer the sale(s) relative to the current date normally gives you the best indication of current value in the area. (You will consider many other factors normally done during the diligence period after you have the property under contract).
The "solds" will also reveal the number of days on market prior to sale and the percentage of the selling price relative to the listing price. This will allow you to understand what your potential sale price may be and decipher as to what "standard" the properties need to be renovated which in turn reveals how much you can spend with the hopes of getting the best bang for the buck. This will simply dictate a realistic selling price in order to move the property quickly. Once you are clear on these facts you may or may not decide to proceed based on the amount of potential risk vs. the amount of profit, but it will make your offer price allot clearer. We'll unpack this further and assume your initial calculations are favorable and you go see the property.
Once at the property, you must quickly prioritize the repairs begin calculating general clean up and repair costs (bring a contractor until you become good at this). You must become a master at knowing what to fix and what not to, based on the area. You'll make the largest return on cleaning the property, landscaping the front, painting and making the kitchen and bathroom nice.
When crunching the numbers, factor in the renovation costs, carrying costs, closing costs (lawyer and realtor on both ends), as well as your desired profit and subtract this number from what you and the realtor deem as your "after repair value" as a retail price. To be safe, I like to add 5 or 10% to my renovation budget and holding costs to allow for anything unforeseen. If the numbers are still favorable, make an offer on the property. You have now determined the most you can offer, so you can make an offer that is a bit lower to build in some negotiation room. Try to negotiate the property to under your top line. If the seller won't move at least to your top line, walk away! Don't force a deal... there's lots more out there.
Your offer will contain a number of standard clauses. In a contract, wording is everything so I will offer a few suggestions to give you the gist of what to include in your schedule A. (disclaimer: This is clearly getting into legal stuff and I am not a lawyer or trying to give legal advice. Please consult with a real estate lawyer on all your contracts.)
a) Use clauses that end with the wording "subject to the purchaser obtaining and approving... satisfactory to the purchaser"
b) An inspection clause (this clause is optional and some people don't use it as they are doing a buy/fix/sell, however it is prudent to be careful so even though your intent is to do a cosmetic repair job, an inspection may reveal a much deeper problem which may become a negotiating point or a deal breaker)
c) A clause that allows you access to the property known as a "right to show" clause. This can give you access to the property (with 24 hours prior notice to the seller) allowing you to bring your contractor(s) to ensure accurate or competitive quotes during your diligence period. Once you choose a contractor through this process, you may want to see the property again with your contractor prior to removing subjects to discuss your "game plan."
d) An assignment clause. This clause gives you the ability for another person, persons or company etc., to close on the property instead of you. When worded properly, this clause essentially hands over all contractual obligations to another purchaser and eradicates you from all liability and any further obligation (again, please consult your lawyer).
Once you have an accepted offer, you can now go to your selected buyers list and "present" the deal to them. You should create a standard template by which you send all your deals out for ease of understanding and consistency. Your presentation should include the following:
a) Purchase price
b) Down payment amount
c) mortgage qualifying amount
d) spreadsheet of comparables
e) projected turnaround time and description of the repairs needed
f) projected amount of renovation costs, closing costs, carrying costs, realtor commissions, marketing, etc.
g) the projected profit
h) JV partner's share amount, cash on cash return
I) Your share amount
j) Plan B description (what happens of the market turns and you can't sell immediately)
k) JV agreement outlining each partner's role / obligations in the venture and exit
Your role in a joint venture like this can be as simple as putting the deal under contract and assigning the deal to one or two people on your buyer's list for a fee. Most people on your buyer's list probably won't have the time or expertise to participate more than as the money or credit partner, allowing you a larger share in the deal.
In order to justify a larger share you must utilize your knowledge, contacts and time. Once you have the money partner and credit partner, you can then hire the crew and manage the process through to completion. You can have the money partner pay for all expenses; however you must be diligent in your bookkeeping in order to account for every penny.
Marketing the property as a "For Sale By Owner" is another key part of your duties (although you can list on MLS instead). I suggest a sign on the property during renovation which states that you give a $2000 reward to anyone who finds you a buyer. You can also "flyer" the neighborhood to bring attention to your property. Often people in the neighbourhood want their family or friends living nearby and alert them to the newly renovated property for sale.
Once the property sells, the investor receives their capital back and the profit is divided accordingly based on the JV agreement. You put cash in your pocket and your partner(s) will be asking you when they can participate again.
Scenario 2
Strategy: find a property for a mid to long term hold, find a prescreened joint venture partner to qualify for the mortgage and put in the 20% down payment.
There are many ways to approach finding a property for a long-term hold. Obviously utilizing your trusty realtor to find you property that produces good cash flow is your first step. Another way to find property is to call "for rent" ads. By calling these ads you're responding to a landlord that has a current vacancy. In many cases when calling a "for rent" ad, you may find yourself talking directly to the owner.
When talking to the owner you can find out particulars about the property such as property location, property condition, current rental amounts and current vacancies. Naturally as you're speaking to the owner you can strategically discover if the owner has any "pain points" in regard to this property and potentially others in his portfolio. Does the owner have too many ทาวน์โฮมมือสอง กรุงเทพ vacancies, problem tenants, overdue repairs or outstanding debts?
The old adage; "there are no bad tenants, there is just bad management "is applicable in respect to many landlords. Often an owner of one or more rental properties may find themselves in over their heads. You just may be/have the solution they are looking for.
Whether the property has been located through your realtor or privately through your own real estate scouting, it is important to get that property under contract. The clauses you use in your Schedule A are similar to the above suggestions. They should include your financing clause, inspection clause, assignment clause and the "right to show" clause.
The "right to show clause" is utilized in a different fashion than in a buy fix and sell. In this instance, we want to have access to the property to show potential tenants (pre-screened on another one of your lists) any vacant unit or units. Obviously if our JV partner knows it is a fully tenanted property prior to removing subjects, it is clearly a more viable deal.
Other key clauses can be used to determine the true income and expenses of the property. Your realtor or lawyer can word this clause to their liking, but essentially you're asking for the income and expenses.
Once you know the income and expenses, you can construct your presentation template for your JV partners. This presentation will include:
a) Purchase price
b) Down payment amount
c) mortgage qualifying amount
d) closing costs
e) initial repairs needed
f) a spreadsheet of comparables ("solds" and current listings)
g) historic appreciation in the area
h) actual current rental income
I) monthly expenses including: mortgage payment, property taxes, insurance, utilities, rentals, maintenance, 5% vacancy and potentially property management if there is enough rental income to substantiate this expense (and if you JV partners agreeable)
j) projected profits considering monthly cash flow and sale at agreed selling date
k) cash on cash return
l) brief outline of your JV agreement including your share amount, your joint venture partners share amount, desired length of ownership, provisions for unforeseen circumstances such as death of a partner or need to liquidate the property prior to the end of the agreed term etc. (Allow your lawyer to draw this agreement)
m) Description of each partner's role. To substantiate 50% of the monthly cash flow and 50% of the appreciation, each partner must bring something to the table. Your joint venture partner's role is obviously bringing the cash in a credit to the table. Your role is finding the property, negotiating the deal, being the liaison with the lawyer and mortgage broker and being the property manager through the length of ownership (which is equally or more important than the money or credit)
In both the above scenarios, you could be the provider of the money and look for the mortgage qualifier or you could be the mortgage qualifier and look for the money partner. Ideally if you can bring in the money partner and the mortgage qualifier together (maybe the same person), you can have a duplicable business model which can pay you significant rewards ongoing, simply by utilizing your time, expertise and your contact base by growing your lists and joint venturing.
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