Fixin’ to do a Rehab by Jerry Fink

Jerry Fink has been involved in various aspects of real estate for over 30 years.  In the early 2000’s, after being caught in another corporate downsizing, he went into real estate full time.  He’s my go-to for all things rehab, because his background as a CPA makes him very process-driven. He leads to all-day property tours at my Hands-On Wholesaling Academy, which is coming up again August 22-25

O.K., so you have gotten it into your blood, mind and soul that you want to be a Rehabber.  Take that ugly, smelly eyesore and turn it into the gem of the neighborhood.  No problem, right?  After all, you’ve watched all the shows on TLC and HGTV.  You know all about what countertops to choose…what color schemes will wow your buyers…and, that bathroom layout you have etched into your mind is killer….

Well, there may be just a bit more to it than you think.

In this article, I want to address some of the areas you will want to start with before ever lifting a hammer or paint brush.  Some of the things which, if done correctly ahead of time, will make your project run infinitely smoother, save you time and money, and allow you to keep any hair you currently have.

What Needs to be Done?

Believe it or not, this is one of the areas where most of us…even experienced Rehabbers…have some of our biggest challenges.  Do I replace the windows?  What about the furnace?  Should I use Home Depot countertops…Corian…mid-range?  There are a myriad of things to consider here, and the more experienced and wise you become, the closer you will be to “guessing right”.

For instance, one of the first things you must consider is:  Who is my end buyer / user – are you rehabbing for a landlord or for a retail buyer?  Vinyl flooring in a rental unit is just fine, but a retail buyer will really be impressed by ceramic tile in the kitchen and bath, and *may* be worth the extra cost.

So, once you have thought through who you are rehabbing for, and what “level” of rehab you are doing, you need to put together your “Scope of Work”.  In my business I have 2 levels of these; one for “Light Rehabs” (under $10K of work), and one for “Full Rehabs” where I am gutting a property, or getting into replacing complete systems.  For this article, I will be primarily discussing the Light Rehab Scope of Work.

How will you do this?  Do you think you will remember what needed to be done once you get home?  Not likely.  You could jot down some notes on a yellow pad, which would be better.  How about using a program that prompts you through all the common things which need to be done to a house?  Now we’re talking…

Over the years I have developed a program for doing just that.  It has line items for each component in each room.  I simply notate whether I am going to replace the duplex outlets or just the cover plates?  Is a new kitchen faucet in order?  What color should the living room be painted?

What Materials Will you Need and Where Will you Buy Them?

After you have decided what needs to be done, you will need to figure out what materials are required, right?  If you decided to change out the duplex outlets in each room, you need to add up how many and what color.  You need to calculate the number of single plate covers, and the number of double plate covers.  How much of that “oops” purple paint will you need to do that second bedroom?  And, how many trips to how many carpet outlets to find a suitable carpet at a price you are willing to pay?

I have to admit, early on I spent waaaayyyy too much time carpet shopping, and bargain shopping for this and that.  Finally, it occurred to me that MY TIME is worth more than that.  So, I went on a quest to find materials, and color schemes, and fixtures which work…and did the shopping just one time.

And, you may do just that.  Off you go.  Hours and hours at Home Depot and Lowes, the carpet outlets, the appliance store, the cabinet stores….and eventually you have come up with your list of appropriate materials.  So, now you simply marry your scope of work, to the materials needed, to the appropriate materials list, and the supplier list and you’ve got it made.  Well, pretty close to true.  You still have those pesky “sundries” items to consider:  Do we have any paint rollers left?  What about painters’ tape?  Did we use the last of the drywall compound (for patching)?  If you and your contractors are going to be efficient, all those things need to be available, too.

How about one better?  What tools will I (or my contractors) need to do what needs to be done?  Over time, I’ve even created a tools checklist, so I don’t have to hear my contractors sing “can’t do this today, because I forgot my whatchamagigger”.  Again, time saved, and productivity increased.

Who Will Do What, and When?

Ok.  So, you have decided what needs to be done.  What materials you or your contractors will need to do what needs to be done.  And, where you will buy those materials.  One main step to go before that first hammer is lifted.

If you have dabbled in construction, rehab, repairs, mechanics, etc. most of your life…your first inclination will be to do all the work yourself in the evenings and on weekends, and save all that labor cost.  Yeah, you can do that, and maybe do one or two rehabs a year.  That is fine if it is your hobby.  But one of the truisms of this business is that time is money.  Your single biggest enemy is not the cost of doing the rehab, but the cost of carrying that house.  Interest costs.  Gas and electric bills.  Taxes.  Insurance.  They will eat you alive.

However, if you are disciplined enough to get your scope of work completed, and organized enough to have your materials ordered and delivered, be smart enough to hire people to do the things that they do day in and day out.  I can hang and finish drywall, but the pros can have a house finished before I am through with one room.

I recently saw one of the Extreme Home Makeover shows where they built a 7 bedroom, 4,500 square foot home in under 55 hours elapsed time.  My head was spinning thinking about the logistics of pulling that off.  While we won’t be doing anything quite like that, the concepts are still valid – creating a coordinated workplan which will allow the right people, with the right skill sets, to have the right materials and supplies available and do their part in the overall project.  You can plan this on a napkin, or you can do it in an industrial strength program they may use to build a new stadium.  For the level of rehabs we do, a simple one-page overview chart works just fine.

Rehabbing a house can be an extremely satisfying experience.  To this day, I absolutely love going into a neglected or abused house and visualizing the end product.  I see the fresh paint and the new carpet.  I see the neatly cut-in landscaping beds.  I see that welcoming red front door setting off the blue siding and white trim.  I see the product that today’s buyers  and renters are looking for.

But the best part is this.  With the experience I have, and with the systems I have created, I can see all this in my mind…and I can watch it unfold…and I can manage it so much more easily.

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Fight Socialism: Be a Mentor by Pete Fortunato

            Don’t tell him I told you so, but I love Pete Fortunato. He’s the smartest man in real estate and a true guru’s guru. He’s also an unabashed libertarian who speaks and writes about things other than real estate, as in this article.

            Pete is making a rare REIA appearance in Cincinnati on April 4th. It’s just a 90-minute, no-sales presentation on how to use what you have to get what you want—including a mentor. If you can get there, do; there’s more information at  www.CincinnatiREIA.com

            It was a radio talk show. An apologist for my generation (baby boomers) was explaining about how we were all victims of the lies of the 1950’s.

            The speaker said that as children his generation had heard and read many Horatio Alger stories; stories in which a young, ambitious person dreamed of becoming a financial success and went on to turn that dream into reality.

            The speaker argued that he had believed that he, like the heroes in those stories, would create success for himself. Reality, however, is different than fiction and the difference had left him and his fellows disappointed and depressed.

            “We believed those stories!”, he said. “We set goals, worked hard and we still failed. Now people have given up. They no longer believe that they can create a better life.”

            The ingredient that existed in fiction but was not available to them in the real world, he alleged, was the mentor.

            In each Horatio Alger story, the successful entrepreneur discovered a mentor who was willing to teach an ambitious youngster. In the real world people are too jealous of what they have to share trade secrets with anyone. Successful people do not share and we fail and despair for lack of mentors, he concluded.

            I listened to the radio in disbelief. What I was hearing was in direct conflict with my experience. Every successful man or woman who I have met has been delighted to find a person who is interested in what they are doing. I have been advised and helped again and again.

            I was taught to choose carefully the people with whom I associate.

            I know that one takes on the attributes of those who surround him. Optimistic, forward-thinking, purposeful people have always been my friends. It can be (and should be) that way for everyone. Such people are generous in their encouragement and aid for anyone seeking to create a better future.

            The talk show haunted me.

            Maybe, as role models have changed from accomplished people to teachers in government schools, the majority of Americans have changed from people who work for what they want to people who vote for what they want.

            Maybe, as we have changed from a society of producers to a society of consumers a jealous American majority has come to believe that successful people are dominated by envy rather than by optimism.

            Maybe, as civilization has become more and more litigious, successful people who have much to offer have taken on such a low profile as to be unrecognized by others.

            In your world I know you have found business and financial friends. I urge you to cherish and nurture them. I hope that you will seek out and encourage others to stop hoping and start working to create a better tomorrow.

            Don’t let a promising person despair of finding support and encouragement.

3 Stages in Your Journey to Success

For whatever reason, a lot of real estate investor have this idea that a career path in real estate is strategy-based; we’re all supposed to start with wholesaling, move on to the bigger checks (and bigger complications) of retailing, then buy single family rentals, and then, we we’re really knowledgeable, wealthy and experienced, end up in apartments or notes.

In real life, there’s no such prescribed life cycle; lots of people start out in rentals, or even note-buying; I myself discovered wholesaling only after nearly 5 years in the lease/option business.

But there IS a path that we should all recognize and be on that has nothing to do with our age at entry, or our favorite asset class or exit strategy, and that’s the journey from trading our hours for (highly-taxed) dollars to having our lifestyles completely paid for by our assets.

This metamorphosis takes place in 3 stages, the terms for which were coined by the great Pete Fortunato.

     Starters are folks who are still learning and exploring the trade. They’re willing to do what it takes to get educated and to do the hard work of finding deals, which means that, in a sense, they’re still trading hours (spend finding, constructing, and managing properties) for dollars. If they’re smart, they’re doing all this work to set the stage for the next step in their evolution, where they can produce more of their income from more tax-efficient, less strenuous money created by owning assets.

Once starters begin to gather some real assets and see that those assets actually produce rental or interest income that the government doesn’t take so much of, they Estate Builders. Estate builders are in the process of acquiring enough property (whether that be single families, multi families, commercial properties, or even notes) to produce enough income to completely pay for their lifestyles. How much property that is depends on the type of property and what “lifestyle” means to the individual; as few as 10 or 15 paid-off single family homes could produce enough income to launch an estate builder into the final, and hopefully longest, stage.

When that happens, the estate builders become Enders, meaning that they no longer, for the rest of their lives, have to get ANY income from trading hours for dollars, nor do they need to get any more assets to live happily ever after. This doesn’t mean that the ender never does another deal, but she does it because it’s interesting, or helps someone else get started, or to set up the next generation of her family for wealth, not because she has to.

Obviously, most people who get into real estate, at whatever age and in whatever strategy, have as their goal to be an ender, as quickly as possible. They may not always be able to state that goal quite in the way I did; they’ll say things like, “I just don’t want to have to worry about money anymore” or “I just want to be making enough to stay home [or have my spouse stay home] with the kids” or “I don’t want to have to work until I’m 85”, but it all amounts to the same thing: “I want my assets working for me, so that I can do things with my TIME other than work for money”.

Each of these stages has its own set of challenges: with Starters, it’s  getting over the fear, getting the initial education, just sticking with it long enough to actually become estate builders. With estate builders, it’s about getting enough money to get all the properties they want to become enders, and about the fact that they typically have a lot of debt against their properties during this stage, and about finding the time to find deals when they’re also now managing x number of properties or assets AND, possibly, still working a job. With enders, it’s continuing to find significance when they’re reached a goal that they’ve worked toward for, often, decades.

Sadly, people in the various stages of their journeys don’t interact much.

A say “sadly”, because starters, estate builders, and enders have a lot to offer each other—and most of them don’t know it.

Let’s take a typical starter, who goes to a typical real estate association meeting, and quickly realizes that 70% of the people in the room are starters, just like him. But he’s determined to make connections with the “do-ers”, which is what he considers the estate builders in the room to be.

So what does he do? He introduces himself to every person he can find who’s done more than 10 deals, who seems to really understand the local market, and who no doubt has a lot of connections and resources that the Starter would like to know about. And then he says the fatal words: “I’d love to take you out to lunch sometime, and pick your brain. You can even choose the place”.

This poor starter quickly becomes shocked and disillusioned by how unfriendly and unwilling to mentor a new guy the successful people are. He gets reactions ranging from, “No, I don’t have time for that” to “I have a mentoring program; if you want to talk to me, you’ll join it” to, as I recently heard, “I’ll go to lunch with you for an hour if you pay for lunch AND give me $100”.

But let’s flip that around for a second and look at what’s happening in this scenario from the point of view of the typical estate builder. He’s done his time, had some success, learned a lot at the cost of a lot of hours and, sometimes, a lot of money. He’s busy—he’s still very actively working in at LEAST his real estate business, but might still have a job, too.

And he gets approached 10 times at every real estate meeting (that’s not an exaggeration) by a starter who’s worked up the courage to talk to him, with the request for “Just a minute of your time to ask one quick question”. If he answers all of them, he literally won’t get to go to the meeting he took time out of his busy scheduled to attend. And then he gets the inevitable “Can I take you to lunch sometime?” question, which to him sounds like, “Can I spend $30 to try to learn everything you know about real estate in an hour, and also to try to get you to help me anytime I need it from here on out?”

If the estate builder has been around that block a few times—and most have, if they regularly attend seminars or workshops or association meetings—he’s well aware that he can spend dozens of hours with a starter that he really DOES want to help, only to have that starter take none of his advice at all, and disappear off the face of the earth after a few months. Oh, and let’s remember that the estate builder may even believe he can really ‘help’, since he’s not an educator, and doesn’t have well-formed thoughts and opinions about what other people should do to get started, and maybe he’s an introvert on top of that, and the idea of eating a meal with a stranger is just totally unappealing.

The problem here isn’t that Starters are needy and greedy or that Estate Builders are closed off and unhelpful. It’s that neither person in this scenario is thinking about trading value. One is thinking about getting value, and the other is thinking about having to give one kind of value—actually financial instruction—without getting similar value in return.

What the starter SHOULD be thinking is, “What does this Estate Builder need, that I can provide, in return for what I need, which is help?”

And once you start thinking THIS way, the opportunities for each stage to work with the others are endless. Starters can bring leads, deals, sometimes money, energy, willingness to trade hours in construction, or putting lockboxes on doors, or taking pictures of vacancies, and trade them for the ability to tap the knowledge and resources of the estate builders. Estate builders can trade their knowledge for more opportunities—because if there’s one thing starters are good at, it’s beating the bushes for opportunities that they don’t know what to do with.

So starters, your main job is to get yourself educated in every way that you can, so that you can stir up opportunities that estate builders can participate in, while you learn, and so that the estate builders don’t feel like they’re obligated to teach you from scratch. Estate builders, your job is to understand what starters can do for you that you can’t or don’t want to do for yourself, and then give them what they really want—access to you—for those things, instead of just assuming they have nothing to offer. Oh, and to present this trade to them in a way that doesn’t make them feel belittled or victimized.

And enders? Your job is simple. Help the estate builders and serious starter get where you are, by helping them construct deals that they otherwise can’t, because what you want is purpose, and intellectual stimulation, and this will provide both—plus investment opportunities for all that cash you don’t know what to do with anymore.

If we all recognize that it’s OK to ask for value to give value, we can all be enders, faster.

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Private Lending and the SEC by Alan Cowgill

Alan Cowgill is certainly the best-known name in our business in the field of raising private money. A 25+ year landlord/rehabber, he’s raised millions in private money for his own business, and helped others raise millions more. If you happen to be in Ohio, he’ll be visiting Columbus (www.CentralOhioREIA.com) and Cincinnati (www.CincinnatiREIA.com) in February; it’s worth seeing his approach to getting private lenders.

While speaking all over the nation, meeting thousands of real estate investors the past few years and getting asked questions on the SEC, I realized that there is a lot of confusion concerning SEC regulations as it applies to private lending.

The confusion seems to arise because of the following:

  • Each state establishes their own regulations and exemptions.  Therefore, there are different guidelines depending on where you live.
  • If you cross state lines with your private lending, i.e. houses in one state and lenders in another, the Federal SEC regulations come into play.
  • There are a lot of half-truths floating around and when people hear these, they get confused and possibly fearful.

To be better equipped to answer everyone’s questions, I decided to hire an attorney to do some research.  First, let’s cover the question of “a security” and whether real estate even falls under the auspices of the SEC:

What is a security?

The term “security” is broadly defined to mean “any certificate or instrument, or any oral, written, or electronic agreement, understanding, or opportunity, that represents title to or interest in, or is secured by any lien or charge upon the capital, assets, profits, property or credit of any person or of any public or governmental body, subdivision, or agency.”

That’s the language used on the website of the Ohio Division of Securities.  This definition includes such common items as shares of stock, warrants and options, promissory notes, membership interests in limited liability companies, bonds and debentures.  Limited partnership interests are considered to be securities, while general partnership interests are generally not considered to be securities.  The statutory definition additionally includes the term “investment contract,” which has been construed by court decisions to include numerous investment opportunities and business opportunities, which at first glance may not appear to fit within the definition of “security.”

Does that mean private lending may be considered securities?

When you are borrowing money from private lenders, you are offering them a security.  You’re making an IOU to them, by borrowing their money and promising to pay them a fixed interest rate over a certain time period or when the sale of a property is concluded.

When a company sells shares or stock, it’s giving the purchaser of the securities an ownership interest.  Shareholders make their money when they get dividends on their investment or when they sell their stock.  Private lenders are lending you funds and they make their money by receiving the interest rate you’ve promised them.

All states allow securities to be offered to lenders when they are either registered or offered under a proper exemption from registration.  Securities laws do define debt as a type of security.  It means that securities laws and regulations apply to the real estate business.

What Securities Laws Require:

What I found was that each state is able to establish their own regulations, but they all have the same pattern.  So, I’ll use my state of Ohio as a model to explain what is typical for nearly all states.

  1. In Ohio I can acquire up to 10 private lenders without having to file any paperwork with the state division of the SEC. ONce I file the proper paperwork my number of lenders is unlimited. Different States have different numbers and most are higher than Ohio.
  2. As long as my properties and lenders are in Ohio, JUST the state regulations apply. If I have lenders and or houses in different states, then the Federal SEC regulations apply.
  3. If I go over 10 lenders, the paperwork I need to file with the state can be fairly simple.  But I’ll want to hire an SEC attorney skilled in filing.
  4. I need to give a disclosure statement to potential lenders.
  5. I can’t “pool” lender money unless I file different paperwork
  6. I canNOT use the word ‘guarantee’ in my advertising. That would be misleading private lenders and considered FRAUD.

As a side note, some of you are under the impression that the SEC is out to cause you problems.  The SEC is not the bad guy; they are looking for the bad guys.  They want legitimate business owners to prosper.  In many states, they are very willing to help you if you just ask.  They just want you to comply with their regulations.

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Win ALL of My Homestudy Courses…

Who Wants to Win $6500 Worth of Home Study Courses?

It’s time for the 1st annual “Get Your Year Started Right” giveaway, and one lucky winner will take home every home study course I have–detailed instructions, audios, forms and contracts for:

  • How to wholesale houses for quick cash
  • How to build a wholesaling business that runs without you
  • How to buy properties with owner financing
  • The fundamentals of real estate investing
  • How to get all the leads you can handle with direct mail marketing
  • How to sell deals “repair for equity” for huge returns with no rehab
  • How to negotiate with sellers

Anyone can enter, and we’ll draw the winner at random on January 2nd.

Here’s what you do:

  1. Fill out this form.
  2. If you win, we’ll notify you via email on January 2nd!

Someone is going to get an amazing start to 2019…will it be you?

Good Luck!

 

 

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