It’s been a crazy few years in this business. I get hundreds of leads from dozens of wholesalers every day. Maybe 1 out of 20 is a deal worth giving a second look. And maybe 1 out of 100 is something I would do. But they apparently sell these properties because they keep coming around with more of the same. Today, I’m going to talk about what makes a deal a deal. And it’s more than just the numbers. When sellers (or my TV) says “Let’s Make a Deal” I say “What Makes a Deal?” We will find out today on this episode of Flipping America.
You’ve heard the phrase, “There’s a sucker born every minute.” PT Barnum of Barnum and Bailey circus fame supposedly said that, although there is no evidence he ever did. I want to add to that: A lot of those suckers bought $50,000 real estate training from a hotel room and now are justifying that expense by paying too much for investment properties.
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- Andrew, from Fort Worth, has 2 questions:
- With the higher mortgage interest rates nowadays, how are home prices being adjusted (if any) to keep inventories moving?
- I’ve been predicting that we are going to see a slowing in the increase of home prices. I can’t see any indicators of a crash or even a big drop in prices. But higher interest rates put some homes out of reach. Mid-price and luxury home prices will probably come down a bit, but entry-level homes still have high demand. So it will be 6-8 months before you see much of a slow down in that segment.
- In the event a fix and flip becomes a fix and rent, what percentage of revenue are you holding in reserves for a) vacancies b) eviction costs c) repairs and maintenance?
- I typically count on half of my rental gross income to go to expenses. 10% (sometimes less) to management, and the rest is set aside for maintenance, repairs, and vacancy. I have some that perform more efficiently, but it’s best to plan for the worst.
- For the first few years I owned rentals I made the common mistake of using the net rents as income. When the repair bills came, I might have the money to pay them, but I also might not. That’s too much stress.
- Carlos, from Houston, asked a couple of questions on the live call the other day. I’m going to play them for you now.
Topic: What Makes it a Deal?
The Numbers work.
The Intangibles fit.
There is Alignment (vision, values, circumstances)
Return on Investment
Return on Cash
Return on Effort
Blessing of the Day
May those who love us love us.
And those that don’t love us,
May God turn their hearts.
And if He doesn’t turn their hearts,
May he turn their ankles,
So we’ll know them by their limping.
Tags: real estate, real estate investing, Flipping America, Roger Blankenship, rental houses, flipping houses, deal analysis
Twitter Tags: #realestate #realestateinvesting #realestateinvestments #realestateeducation #flippinghouses #RogerBlankenship #FlippingAmerica
Expected Air Date: Mon 9/19/2022
Flipping America 554, What Makes A Deal?
2022, Roger Blankenship
It’s been a crazy few years in this business. I get hundreds of leads from dozens of wholesalers every day. Maybe 1 out of 20 is a deal worth giving a second look. And maybe 1 out of 100 is something I would do. But they apparently sell these properties because they keep coming around with more of the same. Today, I’m going to talk about what makes a deal a deal. And it’s more than just the numbers. When sellers (or my TV) says “Let’s Make a Deal” I say “What Makes a Deal?” We will find out today on this episode of Flipping America. You’ve heard the phrase, “There’s a sucker born every minute.” PT Barnum of Barnum and Bailey circus fame supposedly said that, although there is no evidence he ever did. I want to add to that: A lot of those suckers bought $50,000 real estate training from a hotel room and now are justifying that expense by paying too much for investment properties.
[0:00] It’s been a crazy few years in this business. I get hundreds of leads from dozens of wholesalers every single day,
Maybe 1 out of 20 is a deal worth giving even a second look and maybe 1 out of 100 is something I would do but they apparently sell these properties because they keep coming around with.
Today I’m gonna talk about what makes a deal a deal and it’s more than just a numbers when sellers or my TV set says let’s make a deal I say what makes a deal.
We will find out today on this episode of Flipping America.
[0:52] Real estate. Wherever you are, whatever your situation, there is an opportunity for you. And now, here’s that flipping America guy, Roger Blankenship. You’ve probably heard the phrase, there’s a sucker born every minute.
Now pt barnam of barnaman bailey circus fame supposedly said that although I’ve looked and i can’t find any evidence that he actually ever did and I’ve thought that for years so he said that there’s a sucker born every minute whether he said it or not doesn’t really matter,
I just wanna add to that a lot of those suckers bought $50 thousand real estate training courses from a hotel room and now they are justifying that expense by paying too much for investment properties,
That’s the way it’s been for years my friends i’ve seen this come and it doesn’t seem to be going and people get out there they they’ve used they’ve browled from themselves they brought from their 401 K’s they’ve added a bunch of new credit cards and,
They’ve paid for training that they have no idea whether there’s a good fit for them but this show is not about that although I get on that rant from time to time this show is about what makes a deal,
[2:00] It’s important to know what makes a deal if you’re going to be in the business of doing deals. Now, before I really get too far into the content, I need to tell you how to get in touch with us and say hello and I I
I should say hello America and thank you Kathy nice to hear from you again today.
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[5:39] Let’s see if I can,
How are home prices being adjusted if any to keep inventories going I’ve been predicting Andrew that we’re gonna see a slowing in the increase of home prices,
I just did a show on the crash. We kind of interrupted our production schedule to put that in
I don’t see any anything indicating that we are going to have a crash or even a big drop in prices. I do see.
[6:17] Some of the luxury price homes the higher price homes in you know what the luxury price is a different price point in
Nearly every market it almost comes down to the county by county,
Sales of those are slowing down and some of those
Prices are coming back and I think that we will see a little bit of reduction in those prices because with higher interest rates now those homes are not.
[6:46] As affordable as they were even the mid price homes are not affordable as they were and so mid price and luxury home.
A mid price and luxury home prices will probably come down a bit but entry level home still have a high demand I was talking with my buddy John Durham who,
Owns a couple of the color Williams franchises here in North Georgia. Just a couple of hours ago, we were talking and
Talking about the market conditions and he he told me that he spends a better part of his day every day,
Teaching his agents people who should know better he said
You kinda read the tea leaves of the market that it crashes not eminent it’s not gonna happen John and I were both right there when things started going south in 2007 and we both learned how to make a lot of money in 2008 to 2012,
So a crash for us isn’t even the worst kind of news but it’s not gonna happen we’re not hoping for and it it doesn’t appear to be in the offing not at all.
What we are seeing though and John agree with me on this is a slowdown and that this luxury market but what he told me and the reason I brought him up is.
[7:55] And the entry level and even the mid level they’re still getting high demand they’ll still get four or five offers on every house that gets listed and it’ll be immediately
6 to 8 months before we see much of a slowdown in the mid level homes and i don’t see any slowing down at all,
Anytime in the next 12 months which is about as far as my crystal ball will focus.
[8:22] Andrew went on and asked in the event to fix and flip becomes a fix and rent what percentage of revenue are you holding in reserves for a vacancys B e eviction cost C repairs and maintenance.
[8:37] This is an interesting question and we do get.
For maintenance repairs and vacancy.
When you’re buying single family rentals, you need to buy low maintenance homes, small, low maintenance homes, and nicer areas as nice an area as you can find with good schools where family will move in.
And want to stay for many years.
[9:29] That’s how you make single family rentals really work. For the first few years, I own rentals. I made the common mistake of using the net rances income,
Then when the big repair bills came
Sometimes I had the money to to pay them but I also might not. That’s just too much stress. That’s not a way to live your life. It’s best to just whatever.
Whenever whenever the rent comes in course you gotta make whatever mortgage payment you have on it but set aside half of the rent.
[10:06] Listen everybody if you got a $600 payment.
Was principal interest, taxes, and insurance. Those taxes and insurance can be considered part of your expenses. So,
And they say you’re
You’ve got this on a $1200 income and most people would look at the $1200 increase
[10:45] Does that disappoint you?
Rental house is for it to be free and clear and actually there’s a lot of truth to that
If you’re only putting,
If you’re putting anything less than $400 a month in your pocket in positive cash flows on that house because of those people move out at the end of the month.
I mean, at the end of the year, or at the end of the least term, you are going to end up spending, you know, $2500 to turn that house around and make it rent ready.
Which actually means that for the most part.
You should not count on making much income. You should really just plan on enjoying the tax advantages of owning that property and enjoy appreciation over the years. You’ll make a little bit of money if you structure the deal right?
But you’re not going to get rich or retire on anyone particular house.
I think that the idea of owning 10 free and clear rental houses as a as a retirement plan is a sound plan for a lot of people,
And so if that’s the way you wanna head then that’s a good idea but remember free and clear is gonna allow you to.
[12:07] Make the maximum cash flow from every house but probably is it going to well no probably about it you’re not going to receive the maximum return on equity that you could get.
Very real and significant advantage of leverage in.
Alright, let’s take a quick break and when we come back, I’m gonna talk to you a little bit more about what a deal looks like.
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Just to prove a point during the break eye glance over it my inbound email that is designed for the wholesalers to send me deals and,
Looking right at the top of it I got an email from somebody who now actually in the last.
I don’t know 45 seconds another 20 emails have come in but,
I’m looking at this property in a town just outside of Atlanta in Douglasville
This is a wholesaler now. They reduced the price to $245 thousand and it’s a pretty nice looking house and 245 probably looks like the right price range as a retail sale now. So, I thought i wonder what the ARV is.
I may not be up to date with everything that’s going on in Douglasville. So, I just started doing a little research and guess what?
[14:08] The ARV on this house is at best 265 to 270 and someone just bought this house for 225.
So, if you buy a house for 245 and you sell the house for 270, if I list this give it to benefit of that. Let’s say you sell this house for 275. For those of you that are brand new,
It may sound to you like you just made $30 thousand and this is so easy but,
Pay taxes for the time period that you owe have owned it and you are going to
Pay commission. So, that accounts for about eight%. So, basically, $25 thousand out of pocket. Now, I think 275 is a,
Sale price on this house but that leaves you making $5000.
That means that also you paid cash and you didn’t borrow the money because if you borrow the money you’re gonna be out of pocket 10 grand and you’re gonna lose money on this deal.
[15:28] Sometimes I see on the TV shows I don’t know I haven’t watched the TV shows in a while so I probably cannot really speak.
To current affairs. I just lost interest in really years ago and about 5 minutes after I started watching them. Now, there are a couple of them actually. They’re pretty good and.
I just don’t watch them in a while. So anyway, usually on those shows, they will tell they will give you the.
Price, you know, they’re purchased in the rehab and then they’ll give you the.
Because everyone has the cost of capital and everyone almost everyone pays a commission to a real estate agent you have to figure those things in there and if you don’t you are truly truly unwise.
[16:18] So, let’s talk about on the positive side. What does make it a deal? Obviously, the numbers have to work. You’ve heard me talk for years about the ARV but,
Just in case someone is listening for the first time in your brand new at this,
That is an after repair value you need to know that before you buy the house so that you know how much you can offer for the house and allow for your
Expenses which include.
Ongoing maintenance which means you know mowing the grass and utilities,
And in the commission to sell it. You have to factor all those things in to make sure that you’re going to end up selling it for more than all of your cost. Hopefully, for enough more, it makes it worth doing the deal and I’ll get to that a little bit more later on.
[17:19] So, there are some specific formulas. Some of them were inexistence when I got into the business 20 years ago. There are a few formulas that I have invented myself.
That help me manage my business and expectations and understand whether a deal will work.
I’ll give him to you but you’re gonna have to write me an email. Okay. I’m here to help you but I want to help people who show enough motivation to.
At least flip open their laptop and shoot an email send it to questions at Flipping America. Net and just say I would like the formulas that Roger uses to run his business.
If your last form we’ll send them right out to you.
Figure the ARV you need to know what that is and you’re gonna need to get some help from a friend if your brand new at this maybe a realtor.
So you’re gonna have to be able to figure this out on your own.
[18:27] Let’s just say that you know how to come up with the ARV multiply that times. Seven that leaves a 30% gross margin at from that,
From that number you subtract out the cost of all of your repairs and when you have done that you will have a number that you can offer for the house,
That leaves you the 30% gross margin but out of that gross margin you’ve gotta pay your commissions your cost of capital and your other incidental and overhead so you’re doing really well if you end up with a 20% net margin,
On these properties and 20% net margin is not that bad.
Aren’t you just that, you know, trying to get too much here? Well.
[19:12] The answer is no because we’re taking an enormous risk and there is also the ever present possibility that things won’t go as planned.
Buying old houses to rehab is not like building new houses building new houses sounds harder but the truth is the cost are a lot more under control because you know what you’re doing and you’re using new materials and you know you could know what every single piece
And part and board and nail cost before you begin.
When you’re doing a rehab you may run into some things that you’d missed or you could not have possibly known when you were doing your initial inspection.
Window glass I had to replace i was rehabbing a house that was on a lake,
We didn’t even think about this but the lake had florida ceiling windows and many of the rooms and they were quite dramatic and beautiful and really awesome but,
The house was old enough that those windows were not tempered glass and for us to pass current code we had to replace that glass with tempered glass since it went down below 18 inches above the floor.
[20:33] Oh that’s that was a $20 thousand expense that we were not counting on when we bought that house things like that happen.
Okay so you.
When you have that kind of margin built in you have room for some errors and some unexpected expenses and you can still survive,
Everything goes well about half the time.
But some other times things are not gonna go well and you need that margin in there so you can still survive and and be able to make money,
At the end of the day.
[21:12] At the end of the day.
There is a reason why when it comes to buying real estate, they say location, location, location.
[21:27] That’s true.
When I’m flipping houses I want to flip houses in a in a market where I expect the time the days on market to be less than 45 now,
That over the past 5 years, that could be just about anywhere in the country. You’ll have days on market of less than 45 but,
As the market begins to
You will find that smaller towns have longer days on market and so that’s not where I want to be flipping houses when that time comes,
But when that time comes we’ll have more opportunities in the larger market so there’s always some place and something you can do
I’ll be honest with you. Even though I’m right here in Atlanta, well, I’m always honest with you. But I’m also being frank with you here.
I have not bought AA house to flip in Atlanta in 4 years.
[22:31] Why? Well, because the numbers are not working. The market’s too tight.
You can find deals that fit and still make good money in other towns because the market is so tight everywhere.
I’m going where the cheese is you know.
So the numbers have to work and the intangibles have to fit.
I have to consider the availability of a contractor. I have to consider how far it is, how often I’m gonna be able to get there.
I I need to look at other things too all of these things became part of the flipping America property grade the basic structure of the house is it basically just butt ugly.
If it is, it’s probably not something I wanna fool with unless there’s a quick way to make it not ugly.
But ugly houses don’t sell as well as pretty houses and you know it’s all in the eye of the beholder.
It’s all in what we are accustomed to and not just what we are accustomed to but what they buyers in that market are accustomed to seeing.
You can take a vacant lot and you can build a square rectangle with a flat roof and a lot of glass and call it a house.
And a lot of the small towns where I’m flipping houses now they would laugh you right out of town nobody wants that.
[24:00] In Atlanta it’s considered cool and I think a lot of major urban areas it would be considered cool too.
[24:07] In small towns like Aniston and Dothan Alabama it would be considered to edgy
And it would definitely definitely alienate a large portion of the buying population it probably alienates people here in Atlanta too but
They buying market is large enough diversion of and there are enough hip and trendy people around who think it’s cool to own something like that that you’ll get it sold anyway,
So you had to look at all of the,
Numbers and look at all the intangibles and then you must consider alignment,
When I talk about alignment I I want you to think of the deal aligning with three things first of all your personal vision for your life
I have a friend who’s vision for his life includes getting up every morning and sitting at a little cafe in Vienna drinking his espresso or Italian coffee or whatever it is and,
Checking on all of his projects in the US which are passive income real estate projects okay great that’s a great vision
If that’s your vision for your life you don’t have any business planning to flip houses long term because with your flipping houses in
Minnesota or Indiana or North Carolina you cannot be sitting in a cafe in Vienna.
[25:31] It may look like a great deal by the numbers and by the intangibles but if it doesn’t fit your life vision it’s not worth doing and then there’s another alignment
Issues that would be with your values.
There are a lot of things that I could do in this business to make really good money if I were willing to compromise on my values and take advantage of someone or put a substandard material into a property
If I wanted to do that I could I could make some good money however.
For a while owned AA business well I’d spent it I owned a granite countertop business for a while I thought I would achieve a level of vertical integration and I found out that my sales my lead salesperson basically
Routinely lied and overstated the square footage.
In a project,
And match the competition.
[26:44] When I found out she was lying I asked her to stop and she said everybody does it I said everybody hey you know if I believe that that’s really true.
And guess what.
Then there needs to be an alignment of circumstances. It may be a great opportunity. It may be perfect with the intangibles and it may fit your vision and values but it may.
Require something that’s just not a part of your life right now. Maybe it’s a deal that requires $200 thousand and you’ve only got $190 thousand. You don’t have that last 10. You’d probably figure out a way to make that work but maybe you only have half of the money that you need to make it happen.
Or maybe it’s not just that maybe it’s.
[27:37] And you need to spend time with that baby and you need to help spouse out,
And share the time and you know, sleep about half the time. You know, what it is when you have a new baby.
That keep you from being able to provide the time there’s,
In addition to the numbers the intangibles and alignment I want you to think about the returns the return on investment is a series of math problems that you can apply and I have fun doing that.
You know, there’s a return on investment for your flip but there’s also several ways of looking at returns.
To make sure that you’re going to get at least something in exchange for all this money that you’re putting into the deal. You wanna understand what that is because look, if you.
Put $300 thousand into something and you make a.
End up making a three% annualized return on it. You might as well just put that money into us index stock fund. You’re gonna do better. There are a lot of things that you can do so there’s no point in doing this for less return.
That’s that’s what I’m trying to get to here.
[29:05] This is where you just simply ask the question is it worth it do i wanna put all this in there for what I’m gonna get out of it only you can answer that question.
[29:14] You know I like to end up these shows with a blessing or a quote and here’s an Irish blessing for you today may those who love us love us and those that don’t love us,
May God turn their hearts and if he doesn’t turn their hearts may he turn their ankles so we’ll know them by their limping.
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