Why Price-Per-Square-Foot Gets Investors Into Trouble?

by | Feb 13, 2019 | Blog

One thing that confuses new and seasoned investors is taking the price-per-square-foot approach to determining the value. What does this mean? Let’s take a look at the following comps and analyze them:

  • House #1 has 1500 square feet and sold for $145,000 or $96.67/square foot
  • House #2 has 1800 square feet and sold for $150,000 or $83.33/square foot
  • House #3 has 1600 square feet and sold for $147,000 or $91.88/square foot
  • The subject property has 2200 square feet so the ARV should be $199,381, correct?

This is absolutely not correct! How did this happen? This happened because the investor took the selling price and divided it by the gross living area. So in this example, they took the three price-per-square-foot values above and added them together to get $271.88. Then they divided that number by three to get $90.63, which is the average price-per-square-foot of the three comps. When you multiply $90.63 times 2200 you get $199,381. Mathematically, this seems to make sense; however, this is one of the biggest mistakes you can make, and sadly, it happens all the time.

The reason you don’t want to do this is the methodology is flawed. According to Ohio appraiser Mike Armentrout who wrote an article titled “The Reality of Price Per Square Foot”:

“The primary fault with $/SF is that it encompasses every feature of the property and not just gross living area. Only calculating the relationship between size and sales price ignores all the considerations a potential buyer may make. If we were comparing two properties that were identical with the exception of size, then it is rational that the larger of the two may sell for more and thus the $/SF could be an accurate indicator. On the other hand, if we had two identical homes in terms of size but one had a larger wooded lot and sold for more, the equation would not be as reliable. As properties have more dissimilar amenities and features, the less reliable it becomes a function of indicating value. This is simply because other factors are not directly related to the gross living area.” 

I couldn’t agree more with this quote. Also, given a specific market, higher square footage homes generally sell for a lower $/sqft and lower square footage homes sell for a higher $/sqft. Ask yourself the following question: would you pay 33% more (or $50,000 more in the above example) to get 400 additional square feet of living space? Of course, you wouldn’t. Neither would a market buyer. In fact, if there were a buyer like this for some crazy reason, the property would not appraise as the buyer might expect, because there is probably no justification for value this high.

Keep these things in mind when you are evaluating a property. If you need help, just contact us and we will guide you through it. For more detailed information about determining the ARV of a house, read my blog The 12 Steps to Determining the ARV.  And don’t forget oddities like garage conversions! Check out this blog here to determine how they can affect the ARV.

3 Key Factors that Impact the Real Estate Market

by | Feb 6, 2019 | Blog

There’s an old saying that my friend’s father used to say, “Believe half of what you read and none of what you hear.” If you watch the news each day and/or read the newspaper, you may have heard or read that real estate prices are going to continue to rise. You may have also heard or read that real estate prices are going to decline. So which is it?

Here are a couple of things to keep in mind: First, no one has a crystal ball where they can accurately predict the future. However, it is important to understand where you are in your market cycle so you can adjust your investment strategy accordingly. Second, nothing will prevent you from investing in real estate more than worrying about things you cannot control.

With that said, here’s what I consider the top three factors that CAN affect the value of a real estate in your market:

  1. Specific economic conditions in your local real estate market like the availability of housing and the corresponding demand (basic supply and demand) are the most important considerations. Your local economy (i.e., jobs and other economic activity) has the biggest impact on the real estate cycle in your market. How do you determine what the market is doing in your investing area? Talk to some active real estate agents and/or brokers that consistently work a given market. They will know the days on market and months supply of inventory. Those are key indicators that can drive values up or down. Also, if you know some good appraisers, they will have similar information, and probably on a broader level.
  2. The forces behind mortgage financing can play a tremendous role on a macro scale that impacts every market in the country. Most mortgage financing is provided by federally backed loans from Fannie Mae, Freddie Mac, FHA (Federal Housing Administration), or VA (Veterans Administration). These lenders have specific guidelines that change over time and impact a borrower’s qualifications. The stricter the guidelines, the fewer the eligible borrowers. Mortgage lenders who underwrite these products will have the answer here, as they know the requirements as they change.
  3. Mortgage interest rates play a major role in the real estate market cycle and change, sometimes multiple times, each day. As mortgage rates increase, while housing prices remain flat or increase, mortgage payments will also increase, making it more difficult for someone to qualify for the same priced house as when rates were lower.

I encourage you to talk to your local real estate experts such as your trusted agent/broker and or appraiser. Ask them what the status is of your investing area. Also, talk to an experienced mortgage broker that works with both homeowners and real estate investors. They will typically have multiple lenders they use for underwriting and can give you a snapshot of the latest rates for both the retail side and rental property side. Knowing this information will help you make an informed decision and help answer the question of where values may be headed.

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Keys to Getting Started In Real Estate Investing

by | Jan 30, 2019 | Blog

One of the hardest things to do in life is to get started. Whether it’s a new job, a new business, or a new relationship. All of these involve challenges because of the unknown, the unforeseen, and a general lack of knowledge and experience. This can create anxiety and fear, which prevents you from moving forward on a path to success. The same is also true for getting started in real estate investing.

I want to help anyone struggling with those first steps, so they can get started in real estate investing. I have outlined what I believe are four keys for putting you on a path to success. So let’s dive into them.

KEY #1: KNOW YOUR REAL ESTATE INVESTING STRATEGIES 

In the single-family real estate investing world, there are basically three investing strategies: wholesaling property, flipping property and owning rental property. Your job is to consider which one(s) you want to focus on, and put a plan together to execute on them. For example, if you want immediate income, wholesaling is the way to go. If you are looking to make large profits, consider finding a deal with enough equity where you can rehab and flip it. If you are looking to build long-term wealth and generate passive income, then you need to buy rental properties.

KEY #2: GET A SPECIFIC GOAL DOWN ON PAPER 

The biggest key to getting started is setting a goal and writing it down on paper. I know I’m preaching to the choir with some of you, however, others might be thinking, “I just don’t need to do that.” Really? How will you be able to measure if you are reaching your target if you don’t really have one? Do you really want to leave it up to chance? Wouldn’t it be better to take charge and have a plan? Write your goals down.

KEY #3: NETWORK WITH OTHER REAL ESTATE INVESTORS

Other real estate investors are going to be your best resource for networking, creating a mastermind group, and building the rest of your team. You want to reach out to them, learn from them, and discuss your ideas with them. If you want to get to the next level with your real estate investing, networking is a must-do.

KEY #4: TAKE ACTION! 

All that is left at this point is for you to take action. How do you do this? Go find a pen and paper and write down your action plan.

If you are still struggling with this, go to YouTube and watch “How to Take Action” by Tony Robbins. That will help put things in perspective for you and help you get started.

Now get moving! Identify the next steps and TAKE ACTION! Want to wholesale properties? Find a wholesaling group on Meetup.com and attend their next meeting.  Want to buy a flip or rental property? Contact a wholesaler, talk to them about what you’re looking for, and get on their buyer’s list. Need financing for your deal? Give us a call!

90% Hard Money Loans and Percentage Confusion

by | Jul 18, 2018 | Loans

Recently, there has been a change in how some lenders are marketing LTVs (Loan to Values): Borrow up to 90% of the purchase price and up to 100% of the rehab cost. At first glance, you might think you are getting a higher loan amount, and in turn, bring less money to closing when you purchase. But you have to read the fine print. They often will loan EITHER 90% of purchase price plus rehab OR 70% of ARV, whichever is LESS. The reality is, you are bringing a minimum of 10% down no matter what your deal looks like.

Unfortunately, this has confused both new and experienced borrowers, and it’s time to clear up this confusion. First, when you see “90%,” be sure you pay attention to the next four words, which say “of the purchase price.” This means you are getting a loan based on 90% of the cost of the property, AFTER calculating the maximum loan amount at 70% of the ARV. Confused yet? I promise you’re not alone.

Let’s look at some examples to help you understand. If you are buying a house for $100,000 that has an ARV of $150,000, with $5,000 in rehab, your loan amount is going to be $94,500, instead of $105,000. The formula is the maximum loan amount ($105,000 in this example) or 90% of cost plus rehab ($90,000 + $5,000), whichever is less.

Let’s say you are purchasing this same house for $120,000. Based on the advertising, you would think that you were getting a loan amount of $108,000 (90% X $120,000). But, because the maximum loan amount is $105,000 (70% X $150,000), your actual note would be for the same amount, $105,000.

To add to the confusion, the advertising states receiving 100% of the rehab cost. This is true for almost every hard money loan. Lenders want to fund 100% of the rehab cost to make sure that all of the work is getting completed. Therefore, the total rehab cost is built in to every loan. If you are working with a lender that is not loaning 100% of the rehab costs, it is an anomaly, and you may need to find another lender.

What should you expect when looking for a loan? Most lenders will loan up to 70% of the ARV for a flip, and up to 75% for a rental property, regardless of the purchase price. If you buy a deal below the LTV threshold, many lenders will give you 100% financing. Of course, it’s based on your financial profile and the amount you can be approved for, without overextending yourself. And, of course, 100% of the rehab should be included in the loan. Most importantly, read the fine print and do the math to see how any offer will actually work out in the end.

Never Confuse These Two Things About Real Estate Deals

by | Feb 1, 2018 | Blog

When it comes to investing in real estate, there are just some deals you are not going to be able to acquire. Best to know this from the start and get over it quickly. Someone else is going to get the deal instead of you, either because they were focused on solving the seller’s problem, beat you to getting it under contract, or more often than not, offered more money than you. Whatever the case may be, you didn’t get it. Also, it certainly won’t be the last time either, unless of course, you completely stop making offers.

Hey, it happens to everyone. I hear investors all the time say they lost a deal to another investor who was willing to pay more for it. And if that’s why you didn’t get the deal, stop thinking you “lost” it. You didn’t lose it. If you did your due diligence, and offered the right purchase price (i.e., one where you can make the profit you want), get over it and move on to the next deal.

Are you questioning whether you offered the correct purchase price? If so, that is totally normal, and you need to ask yourself the following questions:

  • Did I determine the correct ARV?
  • Did I do enough due diligence to determine the complete scope of work?
  • Did I offer the right price based on these factors along with the profit I wanted to make?

If you answered “YES” to all of these, then you should feel good about your offering price, and not confuse losing a deal with someone else making a mistake that’s going to cost them money. However, if you low-balled the seller, then we are talking about a completely different situation. In this market, there’s no room for being too greedy. Whatever the case, don’t beat yourself up over it.

Most of what we are seeing right now is investors paying too much just to get a deal. Why are they doing this? They are very new and don’t have enough experience yet. Emotions are taking over their decision making, especially when pressured from a wholesaler to buy the deal before someone else does.

If this sounds like you, don’t get sucked in. No matter what your deal flow looks like, it’s a dynamic market. This means that deals are happening all the time. Real estate deals happen every day and that’s not going to change. Be patient and find the one that works for you.

You have a Real Estate deal in Texas and looking for someone to help you with hard money loans? We can help! We have a three-time award-winning hard money lender, with offices in North, Central Texas, and South Texas