Anatomy of a Flip

1. 5/16/2019 The Anatomy of a Flip Disclaimer Who Is Joe and Why Is He Talking To Us Today?  I am here to give you insights from my business.  What I have to say, though spoken from the perspective of someone who is successfully working in the industry, is my opinion and any financial or legal decisions you make based on what you hear from me today should be discussed with and vetted by legal or financial professionals.  Real estate is a very large industry with many diverse opportunities such that what is right for one person, may not be for another.  The business of flipping houses has many risks both financially and legally, so participating and investing in this business should be done with great care and with qualified advice from the appropriate professionals.  Independent Businessman Most of Adult Life  Sole Owner of CNY Home Buyer, LLC Started in 2013  Been in Real Estate Off and On for 35 years  Associate Broker With Procopio Real Estate  Been a full time Flipper since 2015  7 Sales on 2016  10 Sales in 2017  17 Sales in 2018  23 Projects and $2.5 Million in volume sold, on the market, under rehab or under contract to purchase 2019 YTD The Business of Flipping Homes The Basics According to Joe Pierce  I am looking for discounted deals, joint ventures and creative, profitable investment opportunities 1 2 3 What this is not What this is Is it a good deal?  How to find a deal  Strategies for knowing a good deal when you see it  Creative financing  What is involved in making a business out of buying, adding value and reselling real estate Determine ARV Know your costs- both out of pocket and at exit Stick to your guns, be ready to show why you need to acquire the property at your price  Wholesaling (Though if you are going to wholesale, you better know if your deal makes sense to a rehabber)  Understanding the full scope of what it takes to flip a home  Marketing tips  Strategies for getting the work done and scaling 4 5 6 Exit Strategy Retail Retail Know what you are going to do with the property before you begin  Rule of thumb is  If you sell retail you are selling sizzle, but have to also face home inspections  If home inspections go badly, buyers get spooked and it will cost in either repairs or lost sales -Retail  30 Days to close- use that time wisely  Flipping in less than a year does not take advantage of preferential tax treatment. However, by taking title to the property, it may fit into the short term capital gains realm which can affect Social Security obligations. -Wholesale  Rehab time + 2-8 weeks -Hold  Marketing time- + 6 weeks -Creative Finance  Time to close with mortgage- + 8 weeks  I figure my costs based on a six month purchase to close Which type affects costs, sales price, holding time and long term strategy 7 8 9 1

2. 5/16/2019 Wholesale Long Term Hold Long Term Hold  Rent-To Own/ Lease Option  -Good way to overcome a property defect that might limit retail sale -Limits management as tenant/owner handles all maintenance and repairs as if it were their own home -Like straight rentals, uses all the benefits of real estate investment- depreciation, cash flow, debt reduction and long term capital gains tax treatment. But appreciation is generally limited to the option price -Holds out the potential for a higher sale price than the current retail value -Requires only eviction to get the property back, unless you do the lease/option incorrectly, which,if construed as owner financing, may require foreclosure  Straight Rentals  Different business model than retail  Can be sold quickly and for generally smaller margins to cash buyers -generally requires less work than selling retail- focus is on being up to code, cleanliness and highlighting features desired by renters    Requires both effective acquisition and cash buyers clientele -uses all the benefits of real estate investment- appreciation, depreciation, cash flow, debt reduction and long term capital gains tax treatment   Can be either no touch or basic repositioning (cleanouts, repair a major defect, etc.) – even cash buyers are affected by the sight of the raw condition of some homes  -can be management intensive and risky with bad tenants and increasingly draconian rules against landlords   Can be sold by assignment, double closing (where deed is transfered but ownership is brief), or buy, do basic positioning and then close  -requires only eviction to get the property back   Other than quick profit, it does not take advantage of preferential tax treatment. By taking title to the property, however briefly, it may fit into the short term capital gains realm. Assigning contracts is just regular income.  10 11 12 Long Term Hold Executing A Retail Sale How do you know a good retail flip deal when you see it?  Owner Held Mortgage  -Good way to overcome a property defect that might limit retail sale  -Limits management as you are the bank  -Creates cash flow that gets taxed based on whether it is long term or short term capital gains  -Holds out the potential for a higher sale price than the current retail value  -Not limited to appraisals or bank valuations- owner financing value is generally higher, and sometimes much higher, than ARV  -By combining higher profit margin with higher than market rate interest, the ROI can be outstanding  -Requires foreclosure proceedings to get the asset back, which can be long and expensive What is the most important number that drives the flip decision process?  We will be focusing on the process of flipping a home on the retail market from here forward, though many of the concepts are applicable to the other Exit Strategies 13 14 15 What is the most important number that drives the flip decision process? Importance of Getting ARV Right How do we determine ARV? Are you wholesaling, selling retail, rent-to-own, seller financing? What is the exit strategy?  Appraisals  BPO’s  Realtor CMA  Zillow? Realtor.Com? Other online home search sites?  Public Records  Knowledge of Neighborhoods  Assessed Value?  Market Rents and Costs Related to Rentals (such as taxes).  ARV is the intangible because it depends on  What buyers are willing to pay in a given market at giventimeperiod-thus it is inherently uncertain ARV  It is predictive of future conditions whereas comps only show the past  It is easy to be overzealous because it is uncertain and can be tricked by aberrant comps After Repair Value Or ARV is critical to the analysis because it is the starting number from which you subtract costs and profit margin to get an acceptable acquisition price What you can you realistically sell the property for after repairs What happens if you get it wrong? 16 17 18 2

3. 5/16/2019 Rule of Thumb For Retail Flips- The 70% Rule Breaking Down the Costs- the 70% Breaking Down the Costs- the 30%  Maximum “Out of Pocket” cost should be no higher than 70% of After Repair Value (ARV)  I consider the 70% as the out-of-pocket costs, these include:  I consider the 30% as the profit and end of sale costs that come out at closing  Acquisition costs  Essentiallyall the costs that show up on the closingstatement  Rehabcosts  ARV should be the realistic price that you think the house will sell for  Any costs that are paidas a result of the closing and come out of the proceeds  CarryingCosts  Gross Net Profit- the balanceof the 30% these costs  Cost of Money  30% covers the cost of sale and profit  NOTE: If for some reason you can defer a cost that is normally paid in the progress of carrying the house to closing, I would still consider this as part of the 70%  These costs represent the amount of money it will take to pay for an carry the project to closing.  So if $100,000, your maximum Pre Re-Sale Cost should be no higher than $70,000  Sales costs, such as commissions, come out of the 30% 19 20 21 Quick Property Analysis- Max Offer Example $100,000 ARV $70,000 70%  ARV x .70 to determine maximum “All In” before closing related expenses  If you have a property that you determine has an ARV of $100,000 and you figure that the rehab cost is $25,000, what should you offer for the property?  ARV x .7 ……. less $25,000 Rehab Cost  Rehab costs  Cost of money  Carrying costs  Acquisition costs other thanpurchaseprice = maximum offer price Should you buy at 55,000? 22 23 24 Probably Not! Typical Rule of 70% Deal The Art of Being Competitive  $100,000 ARV  $70,000 Maximum Total Cost  Less $25,000 Rehab Cost  = $55,000  $100,000 ARV  How do you compete in a way that you don’t over bid and risk a decent profit margin or heaven forbid lose money, while not always losing because you continually underbid against other investors?  $70,000 “All In”  $10,000 Sales and Closing Costs  $20,000 Profit or 20% Margin on ARV  Confidently knowing your ARV, and having a firm handle on the costs of rehab, money and carrying costs allows you to make sound decisions on what you can realistically pay for a property  Now Subtract the Following to Determine Maximum Purchase Price  Less Acquisition Costs Other Than Purchase Price  Less Cost of Money  Less Carrying Costs  You can see that if you have an inflated ARV, underestimate your rehab costs, don’t properly account for carrying or money costs or take too long long to sell after acquiring, the 20% margin can whittle away.  Knowing the Maximum Amount you can pay for a property is the key to the business.  In total far less than the $55,000 25 26 27 3

4. 5/16/2019 Expense Breakdown Quick Analysis Buying Is NOT Recommended Getting A Handle On Expenses Property Flip Expenses- Total 83% of Actual Gross Sales (ARV) Let’s break it down  When Considering A Purchase, Try To Avoid Relying on Quick Analysis Acquisition Expenses 56%  Try to buy timeto properlyanalyze Rehab Expenses 17%  It is easy to overlook or underestimate the cost of improvements  Remember how important an accurate ARV determination is Carrying Costs 1%  Take timeto play architect  What is your exit strategy going to be and what improvementsare needed in order to achieve that strategy? *Cost of Money 3% Sales and Property Disposal Expenses 6% *Cost of money figured at 10% simple interest on Acquisition, Rehab and Carry Costs for five months 28 29 30 Flip Cost Analysis - Rehab Flip Cost Analysis - Carrying Costs Flip Cost Analysis - Cost of Money  Supply Chain  Contractors- Do NOT Mess with a Good Contractor- Let the make a living and you will get loyalty and preferential scheduling  Knowing the market value of the improvements you plan to make  Home Inspectors  Cleaning  You must be the architect who specifies the work to be done and the quality of materials to be used- or get a professional to do it for you. Don’t expect your contractor to make the right choice nor choose what you had in your mind. However, a good contractor can be invaluable.  There are always unknowns- budget for them  Partners  Bank Fees  Points  Interest  Extending the time length of the loan  Appraisals  Title Insurance  Filing Fees and Mortgage Recording Tax  Attorney Fees  Re-inspection Fees  Utilities  Taxes  Insurance  Grounds Maintenance  Staging Rental  Security System  If you sell the house yourself and pay as you go in that process, those would be carrying costs since they are out of pocket. Real Estate Agents do all that and get paid at closing, thus a cost of sales 31 32 33 Sources of Money I use a factor of 10% interest on the “All In” Costs As a Mix Flip Cost Analysis - Cost of Sales You need a team  Legal- Attorneys and Title Companies  Accounting/Bookkeeping  Architectural, Project Analysis  Insurance  Contractors  Employees  Real Estate Professionals- agents, appraisers, home inspection, staging  Financing  Peers/Networking  Partners- those who have a personal stake in your success  Education  Bank Mortgages  Lines of Credit-Yours or someone else’s  Retirement Accounts- Yours or someone else’s- SDIRA, Special 401K, more?  Hard Money Lenders  Syndication  Partners  Private Lenders-Folks who have gone from wealth building to wealth maintenance -Are you managing wealth?  Owner Financing  Assume a Mortgage or Take “Subject-To”  Lease Optioning  Wholesaling- Contract Assignment  Commissions  Advertising  Showing the property  Fliers  Legal/Closing  Repairs from home inspections and appraisals (particularly FHA)  Seller Concessions 34 35 36 4

5. 5/16/2019 You need a system for accountability in determining costs Scaling to Higher Volume THE DEAL  ARV is the most important number to know up front  Have proper systems in place that are scalable and replicable  Know the limits of what you have and then figure out ways to be able to bring in new blood, systems, financing and so forth  Develop your own spreadsheet- you better not miss anything!  There are plenty of work sheets out there, but most are heavy on rehab costs, which is important, but as we have seen, not the whole story  There is a service available through the Community Buying Group at 20% discount for members  HomeflippingSpreadsheet.com  I use Rehabvaluator  The prize is buying the property right- THE DEAL  Time for a second contractor, a virtualassistant, an agent, a closing specialist, etc  If you have THE DEAL, you have options  Give up responsibility hats- find out how your skills are vital tothe business and outsource the rest.  Get creative with funding sources, partners and so forth  Have multiple strategies. Make enough to support your family and then reinvest what comes in above that.  If you don’t know the ARV and the associated costs to sell the house at retail, how do you know if you have THE DEAL?  They have a free basic version called Lite that is very good (need to input whole rehab number)  Flip enough houses to pay the bills  https://tvallc.isrefer.com/go/RehabLite/jpierce/  Then turn the rest into cash flow investments or making your business work more profitably  Whether a wholesaler, retailer, buy and hold or rent to own, you should know all of the above and have it “on paper”. Don’t fool yourself. If you properly account for all costs through a reliable tool, the numbers won’t lie. 37 38 39 CNY Home Buyer, LLC Joe Pierce, Sole Member 315-464-0406 joe@cnyproperties.net I am looking for discounted deals, joint ventures and creative, profitable investment opportunities 40 5