Camera Sewer Scope Critical for Denver Realtors and Buyers
Old House Sewer Pipe Problems: When Don Nichols visited our real estate office recently, I asked him about his Denver sewer line inspection company. Specifically I wanted to know how it relates Realtors who are buyer agents shopping for older houses in the central Denver area with aging sewer infrastructure.
Here is a recap of the questions answered in the short video below offering tips and advice to Realtors, real estate investors, home buyers and home owners about the importance of understanding sewer inspections and repair costs.
Beware the Sewer Line Repair Salesman
How much does it really cost to fix a broken sewer line?
Question the repairs being suggested by plumbing companies
What are the hard costs of sewer line plumbing repairs?
Is the Denver city main verified or that a sink hole?
#1 TIP? Make sure they are putting the camera down YOUR sewer line!
It’s so refreshing to meet people who are really good at what they do, and can explain technical and mysterious jargon in plain English. Don offers a unique perspective when it comes to the costs and risks of sewer line problems: in addition to being in the plumbing business with his dad since childhood, he was a Remax real estate agent for more than 8 years.
I did some online research for common sewer repair questions related to real estate agents and home buyers. I was surprised to read that in many parts of the country sewer repair inspections are rare and not recommended by Realtors to their buyer clients. Sewer inspections seem to be more commonplace in Denver real estate transactions, but there was also a lot of misinformation, mostly by people who Don calls “plumbing repair salesman.”
Thanks to our Special Guest and PMRE Approved Vendor, Don Nichols
I was having a pretty normal day at the office, comping properties, checking on email etc. Until a pleasant looking woman arrived unannounced just after lunch and handed me her card: Special Investigator for theDenver District Attorney. Ouch. She asked me if I had a few minutes? What else could I say, but “c’mon in…”
I asked what it was about, and learned that a certain property that we purchased and then resold last year was under a fraud investigation. A fraud, apparently, that is becoming more and more prevalent in today’s real estate market and investors need to be aware: people selling property that does not belong to them. She asked me to pull the file for the property and then asked for copies of several of the documents. Lots of weird questions ensued: Please describe the seller’s, height, weight, distinguishing features? She then showed me some pictures. What do you remember about the ex-wife? Excuse me? What ex-wife? I remember the son and the mom from closing, that’s it. And they did not look anything like the people in the pictures!
Interesting thing was that we DID receive a call to the office earlier in the year from a person who complained that someone had sold her house without her permission. But she sounded kind of crazy and we get calls from weirdos a lot in this business, so none of us really thought much about it. But remembering that call, all of a sudden I felt like I was starring on the TV show Law and Order, so I had to ask: “Should I be calling my attorney?” She sweetly replied that is was not necessary at this point (right), and informed me she is “a cop, not an attorney.” (whew?)
So the story goes, apparently the “seller’s” of this particular house may not have had the right to sell the property. This was a mild case compared to the blatant fraud that is happening with other deals, according to the investigator. In this instance the husband “allegedly” removed the ex-wife from the deed with a Quit Claim deed without her permission and then sold the property and kept all the proceeds. In my head the question kept coming up: Am I in any way responsible for this?
After a pretty long cop-like conversation, I’m pretty sure I convinced her that our office and business had nothing to do with the Quit Claim deed and alleged fraud. Although she admitted there were some red flags. The organized groups that commit this type of fraud use a team of investors and agents, have in-house notary and use small private title companies to close the transactions. We have that in common with the criminals. Thankfully, we do keep impeccable records of our transactions and we were able to provide all documents she requested. And the dates confirmed that our affiliated people or companies were not involved with the forged signature on the deed. She also made phone calls to the title company and all the employees who were involved in the transaction and all our “stories matched.”
The investigator suggested that we make some procedural changes to our buying system which I would like to pass them along to other investors: Ask for and get a copy of the driver’s license of the person who is signing the purchase contract at the time of signing. Make sure the driver’s license matches the title work, and be watchful of strange title occurances (like Quit Claim deed, power of attorney, etc). We have previously left this type of identity checking to the title closer and never paid much attention during escrow if the title work came back clean. In all my years of investing, this has never happened to me before, and hopefull will never happen again based on the new procedure. Investors, keep a sharp eye out for this type of fraud!
Realtor Profile, John Hayden, the “King of Curtis”
While researching and reviewing proposed investment plans for a historic Curtis Park Victorian, several people suggested that I contact John Hayden of Kentwood City Properties. More than one of his colleagues referred to him as the “King of Curtis” for his knowledge and experience in the neighborhood, so I had to look him up. We met in the heart of Curtis Park on a beautiful summer morning, where John shared his knowledge and enthusiasm for the neighborhood as he showed our team several past and ongoing remodel projects. He seemed to know the history and owners of almost every property! It was a pleasure to learn about how Curtis Park has been transformed from an inner-city slum into a healthy and vibrant community with loads of culture and beautiful display of Denver’s architectural history and future.
In this series we will discuss the all aspects of buying and remodeling older homes for both investors and owner occupant buyers. The focus will be houses of the inner city Denver, Colorado neighborhoods like Baker, Curtis Park, Park Hill, Jefferson Park, City Park, Highlands, Potter Highlands and others. But the information is relevant to house enthusiasts in other cities and neighborhoods with housing stock built between 1890 and 1940 where there is a rich historical blend of architecture and culture.
Please join our team of professional investors, agents and contractors as we help you explore the general nature of construction for Victorian, turn-of-the-century, craftsman, and Tudor homes, as well as some of the less-common alternative styles, like International Modern, Mediterranean, etc.
Denver Square After Remodel
The series will include discussion of foundations, fireplaces, furnaces, roofs, floors, porches, and windows. We will explore the costs and benefits of remodeling for both profit and historical preservation, which do no have to be mutually exclusive.
If you share an interest in these types of houses and projects, please join our mailing list or subscribe via RSS. We will send you in-depth articles to read and videos to watch showing our adventures in buying, remodeling, selling and enjoying old houses. Feel free to leave comments if you have specific questions about design, architecture, costs or construction of these beautiful and eclectic homes. Preserve history and live abundantly.
Dealer Margin, Fix and Flip Profit, and Income Valuation
One of the first lessons I teach new investors or distressed niche agents in our mastermind group lessons are the different financial models for purchasing investment property. There are several types of real estate investors, and they use different criteria to estimate profits depending on the value add to any transaction.
For example, a dealer or wholesaler’s value add is finding a property with profit potential. The work of marketing to motivated sellers, negotiating price and signing a contract with the sellers is a business in and of itself. A rehabber’s value add is making repairs to a property. And a landlord’s value add is operating a property for the long term.
Most purchase formula evaluations are based on the industry term “After Repaired Value” (ARV). This is a final sale value of the property either to an owner occupant based on comparable sales, or to a landlord investor based on income generated.
Dealer Margin
Dealers and wholesalers look to purchase the property at a price that will have enough margin to sell to a rehabber or landlord and leave profit on the table for them. Here are two common formulas:
ARV x 65% minus cost of repairs = purchase price (buyers market)
ARV minus cost of repairs x 65% = purchase price (sellers market)
If you run the calculations above based on a $100,000 ARV and $20,000 repair cost you will notice the difference between the two models, one for buyers market and one for sellers market ($45,000 and $52,000 respectively). A wholesaler who purchases properties at these values will be able to sell to a rehabber and earn a profit on the deal. CAUTION: When determining ARV, be sure to use all the available comparables, not just the “good ones.” In a market of falling prices, it is also wise to check the active properties currently available as well as those under contract so you can predict a lower ARV by the time the property is ready for sale. Time of year is also important when determining ARV. Experienced rehabbers always want to bring their inventory to market during the prime selling season and will reduce their acquisition price during certain times of the year to account for holding costs.
Fix and Flip Profit Margin
The next formula is common for rehabbers or fix and flip investors to use:
ARV x 90% minus repair costs minus profit margin = purchase price.
(profit margin is subjective to each investor, but is often the amount of repairs or 15% of the ARV, whichever is higher)
This formula considers 10% of the ARV as cost of sale (agent fees, title), cost of funds and holding costs (utilities, insurance). NOTE: Novice rehabbers would be wise to use 15% instead of ten to build a larger contingency for construction overruns and time overruns. Using the same house as above, the final “retail” sale price would be $100,000 with a net proceeds of $90,000 after soft costs. The hard cost of repairs is $20,000 and the desired profit margin is $20,000. The rehabber would need to purchase the property for $50,000 in order to make a profit of $20,000. Going back to the wholesaler, who in this example would have purchased the property for $45,000 and sold it to the rehabber for $50,000 and made a $5,000 profit. (the sellers market number of $52,000 would mean a higher demand for fix and flip properties and a higher sale price to the rehabber).
Income Property Valuation
For the Landlord model, lets use the same house and prices above, but assume the sale will be valued on an income basis rather than a comparable sales basis. The simplest method of determining whether or not to consider a property for rental is the “1% Rent Rule:” if the example property sale price is $100,000, than it should rent for $1000 per month to make it a good investment for the landlord. That is obviously a rudimentary method, and does not consider many factors, but is a good starting point and suitable for this introductory article. The more sophisticated formulas are as follows (in order of sophistication and accuracy of the formula), and will be addressed in a future posting. Be sure to subscribe to our Weblog using RSS or or your email to receive the updates.
Gross Rent Multiplier (GRM): Value = Gross Income X GRM (usually 7 to 10 depending on quality)
Cash on Cash Return (CoCR): Calculation of % return on downpayment including tax benefits
Capitalization Rate (Cap Rate): Value = Net Operating Income (NOI)/Cap Rate (6 to 10 depending on quality)
Internal Rate of Return (IRR) -this is an advanced model and calculation not suitable for this article
There are many subtle nuances that come into play with regard to these types of investment property income, profit calculations and evaluations of income property. This article is only intended to provide an introductory overview. If you are interested in studying these models in depth and learning the business of real estate investments, please inquire about our Investment Property Master Mind mentoring and business building meetings. The hands-on “experiential” learning environment will enable you to work on real estate deals in a supervised environment.
As the “apartment guy” in our real estate office, I field a lot of questions about income properties from residential agents. The most common question is “how do I value this building?” The agents are all very accomplished at running values using comparable sales for single family houses, and even duplexes. But when the valuation needs to be determined from income rather than sales comps, they ask for help and advice. Obviously there are several objective and subjective factors that determine the value of income property – location, condition, stability, unit mix, potential, etc. But here’s the 2 minute “quick check method” I teach them for running rough numbers to determine if a project is worth further research or investigation: Continue reading…
In the current financial environment, residential real estate investing continues to be a viable business, but the business has changed dramatically. There are more challenges and deals require different credentials and strategies compared to recent years of loose lending standards and appreciating prices. Private investment placement managers and established cash buyers are squeezing out the “mom and pop” investors because of lack of funding. Continue reading…
One of the ways that I evaluate the level of sophistication of fellow real estate investors, and potential clients, is the answer to this question: “What is your acquisition criteria?” More often than not, the answer is “I just want a good deal,” which is usually a sign of a novice investor. Experienced investors know exactly what they are looking for, and can explain how and why that criteria fits into their overall investment strategy. If your new client is a novice investor, the best place to start is working together to establish an acquisition criteria.
The following is an example of an investor criteria that I use as a starting point for discussion. I work with clients to modify it to create and then meet their goals. This process helps me serve them better and saves lots of time for everyone during the search and acquisition phase. Continue reading…
COUGH!
Please excuse the dust while we remodel with an awesome new theme.
I was having a pretty normal day at the office, comping properties, checking on email etc. Until a pleasant looking woman arrived unannounced just after lunch and handed me her card: Special Investigator for the Denver District Attorney. Ouch. She asked me if I had a few minutes? What else could I say, but “c’mon in…”
