How can you protect your investment and your investors? In this episode, Scott Carson breaks down the three most important aspects of due diligence and protecting your investment by knowing your values, checking taxes, and pulling title. These are the most basic things that you need to look at when you are in any real estate deal. Scott believes that by internalizing these three aspects, you can protect everyone involved in your deal.
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The Three Do’s Of Due Diligence
I am excited to be here. Hopefully, you’ve had a rocking month. Things are always busy around here with a variety of different things. We sell assets, we’re looking for assets, speaking and marketing. I want to take things back to the old school. I want to cover a couple of basic things, especially for our readers out there. People that are looking to get into real estate investing. People that are looking to get into the notes. People that are attending things, but they’re on that edge of pulling the trigger of going the distance and closing on a deal.
This episode is about the three basic things that you need to look at any type of real estate deal and have a property looking at buying. I simplify it down to the three basics. This comes down to securing your investors’ principle. What are you doing to secure it to protect not only you but protecting them and their investment? Especially if you’re using other people’s money, if you’re not using other people’s money, you want to secure your own investment. The thing that was drilled in my head are the three basic things that you have to look at with any type of real estate deal, whether you’re buying a rental, you’re doing a fix and flip or you’re buying notes. It all lines up with these initial three things that you need to look at.
Number 1: Know The Asset Value
The first thing is always value. You have to know the value. I can’t tell you the number of times that people have called me up to talk about a deal or a note. They’re all excited about it, but they don’t know the true value of an asset. That’s not pulling Zillow or any appraisal. It’s literally talking to a realtor meeting comps. If it’s residential, it’s a pretty easy deal to jump on and pull comps. You’re going to have some variation in the markets depending on what you’re pulling. How effective you or your realtor at jumping on the local MLS or Multiple Listing Service, and taking a look at the Comparative Market Analysis or CMA. I’m not talking about going out and paying $400 for an appraisal.
There’s no reason to do that. That’s an initial cost that’s going to be way too much. Even paying for a BPO or a Broker Price Opinion, which can run you $100 to $150 per property. How do you do this? The first is checking the value. You want to see what’s going on in the neighborhood. The condition of the property, if you needed to put your eyes on it or somebody else’s eyes on it. In the note business, we are often looking at a lot of assets. We don’t put eyes on the assets. We’ve made bids. They’ve come back and countered back. When we finally have a number, then we look at a value much more with a fine-tooth comb at that point.
Most people are driving around neighborhoods. They are driving for dollars. We used to say that we’re looking at ugly assets, ugly properties that people rundown. Maybe they’ve got long weeds. It looks like it’s vacant, FSBO or For Sale By Owner. They get a list from a wholesaler on potential assets. They’re pulling the violations, zoning, code, or enforcement violation lists from the local county. It is a good list to look at if you’re looking for properties that are rundown in an area. You are not going to know the condition of the interior. Maybe you can peek inside. Let’s say it’s vacant and you want to walk around the property. Take a look at it. Be careful to never breaking and entering. Don’t perform a B&E or you’ll get arrested. You can’t commit any felonies along the way, but you have to get an idea of where the asset value lies.
Is it in great condition or is it on the low-end and crappy condition? That’s the variation you look at. There are all sorts of one page due diligence checklist. Things you can look at and go from there when you’re looking at an asset. This is different from the note or a due diligence checklist. We’re still talking about the property. When you are looking at the property, what does the roof look like? Are there any cracks in the foundation? What does the lawn look like? What about the windows? Are they busted in? What does it look like? Does it have any paint job? Does it look good? Is it up with the regular maintenance of the rest of the neighborhood? It is a good thing to look at if it’s on par with everything else.
You can look at recently sold houses in that neighborhood. One big thing on value, as we saw before, the value will vary on a neighborhood by neighborhood basis depending on what’s going on with the neighborhood. If there have been some distressed sales where there’s been a foreclosure, pre-foreclosure or a short sale, that would drop down the value of the assets. With a foreclosure, it’s going to affect every property in the neighborhood. You need to look at that stuff. Not everybody looks at that stuff. Some people I know when they bid, they’ll pull the distressed sales. That’s what they’ll look at there in the CMA. They’re like, “Let’s get rid of all the good assets. Let’s drop their value down.” That’s not a smart thing to do. I suggest you always know your own value. Always pull your own comps. Never trust what a seller is telling you.
We’ve seen this many times happen in the note business where sellers pulled several BPOs and they will go with a higher BPO. They won’t look at the other two BPOs. They’ll try to stretch the values by finding higher valued assets on the outskirts of the circle or the area where things are located in. That’s something to keep in mind that you want to look at. Make sure you have the true value and the true area of where it’s at. What goes in a true value? You need to have square footage. People are like, “How do you find that?” Here’s what you need to do. This is where Zillow or Trulia will help you out. They’ll often give you the number of beds and baths, the year it was built. Is it on par with everything else? Does it look like it’s been updated?
Oftentimes, some of the counties will even show recently sold in the nearby area too, which is nice to have people look at comps online without having a real term ball. I still believe the best thing is to look at what’s going on, look at what’s sold in the area, and talk to a realtor in the neck of the woods. When we’re out looking at assets or we’ve been driving on different roadshows and we see an asset, we look at that same block for a for sale sign. Look for a realtor there. What’s a realtor sign going to help you out with? It’s going to find a realtor that knows the market and who’s listing it. They know the value, especially in that house that they sell. They’re selling it and there’s a great comparable to yours.
Is it the right square footage? Is it up to date? Is it a distressed sale? Is it probate? Those are all different things that will affect the value because the interior may need work or may not. The exterior may need some more. Some things you’ve got to look at to determine your values. I’d have people call me all the time with an asset and they say, “It is somewhere between $40,000 and $80,000.” I was like, “That’s way too big. That’s a spread on the value. You don’t know your value.” Especially if they owe $75,000. Is it worth $80,000 or is it worth $40,000? You don’t want to bid $0.50 on an unpaid balance of $75,000. That’s $37,000 and some change. The value is being $40,000. That’s not a good thing to have.
If the value is $80,000 and you’re bidding $0.50 of the UPB at $37,000, that’s a deal. You need to know your values in an area. You need to have a realtor. I’m a big fan of using NoteProz.com. When you type in an address, it will pull up information on the county records if it’s available. It will pull sold and give you a rough AVM. What is an AVM? It is an Automated Valuation Model, basically it’s Zillow. The basic starting point if you can’t find a realtor or real estate agent in an area to help pull comps for you. This is why it’s important to make relationships with local realtors by taking a coffee and networking at your local Meetup groups.
Go to your local real estate clubs. If you can find people that you can work with, jump on Meetup groups in other areas and say, “I’ve got a property that I want to buy. Can you help me?” Realtors won’t always like to pull property values on a property. It doesn’t look like it’s listed. In the note business, I have to tell constantly, “We’re buying. We bought a portfolio broken by a portfolio of loans. Can you give us a quick valuation on that?” If you’re driving around, you’re going to take a look at what’s going on. Maybe pull real estate signs and take a look at it and say, “We want to adjust this down to $20,000 because I guarantee the house. I’m looking at it as in good condition, as brand new spic and span, cleaned up, and ready for the MLS aspect of things.”
Number 2: Check Taxes
The higher value of the house is $5,000 to $10,000 very pretty easily. Don’t get so excited. If you think it’s worth $150,000, that’s the highest number on your values. How would you drop down to $140,000? Somewhere, that way you’re conservative in your numbers and make your numbers work. When you’re working on exit strategies or fixing flips, I always go up that lower number. There’s no guarantee you’re going to that high-end number. Your valuation’s true numbers will come somewhere in that middle. Always know the value. The second one is checking taxes. This is an easily done thing that most people like, “How do I check taxes?” You can jump on the tax associations websites. Go to NETROnline.com. This is a great website.
It is a free website that takes you to a listing to every state, county, city, township or province. You’ll have the county appraisal district. You’ll have the county clerk often have the tax assessor association, treasury of accounting. The first place you want to go to is the tax appraisal district. What do you have to type in? You have to type in either the address or the APN number. What is the APN number? That’s the property number. Every property in every state and every county has an APN. If you don’t know what that number is, Zillow will often show it. If you look down further on it, it’s a great thing that Zillow and Trulia do. If you know the address, that’s the first place. If you can find the borrower’s name or if you know the borrower’s name, type in their name. That’s a handy thing that you want to do both times.
Due Diligence: Checking insurance costs on the front end and how much is its monthly and annual premiums is necessary for exit strategy planning.
If you have the address, you can find the owner. By doing a search for the owner, you’ll see if they own another real estate in that same area, county and city. The thing that you want to realize is that if you’re looking at this stuff, if you can find somebody with multiple properties. It may be easy to reach out to them if you’re looking to buy a piece of property. They may have other deals, other properties that they’re looking to get rid of as well. In the note business, when we look to see if they own other property, this works as leverage when we’re buying a note deal with them. If I want the properties they own and they don’t work with us, their other properties are titled in the same thing. We can go after them and say, “We’re going to slap a judgment against the other properties until you get us paid.”
That’s the big thing about the law. Always know the important things and making sure to check the taxes. What’s owed? Are taxes paid up to date? Is there a pending tax sale? How do we see if there’s a pending tax? They’ll let you pull up the most recent bills is public record if taxes are paid or not paid. If tax is not paid, then double-check. You may want to call the county to see their pending tax sale. A lot of times, if there is a pending tax sale, the county websites won’t allow you to pay the taxes on there. They’ll say, “Pending tax sale.” They’ll give you a call. A call to find out a lot of states falls in two ways.
One of these either redemption periods, they do take a tax foreclosure there. There’s a redemption period where you can pay the taxes to get the asset back. In some cases, when there are tax certificates, oftentimes there’s no reduction period. Once the certificates sale, there’s a two to three-year period before they take into a tax sale. If the tax certificates are not redeemed or paid off prior to the tax sale, then it’s sold. Whoever bought it at that tax sale wins. I would check out one of our previous videos on tax sales and tax overages. There’s a great learning thing.
Checking taxes are important, especially in the note space. If the name is different, this is one thing that people miss out on is they don’t look at the last couple of years on the taxes. They’ll go and see the name and all. What we do in the note space is when we check taxes, we go to the county records. We look to see how much is owed in taxes. What are the annual taxes due? If the borrower is current, but the name is changed especially in the last couple of years back, the loan has not been paid. That’s one thing. The ones have been paid for three years, you want to go back and make sure that there’s not been a name change in the last few years.
If the name was changed, either the property was sold, somebody else has picked it up or it’s gone to tax sale. You can’t work with the borrower at that point because it’s sold to somebody else. There’s a redemption period, 6 to 12 months in some states, and then you can still jump in there for the tapping the last twelve months or less. Checking taxes are one of the easiest things to do. You should always do this before you make a bid on anything. Checking the taxes, checking what’s owed, and what’s going on with it. Is the name still in the same place? The Tax Association website is great in borrowing more assets. It’s a great thing to look at. That’s an important thing to do. That’s checking taxes and checking value. You have a rough value in checking taxes.
Number Three: Check The Title
The third thing is all about checking the title. You’re not going to start paying to the full title here. You could jump on the county clerks and try to look at the title yourself, but you’re going to miss something ultimately. You are not a title expert. This is a requirement. Everybody needs to have a title company that they work with. You’re not going to start diving into title unless you see a name change has happened in the tax sale. You want to take a look at it at the county clerk recorder’s office online and see what happened. If there have been deeds filed. Most of the time, you’re going to pay for a title report to notes. We call it a title update to the previous two owners. The note is still in effect. There’s been a title change as far as the name ownership change in the last couple of years.
With traditional real estate, before you close, once you’ve agreed to a price or some sale, maybe it’s a subject to. Maybe it’s doing a wrap around. Maybe it’s buying about a ride, you’re going to want to get a title report pulled definitely. In a traditional state, you’re going to often pay for the full title update. You have to do it. The seller often pays for this. It’s part of the closing docs, closing costs, and you want to review that. You want to make sure, especially if you’re buying the property, for the most part, you want to make sure that there’s a clear title across the board. Especially if you’re buying most properties and sales, there’s a clear title before the bank will finance that property. It’s a requirement. 100% of the time, there will be a clear title. Make sure that any liens or judgments have been taken off the property. Any city lien, city ordinances, in some cases utilities are paid up to date or taxes are pro-rated and paid before or at closing.
What we do in the note business, we are checking the title. We will make sure that a lot of liens can be wiped out via foreclosure. If we’re in the first lien position, we want to make sure that there are no junior liens behind us. That could be a second mortgage. It could be weed liens. It could be a private lien that slapped on the property. We’ve dealt with a whole variety of things. You want to double-check and talk with a local realtor or attorney more so or the title company and see what happens. If you take that note back and foreclose, will those liens be wiped out? Will those liens go away? Will they fall the borrower and not the property? It’s an important thing to keep in mind there. Another thing that’s important too is you always check the title, especially if you’re going to exit strategy in the note business before we allow a borrower to turn a property over and walk away.
You don’t want them to deed the property back to the bank and there’s a junior mortgage in place. The minute that we filed that release and the junior mortgage drops into the first lien position, we got to deal with them and foreclose them. This is why it’s important always to check the title, checking taxes and back taxes. Are there daily fines being targeted to the property because something is out of code? There is a $500 weed lien, demolition lien, or the property has been subject to being trashed out or demolished by the city because it’s sitting vacant and in a rougher position. The title is very important.
A full title report is about $250 to $300 depending on where it’s at. This can take a couple of days to come in. The more rural the county, the longer it’s going to take you to get a title update. The title can be done in 48 to 72 hours or a full title report can be pulled roughly in a couple of days. What happens a lot of times, especially when you’re taking on a loan on a property, you’re going to close. You want to make sure a week before closing that all the titles have been pulled. Most people wait until the last minute. They’re constantly harping on the title rep to get the title pulled or the title plants to pull out. If it’s a rural area, it’s going to take some time. Keep that in mind.
Some counties charge a fee to pull information, especially the rural ones because they don’t have full-time staff. They’re not online. That requires them to go in and pull information to report it all out. The title insurance is important, but you’re not going to be paying for that on the front end. Pay that at closing or before you close. Especially in the note business, once we agree to a property price on a note and when we signed a contract, then we pay for a title update. We don’t need a full title report. It is very easy to go into the ProTitleUSA.com website. You can order it from there. You can even email the orders at ProTitleUSA.com. The title update for the last two owners would be $85 to $90. It’s not a full title report back to when the property was created, which is what you would do if you’re buying the property and selling in a traditional sale. You’re in need of the full title report in that way.
Recap: Asset Values, Taxes, and Titles
Those are the three biggest things. The first thing that we pull is values. You need to know your values. If you don’t know your value, you didn’t know anything. That’s the thing. When you reach out to somebody, especially if you’re looking at an asset, you’re looking for advice and counsel on what to do, know your values. If you don’t know your values, it’s a waste of time. It’s going to frustrate me to frustrate others that you reach out to for help as well. Always know your values. The second thing is to check taxes at NETROnline.com. That’s a free website. Check out taxes. Check out the owner’s name match up. Check if there are any other assets. Check the taxes if paid. If they’re not paid, is there a tax sale? Was there a tax sale? Is there a redemption period?
These are questions you’re going to ask the county by picking the phone and calling. It is very important to check that stuff out. It’s basic due diligence. Those are the two big things in the front end, values. If you want to pull a BPO, that’s about $125 to $150. In the note space, you’re only able to pay for an external BPO, which is $125, $150. The full BPO can run you $150 to $200. I know some investors that are paying for two BPOs before they close, which is fine. They can do that. That’s an extra $300 cost. They use that as their way with help with due diligence. They’re not relying on realtors or other people to go out there and do it. It all depends on your network. That’s completely up to you. If you have a good agent who understands it and works with you and know the market, that’s great.
If it’s a market that you’re outside of, get somebody to go do it for you. There is a website called Real Property Reports. It links into most of the MLS across the country. If you’re a realtor, it’s free service. You need to have your National Association of Realtors’ login information. If you’re not a realtor, you may want to refer and say, “Can you pull a property report for me if you’ve got access to this?” They can type it in. It’s basically an AVM or Automated Valuation Model. It’s used for front end due diligence. If you pull that, it’s going to give you a range of where they think the property is. No interior inspection, but you can look at that and go from there.
Due Diligence: Don’t take your advice from somebody who’s done one deal and now they’re teaching a program or a workshop.
That takes us on to the third one, checking the titles. Does the person selling the house have the right to sell? Does the bank who’s selling the note have the right to sell the note? Is it still there for you to pick up? Is it gone to tax foreclosure? What other things are behind your lien? These are all questions that have to be asked. The answers are out there. You’ve got to pull that information and go from there. That’s going to be the most important three things that you need to do always with every asset. Knowing your values, checking taxes and checking the title. Make sure that you’re buying something that makes sense. Something that’s still there. Something that has value. You’ve done your initial due diligence.
Double Checking Asset Location
There’s more due diligence when you dive into other things. What does the neighborhood look like? What’s going on in the city? What’s going on in the location? These are important things that you need to talk to your local professionals about. Some people don’t know them. There are areas in Indiana and I’ll give an example that they flooded. They’ve turned into a man-made lake and flooded the neighborhoods. If your property is in that neck of the woods, you’re buying a note that’s supposedly going in that neck of the woods, make sure you’re buying a property and not something that’s underwater. That’s an important thing to look at.
You want to make sure it is true. If your realtors are looking at the assets that they’re looking at the actual property that you’re looking at. You don’t want to make the mistake that happened to some of our students. A realtor went out and looked at two properties, one was a burned-out shack. It was this frustrating property. The realtor pull values for the nice property, not paying attention to the address being wrong. The note that the investor is buying was in the shack, not the nice property. It is an incorrect data that when the investor got the value back, it’s like “It’s a beautiful property.” “It’s an ugly piece of crap that was sitting next door.” We paid for the asset. Luckily, they use their own funds in that deal, but that’s expensive tuition to learn when you’re not double-checking.
Always make sure that the realtor takes a photo of the actual street number on the property. Is he using Zillow or Google Maps? It doesn’t mean it’s always the right asset sitting in there on the dot on the map. Sometimes it’s the next door. That’s a big thing that many people have seen us do. Their due diligence is looking at the actual street numbers or the street number on the mailbox matchup with a house where it’s at. Those are important things that you’ve got to look at doing it. Otherwise, if you don’t, you could be spending a lot of money to buy a shack with a lot of other fees from the city. Other things that you want to make sure that you’re doing is to make sure it’s the same number bed and baths, similar in square footage.
Plus or minus 100 is a big thing on BPOs you’re pulling because you want to look at recent sold besides pending or inactive. Things that are under contract currently or in pending, those sold and active. A big thing to look at too is days on the market. What is the average day on the market for your asset? If you’re figuring your value is $150,000, does that mean it’s on days on the market longer to try to get that? Would it make more sense for you to list it at $140,000 and forget the $10,000, give that to somebody else’s supposed equity, get the thing sold in 60 days versus it takes 120 days. You still have to drop the value down or drop the price down to hit that nugget.
Look at the days on the market. I had one investor call me up and say, “I’m buying a property in La Grange, Texas. I was like, “What’s it worth?” He goes, “It’s worth $100,000.” I was like, “What are you buying the note for?” “$33,000.” “How much is owed on the note?” “They go over $130,000.” “How much repairs are needed?” “It is roughly $35,000.” I was like, “What do they need?” “It needs a new roof.” I was like, “What’s your days on the market?” They go, “365 days on the market.” I was like, “Run, it would take you a year to sell that house when you’ve finished up. What are you clearing financing with? Your own money or somebody else’s money?” “It uses somebody else’s money. We use a hard money lender at 18%.” I was like, “Run, you’re going to lose your profits by paying off your hard money lender on this asset. The numbers don’t make sense.”
Knowing Your Exit Strategy
That’s what you had to know. When you look at the value, you are trying to figure out repairs and figuring out the market conditions. That’s what you’ve got to look at. Your exit strategy is the ultimate thing at the very end that you’ve got to pay attention to. If your goal is to take a property back and hold it for an extended period of time, is it a rental? That’s great. You’re getting paid a little bit more for it. If your goal is to come back and flip it, do a wholesale deal with somebody else. You need to get it at a low price below $0.60 to $0.70. This is an exit strategy and not After Repair Value. ARV is a number. It does not exist out there.
Know your exit strategy for it. If you’re buying a note and it’s owner-occupied, you want to keep them in the property. What do those numbers look like? What are you paying? Is it a performing note or a nonperforming note? These are all different things that you have to keep in mind when doing your due diligence. We’ll take a look at it and see, “They’ve been paying on time for a while. I’m going to pay probably $0.75 to $0.80 for that note.” Is the payment coming in minus costs still going to be a good return on investment for me for a couple of years? What’s my goal after twelve months? Am I going to sell the note as a reperformer, keep it, or go do what? Am I going to have to foreclose?
If I had to foreclose, what do the numbers look like? Those are all important things to keep in mind. What are your holding costs? Do you have a servicing company? What’s that monthly cost going to be? If you’re going to keep it as a rental, are you going to pay for property management? What are the taxes? What are the insurance costs along the way? We had a huge storm come through Austin. A huge tornado hit through Dallas. It damaged homes and businesses. You’ve got to keep in mind, what’s going on with that? If the assets are in Florida or on the Gulf Coast, what’s going to happen? Are you going to be able to afford the insurance costs of a hurricane, wind damage and rain?
I’ve got a couple of buddies that bought a nice house, $300,000 to $400,000 note. They foreclosed it. They put some work in but the insurance costs are $700 a month. It’s expensive insurance on that and has been dragging out this foreclosure on this asset. They keep having to pay the insurance costs. The insurance is eating the deal alive. That’s an important thing that some people don’t even bother looking at until the end. They’re funding their calling to get the insurance paid on it. I was like, “You need to check insurance costs on the front end. What’s it going to cost you on a monthly and annual basis? Figure that into your exit strategy. Is that going to make sense for you? Are you’re going from a double-digit to single-digit return because you didn’t check your insurance costs?”
If you own the property, you’re paying it. If it’s the borrower on it, then they should be paying it. That doesn’t always happen. Keep that in mind. It is very important to take a look at those due diligence items before you close, before you do things. Many people get so excited about driving around, looking at dollars, and seeing other properties, grasses mowed. One of the first deals that I did was subject to deal that was literally right around the corner from where I lived in Round Rock originally. The borrower that owned the property, he and his wife had divorced. He moved closer to Houston. She moved somewhere else, but there was this property that was not being taken care of.
He had to pay the mortgage, but she was the one person responsible for selling the property. She was taking her sweet time. What was happening? The weeds are getting higher. The city had mowed the property a couple of times. I finally was able to reach out to them and I got into the property. You could see it needs some cosmetic works, tile works and new carpet. Not too much, just some basic updating, but there’s a lot of crap left in the house. The only way it made sense for us was to take the property over the subject to, which we were able to take and we wholesale to somebody else to come in. We turned it into a long-term rental. We made $5,000 on the wholesale deal.
He gave me $100 to mow the lawn to save them $250 being on there. That was a thing. I tracked him down. I called a neighbor that I thought where he lived at and the neighbor worked with the guy. The guy called me on a cell phone. A couple of days later, after he got off work, we negotiated things. He came up to Austin at the weekend. We met and talked about the property. We went through the due diligence sheet. We talked about the taxes owed. He was willing to sign the property over, subject to with approval of his wife to get the property sold. That’s what we did. We were able to take it over subject to six months and then sell it off in 45 days. That $5,100 in 145 days is not a bad day, week or month for most people, especially for our first deal. That was phenomenal.
The second thing, another deal that we looked at. I mailed letters, the person called regarding the letters. I drove by it and I saw it needs some work. It needed a whole lot of work. There was ugliness going on in the inside. He had a squatter living inside with four big dogs that were defecating everywhere. The bottom two feet of the sheetrock was yellow from where the dogs were pissing. It was absorbing from the carpet up. When you’d walk in the carpet, it goes squish. There are flies everywhere. Water had been turned off for three months. They are still using the toilets. She’s wiping her butt and putting a dirty toilet paper in the Homer bucket. We close off the toilets for and a household as the level of excrement increased to the point where it was full. It was one of the nastiest houses I’ve ever been in.
Due Diligence: If you want to be successful, find out the people that are going doing it, have done it, and are in a place where you want to be.
Unfortunately, we weren’t able to do anything with the house. She owed more than the property’s worth. The bank at the time, World Savings, wouldn’t sell the note. They wouldn’t discount the note. We tried to make a short sale. They wouldn’t work with us on the short sale. Eventually, she got sick and passed away in that property. There were all sorts of liens and judgments for the city. She’d been arrested a few times and not bonds out. It was an absolute title mess and the value. Although it’s a beautiful big square house and over 0.5-acre backyard at the end is a cul de sac. It was a total mess.
The people that ended up buying at the foreclosure auction had five dumpsters of trash and nasty stuff they pulled out of the house. They stripped the whole house down to the concrete slab and down to sheetrock. It was messy and stinky. They redid the whole sheetrock because she’s smoking in the house too. Basically, they stripped it down to the studs and had to reach sheetrock, redo everything. It was a major rehab. There can be some nasty stuff out there. I know we all get excited about going to workshops and flip this house. All these things that are on TV. We want to be a millionaire. We want to change our lives. It’s easy to get sucked into that stuff, run around, and trying to do things.
If you don’t know and what you don’t know, you can end up writing a check that ends up a check that your ass can’t cash. How do I know? I’ve been there. I’ve made plenty of mistakes in my life in my real estate business as well, too. You learn more from them. This is why it’s important to network with other people, to build relationships with vendors. A good sign is if you’re in traditional real estate and you’re using a hard money lender, hard money lenders won’t finance the property because they don’t believe your values or rehabs. That’s usually a sign that you haven’t done your work. One of the most valuable things that I did early on in my business was when I was getting real estate, I would run it by a hard money lender as my check.
If they were willing to finance it, I knew it was a pretty good deal. I would market it to other private investors knowing that I had to back up funding source with a hard money lender. There have also been times that we have sold assets with pre-approved financing in place from a local lender, a hard money lender who would finance the repairs and be in place. That’s a valuable marketing tool to use. Hard money lenders have their own list of investors that they’ll mail out deals to, email out with the hopes of getting them to finance or pick them on for financing. They can make their points and their spread between what they’re borrowing the money from for private investors and what they’re charging. That’s another thing that you want to look at too. What are your money costs?
If you’re using your own money, what’s the cost for that? Opportunity costs, using your own money versus somebody else. Is somebody else going to charge you? Is it below-market rates? Is it bank financing? Most of you are not going to get bank financing. People talk all the time. I was talking to a gentleman. He’s like, “I’ve only had my LLC for a year. I can’t get bank financing for another year.” I was like, “You’ll need to wait around for buying bank financing.” You’ll go out and talk to investors. You’ll go out and network. You’ve been raising capital from those people and make things happen. If you’re going to go financing with the bank, what are they going to cover? You’re going to use hard money financing.
What are the costs? What’s the time frame? Is there renewal costs extended for six months? What the days on the market? All these things have to match up to make sure it’s a good deal for you before you pull the trigger. Whether it’s traditional real estate or note investing, be very careful out there. All the things can go wrong, either contractors will slough off or you may end up paying a fine. Something might be wrong with the property that you didn’t find like the water heater or boiler, you’ve got to replace the plumbing in an area. There are a whole lot of different things that can go wrong. The slab is cracked. The roof doesn’t even replace the spot. There’s a lien out there that you missed trying to do it yourself.
Look For Help
Those are all different things that can happen. One of the best things that you can do initially is to hire somebody to come in and help you out. Hold your hand, mentor you, walk-in along, a coach is great. Somebody who’s got experience doing this because it’s years of experience. You might have to pay somebody to coach you. Free has no value in that person. He or she who’s got the years of experience, their time has been worth something. Keep that in mind. I see this happening. People bashing coaches and mentors and I laugh. I was like, “They spent all this time, as long as they’ve done deals.” There are people out there that don’t do deals. There’s a big difference. Those that are doing deals, they’ve got tons of experience, their knowledge, their time, their coaching is extremely valuable. Those that haven’t pulled the trigger on deals that aren’t doing stuff that’s not worth it, but there are plenty of people out there. Reach out to and talk to. It’s all worth it to make sure you’re doing it.
How do you find a good coach, a good mentor? Talk, ask people and ask for references. Who have you coached? What have they done? It’s one of the big things that you’ve got to keep in mind. You want to deal with somebody who helped others be successful. That’s the big point of success. If you want to be successful, find out the people that are doing it, have done it, and are in a place where you want to be. Talk to those people. Take them to lunch. Take them to breakfast. Take them to dinner. Get together with them as far as spending time with them. Don’t be an ask-hole when you ask a ton of questions but you don’t take the answers. Don’t sit there and pick their brains.
Don’t reciprocate in some sort of fashion. Some people will do a split deal. Some people will do a flat fee. I’m a friend. Some people will take a percentage. There’s no right or wrong on that aspect. Whoever’s going to give you the best knowledge is going to be worth whatever you pay for those. When I’ve paid for coaches and mentors, it has always helped me speed up that learning curve dramatically where I was able to get a lot more done or avoid mistakes and pitfalls along the way. I had somebody there hold my hand and say, “Watch out for that. Watch out for this and go from there.” That’s important to don’t take your advice for somebody who’s done one deal and now they’re teaching a program or a workshop.
It’s not the same thing. He’s done it over and over again. He should have stubbed their toe, busted their lip open a few times, hit their thumb with a few hammers along the way. It’s important to keep in mind, experience is being paid for in one of two ways, maybe of time in your own experience in money or with money to somebody who’s had the experience of speeding you up. That’s an important thing too. No matter what you’re doing, wholesaling, fixing, flipping, landlording, leaks options, wraparounds, sub-tos, whatever type of asset class it is, there are experts that have done what you’re doing. They can help you get there a lot faster. It will also give you other due diligence aspects along the way that are unique to that asset class.
The thing you can’t do is go to asset class then go out and try to apply to something else. I had a student who’s interested in mobile home park investing. He’s never taken a class in mobile home park investing, but they’re trying to hire a realtor. I was like, “You’re coming from this space. I know you’ve been a realtor before. You are coming from the note space as well. You need to learn what the ins and outs of this are. This isn’t the same thing as going out and making offers. That can get yourself in a lot of trouble. Why don’t you sign up and take a class from somebody here, recommend this person, take this other person’s class? Take something, and educate yourself because that will be much more valuable to you than you going out and trying to do it on your own and try to save $100 or $1,000.”
You’ll make a mistake that costs you exponentially greater than that. Do yourself a favor. You’re diving into brand new. Take a deep breath. Those big three things are universal across the way. You need to know the value. You need to know the tax situation, checking taxes, and then you’ll need to check the title. Those three major things will help protect your investment or your investor’s investment in your deal first and foremost. Commit those to memory. You may tweak it a little bit depending on what type of asset class, but those are the three biggest things to keep it when it comes to performing due diligence initially on different types of deals out there for you. Go out and take some action. I wish you the best of luck and we’ll see you all at the top.