Last Thursday night at the monthly REIA meeting, Than Merrill from A&E’s Flip this House presented an informative glance into his working business model. Than does more than 120 flips a year at an average of $27,000 each. Although he just started 3 years ago, Than is making millions using a system that he partially nabbed from other fix and flip coaches and partially created himself. Than acknowledged up front that he would have something to sell, otherwise he says there would be no point in his flying out here from Conneticut to talk to a real estate investment club. And sell he did. What my husband and I heard prompted us to attend an all day (9 to later than 6!) on Sunday. The cost was relatively inexpensive and anything for more education, right?
In case you’re wondering who attends a real estate investing club, I noticed a lot of people with jobs looking for a way to become self employed, and I also found many who had already made that transition using real estate investment as monthly income. Others are there to build a retirement using real estate investing as a vehicle. Some using sefl-directed vehicles and others doing 1031’s to defer taxes.
Finding the right investment opportunity is key to good real estate investing. The investments we have been buying are properties that can be subdivided or converted to condos or in some other way create equity through development. I hate fix and flips because there have been such a small margin in them because we didn’t knowi how to find below market inventory consistently. We only do the fix and flips if we can increase the value of an adjacent lot or new construction home we sell by increasing the value of the original home.
However, working with distressed sellers to find below market inventory is a business that is very specialized and can by itself be a full time occupation. And there are a lot of investment buyers looking to buy discounted properties. Finding these discounted properties has always eluded me. We have tried the foreclosure route and bought on the court house steps, but too many investors were chasing these properties and they still got bid up, squeezing that profit margin. Then there are title issues and the fact that you can’t really inspect the properties among other things, like needing cash!
Than has been successful finding these sellers and I wanted to know how. He has multiple sources and mutliple campaigns aimed at finding anyone willing to sell at a discount. His program is a highly developed marketing and operation. We were impressed, So, we decided to invest in the systems thinking that if he can make them work, so can we (I know, pretty egotistical). The cost of the program is pretty reasonable, the bigger cost being the time to attend a one week boot camp and implement the multiple marketing systems. But we’re looking forward to it and hope soon to have a source of ‘cents on the dollar’ real estate to offer our buyers. Keep tuned.
BTW, still nothing definitive on the Contractor’s issue, i.e., an owner needing a contractor’s license to perform work on real estate prior to a sale if within one year. We’re all waiting for clarification.
When I bought my first house nine years ago, I asked my brother for advince on getting a good deal (meaning below market). He had been doing full time real estate investing for over ten years at that time. He told me that I had no chance of getting a “good” deal through traditional methods. A realtor isn’t going to show me the place — instead they are going to buy it — or tell a family member or friend to buy it. There are tons of people out there trying to do the same thing.
The advice he gave me was to find the neighborhood where I wanted to buy, know how much I wanted to pay, then cold-write letter to everyone in the neighborhood saying how much I like the area and that I am planning to purchase a house to live there.
I don’t have that kind of chutzpah and I did not follow his advice.
I’d be curious to know if that worked for your brother or if he had other sources and did he make any money? There are ‘deals’ to be found in traditional methods, i.e. working with an agent through the multiple. For instance, you can buy homes with the right unfinished footage, like a basement or an attic. Often you can buy at retail and build in equity. A good agent can find these types of homes. But, because being listed brings the highest price, and is what’s best for the seller, it works the opposite for the buyer.
If this guy Than is making so many millions flipping houses, why in the world is he flying across the country taking time out of his busy schedule to sell others on the idea????
This makes about as much sense as Donald Trump’s infomercial hawking “The Donald Trump Way To Wealth” system.
Truly successful businesspeople don’t stop doing what they do in order to sell other people on doing the same thing, unless that’s what their business really is!
My brother is in the process of liquidating all of his RE investments and retiring in his mid 40’s. He figures it will take ten years to unwind everything. I mentioned I was worried about him with the RE prices falling. His response was, “I purchaced lots for $5k and they went up to $50k. If they fall back down to $30k I think I’ll still be doing okay.”
He credits part of his success to not having a RE license. Imagine a hypothetical distressed seller with two potential buyers. One is a professional RE agent and the other isn’t. I think the licensed agent is required by law to reveal the license if asked. Who do you think the seller would be more inclined to sell to all else being equal?
My brother has also impressed on me the value that someone familiar with a market can bring. Unless you are in RE full time, I do not think you can really expect to make much money in it — unless you are lucky enough to buy into a market like this before the run up.
I’m skeptical that you can find a good deal by working with an agent through the MLS. The really good deals will be gone before you can get to them. Why would any agent take a client to a great deal instead of buying it for himself? I can understand that if the place needs a lot of sweat equity, but then you are just going into the construction/repair business and paying yourself some unknown hourly wage.
redmondjp:
According to Than, by teaching the system, he ends up partnering with investors all over the country and he says that’s why he’s doing it.I suppose if it takes him 3 months and a large crew to earn $27000 per house, and he can sell 10 packages for 3000/package for something already complete, then he’s earning more money in less time by traveling. Add that to the deals he makes with other investors, and it’s worthwhile. He will co-partner and teach an investor the system and take 1/2 the deal. If it’s simply coaching, then he’s earning possibly 4000/hr. I’d do it.
Do you know that Trump doesn’t make good money on his wealth systems?
Brian Buffini used to sell real estate before hawking his coaching and now he owns a 60 million dollar company.
Alan: your assumption about realtors picking off all the good deals hasn’t been my experience. There are some agents that buy in their marketplace, but I’m guessing these agents are more oriented to their own portfolio that bulding up their clients.As I said, I’m doing this to find deals for my investor clients because they’re not in the business of finding these deals. A 3% commission is enough of the piece of pie for me. You make the deal and move on. I’d rather sell a couple of homes and earn a commission that do all the fix and flip work and take all the risk. Being on site and managing a fix and flip is full time.
Moreover, the Law of Agency requires that you work in the best interest of your client and that includes putting your clients needs above yours. Most of us take the Law of Agency pretty seriously, since it’s not only ethical, but sure provides the fodder for a lawsuit if you showed a property and then bought it for yourself.I’ve worked with hundreds of agents over the last 14 years and only know 1 or 2 that do investments and thus become competition for their clients.
And yes, we must disclose that we’re realtors.If you were a seller wouldn’t you want to know your buyer knew what he or she was doing so that the deal would go together. Between the form 17, lead based paint disclosure, mold disclosure, asbestos, underground oil tanks, need I go on, from where I stand a seller is much better off working with a scrupulous agent that with the public.
Anyone remember Tom Vu?
http://www.infomercial-hell.com/tom-vu/
“Tom Vu says there are plenty of real estate bargains for you to make big money if you know how.”
amazing what shows up on this blog!
While there are many ways to save taxes from doing fix and flips, I would like to know how many of you out there are fixing, holding and renting out for a year plus, and doing 1031 exchanges?
I facilitate 1031 exchanges and the way I see it, if you can fix and rent out your properties through a reputable property management company and then defer your taxes, why not do that? Not trying to drum up business, just wanting to understand.
I learned the hard way when it comes to Fixing and Flipping. Our family lost at least $20,000. I’m sure there are ways that you can really make money flipping but master your craft you must. It is not for everyone.
There was an interesting article a guest author of mine wrote about foreclosures, its partly related to Flipping homes. he made a good point: http://renomarketblog.typepad.com//reno/2007/10/foreclosure-fli.html
There are some agents that buy in their marketplace, but I’m guessing these agents are more oriented to their own portfolio that bulding up their clients
It would be a very unprofessional agent who poached a listing from his own client, but my point is more that there are other agents who may not be serving a client interested in that house who are ready and willing to snap up a good deal. Maybe it is a good enough deal that you don’t need to fix and can just flip.
Consider this scenario, you are browsing the MLS in an area you know well. Suddenly a new listing appears. From the descripton it is priced 20% below nearby comps. You do not currently have any clients who would want this property. You do not recognize the listing agent and they do not work with an agency — they must be new. The MLS listing has only been visible for a few minutes. What do you do?
The following is not legal or tax advice. You should seek appropriate counsel to answer your questions.
The 1031 tax deferred exchange is over sold by real estate agents and over used by investors in the many cases I have come across.
Real estate agents like to push the 1031 tax deferred exchange because they are guaranteed two commissions. the agent stands to receive a commission on the disposition of the ireal property asset and a commission on the acquisition of the replacement real property asset. I have run into a few RE agents who lack a basic understanding of the IRC, discounted cash flow techniques, and financial analysis to be competent with an exchange. (I have met a few highly trained and highly skilled real estate agents as well.)
Investors like them because they think they are deferring taxes. Is the investor really better off? I have seen cases where the investor failed to consult their tax professional if they should engage in a 1031 tax deferred exchange. Instead the investor relied on their agent to make the determination. In our practice, one of the first conversations I have is with the clients CPA or tax attorney.
I can think of several reasons to avoid an exchange.
Does the taxpayer have significant long term capital loss carry forwards? If the answer is yes, then engaging in an exchange avoids taking advantage of the capital losses in the current year to offset any capital gain from the disposition of the real property asset. A partial exchange or no exchange might be more appropriate.
Does the taxpayer expect the capital gains tax rate to increase significantly in the future? The current rate of 15% is historically low. Most of the tax professionals I talk to say the coming election will result in a big change in the tax rates. The capital gains rate will increase significantly. Do you really want to delay paying tax on the gain until a future time when the tax rate is significantly higher? 25%? 30%?
1031 tax deferred exchanges are very popular in markets with high capital asset growth or appreciation, but those markets may be the very markets in which to avoid engaging in an exchange. In a real estate contract, the party engaging in the exchange will announce their intent and announce that the other party will not incur any costs associated with cooperating. Mr. Jones disposes of his real property asset in a 1031 tax deferred exchange. He identifies the replacement real property asset. In the contract for the replacement property, Mr. Jones announces he is performing a 1031 tax deferred exchange. Now, Mr. Jones is at a negotiating disadvantage. The seller is aware that Mr. Jones in under a strict timeline to complete a purchase of a replacement property and Mr. Jones must buy. In highly appreciating markets, most of the Mr. Jones of the world will pay a premium for the replacement property because of the time constraints and negotiating disadvantage.
At what point does the premium paid by Mr. Jones to purchase the replacement property negate the tax benefit of engaging in the tax deferred exchange to defer the capital gains tax on the disposition? Is the after tax cost with an exchange actually higher than the after tax cost without an exchange? These questions can have significant impacts on the investors yield or ROI. There is a very good research paper on this topic from ASU.
Make sure your tax professional is part of the discussion and make sure your real estate professional can crunch serious numbers.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Michael –
I really like what you said about the potential pitfalls of 1031 exchanges. What I heard from your words was that if a potential exchanger doesn’t do their due diligence with the proper parties, they are setting themselves up for disaster. I completely agree. But, I think following this line of not doing your due diligence will bring adverse effects no matter what you’re doing in business. Think of all the uninformed clients you’ve had that want a house simply because they like the house even though it wouldn’t be a good deal for them financially.
1031 exchangers that have long-term vision and consult with their Realtor, CPA, Attorney, and a good 1031 Qualified Intermediary will generally get the advice necessary to go forward with an exchange or not.
Also, as to the idea that an exchanger would have little negotiating power because a potential seller knows that the buyer is doing an exchange. In reality, a seller must sign a form indicating their knowledge that the buyer is doing a 1031 exchange. BUT, the seller does not have to sign this document until closing along with all other documents. So, the seller does not have to know about the 1031 exchange until all negotiations are over and documents are being signed. As such, a good Realtor will still be able to negotiate a good deal for their buyer-client.
I’m still looking for someone that can tell me if you can exchange a 1031 under a year. I’ve been told you can.
I wonder how many homeowners know that they can exchange into a house that they are purchasing under certain circumstances. i.e.,
sell 450,000 investment property thru a 1031. Buy a new home for say, 1,350,000. Identify 1/3 of new home as investment, either as a rental or home office, this is easy if 1/3 is a basement level.
So you now have a home and rental in the same building. Easy to manage, living in a nicer home than normal, and, after 2 years, move into the entire home for 2 years, then sell. as long as the whole gain on the home is under 500,000, this works. This is just an alternative to renting a 1031, then moving in for two years and then selling using the homeowner exclusion. Anyone see any issues with this?
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Eileen, I hope the #15 comment will answer your question about the 1 Year Holding requirement. I am going to get something together for you in the next couple of days as to your primary residence/investment property question. I’m thinking about it, just too much is going on to give it the time needed to give you a good answer right now. Sorry about that.
“As such, a good Realtor will still be able to negotiate a good deal for their buyer-client.”
The research indicates otherwise. More often than not, the seller finds out and the buyer loses negotiating power. The parties might be negotiating additional contract items such as the inspection response, a close extension, etc. In high appreciating markets, the buyer will pay a premium more often than not. If the Realtor or another professional working for the buyer failed to calculate the boundaries of the price premium, the after tax discounted cash flows, and the after tax yield, then negotiation is meaningless. If they were calculated and ignored, then negotiation is meaningless. The research is based on the work of Scholes , Kraus, Stoll price pressure hypothesis and the Oats tax capitalization hypothesis. (Scholes won the 1997 Nobel in economics)
Holmes & Slade. “Do Tax-Deferred Exchanges Impact Purchase Price? Evidence from the Phoenix Aparment Market”. Real Estate Economics. Winter 2001;
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
I haven’t found that to be the case. Possibly if the seller somehow learns that the buyer is up against the 6 week rule, maybe maybe, but the buyer still has the same negotiating power because they still ahve the whole market to chose from. All they need to do is identify 5 properties in the 6 week period. Also, I haven’t found that many seller agents who know the rules and would alert the seller that there may possibly be a problem. However, if the 6 month window is running out, and the buyer really needs to be, then there’s a real problem. That happened to me this spring as I was up against the 6 mos timing and two loan programs dissolved from underneath me and I didn’t have the ability to walk away from the deal becuase of the huge tax hit I would have taken.
Here lies the problem. Individual experience while very real is anecdotal. It isn’t large enough to be a sample of the population. Your experience and my experience don’t qualify for observable results of the scientific method using a testable working hypothesis. The research includes 2351 observations during 1990-1997.
In the case where the agents do not understand the tax law surrounding the 1031 exchange there probably is no loss of negotiating power for the buyer. Information is king. When parties involved are sophisticated, the buyer loses negotiating power. The “whole market” or supply is a thin market in a hot market creating supply constraints for replacement properties and additional risk. The time limit requirement creates risk constraint to the buyer and due diligence for the shortened periods and additional risk.
When the seller is aware the buyer loses power in a hot market. The buyer asked for new roof the seller can say no in a hot market. Many buyers are wiling to acquire the property as is. The buyer needs more time the seller can ask for more money in a hot market. The seller can sell for a higher price if the buyer bails. If the buyer decides to bail on the deal (if they can), then the previously identified properties may not be available which creates immediate supply constraints for the buyer and additional risk. The buyer has price risk as the two other properties identified may cost more at a later time.
The simple exchange requires identifying three properties in 45 days without regard to their FMV. Identifying more than three properties entails additional requirements.
1.) The exchanger identifies any number of properties as long as the aggregate FMV is less than or equal to 200% of the aggregate fair market value of all disposed properties.
2.) The exchanger identifies any number of properties regardless of the aggregate fair market value as long as the FMV of the properties acquired are greater than or equal to at least 95% of the FMV of all identified properties.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
I like your thinking Michael. A couple quick things though. Research born out of Phoenix, Arizona from 1990-1997 is great, but only for that time. Think of the influx of 1031 exchanges since 1997. I do not have industry numbers, but 1031 Exchange Coordinators (my 1031 exchange firm) did essentially the same marketing from 1997 to present and we went from beginning a maximum of 40 exchanges a month in 1997 to an average of over 70 exchanges per month last year, when the national market was peaking. So, assuming our firm is the norm – which all indicators in talking with other 1031 firms around the nation say we are – we must take the 1990-1997 research with a grain of salt. It was great stuff, but cannot neatly fit within today’s market. Sure, trends from 1990-1997 having meaning, but remember that only in 1990 did the IRS make 1031 exchanges viable for the average investor. So, the first 7 years of mass 1031 exchanges really can be seen as a poor indicator of what will happen now and in the future as the 1031 industry is much more established.
Also, Eileen’s experience is the norm across the boards from all of my firm’s experience. How to ameliorate this problem you ask? (1) Educate the Realtor sufficiently that the Realtor can see potential issues and pitfalls as they come up; and (2) Every Realtor must have a Qualified Intermediary they can trust so that the QI can help the client and Realtor determine the plan of attack dependant on the options and situation presented.
Finally, as to your Identification period, you had it almost right. Identification for replacement 1031 properties can be very tricky and to give it proper treatment, a comment won’t suffice. Not trying to be spammy, but to give the topic enough treatment, I’m posting about the 3 Identification rules on my blog today. Click on my name above and you’ll find it if you’re interested.
Best,
Chad Hallberg
Chard, I have a couple of questions. you say “but remember that only in 1990 did the IRS make 1031 exchanges viable for the average investor. ”
By 1990, I had exchange one property 3 times and didn’t think I had any issues, although I have to admit, I paid less each time.
The second quesiton is that I went to your blog and couldn’t find the rules on replacement properties. Guess I wasn’t patient enough. Can you send the link for the correct page. Thanks.
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Would anyone argue the CAPM model for pricing based on Markowitz’s work on diversification and Modern Portfolio Theory is irrelevant today? Diversification is irrelevant today? MPT is irrelevant today? The Black-Scholes option pricing model from 1973 is irrelevant today because we had an explosion in the quantity of stock options or stock option transactions during the 1990s? Of course not. The time period and the quantity for financial and economic mathematical models are irrelevant.
I disagree that the Holmes Slade study is only relevant for the time period 1990-1997. The hypothesis is built around the Scholes price pressure hypothesis and the Oates tax capitalization hypothesis in hot markets. The Holmes Slade hypothesis has nothing to do with the quantity of exchanges or the time of occurrence of the exchange. The time and quantity in the test are to document the sample data. Time and quantity is not the subject of the hypothesis and test. The quantity is relevant to determine if the sample size was adequate to supply valid statistical results. The Holmes Slade hypothesis tested the impact on price as a result of the decision to engage in an exchange in a hot market with rapid price increases, thin supply, and strict rules. Increased demand and decreased supply create price pressures and additional risk to yield. It isn’t about hypothesis fitting today’s market. The market fits the hypothesis as pricing stock options today fits the Black-Scholes option pricing model.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
I’m dying to see if anyone responds to this! you must have been an economics professor, Michael.
p.s. I do use the Black-scholes option pricing model myself, but what the heck is the CAPM? Is that got anythng to do with cap rate?
Sorry, I for one am lost here.
I was never an economics professor. spent a year in public accounting. 9.5 years at Microsoft in finance/operations positions and on to commercial/investment real estate. teach an adult education class in real estate finance at DiscoverU.
the Capital Asset Pricing Model is referred to as CAPM (pronounced CAP-M). CAPM is used to determine the required rate of return for an asset to be added to a diversified portfolio. CAPM is for securities.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc