Recently in Rehabbing Michigan Foreclosures Category

So I am at this elementary school in Detroit in December, dressed up as Santa, having the time of my life and the last class we took the toys in is being taught by this very young gentleman named Mr.Uresti. 

After we had giving the toys out and the wrappers came off and everybody was happy and smiling; all the kids wanted to keep the dolls, dinosaurs and the racing cars out for a while and play which gave Mr.Uresti a pause. 

And the kids were all yelling please, please, please let us play; so he said, if I am going to let you guys play with your toys we have to raise our right hand and repeat after me: I promise not to take anybody's else toy or blame anybody for taking my toy; I will be quite and respectful and play with my toys and have a great time. 

They all very seriously repeated the oath and went back to playing. And I thought what a wonderful idea.... May be I should have a MP3 here somewhere that every new Michigan real estate investor should repeat after me before they start flipping foreclosures in their Michigan cities especially when it comes to these 7 rules:

1. I promise not to give any money to any contractor without a written agreement between them and us. I also promise to check their references and get a W-9 form sign and filed from them before I gave them any money. And I also will not give them the final check without getting an Unconditional Lien Waiver Form signed and filed away.

2. I promise not to enter into any partnership agreement with anybody, no matter how long I have known them, without a contract, prepared by a lawyer.

3. I promise not to put any offers on any REO's without having OPM lined up to buy it once my offer is accepted. That will insure that the REO agents I come across in Michigan will love and respect me for all the days to come.

4. I promise not to buy moldy, fire damaged, foundation destroyed, flooded with water houses in 2011.

5. I promise not to try and fix these flips myself so I can save couple of dollars. I will not be cheap and I will find good help to get these houses done fast so I can flip them.

6. I promise to find a great loan officer who can help me get my buyers approved and my flips moved fast so I can spend time in finding the next deal instead of playing mortgage banker all day long.

7. I promise to spend time networking with other experienced real estate investors in Michigan and go to networking meetings like local REIA's and other entrepreneur groups and ask for help and not try to waste couple of years trying to 'discover' things that already been discovered long time ago.

Not every minute that you spend inside your business brings you money back.

One of the biggest 'time suck' things that you will be doing in the next 12 months are the endless trips to Home Depot and Lowes to get materials for your contractors.

You cannot avoid it all together and I have lots of friends who actually enjoy doing it. I have said it only half jokingly that given the choice between having sex and going to Home Depot, most Michigan real estate investor will always pick a trip to Home Depot.

But a time comes, once you have flipped three houses that hopefully you will be realizing that there are a lot of things in your flipping business that once learned, you don't need to be doing over and over again; making endless trips to these two stores being one of them.

If you have not realized that then may be you don't consider your time precious or you are just having too much fun checking out the new tools that these stores keep piling up.

Stop it and spend those minutes some place else.

Here are three ways to start cutting down on these trips:

1. If you want tasty apples, plant an apple tree and not a poison ivy plant. Start with good contractors that are 'mature' business owners and want repeat business from you and are looking for good Michigan real estate investors to work with.

Ask for references. Check those references. Go to networking events in your Michigan County and ask other experienced investors about the people who work for them. These contractors value their times as much as they will value yours so they are going to more organized and are not going to be interested in making 37 trips to Home Depot to fix one house.

2. Start with a good list of 'everything' that you are going to need to fix this house. When you are going through the house and making a list to buy; use paper or a digital voice recorder.

Either way don't rely on your memory alone. Remember the last time when your better half yelled at you for forgetting the milk and eggs for kids the last time you went to Meijer?

3. It is not; repeat not a good idea to start writing big checks for material purchases to contractors EVER or to give them cash for smaller stuff.

Instead buy gift cards from Home Depot and Lowes for small stuff that you can give your contractor and they can give you weekly receipts on purchases they made. A $100 gift card for Home Depot will save you 2-3 trips that week.

Tell your contractor to keep a small box in their glove compartment in their truck and put your receipts immediately into it. They are notorious about losing receipts so pointing this easy method of keeping better records will help you.

1. Just because it is you shopping at Home Depot all by yourself does not means that you should not type up an estimate and follow the bloody thing. Showing up at Home Depot and not knowing what you are going to buy ahead of time and why you are buying it just means that you are going to go over your budget.

When a chef is planning a meal, the first they write down is an ingredient list and then they go shopping and they cook. Watch any season of Top Chef and you will see that the chefs who win again and again go to the supermarket, knowing what they are going to buy.

2. Make a checklist for every room of the house. What needs to be fixed here? What needs to be fixed there? And then follow the checklist. A friend of mine bought a house 8 years ago. To live in as in their primary residence. Then they proceeded to gut the whole house without have any plan on what and how they are going to fix it. It has been 8 years since they move in and they have not slept in the master bedroom YET.

So what? It is their primary residence and if this is what they want to do, who are we to argue about it? But this Michigan bank foreclosure that you are planning to fix and flip is an investment and needs to be treated as such. So checklist matters.

3. Give yourself some targets of time. What is the date today? When is the kitchen going to be completed? When is the basement going to be done? When are the tiles going to be laid in the bathrooms? Is your train running on time or is it 2 months late? Do you know? If you don't know than who knows?

4. Ask for help BEFORE you start painting or laying out tiles if you know beyond the shadow of doubt that you are color blind or you have lousy taste which in plain English means that if you are a man this advice applies to you. Find somebody in your life: mom, sister, girlfriend, mother-in-law - whose house has always impressed you and asked them nicely to help you pick out colors and tiles.

5. Have a budget. Typed up. And follow it. Just because you have a deal partner with ridiculous deep pockets does not means that this is your chance to compete with Extreme Makeover Michigan Edition. If your budget for tiles is $300 - then make it work.

Don't go to Home Depot and walk out with foolish grin and a $700 receipt. Every time you overspend on materials (since there is no labor as you are doing the grunt work) - you are giving away your profit away to Home Depot. Trust me they make enough money as it is. You don't need to help them. Help yourself.

6. When you are done with the house, hire somebody to clean up the house top to bottom. Don't do it yourself.

7. The flip side of spending too much is spending too much on things that even though are important BUT don't sell houses. They are two different checklists and are both important.

8. Have a sign in front of the house from Day 1 advertising the house. Since you are going to be inside the house all the time anyway, let the neighbors and street traffic come in and talk to you. Would be cool if you flip the house even before it gets done.

9. Pull permits and licenses which are required by law. I see investors in the City of Detroit sometime trying to cut corners. Look I understand the temptation but it is not simply worth it.

10. Have a start date. Have an end date. A project has both. Write these dates down. Better still buy a countdown clock and put it on your desk. Program the end date in it and now it is counting backward to it.

This is the countdown to you getting a big fat check with your LLC name on it. Be excited as it counts down and your house is coming along. Do not put this date in your head. You will add 3 months to your rehab project if you don't write it down.

What is the most important number on that quote you just got from your contractor?

For most real estate investors in Michigan (especially the ones just starting out) THE ONLY NUMBER that matters is the price the contractor is charging to fix what needs fixing.

There is also another number, equally important: how long will it take them to do (in days) what you are hiring them to do? After all you cannot sell the house (or at least close) on the house till it is fixed.

When you get the very very low bid from a contractor, chances are that they are saving money at least in their minds because they will be doing everything with a one person show - them and them alone.

Add 3 extra days to whatever they are promising you simply because that is how things work in real world. Cars break down, they get a nasty cold, family member is getting married out of town and they have this trip planned for months and so on..........

3 days extra does not sounds so bad if you can save some money but when you total all of them up (hopefully you are not using your brother-in-law to do EVERYTHING) before you know it, you are at 30 extra days. That is an extra 30 days you will not see a lovely check with the name of your LLC printed on it.

Look at the money but count the days also. They are both equally important.

3 years ago, new construction home sales in Metro Detroit, Grand Rapids and Lansing started to slow down. Building a sub-division is a long tedious process and typically takes 3-4 years from idea to first house being built and the builders were seeing a foreclosure tidal wave coming in Michigan and decided Michigan is going to have lots of foreclosures coming to the market and they will have a tough time getting a top of the line pricing so they wrapped up the sub-divisions that they were already building and stopped applying for new permits.

This immediately bought a rush of talented and very skilled electricians, plumbers, roofers, general contractors, painters and pretty much everybody involved in building a house in the market looking for work.

Yet I see till today, new real estate investors in Michigan paying way too much for basic rehab cost. Like, shaking-my-head-in-amazement type checks get written every day to people who are fixing their house up.

Why is so? If there are so many skilled contractors in every field looking for work in Michigan, why does new real estate investors in every major Metro area in Michigan pay more and cut in their profits?

The enemy is simple: ONE BID. Almost all the time when somebody is telling me that they went over in rehab costs - all they got before they decided to hire somebody was one bid. If the guy who is painting your house is your out of work first cousin and you want to help him by paying him a little more... that is fine but you cannot pay everybody whatever the heck they are asking without knowing what the market rate is.

Easiest way to finding out what is a 'good rate' for fixing anything? Ask 2-3 people to go through the house and get quotes from everybody. Throw the crazy high and insanely low and ask for references for the middle quotes. Call the references and ask them if these guys have kept their word - both on delivering on time and fixing what they are supposed to fix for the amount of money they said they would and then choose. Takes may be an hour to do the above but you will save thousands.

Don't let your personal likes and dislikes play here also. #1 reason investors pay more for simple things: "Well I kinda like the guy and we are both UofM fans." That is a good reason to go out with the guy and drink couple of beers next time a UofM game is on but not enough of a reason to pay him $1500 more to replace a furnace and some pipes in the basement.

Good rule of thumb to live by in Planet Ijlal: if you are not getting 3 bids for every major thing that you are getting fixed up in your flip: you are paying too much. Fix this hole in your foreclosure buying business and you will add more to your check without doing anything extra.

So you formed your LLC, ordered your business cards, and put couple of checkmarks on your calendar for the month to go and meet local real estate investors in your Michigan County. Here is the next item on your list as you build your real estate investing business in Michigan - build your team.

Contractors, loan officers, property inspectors, appraisers, and buying agents - you want them all.

Whether you are going to a seminar or a networking meeting - ask the folks sitting next to you if they have recently used a good person for a deal that they can recommend to you. Get their phone number and write it down. You are going to begin with an empty list like we all did and your mission is to complete this list as quickly as possible.

Here are your team members:

Buying agents
Property Inspectors
Electrician
Plumber
Painter
General Contractor
Cleanup / tear-out crew
Landscaper
Driveway installers
Heating and Cooling
Leaky basement fixers
Bathtubs and sinks reglazer
Loan officer

Your goal is to get at least 3 names in each category. Not because I want you to shop them all day against each other but somebody could be busy and not able to work on your flip deal or simply out of town for the next 2 weeks. So you will need backup and 2 extra names give you a strong backup. One is a terrible number when it comes to a list like this.

Most real estate investors can avoid all kind of headaches if they follow some simple rules when working with people. Here are my rules. I learned all of them the hard way, meaning I was sufficiently stupid when I started to break all of them and I paid a price. Sometime it was money but mostly it was time.

One day wasted is one day wasted and no amount of money can bring that day back. That is why good folks on this list can not only save you money but also save you from wasting valuable days. You cannot sell a house unless it is fixed. The faster your house is finished and you put it back on the market, the faster you can turn around and sell it.

The cheapest guy that is willing to paint your house (or fix plumbing or do the roof) for almost nothing is cheap for 2 reasons.

1. He is dead broke, desperate, behind on his child support payments and may be about to go to jail. He has been fired or gotten into fights with the last 10 people that hired and trusted him and he has no chance in hell in ever getting hired by his previous clients. Heck he can't even give you two lousy references.

2. He is going to do everything himself. For what you are going to pay him, he cannot realistically hire anybody to help him during the project. It is going to be a one-person show.

Do you really want to bet your own $20,000 check on this guy? You can't sell the house till it is fixed, yet most real estate investors who are cautious enough to read every single line of a purchase agreement yet strangely feel compelled to act brave enough to trust THIS GUY to take them to end zone.

Remember what mom used to say when we were all young... when something sounds too good to be true, it usually is.

Turns out that mom knew more about running a business than a whole lot of folks running around with LLC's and PA's in their names right now.