Keep in mind that business credit is much different from personal credit. While you may have to secure any business credit against your personal assets for a couple years, the goal should be to build a strong enough credit history with your business that you are able to secure business credit only against your business assets, and not have to put your personal assets on the line. Additionally, in the real estate world, getting commercial credit lines — which don’t have the same qualification requirements and aren’t limited by your personal debt-to-income ratio or credit score — is one key to scaling an investment business.

Based on the research I’ve done (I highly recommend a site called Credit Boards that has a lot of great information), here is the 6 step process I would recommend to building credit for your business:

1) Create a Corporate Entity. This could be a full-fledged C-Corp, an S-Corp, or an LLC. The key is that you have created a legal entity separate from yourself and that can have a credit history and rating all to itself. There are a lot of differences between these types of business entities, and if you don’t know which one is most right for your specific business, talk to an accountant and an attorney to get some help.

2) Apply for an EIN. Once you have your business legally set up, you need to let the government and IRS know about your business. An EIN (Employer Identification Number) is analogous to a Social Security Number for your business. You can apply for an EIN free-of-charge online at the IRS website.

3) Get a Business Phone Line. This is actually an important step. The credit reporting agency that will likely be tracking your business credit (as well as the businesses that supply you credit) will want some proof that you are actually conducting business, and will also need a way to index your business in their databases. They do this using your business telephone number. In addition to just getting a business phone line, ensure that the business (and it’s associated phone number) are listed in both the 411 Directory (White Pages) and the Yellow Pages. Most phone companies that supply business lines will do this free-of-charge when you order your phone line. Because you need the Yellow Pages listing and the White Pages listing under the business name, you won’t be able to just get a residential phone line and call it a business line; and unfortunately, a business line will cost a little bit more.

3.5) Get a New Address (?) At this point, a lot of people will tell you that if you’re working out of your house, you need to set up a mail box (not a P.O. Box) at a local mailing center, so that your business doesn’t appear to be a home-based business. I’m not sure if this is a requirement or not, and have not set up an alternate mailing address as of yet. I want to see if I can skirt around this requirement…and will let you know if it works.

4) Apply for a DUNS Number. Dun & Bradstreet (D&B) is to the business world what Experian, TransUnion, and Equifax are to the personal credit world — they are the single biggest business credit reporting agency in the world. By going to their website or calling them, you can set up a D&B account and get an unique identifying number that will allow you to start building business credit through their credit databases. Beware that D&B will do their best to upsell you on tools to build your credit better and faster, and if that’s what you really want, go ahead and spend the money. But know that you don’t need to purchase any additional tools from D&B to start building your credit; that’s just how they make more money.

5) Open a Checking Account. Go to your preferred bank and tell them you want to open a business account. Try to find one that has few or no fees, if possible. They will ask for some details of your business, and will want to see your Articles of Incorporation and will need your EIN, so come prepared.

6) Start Applying for Credit. Get a business credit card (Amex and Advanta are highly recommended), open a Staples credit card, open a Dell business account, open a Home Depot account, or try opening business credit accounts at any of your preferred vendors and stores.

As you start building credit, you may notice that the stores/vendors stop requiring a personal guarantee for the credit lines. This is what you’re ultimately trying to accomplish — building business credit in the name of the business entity without impacting your personal credit or relying on it. Good luck…and I’ll provide an update in a couple months on how this is going for me…

I’ve been so busy with houses #1 and #2 that I haven’t spent as much time thinking about this one, but spent the day there today getting my inspection complete and starting my Scope of Work document. I also haven’t written much about this one, so here are some more details:

• First, of course, are some pictures…
• This house is another bank-owned foreclosure that I was able to pick up very cheaply. It needs a lot of work, but I’m confident that I’ll be able to make a profit on this one, and am planning to probably put a bit more work in than necessary to hopefully ensure that I can sell it in this market. I may have to spend an extra $5-10K on this one to ensure it sells quickly in it’s price-range, but I think the trade-off is worth it.
• As I mention above, my goal on this one will be to sell. As I’m going to have to basically gut the kitchen and baths, put down all new flooring (there is no flooring there now), and move around some walls, I’d rather just sell it in its new pristine condition as opposed to giving a renter the opportunity to destroy it again.
• I had my inspection today, and there were no major surprises. I was happy to find out that most of the major systems worked just fine, with the exception of the hot water heater. The roof was in good shape (other than the gutters), and there were no major electrical or plumbing issues. There is some evidence of termites, so that’s one expenses I didn’t count on, but hopefully there’s no major damage and any existing damage can be easily remediated.
• It was also very nice to find out that the house is built with a truss roof, meaning that none of the interior walls are load-bearing. This is great, as my biggest concern with this house is the fact that many of the shared rooms (living room, kitchen, dining room, entryway, bonus room) are very compartmentalized. I’d love to be able to open up the floor plan, and now I know I can. In fact, I can add and remove any walls I want, giving me essentially carte blanche on the layout redesign. Of course, this is where I’m concerned that I’ll probably go crazy and over redesign, but it should be fun.
• I also need to decide how I’m going to handle the contractors on this one. While I was considering bringing in a bunch of subs on my own (electrician, landscaper, roofer, painter, GC, etc), I found another company that will provide all the contractors at a very reasonable price (the guy that owns it is a friend of a friend). So, I’m going to let him bid the job, and if he comes back at a reasonable price, I’ll suck up the few extra dollars I might save by GC’ing it myself and just go with them.
• I hope to close on this one in the next week or two, so it’s time to get moving on some bids for the work…

Here is a video of the main floor of the house, along with some front and back yard shots:

And here are some pictures after much of the demo has been completed:

With my due diligence period almost over, I ran the numbers one last time the other day, and this is what I came up with…

My budget for this one (as a rental) is $14,000 ($11,500 plus the closing credit), so with the $61K purchase price, my all-in cost will be $75,000 plus closing/financing costs.

I plan to do the following work:

• Replace the roof
• Repair/replace cracked rafter in attic
• Repair soffit/fascia/trim damage from leaking roof
• Replace A/C
• Replace Furnace
• Replace Water Heater
• Replace fridge/dishwasher
• Get an exterminator in to seal up openings
• Minor plumbing repairs
• Steam clean rugs
• Deep clean house
• Paint interior

I have a bid on the roof, rafter and soffit repair for $5K. I have a bid on the A/C, Furnace, and Water Heater replacement for $5K. I have a bid on the painting for $1500. The appliances will cost less than $1000. The exterminator will be less than $500, the plumbing repairs will be less than $500 (hoping to get that thrown in with the HVAC work). That leaves me about $500-1000 worth of wiggle room for anything unexpected, though this place is in really good shape once the mechanical stuff is replaced.

As for rental comps, it should be pretty easy to get $800/month, and I’m hoping for closer to $850. While I like to use the 50% rule for expenses, with all new mechanical systems, new appliances, and new roof, my expenses for the first several years should be well below 50%, and if I can keep them at 44% or below, I can cash flow with 100% of my money pulled out (and self-managing it). With a 10% down-payment left in there, and not refinancing out my rehab costs, it actually cash-flows pretty well, and my return is close to 9-10% on the investment.

When I go to sell, I’ll want to add about $10K more work:

• Exterior Painting
• New Microwave/Washer/Dryer/Stove
• New Windows
• New Doors
• Repair the “bulge”
• Fix up the garage conversion room (sheetrock, flooring, etc)

This will take my basis to about $85K, and comps in the area would indicate that the place is worth $120K-$130K (though I don’t think it will sell quickly in this market, so I’ll have to wait at least a year or two, and may wait much longer). So, I should make $25K-35K after all commissions, and maybe more since my wife will be the agent for the sale.

Not a home-run, but certainly a decent deal…and the work on this one is *easy* compared to some of the others…

Of course, the goal is to have the business a bit more streamlined by then (and maybe have another “helper” as well). So, for now, I just need to ensure that I’m spending enough time working on defining repeatable processes to make future houses a bit more efficient. To give you an idea of the type of stuff I’m currently working on (and what is filling my days), here is a copy of my current to-do list, as it stands this minute:

General

• Plan for Building Business Credit
• Get Biz Phone Line
• Get DUNS Number
• Investigate RealQuest for Comps
• Find Contract Attorney and Setup Meeting
• Financing Investigation (Commercial Loans)
• Financing Investigation (Hard Money Loans)
• Get New Cell Phone w/Email Capabilities

House #1: The Corn House

• Take Video Before Work Starts
• Get Completed GC W-9 Form
• Update Mailing Address for Property Taxes
• Pick Out Countertops
• Pick Out Cabinet Colors
• Pick Out Cabinet Door Style
• Pick Out Exterior Trim Colors (and Shutters)
• Pick Out Shower Door Style/SKU

House #2: The Bulge House

• Get Response from Bank on Renegotiation
• Get Underwriting Status
• Find Updated Rent Comps
• Get Section 8 Rent Estimates
• Talk to Neighbors
• Decide on Rent/Sell
• Define Scope of Work
• Define Materials List
• Get HVAC Price Quotes
• Get Plumbing Price Quotes
• GC Walk-Throughs and Price Quotes
• Pick a GC
• Get Landlord Insurance
• Get Closing Date/Attorney
• Take Video Before Work Starts

House #3: The Second Chance House

• Submit Loan Info/Docs
• Investigate HML/Refi Loans
• Get Loan Appraisal Scheduled
• Get Water Turned On
• Get Electricity Turned On
• Get Gas Turned On
• Schedule Inspection
• Take Before Pictures
• Decide on Rent/Sell
• Define Scope of Work
• Define Materials List
• GC Walk-Throughs and Price Quotes
• Pick a GC
• Get Landlord Insurance
• Get Closing Date/Attorney
• Take Video Before Work Starts

Next Houses

• Do Walk-Throughs of Four Houses
• Lunch with Ian (HomeVestors)
• Talk to Toni (Coldwell Banker)

While this may not seem like an overwhelming list of things to do, keep in mind that many of these things are time sensitive. For example, both The Bulge House and The Second Chance House are in their “due diligence” periods, and so I only have 7-10 days to do things like turn on utilities, get inspections, submit loan docs, get appraisals, etc. Once that due diligence period is over, I’m pretty much stuck with the property, regardless of what I find down the road. And while things like pictures and videos don’t really seem that much of a priority, I think I’d be disappointed if we get to the end of these projects and don’t have documentation. With demo starting on The Corn House tomorrow, I really need to get that video done today (and yes, I’ll post it!).

Okay, back to work…

While I’m sure I’ll deal with plenty of contractors who insist on using their contracts and forms, the GC for this project was perfectly amenable to my creating the contractual agreement, as long as it included his bid as an addendum. I know of several investors who don’t think much about the contractual side of the business, and essentially sign whatever the contractor throws in front them, or in many cases, don’t sign much at all. Considering I have a good bit of money on the line if I get sued (or worse yet, if I get audited by the IRS), I try to be very careful with my contracts and documentation.

For anyone planning to get into this business (even as a hobby), let me recommend that you have a consistent contract regimen with every contractor you work with, regardless of whether it’s a $500 project or a $50,000 project. The risks are the same, and amount of effort to mitigate that risk is really not too great. With that in mind, here are the documents that I require every one of my contractors sign before they start on a project:

IRS Form W-9

A W-9 form is an IRS form that is used to collect information about your contractor (name, address, SS#, etc) that can be used at the end of the year to create and issue tax forms to the contractor and to the IRS. Without the W-9, you risk not being able to get in contact with the contractor at the end of the year to provide him with a statement of earnings for the year. You also run the risk of having no proof of Independent Contractor relationship with the contractor, and may end up paying payroll taxes for that contractor and any wages you paid him.

Some people figure that they’ll be able to collect the contractor’s information at some point in the future, but remember, a contractor may be just as happy if you can’t file tax information about him, so it may actually be more difficult to collect this data after the contractor has completed your job. A W-9 only needs to be filled out once (and kept on file); it’s best to have this filled out by the contractor prior to handing him his first check.

Independent Contractor Agreement

This is a big one, and should be created and signed before each project begins and with each contractor you will be paying. The Independent Contractor Agreement basically lays out the contractual relationship between you and the contractor. Besides containing all the details about the specific project at hand, it clarifies that the relationship between you and the contractor is not employer/employee, but instead an independent contractor relationship. This is very important, both from a legal and a tax perspective. From a legal perspective, it provides you some protection against lawsuit, workman’s comp suit, etc. And from a tax perspective, it will likely save you quite a bit of money in payroll taxes that you’d otherwise pay if the contractor were considered an employee.

Plus, as I mentioned, the Independent Contractor Agreement lays out the specific contractual terms for the project at hand. For example, the contract specifies such things as:

• List of specific services to be performed
• Compensation terms
• Terms around who provides tools, materials, etc
• Penalties assessed for missing deadlines
• Insurance obligations
• Description of how change orders are done
• Etc…

This is the primary contractual document between you and your contractor(s).

Scope of Work

This document may be included as part of the Independent Contractor Agreement or it may be a separate document (usually referenced by the Independent Contractor Agreement). The Scope of Work defines the specific set of tasks you are hiring the contractor to complete, and is essentially his checklist against which he has created his price quote and against the tasks he will be expected to complete to get paid.

The Scope of Work should be as detailed as possible, and should even contain specific information about the materials to be used, where to procure them, etc. If you ever go to court against this contractor for failure to complete his job, the judge is certain to want to see the Scope of Work and compare it to the job performed. The more specific the Scope of Work is, the more likely the contractor will live up to expectations, and if it should ever go to court, the more likely you are to convince a judge that the job was not properly completed.

Payment Schedule

This document may also be included as part of the Independent Contractor Agreement or it may be a separate document (and again, usually referenced by the Independent Contractor Agreement). The payment schedule clearly defines the milestones the contractor needs to hit to get paid, and exactly how much he will get paid at each milestone. What the payment schedule looks like is up to you and your contractor, but suffice it to say, you should be looking to pay as little as possible until a substantial percentage of the job is complete (and of course, the contractor will likely want as much money as possible upfront and early in the project).

When you work with a contractor for the first time, you may find the need to have many payment milestones. For example, here is the payment schedule I try to use when I work with a contractor for the first time:

• Milestone #1: 10% paid when these documents are signed
• Milestone #2: 20% paid after the first day of work is successfully completed
• Milestone #3: 30% paid after half the work is completed
• Milestone #4: 30% paid after substantial completion of the project
• Milestone #5: 10% paid two weeks after substantial completion of the project

Paying essentially 30% at the beginning of the project generally appeases the contractor, and withholding 40% until the end of the project usually encourages the contractor not to slack off or leave your project for another job. Certainly, after working with the same contractor on several jobs, you’ll want to make things simpler by consolidating to just a couple milestones (if not a single milestone); perhaps 50% upfront and 50% at the end of the project.

Insurance & Indemnification Agreement

This form is used to ensure that the contractor provides a reasonable amount of insurance (both liability and workman’s comp) for both himself and any of his subcontractors, employees or agents. This form also obligates the contractor not to sue you for any actions that he or his crew might take. Basically, this is a cover-your-ass document that ensures that the contractor will take responsibility for his crew’s actions and also will provide adequate insurance should there be an accident on the job site.

A lot of people will not use this particular document, but remember, all it takes is one lawsuit to put an end to your business and your savings.

Lien Waiver

A lien waiver is a document signed by the contractor at the end of the job stating that they have been paid everything due to them. By signing this document, they are agreeing not to file any mechanics liens against your property (a mechanics lien is a claim made against your property’s title and can keep you from being able to sell it until the lien is cleared). Make sure that your contractors sign a lien waiver prior to getting their last payment. And refuse to provide payment until the lien waiver is signed, especially if you don’t have a good relationship with that contractor.

Other Documents to Collect

The documents above are the primary documents you need to have signed when working with any contractor. In addition to those documents, you should collect some important information from the contractor and keep it on file in the case where any legal issues later arise. Those documents you could get a copy of from your contractors include:

• Proof of License
• Proof of Liability Insurance
• Proof of Workman’s Comp Insurance
• References

House #1: The Corn House

Today is the big day — I’m closing on my first investment property, The Corn House!

Here are some of the other things going on with House #1:

• I finally found a GC who will perform my Scope of Work for a reasonable price. After talking to several high-end remodeling companies, I finally realized that I need to focus my GC search on those contractors who actually perform much of the work themselves, thereby eliminating much of the overhead. In some cases, this will require a bit more management on my part (or on the part of the project manager I will be hiring one day soon), and may also require some hiring of sub-contractors and scheduling for the various interdependencies among them. For this project, though, I found a guy who I really like. He provided me an estimate on a previous house, and I’ve been looking forward to working with him. I’ll have more to say about the rehab portion of this project later, but I’m happy to say that the rehab work should start in the next couple days.
• I spoke with my CPA to figure out the various implications of how I might hold title on this property, and have decided to hold title in the name of my company. While this could cause refi issues down the line, I think this is the best decision.
• I finalized the Landlord Insurance Policy on this house today, and will be paying about $420/year for insurance. Not too bad; I expected more.
• I received the HUD-1 statement from the closing attorney, and I picked up a Cashier’s Check for the cost of the property (I’m paying for this one in cash).
• Tomorrow I plan to finalize all the paperwork with my GC for this house, and before he begins work, I want to walk through the house with a video camera to document the “BEFORE” state of the house. I’m looking forward to the “AFTER” walk-through in a couple weeks. And will post both here on my blog.

Hopefully there are no surprises at closing, and by this afternoon, I’ll have the keys to my new (investment) house!

House #2: The Bulge House

With all the inspection issues that came up the other day (including finding out that the house is on a septic tank, after the MLS listing said public sewage), I’ve decided that I need to go back to the bank and try to negotiate a lower price on this property. At the current price, I’m not sure I can realize a decent profit, and considering that many of the issues I found could not be recognized until the utilities were turned on, I don’t feel too bad trying to renegotiate.

The question remains, what will I do if the bank refused to budge on the contract price? Will I let this house go or suck it up and buy it knowing that my profits are potentially squeezed a bit? I guess we’ll see what happens.

House #3: The Second Chance House

I finally get the addendums from the selling agent on this house today, and I signed the contract. I’m really looking forward to getting started on this house. The first decision I need to make is whether I want to get it inspected during my due diligence period. While I normally get full inspections during the due diligence period, the bank is going to charge me $300 to turn on the utilities for the inspection! Couple this with the fact that I picked up this property so cheap that there really aren’t any issues that would deter me from closing, and I’m seriously considering not having the inspection.

Of course, I’m sure I’ll wake up tomorrow morning and kick myself for even considering not having an inspection; as long as I’m getting such a good discount on this one, it’s probably worth the $300 extra to get it inspected.

First, here are some pictures…

From a numbers perspective, I’m picking this house up at around $61,000. It’s a bank-owned foreclosure that dropped from $125K down to $70K before I put in my lower offer. Rehab costs to rent are about $12,000 (see below), and rehab costs to resell are about $25,000. If I were to resell, I’m guessing that I could currently get about $115,000, though in this market, it may take a couple months. If I were to rent, I’d likely get between $800-850 per month.

Therefore, as a rehab and sell, after closing costs, financing costs, rehab costs, holding costs and selling commissions, we could expect to earn a profit of about $10-20K. While that’s not a horrible return on what is likely to be just a couple week project, I’m not confident that this house will be easy to sell, so there is certainly a risk of over-improving and then having to rent at some point anyway.

And as a rehab and rent, assuming a 10% down payment on a 30-year fixed interest loan, after closing costs, financing costs, and rehab costs, I could expect to spend about $21,000 out-of-pocket, and earn about $100-150 per month in profit (after paying all bills and maintenance costs). This a return of about 7% on that out-of-pocket investment, which isn’t great, but considering that the property will likely sell much more quickly and for a higher price in a couple years, it may be worth a lower return for the time being. Additionally, if I refinance the property at some point, I should be able to pull all my investment out, and still earn a couple dollars per month in profit. This is a more optimal situation, as it would allow me to pull out all my cash, but still hold onto the property until the market turns around.

Based on that analysis, I’m currently leaning towards renting this house for at least a year or two.

That said, the rehab costs (even to just rent) are higher than anticipated, based on the inspection I had yesterday. While the “bulge” in the wall that I was concerned about is almost certainly not a structural defect, the inspector uncovered a number of other issues that must be addressed, even if the house were only to be rented:

• The roof has three layers of shingle, and the weight of the shingles has caused a roof rafter to crack. The entire roof needs to be redone, and the rafter must be replaced. The roof is about 8 squares (a unit of measurement for many contracting jobs), putting the total roof replacement cost at about $3000, plus some extra for the rafter repair/replacement;
• Both the air conditioning compressor and the furnace need to be replaced. For an 1100 sq ft house such as this, that will likely cost about $4000;
• The water heater needs to be replaced. This will be another $1000 or so;
• There is some evidence of prior vermin infestation, so getting an exterminator will cost about $500 (assuming some follow-up work);
• The kitchen needs a new refrigerator (and dishwasher, if I decide to replace the broken one). I expect another $500 for these;
• There are some minor plumbing issues (clogs, leaking water filtration system, etc). I’m budgeting about $500 for plumbing issues.

Based on those estimates, these big-ticket items will likely run about $10K.

If I choose to rent, I’ll likely add an additional $2K or so to the rehab for things like carpet cleaning, house cleaning, new mini-blinds, and interior paint. If I choose to sell, I’ll probably add another $10-15K on top of that for things like all new appliances, landscaping, exterior paint, building a patio, leveling some floors, fixing the “bulge”, etc.

The next step is to get a good roofer, HVAC guy, and plumber out to give me quotes on the big-ticket items above; these quotes need to be completed this week. Once I have those, I’ll know for sure whether I want to move forward to close on the Bulge House.

Then my partner says he hears more water running, and it sounds like it’s coming from the back of the house. We walk around the back, and sure enough there is water gushing out of the exterior water tap (for the hose). We turn that off, and now I’m really confused. As we walk back up the steps into the house, I notice a familiar tool laying on the porch; it’s the tool that turns the water on and off at the main water meter on the street. Apparently, the water company was asked to turn the water to the house on (the listing agent must have called so I could do my inspection), and had no idea that various water supplies had not been shut off in the house.

As we re-enter the house, I again hear water. This time it’s coming from the laundry room in the converted garage. What was once an exterior tap is leaking rapidly, with water running onto the vinyl (which was essentially on top of the old driveway pavement/foundation. Without light in that room, I wasn’t able to fully determine the extent of the leak damage, but the floor was pretty soaked.

My partner then calls me into the kitchen where water is flowing out of from beneath the sink onto the vinyl kitchen floor! Apparently a water filter below the sink had been disconnected, and water had been dripping for quite a while. The floor was soaked, as was the sink cabinet. It took about 10 minutes, but we finally figure out the sources of the leak and shut it off.

Since we didn’t have any towels with us, we decided to head home and get some. About a block from the house we drive past a garage sale, where they are selling used clothes for $2 a piece. We buy 10 sweaters, turn right around and head back to the house. We clean up the water as best as possible, open a couple windows to facilitate drying and head home. I don’t know if there was any flooring, sub-flooring, or even foundation damage due to the water (my guess is it was running for several days), but we have an inspector coming out in a couple days, so we’ll get his opinion at that time. In the meantime, I let my agent know that if the damage is bad, I might need to exercise my due diligence option or negotiate a lower purchase price.

I don’t know how long the water had been running, but I do know that if I hadn’t come back when I did, the damage would no-doubt have been much worse when I finally did show up.

I’ll have more to say about the Second Chance house later in the week…

Unfortunately, I still have some open questions about this property:

• I haven’t yet decided how to hold title. From an asset protection standpoint, the right thing to do is to hold title in my company’s name. And because I won’t be getting bank financing on this property, there is nobody who should care how I hold title (when getting financing, banks generally want to see title held in the name of the borrower, not a company). But I’m still not certain if there would be implications around refinancing if I did this and it turns out I decide to hold and refinance the property. I need to talk to my bank about this.
• I haven’t found contractors to do the work on this property as of yet. I received most of my contractor bids back, but unfortunately the contractors I would want to work with all came in too high (they are upscale remodeling companies) and the contractors that came in reasonably priced didn’t give me enough confidence in their ability to execute. Now that I have a bit better idea of what I’m looking for in contractors (include the price range of various types of contractors), I think I will do a better job of screening. But unfortunately I’m back to square one with finding contractors for this property. I’ll be doing more walk-throughs and getting more bids early next week.
• I’m waffling about what degree of rehab I want to do on this property if I plan to try to resell. Considering the price point of the property (low $100Ks after rehab), I think my plans might have called for over-improvement. Stepping back, I think I need to do less work to potentially generate greater profit. I’m highly considering scrapping the idea of finishing out the basement, replacing the cabinets (I’ll refinish instead), adding recessed lighting, etc. While these are nice features, I don’t believe they are must-have features at this price point, and I don’t think they will ultimately affect a buyer’s decision to a large degree. So, I’d rather save another $8-10K by not doing this work, and apply a small part of the savings to other features that will make a bigger difference to the buyer.
• The big thing is that I haven’t yet decided if I will be reselling or renting this property. Much of this decision goes back to the points above about cost of rehab and finding contractors, but ultimately this decision needs to be made before I finalize either my contractor bids or my scope of work. I’ll review the recent comps, run the numbers again, and make a final sell/rent decision by Monday, at which point I’ll go full-steam ahead finalizing my scope of work and finding contractors.

In the future, I need to have a lot of this stuff figured out before I buy the property; I’m actually a little bit annoyed at myself for still having these open questions a week before closing. But, considering this is my first investment, I’m not overly concerned about the fact that I’m “over analyzing” these things. Luckily, I believe this property will work either as a flip or a rental, so my risk is relatively low in not making that decision yet. Plus, by paying all cash for the property, my holding costs are very much reduced, and other than tying up a bunch of cash, there is little risk in taking a few extra days to finalize my exit strategy and my plan.

Hopefully I’ll have more to say by next Wednesday on how I plan to proceed…

Luckily I factored a 10-day due diligence and inspection period into the contract, so I have 10 days to deal with any issues I need to deal with and decide whether I want to move forward with this one. The first issue is that the house used to have a garage, which was at some point was closed up and converted to an extra room. While this isn’t a bad thing in-and-of itself, if the owner who did the garage conversion didn’t pull all the permits and get all the proper inspections, then this is a considered an “illegal garage conversion.” The reason illegal garage conversions are bad is two-fold:

• If the county finds out about the conversion at some point (for example, if I were to pull permits or get inspections for other work being done), it’s possible that I’ll get fined for the illegal conversion, and may even have to go through a costly inspection (tear down sheetrock, etc) to validate and potentially fix anything that wasn’t done properly;
• If the illegal conversion is discovered and not corrected, when I go to sell the property, I may have problems selling to buyers who want to use government subsidized loans (FHA, VA, etc). Since these are my primary buying targets (first-time home buyers), it could make it much more difficult to resell the property.

All that said, even if the garage conversion is illegal (which I suspect it is), the cost of remediation (or the risk of ignoring it) may not be very high, and I very likely may move forward on this one anyway.

The second issue that needs to be checked-out before I were to buy this house is that one of the main structural walls that runs down the middle of the house is bulging out on both sides right in the center of the wall. While it could be a structural issue, there is no other evidence of structural instability in the house (at least not that I noticed, but I’m certainly no expert). So, my hope is that that the builders just had to sheet-rock around some structural component (a plumbing pipe or fixture, for example), and that’s the reason for the bulge. Certainly, if the bulge is the result of a structural defect, it likely won’t be worth buying the house without an additional and considerable price discount.

I have 10 days to do my due diligence on these and other issues that come up, of which four of those days I’ll be out of commission for my wedding. So, it’s going to be a busy week, but I’m starting to get used to that. I’ll post more updates and details about the bulge house over the next week, if/when this due diligence issues get resolved.

Well, over the weekend, I was looking at the MLS, and noticed the property was again available. Only this time it was listed at about $16K below the previous asking price, or about $11K below my previous offer! I called my agent to ask what was up, and the best info she could gather was that the previous buyer walked away before closing, and the bank was ready to put the property back on the market. She had no idea why the bank was listing the property with a price reduction (considering they got at least two offers at the last price), and thought that it might have been a mistake.

Regardless, I decided to put in another offer at $3K below the new list price, and $14K below my previous offer. Let’s see what happens…

Personally, I go out of my way to make my projects as easy as can be. I created a Scope of Work with everything I want done, I create a material list that has my materials right down to the store, the brand and the specific SKU number. If people are honest with me, there’s very little that I will ever get upset about. And if you get my business once and do a great job, I’ll make sure you get plenty more business from me and everyone I know who might need you.

But, if you really want to earn my business (and create a strong partnership), here are some things I recommend focusing on when we meet:

* Show Up On Time, or Call. Remember that I’m in Atlanta where it’s around 105 degrees, sitting in a foreclosed investment property that probably doesn’t have the electricity turned on (and therefore no air conditioning) waiting for you. So, if you’re going to be more than 10 minutes late, please call. I realize that things come up, you probably live an hour away, and traffic is horrible, and I really have no problem sitting in my truck with the AC blasting waiting for you. But, I want to know that you haven’t forgotten about our appointment, and that I won’t be sitting in my truck until I run out of gas. So, if you’re going to be 30 minutes late, just pick up the phone to let me know, and all is forgiven.

* Take Notes. It amazes me that when doing a walk-through to get a bid on a project, some contractors don’t write anything down. Most of my walk-throughs last one to three hours (I was surprised by this at first, but good GCs want details upfront), and unless you have a photographic memory, I have little confidence that you’re going to remember every detail I’ve mentioned during our walk-through. And the last thing I want to do is have to repeat everything again when it’s time to start the job (not that you’re likely to get the job). Oh, and if you’re not taking measurements at some point (after the walk-through, or even the next day is fine), how can I believe that you have any idea what your materials cost will be, and therefore whether your bid is reasonable?

* Ask Questions. Sure, I’ve provided you with a Scope of Work that lists everything I want done, but that list is far from detailed enough to allow you or any contractor to complete the job (I’m just not that good). I can’t be so thorough that you have no questions about the property or the job, so not asking questions tells me that you are not very detail oriented or don’t really care about the details of my project.

* Make Suggestions. Most of the contractors I’ve dealt with, I’ve told them upfront that I don’t come from a construction background. And I’ve also told them that my properties are investments and I’m on a budget. So, when I say things like, “Let’s move the kitchen sink back 3 feet,” I expect you to remind me that it will probably cost an extra $500 in plumbing to do so. Maybe I’ll still want to do it, but at least I can do so with the knowledge of where my money is going and how I can keep costs down. Even better, if you have some good ideas for how to design that basement we’re finishing as inexpensively as possible, by all means, let me know. You guys have done this a lot more than I have, and I wouldn’t have made that fact clear if I didn’t want some expert advice along the way.

* Remember That It’s My House. Just don’t push the last tip too far. I don’t mind if you throw out a million suggestions, and have a better way to do every little thing I ask (in fact, I appreciate it), but remember, in the end, the decision is mine. To the GC that came in and basically told me that he had flipped a lot of houses and that I should just write him a check and let him rehab mine exactly like all of his, thanks anyway. Again, I love lots of suggestions and advice, but in the end, unless you’re paying for it, it’s my decision.

* Don’t Quote a Price On the Spot. Whenever a contractor does a walk-through, I can’t resist asking if he has a ballpark estimate for me before he leaves. Some will say, “I don’t like to throw out estimates before I can sit down and put the numbers together.” I respect that. Some will say, “I can give you an estimate, but I have to run the numbers and it very well may come in higher or lower.” I respect that too. What I don’t respect is, “Yeah, I’ll do it for $40,000…do I get the job?” No, you don’t. If you’re going to make up numbers now, I have no idea what else you’ll be making up later to get even more money out of me.

* Break Down Your Bid. When you eventually get me your bid, please, please, please don’t just give me a list of things you plan to do (often just parroted back from my Statement of Work), along with a final price. This is just as bad as quoting me an estimate on the spot. It’s great that you list “Replace countertops” in your bid, but unless I know whether you’re planning to replace them with laminate, granite, or phone books, how am I supposed to know if I’m getting a decent price or not? Also, if you come in with the lowest bid but it’s still $2000 too high, I’d like to be able to see a breakdown of costs so I can say, “I see that replacing the countertops will be $4000, can we shave $2000 off of that by just refinishing the cabinets that are there?”

* Give Me a Materials List. Along with above, if I don’t know what materials you’ll be using (or at least a quality level), how can I evaluate your bid? For one thing, I want to use the same materials in all of my houses, so ultimately I’ll provide the final list of materials (and we can negotiate who buys them, if you have a preference). Second, I want to know if your materials will be more or less expensive than mine, so that I know whether your bid might be affected by my materials list (if I you had planned for laminate countertops, and I want granite, I’m going to make sure you get paid enough to cover the difference, and vice-versa). And lastly, don’t say things like, “I use my own materials, and if you tell me what colors you want, I’ll try to match them as best as possible.” That guy won’t be getting my business.

I’m sure I’ll have more suggestions once I get to the point where I actually hire some of these guys, but keep in mind that a walk-through is a first impression, and if you screw up the first impression, it can be hard to recover. All it takes is a little common sense…

1. I met with a number of GCs this week to get bids on the Corn House rehab. I expect to have four formal proposals/bids in my hand by early next week, and I’ll go from there deciding what I’m going to do with this property. While I’ve been leaning towards rehabbing and reselling it, I have a feeling all the bids are going to come in above my allocated budget, and if I can’t figure out a way to get the prices down (or cut some less important rehab work), I will have to consider other options. The most reasonable other option would be to do a much smaller rehab — on the order of $4-7K — and then rent the house for the next year or two until the market rebounds, and prices increase a bit. Then I can consider doing the major rehab at that point, when I’ll have more room to spend on the construction costs. One way or the other, my goal is to decide by next week what I’m going to do with this house.

2. I still don’t have a closing date for the Corn House. The contract specifies that it will be on or before August 18, but because it will be a double close (the wholesaler I bought it from will also be attending the closing, as he is the one with the contract on the property), I will let the wholesaler take care of arranging the closing schedule. The other issue with having closing on the horizon is that I don’t yet have my financing lined up…

3. The lender that I’d generally be using refuses to do double closings (as do most traditional lenders, because double closings present some title risks), so I have to find another lender or pay cash for the property. Because the total cost of the property plus rehab will be about $100K, I really don’t want to tie up that much cash for what could be a long time (if I have trouble selling after the rehab). So, I really need another financing option. The wholesaler I’ve been working with has promised to line up a lender who should be able to help me finance this deal, but he’s been busy and slow to help me out. He’s promised to come through on this, so for the time being I’m going to trust that I’ll be able to get this done through him, and not spend any extra time on finding a backup source (hopefully that won’t come back to bite me).

4. I put an offer on another house yesterday. I don’t want to say too much about it, as I’m skeptical I’ll get it at my asking price. And, even if I do get it, I need to do some serious due diligence during the 10-day inspection period that I put in the contract. Two issues about the house are concerning me: 1) there is a former garage that has been converted to a rec room; if the conversion wasn’t done legally (i.e., they didn’t pull the permits and get inspections), I could be on the hook for fines or even have probably selling to certain buyers in the future; and 2) There is a big bulge in the center of a (presumably structural) wall that runs through the house…the bulge is on both sides of the wall, and I’m not sure if they sheetrocked over an obstacle (like a plumbing pipe) or if there is a structural issue. If the offer is accepted, I’ll use that 10-day due diligence period to check things out.

5. I’m running into more concerns around the financing for my properties. While I have secured (with a partner) traditional residential investor financing, in today’s credit climate, that may only be good for the first 4-7 properties I buy. After that, lending restrictions, debt-to-income ratio, and a host of other factors may converge to make it very difficult to acquire additional property. The one lending vehicle that I believe will help the situation is commercial loans where I’m able to buy property under my corporate entity. So, it’s back to the banks over the next few days to try to work something out; I’m not particularly hopeful, but I have to give it a shot.

That wraps up an exciting week…while I’ll try to post as much as possible in the coming 10 days, I’m getting married next Friday, so I won’t be focusing on the business nearly as much as I have been. It’s probably better that I slow down for a couple weeks anyway…

While the business I’m trying to build may involve flipping/renting houses, that little fact is relatively unimportant. A lot of business owners believe that what the business does should impact what they do; they confuse their business with their job. That’s not how the successful business owners think.

Successful business owners realize that their goal is to create systems and processes around doing something profitable. Those systems and processes can then be used to replicate and scale that profitable effort over and over and over again.

In my case, the business is all about rehabbing and selling houses. But my job is has nothing to do with rehabbing and selling houses. My job has to do with creating systems and processes to allow my business to rehab and sell more houses.

For example, I could — as some have suggested — spend 3 months doing all the rehab work myself on my first house, and probably save $10,000 in contractor costs. If I spent 40 hours a week for those 3 months working on this particular rehab, that extra $10,000 would equal about $20/hour in extra profit. But, what if instead I took those three months, and focused my time on finding 5 more houses, each of which generated $20,000 in profit? That’s an extra $100,000 in profit over that time period, or more than $200/hour. That’s not bad, but…

What if I spent those three months streamlining my process around buying, rehabbing and selling houses, and got to the point where I could do it 20 times in three months? That’s an extra $400,000 in profit, or about $800/hour. In fact, if I only focused my energies on replicating and scaling, there is no limit to the potential growth of my business.

Likewise, I could — as many have suggested — save a few hundred bucks here and there by hiring unskilled labor (those guys down at Home Depot who work their butts off, but need to be told what to do). If I do this, I run into the same trap. Those guys would require a lot more oversight, and babysitting contractors is just another $10/hour job. I’d rather hire the guy who costs twice as much, because I know I can trust him to get the job done on-schedule, on-budget and with a high degree of quality; that frees me up to focus on replicating and scaling the business.

If in the time I save by not having to babysit contractors I’m able to pick up one more house, that expensive guy has paid for himself many times over. And if I spend that time figuring out how to continuously buy more houses, that expensive guy has now become invaluable.

By the way, while rehabbing 50 or 80 or even 100 houses a year might seem far-fetched, there are a lot of people who are successfully doing it. But they don’t do it by spending time caulking showers, laying tile, or any other $10/hour task. They do it by focusing on the processes that allow them to replicate and scale. Everything from having vast network of supporting team members (Attorneys, CPAs, Agents, Brokers, Contractors, etc) to having well documented systems for getting the work done (things like creating a list of materials used in every house and training contractors how to replicate the same finishing touches in every house).

Doing my own rehab work (i.e., being my own General Contractor) is no different than trying to be my own lawyer or be my own CPA. While I guess I could give it a try, I’d instead rather let my lawyer do what he’s good at, let my CPA do what he’s good at, and let my contractors do what they’re good at.

Meanwhile, I’ll focus on figuring out ways to help all of them work faster, smarter, and more efficiently, which will ultimately lead to being able to rehab more houses and make more money for both me and for the great team of people I have helping me. Isn’t that the goal?

In preparation for walking through the house with contractors to get bids, I created a “Scope of Work” document that lists all the work I expect to be done on this project. That provides a reference for the GCs when they leave and have questions, and always gives me peace of mind that my requirements were adequately communicated. In the interest of sharing everything I’m doing, here is a copy of the Scope of Work I put together for the Corn House.

As for my GC meetings, I’ve met with all five of them over the past few days. The level of detail and professionalism really ran the gamut for these guys — one threw out an estimate after 5 minutes of chatting, one spent an hour after the walk-through taking measurements, one brought a project manager who would ultimately be managing my project, and all of them seemed very interested in forming “long term” relationships with me; I guess the fact that I plan to do a lot of these is very attractive when these guys are seeing major slow-down in their businesses. I imagine each will have their own way of doing proposals (e.g., including materials cost vs. not including materials costs), and I’m looking forward to getting the bids back.

I have a feeling that many of the bids are going to be higher than I expected, mostly do to the fact that most of the GCs I spoke with run companies with a lot of overhead (licensing, insurance, vehicles, employee costs, etc). Of course, these overheads costs mean that they take their jobs seriously, and I’d rather pay a little more to know that everyone on the site is insured, the company is licensed, and no corners are being cut. That said, if all the bids come in way higher than I expected, it may create a situation where I can’t profitably resell this house. I guess I’ll have to wait and see…most of the GCs said they’d have bids to me by early next week.

* I had a full inspection of the house on Saturday. Overall, there were no major surprises, which was a good thing. My inspector is tremendously detail-oriented, and found at least a hundred little issues, but most of them I had already known about and budgeted for. His greatest value was to be able to provide information about the “big ticket items,” like the roof (it’s relatively new!), the HVAC system (also pretty new!), the electrical wiring (pretty good wiring job), and the structural integrity of the property (no problems!). He also looked for signs of termites (none!) and mold (plenty of it scattered throughout the basement, but I’m quickly getting over my fear of dealing with mold). So, while the inspection didn’t turn up any serious issues, it was worth every penny; it’s nice not to have to worry about any major surprises during rehab (though I’m sure there will be at least one).

* Between my inspector and the wholesaler that I’m buying the house from, I’m learning a tremendous amount about the rehab process and about construction in general. Gordon (the wholesaler I’m working with on this deal) has devoted a good bit of time to helping me navigate through my first deal. He’s done a lot of flipping the past few years, and has a wealth of knowledge, as well as a great number of contacts (he’s a real estate agent as well). While he certainly has a financial incentive to help me out (he only makes money from me when I make purchases from him), he’s gone above and beyond what I would have expected, and I owe him a lot; he’s made this whole process a lot less stressful, and is always there with great advice when I need it. I have a strong loyalty to anyone who looks out for my best interests; if things go well on my first couple flips with him, I have a feeling it will be a long and prosperous relationship for both of us. Additionally, I spent 4 hours today following the inspector around every inch of the house, asking a million questions (some more than once), and learning more about construction in four hours than I have the rest of my life combined.

* I already met with one of Gordon’s contractors — Ulysses — to get a bid on the rehab job for the Corn House; he came in ridiculously high on his bid (and I played dumb and said I’d think about it). I’ve done my best to stay out of “negotiating mode” on anything real estate related so far (in other words, I’ve tried not to be a hard-ass in my new career); until I understand how things work in this business, I don’t want to be too aggressive.

* In addition to the bid I got from Gordon’s contractor, I’ll be meeting with a few other General Contractors today and tomorrow to get their bids. Once I get a few different bids (including possibly more reasonable one from Ulysses), I’ll check some references, and hopefully have an opportunity to see some work they’ve done; my goal is to find a couple contractors that I can build a long-term relationship with, because when the real estate market picks up again, it won’t be this easy to find guys who will drop everything to take my projects. I figure I have about a year to build some strong contractor relationships.

* Closing for this property is scheduled “on or before” August 18. Hopefully there won’t be any issues prior to closing, though I still have to figure out how I’m going to finance this property. I can’t go through the traditional loan process, and I’ve found that most traditional lenders won’t finance a double closing (they’re concerned about tracking title through multiple transactions), and I’d prefer not to spend $100K in cash on this one (I have another potential property in my sights that might require a lot of cash). I have at least three options for hard money, so I’m going to spend a couple days this week figuring out which one I want to pursue.

And that’s the update on the Corn House…

* First, some pictures of the new property. The basement pictures aren’t in here yet, but since I’ll likely be finishing the basement, I’ll upload those when I get a chance. If you take a look at some of the pictures of the back/side yard, you’ll notice these very tall (~15 ft) stalks that look like corn. They’re all over the back yard, and I have no idea what it is (it’s not corn, and it’s not bamboo). Whatever it is, because of it, I will now officially refer to this house as the Corn House forever more.

* I’ve been going back and forth about whether to rent or try to sell this house. While I think either exit strategy would work, I’m leaning towards reselling for a couple reasons. First, this is the first property I’ve purchased, and there would be a get feeling of satisfaction if I could take the whole thing from beginning to end quickly, and actually make my first profit from this business. Additionally, I really want to get to know some of my contractors (as I’ll need them for bigger things later), so having them do a full rehab would allow me to better judge their skills, their ability to hit schedules, etc. Lastly, the comps indicate that — despite the tremendous slow-down in the real estate market in Atlanta — this neighborhood has been fairly strong at keeping values and getting houses sold. While trying to resell is certainly a risk (I don’t deny that!), it may be my chosen exit strategy on this house. Of course, if I can’t sell, I can always rent; it would cost me $$$ out of my pocket for a while (since the rehab costs are higher), but that’s a risk I’m willing to take.

* I’m starting to put some processes in place to make future acquisitions and rehabs easier and more efficient. I’ve created a “Scope of Work” template that I am using to define all the work I want done on the house, and will be using that to convey my rehab plan to my contractors. And I’ve started putting together a master materials list with products, SKU numbers and prices, so I’ll be able to quickly estimate materials costs on future projects and will be able to quickly put together a materials purchase order (or give the purchase order to my contractors for them to do the purchasing).

More updates tomorrow…