Don’t Do This! Jay Conner Talks About Recent Real Estate Deals
Jay shares a recent deal and why he walked away!
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Well, hello there! This is Jay Conner. The Private Money Authority. Welcome to another episode of Real Estate Investing with Jay Conner. You may be watching right now on the live stream on our YouTube channels or on our Facebook live stream. Or you may be listening in on iTunes, Google play, or one of our other channels. And wherever you are tuning in from, I’m excited, you are here for this episode because today’s episode is titled, Do not do this deal! Do not do this deal! Subtitle 112 Charles street. The reason I want to bring you this episode is because this episode and story actually reminds me of the very popular Kenny Rogers song. Which is titled, Know When to Hold Them and Know When to Fold Them. And I’ll tell you my experience in real estate investing. If you don’t know when to fold your cards and walk away from a play or walk away from a deal that can be so much more expensive than the actual profit that you could be making on a deal.
I mean, some of the most important lessons that I’ve learned since investing in single family houses, since 2003 and rehabbing over 400 houses, is that you need to know when to walk away. Do not fall in love with a deal just because, Oh, I might be having a deal! In fact, this story I’m going to share with you on 112 Charles Street, when you first look at the numbers in this deal, it looks like there’s a spread of a potential $100,000 in this deal. But when you analyze the deal and you do your due diligence and you follow the steps that I’m going to lay out to you right now, step by step, you will see how this is not got a potential of a hundred thousand dollars profit, but in reality, it’s got a loss of over $20,000 when you analyze the numbers.
So before I dive into this deal with you, for those of you that are brand new to Real Estate Investing with Jay Conner. Here on the show, we talk about all things, real estate investing, how to find deals, how to get them funded without relying on banks or mortgage companies or your credit, how to sell houses fast, how to automate the business. And here on the show I have amazing guests most of the time. We talk about all kinds of real estate. We talk about storage units. We talk about land deals, commercial deals, single family houses, and everything that relates. Now, if you happen to be by chance, be tuning in on the live stream right now, go ahead and tell us where you’re tuning in from right now, type in your city and state and say hello to everybody. Leave a comment, leave a question.
As I go through this deal, if you’ve got any questions and you’re actually tuning in live, go ahead and type in your questions and I’ll get your questions answered. And if by chance you are listening to the show either on iTunes or Google play, be sure to subscribe, rate, and review on iTunes. I really appreciate you subscribing. Also, if you are watching on YouTube, be sure and subscribe and tap that little bell so that when we go live, you’ll be notified and not miss out on Real Estate Investing with Jay Conner, the guests that I have on here and the fantastic information and training that we provide absolutely for free in this road of real estate investing and education. By the way, if you would like to, Hey, Rob from Greenville, North Carolina, glad to have you on! If you would like to get plugged in to funding for your real estate deals without relying on banks or credit or mortgage companies, I’ve got a free online class waiting for you to go to at the end of the show. You can head right on over to www.JayConner.com/MoneyPodcast.
That’s JayConner.com/MoneyPodcast. And on that training, it’s only about an hour long I’ll reveal, the five easy steps it is from going from zero funding to having in the hundreds of thousands of dollars in funding right away, very quickly again, without relying on credit banks, mortgage companies, or your experience. Alright! Let’s go ahead and jump in to this case study. This is a deal that I just within the last few day, or last few days, I said, no! No! No! This is not a deal. So let’s dive in and why, and the lessons that you can learn from it. So, first of all, 112 Charles Street. By the way, for all of you think your brains that like spreadsheets, yes. I actually have a spreadsheet to share with you today on this deal, the numbers and et cetera.
I know that’s going to make you super happy. So this deal, how did I find this deal? Where did this lead come in from? Okay! This lead, 112 Charles Street came in from a Facebook ad. Facebook ads, and yes, today Facebook ads are one of my most consistent lead sources that I have on off market properties. Now, what I mean by off market properties? These deals that are coming in that I’m getting the most profit on are not in the multiple listing service. In today’s market, shoot! Too much competition. The bank owned properties. They’re wanting to list these properties at too high of a price. And it’s, I mean, it’s simple. I understand it. Supply and demand. I mean, right here in Eastern North Carolina in my hometown Newport zip code 28570, it’s got about 25,000 people in that zip code.
There are less than 10 houses on the market priced under $200,000 and I’m talking a 1300 square foot single family house. And our months of inventory on the market is only 2.4 months. What that means is, if nobody puts our house on the market in the next 2.4 months, we’re going to be sold out, have no inventory. As of last week in that zip code, there were only 152 houses on the market. And over 90 of them are under contract to cash out. I’ve got three houses right now in a contract to cash out. One of them, I just put on the market this past weekend. And this morning it is under contract at full price. Full price offers. So the reason I share that with you is that’s why we cannot rely on homes or houses or properties in the multiple listing service to fund our deals.
We’ve got to have marketing in place for off market houses. What’s an off market house? That is simply a property that a owner or a seller does not have it listed in the multiple listing service. And quite frankly, they may not even know that they are actively seeking to sell the property. They don’t have it listed in the multiple listing service. So here, 112 Charles Street, Facebook ad. My ads come up right in their newsfeed and people’s Facebook newsfeed. And there it is a picture of me holding a yellow bandit sign that says, I buy houses fast for cash. People respond to that. I have, they fill out their information. And what happens in step number two of this scenario? Well, they fill out the information and their information, their contact information and information about the property is then automatically sent to my team.
Well, who’s on my team? Well, my important person that it gets the initial information from all of my sellers. Her name is Kim and she is my acquisitionist. Well on the, world’s an acquisitionist? Well, my Acquisitionist, Kim, does what I used to do. And that is reach out to all of my motivated sellers that are responding to my marketing. Gets the completed property information filled out all the information about the property. So that’s what Kim did. Information from this owner of this property came in, her contact information, the seller of the information about the property. And now Kim gets them on the phone and gets all the information. That’s step number two, getting the property information sheet filled out completely. Mortgage information. Is it free and clear? What’s the condition of the property? What’s the asking price and et cetera. Step number three in this deal.
So Kim gets the information filled out and all that information is now sent to me by the software that we use to communicate with each other. She’s not emailing me a property information sheet. We use a CRM, a Customer Management Software System that gives me all the information on the properties from sellers. So now here’s the step. It comes to me. And now I quickly analyze the deal. Alright? How do I analyze the deal? Well, I look at, first of all, where’s the property located? I’m familiar with the areas around here. I’ve been investing since 2003 here in the local area. So I look at what area is located. I look at what the asking price is. Now. I do not know at this point in time in this step as to what the actual after repaired value is, but I got a pretty good idea because I’m familiar with the area.
I know this particular property has got approximately 1600 heated square feet. I know it’s going to be worth in the areas located somewhere around $200,000 or so if it’s in excellent condition. Well, I take a look at what is owed on the mortgage. In this particular scenario, 112 Charles Street, the seller owes $105,000. Her asking price is $115,000, which is $10,000 more than the payoff, the mortgage information. Now, in this case, it’s a motivated seller and the seller is willing to give us the mortgage information. Now, don’t miss this. Whenever there is a mortgage and there’s money that’s owed on the property, my immediate thought is, can I buy this property subject to the existing mortgage? There’s a mortgage. Is there a possibility that the seller will be willing to sell me this property with them, keeping the mortgage in their name, me agreeing to make their mortgage payments and they transfer title or ownership over to my company.
That’s the first thing I think. Now, bear in mind this property having a mortgage, I do not have my acquisitionist even talk about the possibility of buying subject to over the phone. That the seller is not going to even know what we’re talking about over the phone. I reserved the conversation of buying subject to the existing mortgage when we are in person with the seller of that property. So here I am in step three, I’m analyzing the deal quickly, quickly, quickly. Why do I think it’s the ballpark after repaired value? How much are they owed on this? How much are they owing? Well, they’re asking 115,000. They owe 105,000. So even at 115, I’m going, wow! It’s probably going to be worth about 200,000. They’re asking 115,000. Wow! There’s like a huge spread here or potential spread. Even though at this point, I do not know what the exact repairs are on the property.
So that’s step number three. I do a quick little overview. Does it look like there’s a potential deal? The potential spread. Step number four in this process is I now want to get my real estate agents opinion of the after repaired value. How in the world I do that? Alright! Bear in mind. We’re not going to the property yet. Now at this point in time prior to step number four, I’m communicating with my acquisitionist and I’m telling Kim, please let the seller know I have reviewed the numbers. It looks like there’s a possibility we can do a deal here. We are in the meantime, going to do a little bit of research on values in the area, and we’ll be back shortly to probably schedule an appointment for the team, my team, to go look at the property. So here we are in step number four, we are now asking my real estate agent for his opinion of ARV, which stands for After Repaired Value.
So what’s the definition of After Repaired Value? In my world, the definition of After Repaired Value is, the home is going to be an absolutely drop dead gorgeous! Ready for Southern living magazine pictures. I’m talking granite countertop, stainless steel appliances, all new interior paint, new exterior paint. If it’s a, you know, paint on the exterior. Painting the garage floor with brand new concrete paint. New floor coverings with luxury vinyl plank. New cabinets. Everything is looking and smelling brand new. So you see, my real estate agent knows because I’ve been dealing with the same realtor to do my After Repair Values. Since 2004, my realtor knows what kind of condition my home will be in if I buy it and then I get ready to sell it. So there we are. Step four. My acquisitionist ask my realtor for a CMA to get the After Repaired Value.
What in the world is a CMA? A CMA stands for Comparative Market Analysis. So what’s my realtor going to do? My realtor is now going to do a CMA. Is going to research. You see, I don’t do my own CMAs. My lands! Let the people do what they do best. And you stay out of the way. I would rather have a root canal than do a CMA and all that detailed stuff. But my realtor loves doing that stuff. Has analyzed and studied hundreds and hundreds of appraisals. He knows what to adjust for, you know, garage. You know, only two baths, one and a half baths, all that jazz. So within 24 hours, my realtor is now going to email me and my acquisitionist, the CMA, the Comparable Market Analysis. Which is going to assume that this home is going to be an absolute gorgeous condition in the After Repaired Value condition.
So here comes the CMA. I look at it. Guess what? The CMA now says from my realtor that this home at 112 Charles Street has got an after repaired value of… Drum roll… $205,000. So I was estimating that the ARV was going to be somewhere around 200. Now I’ve got it confirmed at least based off of closely, you know how are close houses in proximity to the subject property without my realtor seeing the home yet. It’s at $205,000. So let’s look at the numbers so far. What we know about this property so far at 112 Charles Street is after repaired value based on comps should be $205,000. We now know also that the seller has told us that they owe $105,000. We also know their monthly mortgage payment is $800 a month. We know the seller’s mortgage payment is $800 a month.
I already know if repairs are not like, you know, off the chart, I can get a positive cash flow by charging $1,200 a month to a rent, to own buyer in this area. I already know I can have a $400 positive cash flow on this property. Once I get a rent to own buyer in it. So we know the after repaired value is 205,000 prior to my realtor actually going and looking at the property, make sure we don’t have any ugly neighbors or ugly properties next door that would reduce the value. We know the asking price is 115. We know the seller owes 105. We know the monthly mortgage payment, including insurance and taxes, 800 bucks. We know we can rent it out or rent to own for 1200 bucks. That’s what we know so far. Sounds like it’s worth going to take a look at it right? Now.
What’s the next step? Next step is step number five. Let’s go look at the property. It’s now time for the team to go look at the property. Why do we want to look at the property? The objective, the reason we’re going to go look is for one, two sole purposes, two reasons. Number one, estimate repairs. I have no idea yet. Really. I mean, really? I have no idea yet as to whether this is a deal. I know it’s a potential deal. I mean, wrr. I mean, look at that spread. We’re looking at, right? I mean, my lands! Big potential spread, but I have no idea really, if this is a deal, because I have no idea what the repairs are. So how are we going to do that? Well, I happen to be in town since we’re not traveling very much these days. And so I’m going to go with the team.
Who’s the team? Alright! My team are the following. To determine repairs, I’m going to have my contractor go. I’m going to go. And my realtor is going to go, alright. So my acquisitionist schedules this appointment for the team to go now, actually look at this property, bear in mind, we haven’t gone to this property. We haven’t drove by this property. We’re letting the data, we’re letting the data, make the decision as to whether we’re even going and looking at this property. Okay? So here we go. Step number five. We’re going to look. So we get into the property and now we are estimating repairs. The owner of the property, the seller is there and we, and we look around, well, come to find out this property. This house has still got damaged to it from hurricane Florence, which goes back almost two years ago.
Now, not bad. I mean, it’s already had a new roof put on it. It’s got a new HPAC, but there’s still, I mean, there’s been no cosmetic work on the inside. We still got leaks stains on the ceiling. I wish I had pictures to show you. There’s still a hole in the ceiling of the living room, right? So let me just go in, cut to the chase. I go through the I go, actually I have my crew leader, right? You will have a contractor. I’m a crew leader guy. So we estimate repairs. Now here’s the deal folks. Here’s the deal. This house has only got one and a half baths. Big, big problem. Big problem. Thank you. OG. For the feedback there. Great info. OG, hang in there because we’re not to the conclusion yet. Everybody hang on. Here we go.
This property has only got one and a half baths. It’s split level. And the owner of this property. When they had kids living in the house, they’ve already converted the garage into heated and cooled living space. They have converted the garage into two more bedrooms. So now as this house currently is, it’s got not three bedrooms. It’s got five bedrooms and one and a half baths. Does that sound like a scenario for a disaster in today’s market? In our market, it’s like, nobody wants one and a half baths. So we’ve, me and the team. We’ve got to figure out a way to convert this house to at least two full baths. Here’s the deal. In this house, the principal bedroom, the principal bedroom is upstairs and the bathroom for the principal bedroom. The private bath is only a half bath. Oh my lands! And it’s only a half bath.
And the principal bedroom is not that big. You cannot put a King size bed in this bedroom that I’m talking about. So now we have to approach this property about where are we going to put a full bath? So the best scenario we can come up with is convert the garage. That’s already been converted into heated and cooled space. Convert this garage into the principal bedroom suite with a large principle private bathroom. So we estimate it’s going to be $10,000 at least to convert that garage. It’s already been converted into two bedrooms, into a complete principal bedroom bathroom suite. That would leave, still, see all the bedrooms are upstairs right now, right? That would still leave three bedrooms upstairs with a full bath servicing, two of the bedrooms. And then one of the bedrooms having the half bath, then there would be a full principal, bedroom, bathroom, suite downstairs.
Alright. So here’s the math. So my crew leader and I, right there on the spot, we estimate $46,000, $46,000. And that’s before Murphy shows up, you do know who Murphy is, right? You know who Murphy is? Murphy is a character that shows up in every rehab you do. Sometimes his relatives show up. Grandparents, cousins, sisters, you have all these unexpected expenses. So I always calculate at least $10,000 in unexpected repairs. Also known as Murphy repairs. Yes. Watch for Murphy in every property. So I’m already at $46,000, not including the unexpected. So let’s run the math,
Let’s run the math. By the way, before we run the math, I want to share with you my conversation that I had with the seller of this property before I left the property. And before we leave, I always tell the seller, I always tell the seller that we’re going to do our research and we’ll come back to you within 24 hours with our best offer. Now, if you’re in a competitive market, you need to make your offer to the seller while you’re there, right there in front of them before your competition shows up and makes an offer. Alright. Very, very important go into contract right there and then if you can. In my market, there ain’t no competition, but in most markets there is. So listen to this conversation that I had with the seller. I said to the seller, and you see, the seller knows nothing about subject to up until this moment. So I’m getting ready to leave the property.
I said, we’re going to do some more, you know, you know research. But I said to the seller, I said, in most situations, my sellers that have a mortgage, what we do is we have a traditional closing at the real estate attorney’s office. And I will agree to make all of your mortgage payments for you. We’re going to transfer title and ownership into my company name, and I will make all your payments for you until I rehabbed the property and I cash it out. So all of these problems, taxes and insurance and mortgage payments are now my problem. And so the seller looks at me and says, well, I hadn’t thought about that. I wanted to be completely done with this property. I thought you’d be paying for it cash. And I said, well, I am going to put quite a bit of cash into it for rehab, but I’ll make your payments.
So at the end of that conversation, she wanted to call my real estate attorney and find out about subject to the existing mortgage, which I was glad for her to do. She did. And she let me know, yes, I am willing to sell this house to you, subject to the existing mortgage. So why in the world was she willing? She needed debt relief. She needs debt relief. She’s making this payment. She’s already moved out to another house. And this monthly mortgage is drowning her. She is current on her payments, but she needs debt relief. Big time. She agrees to sell to me on subject to the existing mortgage. So back to where we are, we’re now leaving the property. And I now know the repairs. Well, let’s run the math. This is now step six is constructing the offer to buy it subject to. Now, let’s run the math.
Step number seven is running the math. And what is it that always makes the decision on whether you buy a property or not? And that is the math. What’s the math? When you are putting any kind of money in the property. And by the way, I’m not putting $46,000 of my own money in this property. I’m going to use private money to fund the rehab of this house. So I will buy it. If the math makes sense, I will buy it subject to the existing mortgage and I’ll use private money in a second position for the rehab. Now, by the way, remember, she’s asking $115,000. So let’s run the math. The math is the MAO formula. What does MAO stand for? This is the formula you’re going to use to decide whether you’re going to make an offer and buy the property or not.
Here’s the MAO formula, which stands for Maximum Allowable Offer. MAO formula starts with ARV. The After Repaired Value. The After Repaired Value my realtor now confirms while being at the house that we visited is $205,000. So now we take our $205,000 and using the MAO formula, we’re going to multiply $205,000 times 70%, $205,000 times 70%. That’s your profit that you are calculating into this formula. So $205,000 times 70% equals $143,500. $205,000 times. 70% equals $143,500. Now we’re going to subtract. We’re going to subtract repairs $46,000. Well, let’s do that. That’s going to give us the maximum allowable offer right there, but we never make MAO. We never offered MAO, we’re going to give ourselves a $10,000 buffer. So let’s run the MAO formula $205,000 times 0.70 equals $143,500. As I just said, now we’re going to subtract repairs of $46,000. There’s MAO, right there. A Maximum Allowable Offer is $97,500.
Oh, my lands! The Maximum Allowable Offer is way below what the seller owes of $105,000, right? I mean, yeah, they owe 105. They’re asking 115. MAO, Maximum Allowable Offer is 97,500. But that’s not the maximum offer we can make. Remember we’ve got to subtract an additional $10,000 for Murphy, the unexpected. So actually the offer I can only make on this house is $87,500. That’s 205,000 times 70% equals 143,500 less repairs of 46,000 equals 97,500 less, $10,000 for Murphy, the unexpected. Maximum $87,500. And my lands! She owes $115,000. Well, the lessons are not over yet. Hang on with me one more second, and we’ll be done with this show. So I said, let me get two more estimates. So I know my crew leader, we can do it with the crew for 46,000 in an account for an additional 10,000. So what do I do?
I get a bid from a contractor that I know and trust. Look what my contractors bid was at his cost? 64,000, there the bottom $64,680. But look with his profit. His charge to me is 76,000 plus dollars. My lands! That’s $30,000 more than the crews. I had another contractor bid and look for all you think of brains. Yeah, there’s all the line item budgets. There’s all the line item budgets, right? Had another contractor come in at 66,000. So I confirmed that me and my crew were coming in at the best at $46,000. What’s that lesson learn, always get multiple bids just to be sure you’re getting the very best deal. Right? So there you have it folks. The math makes the decision. 87,000 and look, that’s not even taking into account that half. Well, that does take into account converting the half bath, you know, to a full bath.
So I looked at this a different way. I said, look, what if I don’t do that garage conversion? Why don’t I just, you know, do the rehab and sold it on rent to own? Well, my lands! My repairs are still at $36,000. I looked at doing it on a work for equity. Too much work to do. So we sliced it. We diced it. We carved it up every way that we could. And now, you know, step by step in this example of 112 Charles street, when to hold them and when to fold them.
There you have it folks! Another episode, if you liked this episode, be sure and subscribe. Write and review. Give us some comments there. If you’re on YouTube. If you’re listening to us on iTunes, Google play, be sure and give us some feedback. We appreciate all your feedback and I appreciate you being here. I’m Jay Conner, The Private Money Authority. Wishing you all the best and here’s to taking your real estate investing business to the next level. I’ll see you on the next episode of Real Estate Investing with Jay Conner! See you on the next show!
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