Last Week in the News

The Conference Board reported that its index of leading economic indicators rose 1% in April. It was the first gain in seven months and the biggest gain since November 2005. The index is designed to forecast economic activity in the next three to six months.

The National Association of Home Builders/Wells Fargo housing market index rose two points in May to 16. This follows a five point jump in April. It was the first back-to-back monthly gain since February 2008. An index reading below 50 indicates negative sentiment about the housing market. However, the latest gain confirms strength in the prior month and it’s the best reading since September 2008.

Construction of new homes and apartments fell 12.8% in April to a seasonally adjusted annual rate of 458,000 units, the slowest pace since recordkeeping began in 1959. The drop was led by a 46.1% decrease in the volatile construction of multifamily units. Construction of single-family homes rose 2.8% to an annual rate of 368,000 and building permits were up 3.6% to a rate of 373,000 in April.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ending May 15 increased 2.3% to 915.9 from 895.6 the previous week. Purchase volume fell 4.4% to 254, while refinancing applications jumped 4.5% to 4,794.4.

The Labor Department said initial claims for unemployment benefits fell by 12,000 to 631,000 in the week ending May 16 from the previous week's upwardly revised figure of 643,000. The number of people continuing to claim jobless benefits in the week ending May 9 rose to 6.66 million, a record-high figure for the 16th straight week.

Upcoming on the economic calendar are reports on consumer confidence on May 26, existing home sales on May 27 and new home sales on May 28.

Provided by:
Judy Haller

Prospect Mortgage
3985 Prince William Co. Pky., Suite 104
Woodbridge, VA 22192
Office: (703) 590-7132

I have been following the so called Green Building news for a couple of years now, although mostly just in my periphery.  I did my thesis for my MBA on affordable housing a couple years ago.  At that time I read through quite a bit of literature on Green Building.  My interest in it then was as it relates to affordability along the lines of energy efficiency making a home cheaper to own (not just buy) by keeping the utility bills lower.  I have thought to myself on several occasions that I should do a green project but just never committed to it.  I’m not so concerned about the costs I’m more concerned about the hype and the stuff I don’t know.

There is so much debate right now over what standards to follow to make a home green.  I have always been leery about making the claim that my home is green because the “GREEN” crowd seems to be full of Monday morning quarterbacks, very eager to shout down a person’s green claims as not green enough or at all.  The tumultuous topic may be calming a bit with more people buying into the US Green Building Standards LEED certification standards.  I could be very wrong about that but I am finally taking some tip toes into the cool waters and adding my first green attributes to a rehab project I have in the works.

I don’t know that I will call the home green when I sell it but this particular home seems to be perfect for green enhancements.  It is located in Annandale Virginia a very blue region of the state politically.  It already had a passive solar heat system installed.  There was a major mold issue so we were compelled to cut up the perimeter of the basement floor and install a French drain and pump system, which the company now guarantees a dry basement.  The furnace was built to receive a hepa filter, though one is not present. 

So, using that and building on it, I intend to install a hepa filter in the furnace.  I will use Energy Star Appliances and installing rain barrels to collect run-off from the roof.  No VOC paint will be used for all the interior painting.  The current solar system will get a check up to ensure proper operation.  We’ve added insulation to the basement walls (many of the homes this age have no insulation in the basement.)  And documentation will be provided in the open house to show the dry basement guarantee.

These efforts really won’t cost me much but I’m hoping they will pay off, not so much in money.  Instead, I’m just hoping for a quicker sell.  In this market I’m hoping being green will help me stand out in the crowd.  I’ll let you know how it goes. 

Prospect Mortgage
3985 Prince William Co. Pky., Suite 104
Woodbridge, VA 22192
Office: (703) 590-7132

Last Week in the News

On Monday, May 4, the Commerce Department reported total construction spending increased 0.3% in March. It was the best result since September 2008, and ended five months of consecutive decline. Economists had expected spending to drop 1.5%.

The National Association of Realtors reported that its pending home sales index, an important forward-looking indicator based on signed contracts, rose 3.2% to 84.6 in March from 82 in February. It was the second consecutive monthly increase after the index hit a record low in January. The reading is 1.1% above the March 2008 level.

According to the ICSC-Goldman Sachs index, retail sales rose 0.7% in the week ending May 2. On a year-over-year basis, retailers saw sales decline by 0.8%.

The Institute for Supply Management reported the monthly index of non-manufacturing activity rose in April to 43.7% from 40.8% in March. Economists had expected a reading of 42%. Figures below 50% indicate contraction, making April the seventh straight monthly decline in the index.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ending May 1 increased 2% to 979.7 from the previous week. Purchase volume rose 5% to 264.3, while refinancing applications jumped 1.2% to 5,169.3.

The Labor Department said initial claims for unemployment benefits unexpectedly dropped by 34,000 to 601,000 for the week ending May 2. However, the number of people continuing to claim jobless benefits increased by 56,000 to 6.351 million.

According to the Federal Reserve, consumer debt fell 5.2% in March to $11.1 billion. Economists had forecast consumer debt would drop $3.5 billion. Total consumer credit debt in March was $2.55 trillion.

Upcoming on the economic calendar are reports on retail sales on May 13, producer price index on May 14 and industrial production on May 15.

Wholesaling is a great way to start out in real estate.  To get up and running in wholesaling you need at least one good go-to-buyer, hopefully more.  You need a buyer who is serious and moves fast on good deals.  This market won’t wait around for indecisive buyers.  I’m one of those serious buyers.  I move fast on good deals and once I commit to a deal I very rarely walk and, if I do, it’s only as a very last resort and with great pain and deliberation.

You have got to have confidence in your buyer and your buyer has to have confidence in you, the wholesaler.  The only reason I would pay finder’s fees is if a wholesaler is saving me time and hassle and presenting ready to go deals on a silver platter.  Marketing, managing, coordinating, contracting and oversight of ongoing rehab projects are more than a full time job.  I’m more than happy to pay bird dogs to feed me steady streams of future deals.  But if you waste my time more than a couple times then I’m not going to give your deals much attention after a while.  I can go find my own deals with not much more hassle and save the finder’s fee.  If I waste your time I would expect you’d eventually stop brining me deals.

I think new wholesalers often neglect or under price 3 key general aspects of a rehab deal.  On the show “Flip This House” they only show the purchase price and the repair costs on their deals, but there is more.  Make sure you also account for closing costs when you – or I- buy the home, holding costs (I normally budget at least 6 months) and closing costs when I sell the home (including realtor fees and possible closing costs paid for the buyer depending on the market).  These three items can easily add up to 23% of your end sales price.  You won’t be in business if you neglect or even undervalue these costs.

Base your deals on the numbers.  Know the value of your property as is.  Know the value and costs of your repairs.  Know the costs of a transaction.  Make sure you (or in this case your end buyer) have at least a 20% net margin after all costs.  Here is how I figure most of my flips.  Take the after repair value or what you think you can sell the home for and then deduct:

(1) 20% for your buyers profit.  Some people require thicker margins, but I really recommend not going any less than 20%.

(2) 6-9% for closing costs when you sell (if you’re going to list it with a realtor 6% for them and then 1% for your closing costs and I like to budget 2-3% for the buyers closing costs at least in my market) Even if you’re not using a realtor, make sure you budget for sales and advertising.

(3) The cost of your repairs.  (Get estimates)

(4) 6 months holding costs (interest, taxes, insurance)

(5) 3-9% of the purchase price for your closing costs when you buy it.  (This depends a great deal on your financing.) If you’re dealing with a private lender they could easily charge 4-6points and then tack on 1-2% for the title insurance, stamps etc. etc.  Check with your local title company for basic fees.

(6) Your finder’s fee

The resulting number will be the minimum price you (the wholesaler) should be willing to pay for a property.  I know step 5 is confusing since at that point you won’t know the purchase price but you should have a ballpark idea.  Just put a good estimate in for step 5.

Once I go through the above backwards plan and get a purchase price; I then go through it again starting with my newly discovered purchase price and adding all the costs to make sure the price falls within a good window for a fast sell.  Holding costs can kill you.  Cash flow is one of the biggest rehabber killers.

These are not absolute numbers.  Some deals I would have to see thicker margin.  For instance if the comps were really uncertain, the neighborhood is particularly risky, if the project is a long distance from me and therefore more difficult to manage, and an endless number of other factors.  Every deal is different.  If that frustrates you then you’re in the wrong business.  Flipping is more art than science.  The numbers above are about as much science as you get and offer a good starting point.

Happy hunting.