Another way for brokers to make money

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Education & Training with Total Broker Education


MARCH 27th, 2007 by Richard Weathington

 

Former student Robert Smith, 37, was  an IT software engineer in San Diego. He likes to invest with friends and says his favorite deals are "fix-and-flip" scenarios. He holds multiple properties and has invested in both Las Vegas and Phoenix. He previously lived in Phoenix and is familiar with its real-estate market.

Check out how our investor's investment stands up. 
The property: The 1947 ranch-style house is set on nearly one third of an acre in Phoenix. The 1,232-square-foot home has three bedrooms, two bathrooms, a fireplace and a cooling system. In addition, there is an 800-square-foot guest cottage with two bedrooms and one bathroom. When he purchased the property, "It was worse than a fixer," Mr. Smith says. However the home is in a safe and close-in area known as Arcadia, he says.
 
Investor Robert Smith
Purchase price: $193,000 in May 2006. Mr. Smith made the purchase with a $35,000 cash down payment and financed the balance with a high-interest loan. The loan carries a 10% interest rate.

Additional investment: $55,000. The bulk of his spending went toward upgrading the kitchens in both the main house and the cottage, including replacing kitchen counters and cabinets and all appliances. In addition, Mr. Smith replaced the roof on the main house ($4,000) and upgraded the electrical system in both units ($3,000). He and a partner did almost all the repair work themselves, Mr. Smith says, except for the electrical upgrades. He also paid to haul away belongings left behind by the former owner and estimates he disposed of more than 100 cubic feet of debris, including 20 mattresses.

The strategy: "I look for the property that scares everyone off," Mr. Smith says. He closely researches neighborhoods and looks for homes that are priced below-market in city neighborhoods that are showing the highest sales-price gains by percentage, he says. That way, he can increase the property's value by fixing it up and putting it on the market at a price that is reasonable but also profitable as an investment, he says.

One of the property's renovated kitchens
The pitfalls: Although the electrical work was more extensive than he had anticipated, he doesn't regret buying the property, Mr. Smith says. He understands that when dealing with rehab properties, problems may crop up, or post-purchase inspections may reveal unexpected surprises, he says.

The transaction: Mr. Smith has set an asking price of $329,000, or $136,000 above what he paid. He has at least one full-price offer to date. He expects to pay a capital gains tax of $20,250. The math works this way: $329,000 (sale price) - $193,000 (purchase price) and $55,000 (renovation costs) comes to $81,000, of which he expects pay a 25% capital-gains tax, or $20,250. He is selling the home for sale by owner and is willing to pay as much as 3% for a buyer's agent commission, he says. The commission would reduce his take by a maximum of $9,870. His property appreciated at a faster rate than homes overall within Phoenix because he chose a quickly appreciating neighborhood and because he made substantial repairs, he says. Homes in the zip code in which Mr. Smith bought rose in value 6% during the past seven months, compared to 2% overall for Phoenix, according to Zillow.com.

Comments (1)

David R. Fuller
RE/MAX - Anthem, AZ
Number one growing county in the nation!!! There is still good money to be made here in Phoenix!!! Believe the hype of the slow down and miss the boat.
Mar 28, 2007 05:48 PM