REI: Getting Out of a REI Deal

Contract Contingencies or "loopholes" can help you get out of a bad deal.

This week I am going to go over how you can be protected by contingency clauses in your purchase agreement contract, specifically from an investment perspective.

Purchase Agreement Loopholes

When you sign a standard real estate purchase agreement, you have the option to include contingencies, to protect you and allow you to get out of the agreement. You can include a financing contingency, (if you need to get approved for financing), a title contingency, (in the event the title is not “clear”, in merchantable condition, and the seller cannot remedy it), sale of another property, appraisal price being equal to or greater than the sale price, no issues found during an inspection period, or pretty much any other contingency you would like to include.

The key thing to remember is that the seller has to accept these contingencies. The specific ones listed above are standard contingencies and sellers are used to seeing them. As a real estate investor, you should know that the number of contingencies could possibly affect the seller’s decision to accept your offer if there is a similar offer for the property with less contingencies.

The main contingencies to include are the inspection period and clear title.

You should have your financing in place already, to make the deal go smoothly. This can be personal cash, private money, hard money, or being pre-qualified for a loan from a traditional lending institution.

In selecting your properties, you should have a pretty good idea of the market value of the property and in pursuing the target property, have negotiated a sale price that is discounted from market price, allowing you to cover expenses and cash flow.

Utilizing a Contingency

A couple of weeks ago, I posted about making an offer on an REO property. I was excited for the opportunity to acquire this property because it was in the same neighborhood as the last property we acquired and had a couple of more amenities.

We were at the point of waiting for the asset manager to respond with the final signed contract so we could start the inspection period. We waited and waited…but did not hear anything for a whole week.
We were told to expect up to a seven day wait for a response, but when we finally did get a response on the ninth day after we submitted contract signatures, the asset manager had signed the contract two days after we submitted it. This left us with approximately two and a half days for inspections, title search, etc., and late on a Friday morning. There was no way we would have been able to get the title search completed at that point.

We exercised the contingency and canceled the contract.

Because of issues like this, I am glad I had the option to exit the deal. Some investors may not worry about the title, but I do. I have run into title issues in the past that made it hard for me to sell a property, so I wanted to be sure that the title was clear. Especially with the property being an REO property.

With it having been through a Sheriff’s Sale, the title “should” be cleared of all liens, but if a lienholder was not notified that the property was going up for Sheriff’s Sale, then their lien is still in effect.

I could have run the title search before getting confirmation that we had a contract in place but did not want to spend $500 and not be able to get the property under contract.

So, on with the property search!

Oh, if you are in the Houma/Thibodaux area and have property you need to sell, get in touch with me.

And, as always, let me know what you think in the comments. Ask questions, tell your story.
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Business Finance - Understanding Cash Flow

An infographic representation of Cash Flow.

Today I want to go over Cash Flow and why it is critical to business finance.

There are four basic reporting metrics for business finance:

• Balance Sheet – Statement of financial position, reporting a company’s assets, liabilities, and owners’ equity at a given point in time.
• Income Statement – Statement of revenue and expense or profit & loss.
• Equity Statement – Statement of changes in equity or retained earnings.
• Cash Flow Statement – Statement of a company’s cash inflows and outflows during a given period of time.

I will cover the first three in more detail with later posts because I want to talk about Cash Flow and the Cash Flow statement.

Cash Flow

Cash Flow is the total amount of money coming into a business (revenue, income, investments, loans, etc.) and the total amount of money going out of a business (bills, expenses, wages, capital purchases, etc.) over a given period of time. It can be a year, a quarter, a month, or any time period you want to look at. For my purposes, monthly reporting is preferred, as it coincides with other regular monthly financial reports.

Doesn’t the profit & loss report show you the same information?

While reporting similar information, Cash Flow & Profit & Loss Reports serve different purposes. The Cash Flow report gives you an understanding of how you are bringing money into your business and how you are spending it while the P & L report shows you revenue earned and expenses paid.

OK, that still sounds similar, you say.

It may be easier to understand if you look at it from the perspective of different accounting methods. Businesses use either the Cash Basis or the Accrual Basis methods. 

"Cash basis - Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.

Accrual basis - Revenue is recorded when earned and expenses are recorded when consumed."

If you are operating on the Cash Basis method, your revenue and expenses are recorded into your accounting system when they occur. In this case, your P & L and Cash Flow Reports should show almost the same information for a given period, with minor differences like loan principle repayments not showing up on a P & L.

In the case of the Accrual Method, you might earn revenue in a given month, but you won’t see the money from it until the invoice gets paid, which may be a month down the line. As for expenses, you may be paying for supplies immediately, but can’t show them on the P & L until the revenue is earned. So, you are potentially paying for supplies in one month, showing revenue in the next month, and not actually getting paid until the third month.  In this scenario, the P & L would show the expense & revenue in the second month, but the Cash Flow would show the outflow of the expense in the first month, no activity (with respect to the subject order) in the second month, and would show the revenue inflow (invoice being paid) in the third month.

Because of this, you should be looking at both reports to better understand what is going on in the business.

Why is Cash Flow important?

To be a successful business, you want to have positive cash flow…that means that you have more money coming in every month than you are paying out in expenses, wages, and bills. This seems like a “DUH!!!” statement, but without looking at both your P & L AND Cash Flow reports, it would be hard to make sure you are able to bring in more cash than pay out in expenses.

Without regularly reviewing the Cash Flow statement, you might think you are breaking even or close to it, until you realize that your bank account has steadily been dropping and you really were not even close to breaking even.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Drilling Automation: Why Aren't We Further Along?

Current level of Drilling Automation

This week I am going to attempt to provide some answers to the question of “Why we aren’t further along with implementing Drilling Automation?”.

The thing that got me started thinking about this topic was an article in the Journal of Petroleum Technology discussing data accuracy, mainly a paper recently presented at the IADC/SPE Drilling Conference. The topic of that paper was An Algorithm to Automatically Zero Weight on Bit and DifferentialPressure and Resulting Improvements in Data Quality. 

Abstract: SPE189636-MS

The paper details a study by Pason, a company that collects, analyzes, and distributes real time and historical drilling data from rigs in North America. They conducted a study on the accuracy of Weight On Bit measurements and determined that the majority of the WOB data was incorrect due to drillers not properly zeroing the WOB indicator. They proceeded to develop an automated algorithm that zeroed the WOB and another key measurement, differential pressure. This improved the accuracy of the data collected immensely.

The thing in the JPT article that caught my eye was the question, paraphrased here, “What is keeping the industry, as a whole, from collecting more accurate data?” The main answer seems to be that collecting more accurate data is not free. Due to needing to utilize more accurate sensors and having, at minimum, personnel regularly recalibrate those sensors, to developing better sensors and systems, it all costs more money than the current standard provided.

This is a parallel to what we are seeing as a hindrance to progressing with Drilling Automation. Operators want the lowest price they can get to drill their wells, service & equipment providers want the highest price they can get for their equipment, products, & services, and in most cases, what you wind up getting is low-cost provider solution (read minimum quality for cheapest price).

In recent history, most operators have not wanted to help develop new technology and/or practices. While you do see companies like Statoil, Royal Dutch Shell, Apache, and others investing in drilling automation projects and sometimes partnering with service providers to do this, the majority do not.

I think part of the reason why we are not seeing large scale advancements with Drilling Automation is that there is not one entity in control of the entire operation. Factory automation is far easier for at least two reasons: Factories are usually controlled by a single entity and the tasks that are automated are simple, repeatable steps.

Drilling a well is not the same as operating a robotic factory. You can automate a lot of things that are repetitive and can be accomplished by robots. Drilling a well is not the case. There are exponentially more variables involved with drilling a well than welding pieces of a car together. Due to that expansive number of variables, changes in each multiply the contingencies and potential responses needed. To sum it up, it is not an easy task to accomplish. Not impossible, mind you, just not easy.

A lot of wells involve a minimum of three or four different companies working to drill the well. All with different goals and business models. That adds to the complexity. This can be somewhat caveated by Red or Blue rig models where a single service company provides most or all of the various services to the operator on the rig, OR the independent Operator model where they hire their own consultants and utilize third-party suppliers for equipment & products.

So, because of all this complexity, in addition to variations in the market (read: Current, hopefully over, crash in the industry), it makes it hard to make progress with drilling automation.

BUT, there are changes afoot! Industry conferences are starting to highlight Drilling Automation. More companies are becoming involved in the space. With the progress being seen in artificial intelligence, things that someone had to “feel” or “intuit” may soon be reduced to a routine validated by a computer algorithm.

We are starting to see progress. Interest from multiple players, large and small. Companies transferring their expertise from wetware to hardware and software. The singularity for Drilling Automation is not tomorrow. We may never get to a totally automated drilling process with no human involvement, but if we can get 95% there, that will be a huge reduction in cost and increase in efficiency!

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Business Startup: 9 Tips for Starting a Small Business with Partners

Today we are going to talk about a very specific subject: Starting a small business with a partner or partners.

The generally understood definition by the United States government for a small business is a business that employs less than 500 people. There are financial considerations that also go along with that, but I am not going to attempt to touch on those here.

With this in mind, the concept of the US economy being powered by small business makes a lot more sense. A large majority of businesses are small businesses.

I would venture to say that there is a sizable portion of the population that if not already running a business, want to start one. Based on that, I am going to provide some tips to get started and hopefully avoid pitfalls that I have run across in my business dealings.

Partners

Select your partners well. This seems obvious, but you need to ensure that goals are aligned, that you want the same things for the business. Make sure that you can work with your partners. Make sure that your personalities do not clash. Make sure that all partners are able to understand viewpoints that are different from their own ideas and give them thoughtful consideration. Put a plan together for how you will proceed and have everyone sign off on it. Avoid partnerships where one or more partners are self-serving and attempt to obstruct ideas that do not favor them.

Duties

Define the duties of each partner for the business before investing any money, time, or effort. Agree on who does what and how it will be done. Have each partner provide a plan for how they will accomplish their duties. This seems a bit like overkill, but the effort put into this exercise will pay dividends in the form of getting each partner to think about what they will be doing and how they will be doing it. That alone is worth the exercise.

LLC or C-Corp

There are other types of legal entities, but this seems to be the most common structure used for small businesses. Depending on the type of business, you may be forced into using a C-Corp entity structure, such as a manufacturing business with inventory. While I am not an attorney and I do not play one on the internet, I am of the opinion that most small businesses are best served by an LLC structure.

In an LLC structure, the entity is considered a pass-through entity, so the profits of the company are passed through to the partners based on shares of equity in the company, to be reported on their personal income taxes.

With a C-Corp, the company is taxed, then dividends passed on to the shareholders (partners) is taxed again.

Operating Agreement

This is also a big one. The operating agreement can be based on the details pulled together in the Duties step. It just formalizes how the company will operate and documents the what & how for each partner. It also should contain exit strategies for each partner and for the company as a whole. This is probably more geared towards an LLC entity, but also has relevance to shareholders in a small private C-Corp.

Entity Name

If you already have a good idea for an entity name, then obviously, use it. But if you don’t, there is no need to stress out over it. Pick a name and as long as it is not already in use or trademarked, it will be good. If you later want have specific company branding/marketing, you can create a “Doing Business As” or DBA name. In most cases, all you have to do is file a form with the state for it to be recognized.

Employer Identification Number (EIN)

The Internal Revenue Service (IRS) uses the employer identification number or Tax ID as an identifier for businesses so they can track income and revenue. It costs nothing and can easily be applied for online.

Business License

Depending on the nature of your business, you may need to get a parish, county, or city business license. They are usually just a nominal fee, but not a whole lot. (Caveat: larger cities may have more exorbitant fees).

Business Bank Account

Always use a business bank account for your business finances. Keep your personal finances separate from your business finances. This will help to keep track of how well your business is doing.

Accounting

For accounting purposes, you can start out tracking everything in a spreadsheet. Document revenue, document expenses. Depending on the nature of the business, you may need to do a little more than that and use an accounting software program or service. Once you reach a level where revenue and cash flow allow it, accounting tasks can be delegated to a book keeper.

I would also like to recommend using a CPA for filing your taxes. Having a good CPA on board will keep you out of trouble. Especially if a partner decides it is someone else’s job to get all documentation to said CPA at tax time. The CPA will file an extension on your behalf to keep you out of trouble.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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REI: Kick Yourself in the Ass Gotchas

Image from US Patent #6,293,874..."User-operated amusement apparatus for kicking the user's buttocks"

Today I am going to cover some things that we experienced last year while rehabbing a house acquired to become a rental.

This was our first acquisition, so I wanted to be thorough in analysis, planning, and execution. I had a home inspector check for problems with the house. He checked the electrical, cooling, foundation, plumbing, water heater, and roof. Issues were pointed out with the electrical, gas valves, air conditioner ductwork, and a couple of other minor things.

I brought in the following for estimates:

• An electrician to fix the issues pointed out by the inspector and to add GFCI outlets near the sinks.
• A plumber to replace supply valves & faucets in the kitchen and bathroom, gas supply valves for the stove and water heater, and to re-route the overflow drain for the water heater.
• A HVAC contractor to replace the ductwork.
• Multiple contractors to bid on the rest of the rehab stuff.

I thought I had things well covered. I was wrong. The first shock was that we had to replace the whole interior HVAC system. The furnace part was rusted through and a fire hazard. That wasn’t too bad, as we had a buffer in our budget for overages and $4,200 wasn’t going to kill it. (That price did include replacing the duct work.)

The next surprise was after the first tenants moved in, they attempted to wash clothes and the washer drain overflowed into the utility room. A phone call to the plumber and a day of trying to unclog the drain, it was determined that years ago, when the neighborhood was converted over to municipal sewerage, the original owners never bothered to tie in the utility room drain to the main drain line and just left it connected to the main field drain in the back yard, which had since collapsed, thus restricting flow and backing up into the utility room. Add another day for the plumber to route a drain through the wall and across the back patio (most likely the condemned septic tank) and tie it into the main drain line at a total cost of approximately $700.

Caveat: We will have to eventually add a full drain line underground tied into the main system. 

#SilverLining: We will now have the drain necessary to convert part of the utility room to a half bath at some point, increasing the value and desirability of the property.


At one point, the original owners of the house upgraded the windows to vinyl double-paned glass. In doing so, there were gaps in between the windows and the sill in some rooms. I notice them, but in triaging everything that needed to be done, they kept falling to the bottom of the priority list. And, they never got done. Additionally, we kept finding wasps in the room where the gaps were the biggest. It seemed unrelated. The tenants actually correlated the gaps with the wasps continuously appearing in that room and asked for me to fix it. It didn’t take more than some expanding foam and caulk, but, like the other items listed here, I should have recognized the issues and fixed them prior to the tenants moving in.  Total cost for the fix: about $25.

So, for the next property we purchase, I will make sure that we check all drains for restrictions, ensure all trim are sealed, and plan to continue to have the HVAC contractor evaluate the heating & cooling system. This will help to save extra work that we did not budget for and aggravation for us and the tenant in getting the issues mitigated.

If you have rental property, have you run into things like this? Let me know in the comments below.

And, as always, let me know what you think in the comments. Ask questions, tell your story.



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Real Estate Investing: Getting Scammed by a Contractor

Actual picture from one of our properties.

One of the last things you want to do is to get scammed as a real estate investor. It will happen if you are not prepared and do not have systems and processes in place to keep you from getting scammed.

Story Time

When we decided to turn my in-laws house into a rental, we started to look for contractors to do the rehab on it because I was too busy with work to do it myself (and I wasn’t that great at what was needed anyway).
We asked around on Facebook, but didn’t get a whole lot of suggestions. A friend of a relative could do some of it, but we wanted to get someone to do all of the work.

My wife heard an advertisement on a local radio station for a home improvement contractor, so we called him to get a bid. He gave us a fairly cheap bid and said he could start working immediately. We decided to use him. (Mistaken Thinking #1: Since he was advertising on the radio, he must have been a legitimate contractor.) He told us he was licensed and insured, so we believed him (See mistaken Thinking #1). He then asked for a 30% down payment to be able to purchase materials, so we paid him the down payment. (Mistaken Thinking #2: It’s OK to pay a down payment before work starts.) After six weeks of no work being done except removing the one piece of baseboard and shoe molding in the picture above, in addition to him coming to us for additional material draws (that we paid), we finally realized that he wasn’t going to do the work.

We suspected something was up after four weeks, but didn’t want to believe it. Thankfully our state has a contractor Fraud law and between our complaints and complaints of other victims from surrounding area, there was enough to arrest him. He made a plea deal and has paid back almost half of the money he owes us.

Tips for dealing with contractors:

• ALWAYS VERIFY their state-issued contractor’s license! Your state’s Contractor Licensing Board or a similar entity should have a way for you to verify that the contractor’s license is still active via a website.
• ALWAYS VERIFY their Insurance Certificate! Call the insurance company and/or agent to verify. These days, anyone can create counterfeit insurance certificates online. Their insurance protects you if one of their employees gets hurt on the job.
• Check references. You usually will be referred to contractors by other friends or investors who have used them before and can vouch for their work. 
• Sign a contract that details the following: (Disclaimer-I am not a lawyer & I don’t play one on the internet…always check with your own attorney!)
• Scope of work to be performed
• When the work will start
• How long the work is expected to take
• What milestones need to be achieved, satisfactorily, to qualify for a draw
• Check on the contractor’s work frequently to ensure timely completion

We eventually found a really good contractor who came in and rehabbed everything in the house for us in about a month for a really good price. And we have been renting out the property ever since.



Let me know what you think in the comments. Ask questions, tell your story.



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Online Workflow Automation

Left: Manual Process; Multiple queries to multiple parties.
Right: Workflow Automation directs processes smoothly.

A couple of weeks ago, I was looking into tools to help automate workflows, preferably online tools. My initial premise was that I wanted to be able to track steps, tasks, and procedures in our real estate investing.

Some of the tasks can be accomplished by the popular IFTTT service. But what I have figured out is that the majority of what you are able to do with IFTTT is geared towards personal convenience and not business processes. 

Initially, I was looking at Microsoft Flow, an online workflow automation tool, but while investigating some the connectors for it, I found some built-in integration capabilities already exist in services like Trello and Slack. So, deeper down the rabbit hole I went.

I was able to set up a Slack workspace and that in itself is a pretty cool tool for facilitating and capturing communications, documents, and other business-related information,in addition to being able to tie in to my G-suite Docs. 

I mentioned Trello above. I had looked at them in the past, but had not really found it useful for what I was wanting to do, at initial glance. I also remembered that the manufacturing business we invested in uses it to track orders and everything related to the orders. I contacted the investment partner who had set it up and asked him to explain how they were using it. 

It is set up like a Kanban board and as each task or set of tasks is accomplished, it is moved to the next stage in the order process. What I don’t like is that it is not automated. Each “card” (where the order information and communications are captured) is moved manually from one column to the next when someone accomplishes a milestone in the process. 

A similar service called Pipefy appears to provide the same Kanban-style setup, but it looks like you can set triggers for the cards to automatically advance from one column to the other. Since I just found it as I am writing this post, I don’t have time to investigate yet, but it looks pretty powerful. I think it has the potential to claim a spot in my workflow automation toolbox.

Anyway, I can visualize building out steps the process across the columns and have each card contain the tasks needing to be completed before it moves to the next column.

The more I thought about this, I realized that by combining Slack with something like Trello for the manufacturing business, we could achieve a few long-term goals. Trello actions could be reported into a Slack channel, giving us, (investment partners), a simulacrum of a real time dashboard of what is going on with orders in the manufacturing business. A similar setup could be made for product quotes. Slack channels could be used for communication between employees, management, and investors, respectively. Other channels could be used for Knowledge Management (KM)...a living archive of answers, best practices,documents, etc. I think I will call that channel #stunt_brain!

There are other options for automation and integrating various online applications like Podio, Zapier, and Zoho CRM. I haven’t played with them much, so I can’t really say a whole lot about them other than they exist.

Hopefully this has given you some insight into what I thought to be cool tools to bring efficiency to your workflow.


Let me know what you think in the comments. Ask questions, tell your story.


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