A new article on June 3, 2009 from MSN Money writer Michael Brush indicates that there is a third wave of foreclosures still to come from prime borrowers (i.e. those previously “safe-borrowers” with sound credit and fixed-rate mortgages) as a result of job losses thanks to the worsening economy (“Coming: A 3rd Wave of Foreclosures”).
The article states that “In the first quarter, the percentage of these borrowers who were behind on their mortgages or in foreclosure had doubled from a year earlier, to nearly 6%” and goes on to say that “Credit Suisseanalyst Rod Dubitsky predicted last week that 8.1 million mortgages, or 16% of all mortgages, will go into foreclosure over the next four years. A weak economy, continued declines in home prices and rising delinquencies among prime borrowers all but ensure that foreclosures “will march steadily higher,” he says.” Not such great news for the economy, but good news indeed for entrepreneurs interested in starting a foreclosure cleanup business to clean and repair foreclosed homes for the banks.
To put this in perspective, this means that there will be over 2 million foreclosures a year and more than $2,025,000,000 up for grabs in money that will be spent on cleaning up these foreclosed properties (since the average bill is $1000+ to clean up one of these properties).
Let’s take a look at how you can position yourself to capitalize on this coming foreclosure movement
Set Up Your Company Properly
If you want to be hired for cleanup or preservation work, you’ll need to operate your business as a professional company. The good news is that you can set up a business quickly and inexpensively, and usually on your own. Many people decide to set up an LLC (Limited Liability Company) because of how quickly and easily it can be done but you’ll want to check with your accountant or other business professional to select the type of business entity that’s right for your personal situation.
If you do decide to start an LLC, you can usually find all of the documents you need online from your state’s government website. Usually the branch you’re looking for will be called the “Industrial Commission” or “Corporation Commission” or similar. Try typing in “start a business + ______ (your state)”. Anything ending in “.gov” is usually a good place to start as it indicates a government site.
Once your business is set up, you’ll need an Employer Identification Number (EIN), which is like a SSN for your business. You can register for one online: type in “IRS” & “EIN” into a search engine to find the online registration link.
As soon as you have your EIN (which you can usually get immediately online), you can open up a business bank account for your company. This step is very, very important. In the excitement of things, many people get caught up in the day-to-day dealings of running a business and use their personal accounts to pay for business expenses. Not only does this present an accounting nightmare at the end of the year, but it could present problems for you with the IRS if you don’t keep your personal and business finances separate.
Once you legally set up your business, you may be required to register your business with your county or city in order to get a business license to operate. You can start by calling City Hall or the Office of the County Clerk to inquire as to whether or not you need a city/county/state business license and if so, how to get one.
So to recap:
1. Legally set up your business
2. Get your EIN # and set up a business bank account
3. Apply for a business license
4. If you want to do preservation work, determine whether or not you need a contractors’ license
You absolutely must have a Commercial Liability Insurance policy and Workers’ Compensation Insurance in order to run your business. Not only is insurance essential for protecting yourself from liability and protecting those that work for you in the event of a work-related injury, but many asset management companies will not do business with you if you do not meet their minimum insurance requirements.
Insurance will likely be one of your largest start-up costs, however, most insurance companies allow you to pay the premium on a monthly (rather than yearly) basis, which definitely makes this expense more affordable.
General Liability Insurance policies can cover the following: bodily injury, property damage, contractual liability, personal and advertising injury, professional liability (also known as Errors & Omissions (E&O) insurance, this coverage protects you and your business from litigation caused by charges of professional neglect or failure to perform your professional duties), hired auto and non-auto liability and umbrella liability.
You’ll want to speak directly with your insurance agent to get a better idea of the extent of the coverage provided by their particular policy and one that is best suited for your individual needs
Workers’ Compensation Insurance is required in most states when you have W2 employees, and some states also require your insurance to cover your 1099 contractors also. Workers’ Compensation (“Workers’ Comp”) covers your employees’ medical and disability expenses related to work-related illness and on-the-job injuries.
In the states where you are not required to cover your 1099 contractors you would need them to provide proof that they carry their own Workers’ Compensation insurance. Although tempting to shift the financial burden of maintaining a policy onto your 1099 contractors, in all reality, you are probably better off to take on the cost of all staff Workers’ Compensation (all W2 employees and 1099 contractors). The reason is that it’s difficult to find only independent contractors that have their own policy. In addition, this industry has such high turnover that if you put this restriction on your independent contractors, you’ll waste valuable time and lost revenues trying to find replacements in a hurry.
Here’s a great tip: sometimes you can get “pay-as-you-go” insurance where your workers’ compensation insurance premiums are based on your actual payroll, rather than an estimated amount. This is great for companies that are just starting out or have a fluctuating workload. Type in “pay as you go workers comp” into a search engine for results in your area.
As a second tip, we’ve used Farmers Insurance for years and have always had excellent customer service and great rates. Just Google “Farmers Insurance” for an agent in your area.
Foreclosure Cleanup v.s. Property Preservation Services
As the name suggests as a Foreclosure Cleanup Company, you’ll be cleaning out all of the junk in the house (also called a “trashout or a “junk out”), as well as cleaning the interior of the home. You may also be required to remove vehicles on the property. Usually foreclosure cleanup companies are also responsible for doing a basic landscape cleanup which includes hauling out any junk from the front/back yards, cutting the grass and trimming trees/bushes.
Cleaning up the property is the extent of services offered by a Foreclosure Cleanup Company, whereas a Property Preservation Company is also involved in the “securing” of the property and the “preserving” of the property.
Here are some of the services that a preservation company may offer (note that a Property Preservation Company will generally also offer cleanup services):
Securing the Property
o Initial vacant property inspection
o Lock changes
o Boarding of windows and doors
o Temporary roof repair
o Securing swimming pools
Preserving the Property
o Exterior Debris removal
o Abandoned vehicle removal (cars, boats, etc.)
o Interior Debris removal (junk-out)
o Hazardous waste removal
o Interior cleaning services including carpet cleaning
o Window washing/graffiti removal
o Window replacement
o Pool services (draining, acid washing, maintaining, etc.)
o Pest control services
o Yard maintenance/landscaping
o Snow removal
o Gutter cleaning
o Pressure washing
o Carpet removal & replacement
o Tile/Floor repairs
o Sheetrock/drywall repairs
o Carpentry repairs
o Plumbing fixtures repairs & replacements
o Fire & mold remediation
o Fence repair
Here are a few things to consider when determining the extent of the services you want to offer:
A Contractors’ License is generally not required for Foreclosure Cleanup Company but is likely required for preservation companies doing work over a certain dollar value (usually $500 – $1000+). Sometimes this license can be obtained by attending a course and successfully passing a test whereas other states require previous, verifiable industry experience.
The insurance premiums tend to be higher on companies that offer preservation services as they are considered to be a “general contractor”. However, the revenue potential is much higher as preservation services tend to run from a few thousand dollars upwards instead of $800 – $1500 for each cleanout.
Usually what people do is start out initially offering just the foreclosure cleanup services and then when things pick up, they’ll add preservation items to the list of services they offer. This let’s them get their foot in the door without having to spend a whole lot of money upfront when setting up their company.
Source the Right Equipment & Tools
The great thing about starting a foreclosure cleanup company is that the initial expenses are quite low as much of the equipment and tools needed for cleaning foreclosures can likely be found in your own garage:
o Cleaning chemicals (i.e. all purpose cleaner, disinfectant, toilet bowl cleaner, window cleaner)
o Cleaning supplies (broom, mop, scrub pads)
o Vacuum cleaner
o Garbage bags and shovels
o Work gloves and disposable plastic gloves
o Lawn mowers & lawn tools
For the smaller items you don’t have on hand, check your local dollar store. Their prices can’t be beat and they usually have the same chemicals and cleaning supplies as the other retailers. Once you start doing some volume, consider shopping for your supplies at Sam’s Club or Costco to keep your expenses low.
You can also find used equipment in great shape (such as vacuums) by going around to your local Saturday morning garage/yard sales. If you have a “Re-Use” center or a Salvation Army, you may consider checking there also as they often have vacuums and other small equipment or yard tools for sale.
For hauling junk, you’ll need some sort of trailer and a vehicle large enough to pull it. If you don’t have a truck and a trailer, you can always borrow a friend’s truck and rent a trailer from U-Haul or just go ahead and rent a moving truck from U-Haul. (Remember though, that you’ll be charged a daily rate plus a per-mile rate when you rent a moving truck whereas if you use your own truck and just rent the pull-trailer, you’ll only incur the daily rental rate for the trailer.)
Sometimes you’ll be required to clean a property that doesn’t have electricity or water. In the event that there’s no electricity, you’ll need a generator to operate the vacuum cleaners and other electrical equipment. These can be rented at Lowe’s or Home Depot and is a much better alternative to purchasing one outright unless you’re going to use it on a regular basis (a new one will run you about $500+).
To save on expenses, it’s best to rent equipment in the beginning.
Once you get up and going, it may be worth looking into purchasing equipment of your own. Check the online classifieds ads (such as Craigslist, Kijiji and Backpage) for used trailers, generators, etc. You should also check with U-Haul as they have been selling some of their excess trucks as of late.
Stay Safe on the Job
As a business owner, you’re responsible for keeping your staff safe while working on the job. Working safely is paramount to the health of your staff and the reputation of your business (and also keeps your insurance premiums low). It’s imperative that you review safety issues prior to allowing anyone to work on the job – you must provide both classroom and on-the-job safety training to all new hires.
Now, it doesn’t have to be anything fancy; you can spend 20 – 30 minutes reviewing safety policies, safe working practices and answering any questions and then you’ll be done! Make sure you have people sign in and out of the meeting and that you document that a safety meeting took place.
It’s also very important that you become familiar with OSHA and Safety Standards as well as the health & safety hazards associated with this industry so that you can keep your staff safe, avoid accidents and costly fines. You can find the OSHA Pocket Guide to Construction Safety (it’s a short and an easy read) at the main website (OSHA DOT gov) by searching for the report name.
Another way to protect your staff and your business is to make sure that you check references before you hire someone. Insist that they list non-related references (i.e. not mother, sister or best friend) and instead list references of previous employers or someone they know in a professional capacity. We also do drug testing and background checks – it might sound paranoid to some, but the safety of our staff, our customers’ property and our company’s reputation is far too important to risk not spending $20 on a background check or drug test.
Price Your Services Right
In this industry, the lowest price always wins the bid (unless, of course, the lowest bidder has a terrible track record of not completing work and is utterly irresponsible and unprofessional, in which case the company has just committed “reputation-suicide” and will never be hired again). Lenders don’t want to spend any more than they have to on these properties so you want to make sure you price your services comparable with the going market rates (but at the same time, priced so that you still make a great profit and don’t leave any money on the table).
For cleaning out foreclosures, most banks expect to spend anywhere from $500 – $1500 for a cleanout (trashout, interior clean and initial landscape cleanup), but it could be a bit more or a bit less, depending on your area. It’s important to know that most lenders have prescribed “price caps” for the maximum amounts that they’ll pay for services.
If you’re also providing preservation services, a great site that we’ve used before to determine our prices for doing repairs is www.CostEstimator.com for getting the market rates for construction costs – you can get a free 30 day trial (no need to enter credit card – it really is free!). There are over 3,000 cost items adjusted for over 210 local, geographic regions to create your bid and you can add as many others as needed. If you want to sign up after the trial, it’s only $15/month.
Market Your Services
It’s true – “nothing happens until somebody sells something”… and you’ll need to get out there and sell, sell, sell your business. Once you’ve done a few jobs, you’ll find that word of mouth advertising and referrals will provide a large pool of new jobs for you, but in the meantime, you do need to do everything possible to let customers know you exist.
A large portion of work will come from the relationships that you build with Real Estate Agents (“Realtors”) who list bank-owned homes (often referred to as REO listings). They are often given the task of bidding out the cleaning and repairs of new listings by the asset management company so you’ll want to make sure the agents in your area know your company handles this type of work.
A great way to find out which Realtors in your area list REOs is to go online to the major bank’s REO websites and “data mine” the contact information for the listing agents (name, email, phone numbers). It can be painstaking work, but definitely worth it.
Here’s an example of a bank REO sites to get you started collecting Realtor information
WELLS FARGO (Properties managed by Premier Asset Services): pasreo.com/pasreo/images/pas_logo.jpg
NOTE: In order to access agent information, select the state and click search. Then, individually select each listing and click on “Print Property Report CVS”. Each listing and corresponding information (such as agent name, phone # and email) will be created in an Excel spreadsheet. You can access the page
Remember to follow up with a phone call a few days later. Don’t be shy about asking the Realtor if he/she has any jobs for you to bid, either – most of them are very accommodating and willing to give a new company the opportunity to provide estimates.
The other way jobs are bid out is through large Asset Management Companies (also referred to as Marketing & Management Companies, REO Field Service Companies and Property Management Companies). Essentially, the lender says, “ok – I have thousands of properties to get rid of. Here, national ABC Asset Management Company: clean, fix and sell these properties for us”. And the national Asset Management Company will then subcontract out the work to local foreclosure cleanup and property preservation companies. In order to work for these companies, you usually need to sign up your company as a potential vendor. Many times this can be done online.
There are both positives and negatives associated with working for the larger companies. On the positive side, you will probably be given a few projects to work on at a time so you will be kept relatively busy. On the negative side, they usually want you to offer ‘wholesale pricing’ and don’t pay until 30 – 60 days after you invoice them for the work. Working for one of these companies, however, will give you the experience you need to go after more work.
Other possible customers include wholesale property investors (groups of investors that purchase foreclosed homes at the auctions and then sell them to smaller investors at a wholesale price), investors, landlords, property management companies, Realtors and so on.
You should also consider attending your local networking events such as the Chamber of Commerce meetings and any local investor meetings in order to hand out your card and network with potential customers. The more you get out there, the better chance you’ll have of securing some great, long-term customers!
This is definitely an exciting industry and a very profitable one for those of you who don’t mind getting your hands a bit dirty! Good luck!