First Deal Need Advice?
I'm working on my first deal which in an REO and I'm using a hard money lender to fund the deal.
I'm using the following formula to calcuate the max. purchase price
APR x .65 - minus cost = purchase price.
Here are the figures from my deal
$96,000 x .65 = $62,400 - $41,000 (repair cost) = $21,000.
My questions are
How do I factor in closing cost, interest, Realtor's comission, etc.
Also, should I not lead with my best offer, since the bank my present a counter offer?
Yaisa
I don't know about your particular area, but I'm realtor and real estate investor in Myrtle Beach, SC and this is how it is here in terms of fees. A) .0037 x purchase price = Deed Stamps B) about 6% for Brokers fees C) Attorneys fees usually run about $300 and D) add about $100 miscallaneous fees. These are most of the fees associated with selling the property. With buying the property(as is I assume) there is the termite inspection and title insurance. However, since I don't know the specifics of this deal, this is just an estimate. Hope this helps
Where did you get the 96k figure from?
Are you sure you are going to have spend almost 42% on rehabbing.
This may be a hard deal to get the bank to accept if you rehabbing cost are to high. I mean your estimate is much higher than reality. The last deal that cost 40k to rehab had MAJOR MAJOR repairs to be done including a cracked foundation.
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I agree with wheelerdealer on this one. for 41K you could almost totally demolish and start over. If your numbers are correct, this is a monumental project for someone inexperienced with rehabs.
I try to keep repair costs less than 20% of ARV. I don't get involved if they are over 25% under any circumstances.
Don't however let my guidelines rule your investments. I urge you to be cautious with this one. (If you get it)
Good Luck,
Jeff
Thanks for the responses. The $96,000 is what comparable homes have sold for in the area.
I had two repair estimates and both were for $40,000
Hey,
The formula (Offer=(FMV*75%)-costs), you costs are NOT just the repairs, they are all your costs to bring the house to market. If the repair costs are $41k, the other costs (holding, commission., etc) are going to reduce your offer to basically nothing.
I agree with the other posts...I can not imagine $41k in repairs. Unless the house burned to the ground.
Maybe it would be helpful if you listed the repairs here.
After reviewing the post, I think I need to located another general contractor.
Summary of the costs are as follows:
Materials: $26,158.16
Labor: $14,700
Total: $40,858.16
Major expenses:
New Roof: $8,000
Asphalt new drive way $1,500
Furnace with air conditioner unit: $6,500
Floor sanding: $1,800
Concrete patio slab: $2,000
Speaking of: Are you paying these contractors to give you estimates? Reason I ask is that I've found a home that needs lots of repairs, but don't have the experience to estimate the repairs costs. Will contractors give you a walk-through estimate for free? If not, how much do they generally charge?
I found several contractors who give free estimates in my area.
I'd get about 3 more estimates. If the house is only 96k rehabbed you are paying WAYYY to much for your roofing and air conditioner/furnace - even with all new ductwork. Keep in mind that you rehabbibg a home to be livable and not to be a bionic house.
Use this house as a way to learn about house repair. Are you using the contractor just for estimate or also to perform the work? No investor that I have uses a contractor. They are just too bloody expensive. You should develop a list of A/C, Plumber, Electric, Carpenter, Flooring, Handy, Painting, Drywall, etc people. You will have to manage the project a bit but it gets pretty routine when you use the same people over and over. Just find the rehabbers in your area and ask who they would use. Or go to the houses and get the phone numbers directly.
I repaired a small house fire in a 1100sf house that included all windows, all new lighting, all new window treatments, all new flooring, drywall repair, new kitchen cabinets, regrout the bathroom, chemical clean all walls, prime and paint all interior walls, paint exterior, for about 12k.
Had another fire in a 1400sf house that had a hole through the ceiling about the size of a mini fixed for 40k. This included plans, new electric rewrire, A/C installed, new roof, rebuild the rafters in about 30% of house, rebuild the walls in about 40% of the house, new appliances, new kitchen cabinets, new windows, drywall and texture on new walls, prime and paint interior, prime and paint exterior, new toilets, new bathroom cabinets sinks mirror, new light fixures, rebuild shower stall, new doors molding baseboards, new door hardware. The only thing not done was replumb. I had almost no holding costs as the house cost 20k purchased on a credit line. Materials were Lowe's on account. Made 34k net.
Trying to make the point that 40k is probably an inflated contractor price. Also that 20k profit on an ESTIMATED 40k repair with hard money holding costs is cutting it close.
Brenda
Yhagood,
Your 70% of ARV (or 30% discount to ARV) has embedded in it a 3% figure to covering closing costs 3% to cover Marketing 3% to cover financing and 1% to cover unforeseen things.
The remaining 20% is the profit you should earn.
So those costs of closing, financing, and Marketing are already factored in.
There are houses that need $40K in work. It depends what property values are and on the size of the house.
It would help to meet A LOT of contractors. Include a few licensed and a few unlicensed Handymen. YOu may want to use them for easy jobs.
When you ask a licensed GC to price a whole job he MAY charge the same labor per hour for a carpet installer as he does for a skilled roofer or electrician.
If you sub out the job yourself the roofer may make $25 per hour the electrician may make up to $35 per hour and the carpet costs $1.25 per square foot installed! And probably wont take more than a couple of hours.
You just have to speak to as many people as possible before you undertake a huge renovation like this.
Ask other investors to recommend contractors. Meet them and feel them out.
I dont know if I could guess that $40k is too much because I havent seen the whole house. BUT I KNOW that $8000 is too much for your roof.
IF it is a BIG roof about 30 squares (3000sf) then, maybe. Only if all the shingles AND wood needs to be replaced.
ASk him to tell you how long a job will cost and how much the labor is associated.
When he tells you 3 days for the roof and $4000 in labor $4000 in materials, I know the materials are too high, but that you will have to learn for yourself. But labor is easier. Ask him why his 3 guys or 4 guys should be making $300 day or more.
The head guys get more but the guys cleaning up and hammering nails dont get paid near that much.
You should expect the GC to charge 10% markup or more over labor cost but not 100% or more.
Hope this helps.
Good Luck,
N.
Ok, I have to ask ...
Yhagood used a 35% discount on his formula, then Bruce used a 25% discount, and finally, Neill7 talks about a 30%.
I can guess that the the bigger the discount, the better for me, but what's the biggest discount, a bank would likely accept?
Roger
Rangui,
Actually there is only a difference of about 5% in all the quotes. It depands on what you are including in the discounted figgure. a 25% discount with an additional 10% for expenses, (Closing costs etc) is still 35%.
As it happens, the reason for the discount amount besides nearly guaranteeing that you make money as an investor., is the use of hard money as a source of financing. HML's typically loan 65 to 70 percent of ARV. This allows you as an investor to do a major rehab job for low out of pocket expense.
A bank will accept what you can convince them to accept. If you can justify the discount, sometimes they will go gor it. other times they need to have it a while longer before they will accept the fact that it won't sell for what they thought was a reasonable sale price.
Good luck,
Jeff [ Edited by jeff12002 on Date 01/19/2004 ]
As a residential architect, all I can say is be careful with these "walk through estimates" from contractors. Even if you have an architect draw up a formal set of construction documents for you, and gain competitive bids from multiple contractors, they will invariably seek to hit you up for change orders that would increase the construction cost at the end of the day. A tight set of drawings will prevent this from happening.
If you don't have a set of working drawings that they bid on and are bound to by contract, you have no guarantee whatsoever that the total price of construction at the end of the day will be the same as the original estimate.
You also have no quality control on the work you receive.
There is much you need to be aware of as well- the rights and liability exposure you have under the construction contract you use, the securing waivers of liens, affidavits for payment of materials and labor, witholding proper retaininage, etc.
I am a contractor and would say first, Get several bids from reputable contractors in your area. These referrals should come from your local RE club etc.
Using unlicensed workers is a can of worms waiting to explode. If one gets hurt you are unlimited in your liability and your business entity will be pierced to attach your personal assets. THis is not including all the fines you would be looking at. I used to use cheap labor but in doing so was playing russian roullette.
YOu are obviously inexperienced in rehab and should get someone that knows the ropes to walk you thorugh your "education" and that means a contractor or better yet get another investor to mentor you in this deal for a share if the numbers work out.
The prices you are quoting seem a little high I have done a number of 8K roofs but they were large, used top flight shingles, and required some sheathing work. Get a licensed roofing contractor to give you a bid using 20 year "3 tab" shingles.
Then get a licensed contracotr to give bids on the concrete work and ask for any other options.
65K is way too much to offer for a house in this condition when you factor in the holding costs etc.
I would be looking around 25-30K as a purchase price and if possible would offer quick closing.
Another idea regarding the rehab is using the RS Means Repair and Remodeling Cost Book, which will give you an "idea" of an appropriate price for most things you will encounter. My local library carries the book and yours may also. Try it out. If you like it, buy it. If not, you did not lose any thing.
[addsig]