Calculating Costs.
i am thinking of going into the rehab. what are some of expenses and what do they average from real estate agent, lawyer, title search, inspection etc. and also if anyone has done this type of deal before can you please give me the steps i should take. i have $80-$90 thousand dollars in my home's equity. i can get a line of credit of $20-30 thousand and a have $700 a month to venture with . my credit score is 650-675. any advise is appreciated. i need a mentor. 
You need to get your own numbers in your area. Depending on what you are going to do and how much the rehab will cost, I think that you will hear many tell you that your acquisition and rehab costs should be no more that 65 -70 % of after rehab value. Some may be more conservative than this.
Another issue is that many underestimate the rehab time and holding time if you are turning the property.
for my first property, i would not like to sell right away. i am looking in low income area with future development potential, not bad, drug neighborhoods. my intention is rent to low income families and accepted section 8 ( gov't assistance) or do a rent to own deal.
The key is whether you can make the properties cash flow if you are going to hang on to them. It is pretty hard to do that out here and I do invest in other areas. Perhaps you can make it work in your area with a discounted rehab.
Accurate forcasting of costs associated with a deal is the ahcilles heel of most inexperienced rehabbers. I use detailed spreadsheets I've developed over the years where I can calculate the itemized costs with surgical percision.
However, many of these costs have unknown variables associated with them which require experienced swags and guesstimates. It becomes somewhat of an artform rather than a pure analytical exercise.
Some of the unknowns... actual rehab costs, overruns, time on the market, the range of selling prices or rents you can recieve, interest rate fluctuation before locking in. Don't forget to factor in utilities either.
As to all the fees loike lawyers, appraisers, inspectors etc., that is harder to pin down and varies from market to market. All this stuff is required when you borrow money for a deal and everyone gets a piece of the pie. My advice is just to use a flat percentage for acquisition costs (closing) to analyze a deal.
Acqusition costs: Use 3% of loan amount.
Downpayment is easy cause it will be a fixed number.
Rehab costs, carrying costs... highly variable
Disposition costs: Use 7.5% of sales price.
Disposition costs hurt. 6% goes to realtor fees. Unless you are in a hot market and can FSBO, you will almost surely pay this amount. Discount brokers may cost between 4-5% but ususally don't agressively market your property hence it stays on the market longer and carrying costs go up.
Most people don't understand this aspect of the business and how realtors have created an incentive based stranglehold on the markets they serve. IMO, your best bet is to find the best realtor in your area who knows and sells in the neighborhood your property is in. Give them the listing agreement will full commission and price your property competetively. If you do these two things combined with a successful rehab, the property will sell quick even in a soft market.
Dont even try FSBO unless your market is steaming hot. You will waste money on advertising and waste time and ultimately wind up listing with a broker.
The remaining 1.5% of the 7.5% disposition costs are associated with "sellers" closing costs. This too can be negotiated but it's an average. In many states, it's customary for the seller to furnish title insurance to the buyer which generally costs about 1% of the sales price.
I agree with you spinwilly on the 6% cost of realtor fees, as even I think that cost is almost unavoidable. Do you calculate this cost beforehand when you make your offers ? I find it hard to make a competitive offer with REO's due to that cost. What kind of properties do you mostly do ? (REO's,Preforeclosure's )
spinwilly this is gold advice, i really appreciate it. How long have you been doing this ? I really needed all this insight as I am trying to flip properties at the time and realtor costs is what kills all my deals. Thanks a bunch.
I've been doing this part time for about 15yrs. I am an electrical engineer by trade and a rehabber by hobby. My friends think I'm crazy but I've always had a thing for real estate. I tell them rehabbing high quality rundown properties is no different than rebuilding classic cars.
Getting agents to come down on the commission can be tricky at times... depends on who your dealing with and how skillfully you negotiate. They can come up with all kinds of excuses on why the commission can't be reduced just because you are working without an outside agent. Don't believe them. Stick with your offer and if it's reasonable, the smart ones will find a way to make your deal work.... quickly, before you change your mind.
Look at it from a reasonable perspective. If you were a realtor and you knew there was a 90% chance that another realtor from another brokerage will ultimately present you with a buyer at some undetermined point, maybe many months down the road with a signed contract resulting in a split commision, wouldn't you be better off taking the same level of commission from a serious buyer who presents you a contract today? To make money, agents have to move properties, not sit on them.
Unfortunately, not all agents are that smart. Some are stupid and greedy and cling to the notion that they themselves will attract the buyer and keep the full commission.
If it's a hot property and priced right, it usually sells before it even hits the MLS so no other agents even get a crack at it. This is where the listing brokers and agents almost always get full commission. They love to get these sweetheart listings and the first buyers fortunate enought to find out about these hot properties are the ones who are already working with the brokerage. Sorry everyone else, you just weren't in the right place at the right time. Happens every day.
15yrs in Austin wow, how do you like austin market ? The things you told about agents are true as even I am experiencing those things.
The Austin market is soft right now and there are some really good deals to be had. I've been here 22 years and have seen two complete boom and bust cycles. I buy, rehab, rent and hold during the bust and sell during the booms.
I'm investing in NorthWest Austin at the moment because it was overbuilt during the hiring frenzy and internet stock market bubble of Y2K. It's a temporary supply demand issue that is working itself out and sould move towards a sellers market in 3-5 years.
spinwilly when you said "Acqusition costs: Use 3% of loan amount" in you earlier posts, did you mean the closing costs at 3% of the loan ? I thought 3% is if you are a first home buyer, on investment loans isnt the closing cost suppose to be around 6% or so of the loan amount ?
You could also pay to have your property listed on the MLS without contracting with an agent.
Or, go with one of the discount brokerages that sell for a flat fee.
This could save you thousands and still expose the property accordingly.
SPINWILLY: I hear Sandra Bullock has a nice 8 million dollar house in Austin you could get for 7 million.
Re: I hear Sandra Bullock has a nice 8 million dollar house in Austin you could get for 7 million.
Yeah, that house was apparently a disaster. She sued the builder and won. I can only assume the builder was an idiot for taking on such a high profile client and doing a substandard job. Not only that, be dumb enough to not make it right, work with her, make concessions, settle out of court... or whatever. Taking the case to court was suicide. Who do you the the Austin jurors are going to side with? That builder is likely finished in this town thanks to the wonderfully negative advertising he recieved via the court battle which made the nightly news down here.
As to the closing costs, they're typlically ~3% of the sales price. It shouldn't be 6% because your'e an investor. The downpayment is higher for investor money but I haven't heard that you get reamed on closing costs.
darn, I get the same reply all the time, that since its an investment property, the closing cost by banks are higher !!!! and they are not 3%, more like 6%. My credit is pretty good too, still.[ Edited by machismo on Date 01/10/2005 ]
That sounds absurd. Has anyone given you a good faith estimate where you could share what exactly is costing so much? I might guess that someone is giving you faulty information.
Closing costs are comprised of similar items regardless of which lender you use. Appraisals, title insurance, courier fees etc. These don't get inflated merely because it's an investment property. Many lenders have additional fees and there is no real standard for many of them but they certianly don't add up to an additional 3%.
A standard appraisal might cost $375. It won't be $750 because you are buying as an investor. Similarly, the origination fee is around 1% and is money for the bank to pay it's overhead for pulling everything together. I can't see them upping it to 2% or more. There's no difference in the amount of work required. Ther only difference between an owner occupant loan and an investor loan is "risk" Risk is not part of the "closing costs". The only way risk is accounted for is in the interest rate so the only thing I can think of is points.
Generally, an investor pays a higher interest rate than an owner occupant. Many banks let you "buy down" the interest rate by paying points. Each point is equal to 1% of the sales price. Maybe the info you are getting assumes you are paying 3 points to get a lower interest rate.
I never pay points cause I don't think it's worth it. Better to take the higer interest rate IMO. A little math shows that it takes many years before those points get paid for by the slightly lower mortgage.
Hi was following your dialogue through and it occured to me that you obviously know your market very well through experience and I have been doing this just 2 months now and am not getting the descriptions of markets. In other words when talking to investors and agents they always talk of the market is this or that..How can you tell what the market is doing what do you look for ? DOM, COMPS ...I cant seem to put my finger on it and I am not comfortable taking there word for it I would rather some hard core facts. Thanks for your time and your mentoring!
[BELIEVE AND YOU SHALL ACHIEVE]
Spend your Sundays going to open houses. Go to as many as you can doing walkthroughs, collecting flyers and talking to the agents at each one. In a few weeks you will have a very good feel for home values in your market. This is BY FAR the quickest and most efficient way to learn what's going on in the neighborhoods you're interested in.
Find out if you are in a buyers or sellers market. In a buyers market, there is more supply than demand, homes aren't moving very fast and owners are more willing to negotiate on price. Conversely, in a sellers market, demand exceeds supply and houses sell quick. Sellers often recieve multiple offers and in some cases, to beat out other bidders you must offer more than the asking price.
Supply / demand and average selling prices. That's pretty much all the market is.
here is one of the estimates i've got so far, let me know what you think. Loan amt; 64800, int rate 6.5% 360mnths, closing cost 3570 inculdes all the fees.(does not include any prepaids)
Sounds too high. Can you itemize the costs? I'd like to see where all that money is going on such a small loan amount.
Loan Origin Fee: 650, Apprisial Fee: 450, Processing Fee: 350, Underwriting Fee 620, Admin Fee 300, Closing fee 250, Attorney Fee 200, Title Ins 100, Title Endorsement 200, Title Courier fee 50, Recording Fee 75, Survey 325.= $3500 roughly.
I know these are high costs, but the problem is I dont know which ones I can negotiate on.
once again, this is great help, I would like to keep in touch with you better if possible.
Spinwilly.......Thanks so much for your imput. I have been reading these posts for weeks now and your comments here have been some on the most concise and helpful I have read. Thanks again, and please keep it up if possible! ....An eager newbie