The age old problem….all that extra money takes too much space in the closet

 Go green and recycle it to me, I’ll find a use for it. 🙂

 Are you just itching to get rid of all that extra cash you have sitting unused? I’ll be happy to take it off your hands. But if you don’t want to just send me a check, then by all means, why don’t you just pay too much for a property and give that extra money to the seller? (Disclaimer and Note to authorities: This is my dry sense of humor and not an offer of securities, or solicitation of funds.)

 I said last month I’d talk about some formulas for estimating what to pay for a property on a rehab deal. Of course, if you’re starting out, you’re probably happy to make $5,000 on a deal. But once you’ve done a few, you’ll realize that the risks and time involved mean you have to do better than that once you get going.

Here is a STARTING formula for single family home acquisitions:

  • Start with ARV (After Repaired Value) This is the most important step!
    • Determine what you can realistically sell the property for, and that means what you can sell it for QUICKLY! Not firesale value, but your property should be the best property in the neighborhood of homes selling for the same price, or the same property as the others but at the best price. When someone looks at all the properties in the area meeting their needs, your finished property should stand out as the best value. That’s how you can generate multiple offers.
    • Remember that once this property is under contract, it has to appraise if the buyer is financing. Today’s appraisals are based on the last 6 months of sales, so may be much lower than you think. It doesn’t help to get an offer for 300K, if it appraises for 250K and the seller can’t get financed without bringing the extra 50K to the table.
  • Less 5% for price change downward, or error in estimating ARV
  • Less profit margin – 10-20% of ARV depending who you talk to (you do want to get paid for all this work, don’t you? If not, see paragraph 1 above.)
  • Less 6% realtor commission – yes, you make be able to get an agent for less, or you may be an agent – but you still have to pay the buyer’s agent and your broker unless you are a broker. And if you want to sell quickly, offering a higher commission will frequently help. And if you don’t spend the whole 6%, then just put that extra money in storage in that closet.
  • Less 4% closing costs (buy and sell) – they add up faster than you expect.
    • If you are paying cash, it won’t be this high, but if you have to use hard money, it could be higher, depending on the circumstances. That’s a whole separate discussion.
      • Transfer tax
      • Points
      • Attorney fees
      • Title search
      • Title insurance
      • Recording fees
      • Deed prep
      • Appraisal (sometimes)
  •  
  • Less 5% carry costs – these are ALWAYS more than you think!
    • Taxes
    • Insurance
    • Mortgage interest and principal
    • Electric
    • Heat
    • Water/sewer
    • Plow/shovel
    • Mow lawn/leaf cleanup
    • Association fees
    • Accounting
    • Inspection fees for construction draws
  •  
  • Less repairs – rehab budget (don’t forget a contingency in your rehab budget)

 

So if you add this all up, it comes to 60% or 70% of ARV less repairs. That’s why if you find a property worth 300K after fixup, and it needs 50K in repairs, and you pay only 200K for it, you could still lose money.

Next newsletter, we’ll talk about multi’s. Here is a link to last month’s newsletter if you missed it.

I’ve also created a page with a way to help determine how much you may be able to borrow. This does not apply to every deal, but it’s a starting point. You can check it here.

Your partner in profitable investing,

Ann Bellamy

Buy Now, LLC

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Quick Tip

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 Update to the photo tip – VIDEO WALKTHROUGH!

 Here is a tip I am recycling with an update

UPDATE – consider a video walkthough posted to Youtube! It gives a real sense of the property, and many people have video capability these days – phones, flip video cameras, etc. If you don’t have video capability, then definitely use the tip below:

Take a digital camera with you whenever you visit a property you are considering buying. Take pictures of EVERYTHING! All exterior sides of the building, all kitchens, baths, and all mechanicals including heating, water and electrical panels. Pictures of each room and don’t forget the exterior shots of the houses immediately around this house. And if there is a view, don’t forget that either.

There are lots of reasons to take these photos:

1. They will help with your rehab estimate when you are home and can’t remember one property from another, because they all blend together.

2. If you sell the property, you’ll have documentation of the “before” when the buyer’s lender questions why the value went up $100,000 in only 3 months

3. If you have an insurance claim during the course of ownership, these may be helpful.

4. And most importantly, if you are looking for hard money to purchase and/or rehab the property, these photos are a critical part of your loan package!

5. You won’t have to go back to the property later to take the photos that you should have taken in the first place.