Potential Deal...need Advice!
Hey gang..I wanted to run some numbers by you. I realize that many of the larger repair items have been done by the wholesaler, but that is ok, I want to get my feet wet and learn, even if it means less profit in the beginning. To me, it;s a marathon, not a sprint and I want to build a good foundation when it comes to learning. I also want to do most of the cosmetic items myself. I may even attempt the construction of the kit. cabinets and install...have not done it before, but feel I could learn with the right person showing me. Thinking of using Mill's Pride for the cabinets....anyone ever used them?
Here are the details:
$72,500
3/1 1200 sq feet.
Features: 1920 HISTORIC HOME WITH BEAUTIFUL FRONT PORCH, NEW VINYL SIDING, SECTION 8 PAYS UP TO $1,100 NET, NEW CONSTRUCTION ON STREET AND AREA, CORNER LOT, 10’ CEILINGS, FENCED, LAUNDRY ROOM, 65 % LTV
Repairs Done (by wholesaler): ALL NEW SYSTEMS: HEATING AND AIR, ELECTRICAL AND PLUMBING ROUGH, ROOF, VINYL SIDING, EXT. DOORS, NEW FRONT PORCH, WINDOWS, EXT. TRIM PAINT, SITE CLEAN UP, APPRAISAL
Remaining Repairs: SHEETROCK $1,000-KT/BA UPDATE $3,000-INT PAINT $1,500-FLOORING $2,000-FIXTURES/MISC. $1,500- TOTAL REPAIRS $9,000
ARV (by seller): $125,000
I am having the comps run tomorrow. Exit strategy is to fix and flip using a HML, listing property as soon as I close, then start repairs.
Exit Plan B: Refinance and LO.
I also want to have a clause in the contract that is "subject to inspection". Is that possible? I will have have 2 knowledgeable builders going with me to look at possible repairs. Both are close friends, and one is in charge of all production of large home builder here in Atllanta that builds about 400 homes a year. In addition to my friends walk though, I will bring a licensed inspector also. Also plan to do very thorough title search.
Am I leaving anything out?
Thanks in advance.
Brian
Yes you can and should have an inspection clause in there.
Looks like you'll have 2 knowledgeable guys going with you. Just be sure they know what to look for. While a builder may be able to spot a corner that is not square from a 1/4 mile he may not be familiar or trained to spot symptoms of termite or bug infestation or other problems. Then again your guys may be. Just make sure.
Also, if you plan on doing a lot of the work yourself remember it takes time. A lot more time probably than a general contractor could do it in. You'll be paying mortgage, insurance, utilities, etc., etc. during that time on top of for the materials to do the repairs.
So if a contractor could do it in 3 months and you think you could do it in 6 - add in the extra 3 months of cost and see if you're really saving any money.
Also, what is your time worth? In the exgtra 3 months you spend on this deal you could get another deal....
Of course you do have your two friends that could lend you a lot of help - only you can make those decisions. Just trying to point on some things to think about if you haven't considered them already.
Good luck on your deal
Roger[ Edited by steeler19 on Date 02/26/2004 ]
Brian,
My advice:
Appraisal:
You mentioned you were considering refinancing. Go ahead and determine with whom. I am dead serious about this. This can cost you $10,000.00 or more of your “tax-free profit” if you don't know this, plus kill your credit score while you shop around for a deal to get your numbers back in line. Get the house appraised by one of the BANK'S approved appraisers NOW, before putting in any earnest money. I don't mean a broker's appraiser. You need to get the appraisal done by the actual bank you will be working with for the cash-out loan. You will be amazed at how 2, 3, or even 4 state certified appraisers can be off 10% or more from each other. Also, this no-seasoning stuff is giving the banks the jitters. “Desktop Review” and “No-Seasoning” seem to go hand-in-hand these days. Own the deal or it will own you. There are many more houses for sale than there are people to buy them. It is the cheapest $300.00 you will ever spend. The only appraisal that truly matters is the one that the bank you end up borrowing from will use. Due diligence will save you.
Market Rents:
If the house will not cash flow with private market rents, walk away. This "Section 8 pays" garbage means nothing now (at least in ATL). Single moms with 2 bedroom vouchers (if they are still on the bedroom voucher system) are demanding a minimum of 3 bedrooms, 1.5 baths now if they are smart. They can and do get it. They will call you asking what sort of "amenities" you can offer them to choose you. Food Disposals, Garden Tubs, W/D connections, Fenced Yards, Alarm Systems, you name it, they are getting it. There is a reason they haven't added anyone to the waiting lists since 2000. These folks can live better not working than working right now. These tenants have 0 incentive to get out of the program. Section 8 pays above market rent in most areas of ATL so you have 2 choices: Over improve the house and sit and hope or make the numbers cash flow on the private market. If you get a Section 8 tenant, that's great. Just don't base your numbers on it. Guaranteed Rent? By Whom?
Finance Costs:
Make sure you are ready to give away about 8k to the banks (about 5k in hard money and 3k for the refi). No-Seasoning refi's are getting harder and harder to come by (at least from the 2 brokers I am using. If anybody has any leads, I'm all ears).
True Repair Value:
Sounds like you've got this handled. Don't forget things like water heaters, stoves, refrigerators, faucets, tub refinishing, screens for the windows, & electrical and plumbing FINALS. Usually the tubs are trashed in these types of houses (if not, the contractors will be sure to trash it for you. It seems to be the only place they can find to throw big, heavy things like comodes and old boards with nails sticking out of every side to get them out of their way. And I mean “throw”. Do your own numbers and make sure that your estimates match the quote you are getting. The wholesaler is not the one who is going to pay for whatever they missed in their estimate. Once his people are gone, they are gone. Make sure the closet (pipe opening) under the comode is covered by something.
Contractors:
Wholesale contractors work fast and cheap. They only care about their boss and “BEER 30”. Their boss is the guy that drops by on Friday to hand them their paycheck. (Even then, with contractors, you just don’t know. Remember, there is a reason they are working twice as hard and fast for ½ the pay of your friends. They can do a good job if you are there to oversee everything. Change the lock box codes once the contractors are out. And make sure you never pay them more than half until the work, all work, has been reviewed by you. If you do not like the work done on the wholesaler’s watch, tell him. He will get it fixed. He is their Sugar Daddy. If the carpenter, electrician, or plumber makes a mistake, the drywall people will go right over it. Drywall people are notorious for cutting the outlet holes too big. Make the drywall people tear it down and replace it if you see this. If the electrician or plumber screws up (and they do) you’ll end up patching the holes unless you tell them about it BEFORE you pay them. I’ve seen plumbers actually attach copper plumbing to old termite-ridden floor supports that aren’t even attached to anything. Some electricians and plumbers (particularly the ones that are working fast and cheap) will just start punching holes in the wall until they find what they are looking for. Their next payday is the next job. How about the roof? Did they tear off the old roof and make sure the decking is level and square before they put the new roof on? No? Get it fixed now or forever hold your peace (and your rent a little lower than the other houses on the street). Interior Paint should be next to last. Make sure all of your finished electrical (ceiling fans, outlets, plugs, etc. and plumbing is ready and no more holes will need to be cut in the wall before calling the painter. Do not pay the guy more than ½ until he is done and you have inspected the job and all other work is done but the floor. Once you pay him, you will never see him again. Particularly if his name is “Touch Up” Tony S. Whomever you use, make sure they at least give you a bucket of extra paint in whatever color they use. Do the floor LAST. Make sure the contractors are done. Make sure they leave some extra carpet that you can use for doormats. Watch out for everyone trying to play the “God” card. I’ve actually called contractors to ask them why they didn’t do something for the third time in a row after countless promises to hear “Gee. I’m just walking out of Church. I’ll take care of it first thing in the morning”… Nothing upsets me more than liars and thieves that use the name of God to win your trust. He is watching.
Make sure you add everything into figuring out how much profit you will really make. Expect the bank appraisal to come in about 10% lower. Expect the repairs to come in at least 20% higher. Remember the 8k in bank fees. 3 months vacancy (Interest Only is just that. Say CYA) Then see if you really get 65% LTV.
Buying from a wholesaler can be a good thing, just don't expect the wholesaler to tell you the truth about this stuff. Many times they are too busy to see the details of each deal or just don’t really care. That’s why they are wholesalers. Confirm it all for yourself. Don’t worry about the title search. This will be done by your hard money lender and again by you soft money lender. Actually if you have a good title company you can work with, use them the whole way through and tell them what is going on. You can get a discount. Same thing on the appraisal. You can work “must pass clear title” and “subject to inspection” to your contract. If he won’t go for it, walk.
Hopefully I didn’t over load you with TMI. Dot your I’s and cross your T’s and your deal will work out fine. If you can’t get to real numbers that are ok for you, walk. There are too many opportunities out there right now. Anyone that tells you otherwise is tooting their own horn. My max is no more than 70-75% of real ARV when using a wholesaler. I actually lost $3,500 on paper the first time I worked with a wholesaler. And that was with me doing a good portion of the work myself to keep labor costs down. Luckily, it was just paper. I still ended up with 15% in equity and the cash flow works, but definitely far away from the sensationalized “65% with tax free cash-out”.
To be fair, the next deal I bought was from a new investor who bought from the same wholesaler and ran out of money before he could get all the way through. I ended up at a little less than 70% on that one. The Devil is in the Details. Just be careful and make sure your numbers work, not his, before jumping in.
JohnCl
One more thing: If the house was built in the 20's don't expect everything to be level and square. Just dress it up as nice as you can and move on.
Also, Mills Pride seems fine. I've used it sometimes. I have heard you can get better quality for the same price or less from some of the cabinet shops but I haven't looked into this (You have to paint them yourself). Really depends on your exit strategy.
[ Edited by JohnCl on Date 02/26/2004 ]
And another thing...
Walk the area and talk to the locals. Get a feel for the neighborhood. Wholesalers primarily work in the less desirable areas of the city. Make sure it is rentable. Back to the 2 BR section 8 voucher story. I almost considered taking a 2BR voucher just to feed the alligator once. They called back after talking to some family members to tell me that they could not move there because of the drugs and crime. True, those areas have huge upside potential. But cashflow today is my first priority.
Ok. I'm done. Goodnight.
JohnCl
Brian,
I think John pretty much covered everything. The only thing I could think of if it was built in 1920, then it most likely has a "rock foundation" which is hard to
get an FHA loan with your new buyer.
Also, I would go to the city and make sure there are not violations on it for
illegal room additions, etc....
My suggestion to you is to line up some private money, put an ad:
"Real-estate investor with proven track record looking for investors who want to make 12% on their money."
I would get someone to put the money up for the deal and turn right around and retail it myself! Yeah, you might make more in a year on a L/O but did you know that 50% never make it to the closing
table. Besides, sounds like you can use the cashflow. Why dont you retail this one and go buy two more from this wholesaler you have hooked up with.
Besides, I would not have a house that old as a rental.
One last thought, if the electrical has not been converted from "old style"
you will have to due a service upgrade in order to sell it FHA. The problems I foresee once again now that I think about it is the rock foundation and "old style" electrical. These could be issues if you plan on going FHA. Who knows, the appraisal might not call it out.
Oh, and if you have to put a new roof, most likely it will have "space sheathing"
which means you will have to put plywood over the entire roof when you re-roof it which could be some big $$$. Just some food for thought.
Best Riches,
Jeffrey Adam
_________________
"The only place success comes before work
is in the dictionary."
[ Edited by JeffreyAdam on Date 02/27/2004 ][ Edited by JeffreyAdam on Date 02/27/2004 ]
Jeff, thanks for the message. A couple of questions...does the seller have to disclose to me if it is a "rock foundation" and "old style electrical" if I ask?
Thanks.
Brian
Just look at the foundation yourself, it will be a bunch of rocks and limestone or cement. Open up the electrical panel and you will see a bunch of screwed in fuses that are made of glass.
Best Riches,
Jeffrey Adam
[addsig]