House Worth 100k, 7k Repairs, What Would You Pay?
If you were to find a house worth $100k,
with $7k in repairs and you wanted to
make a profit of $10k, what would you pay? The house is a vacant REO owned by Washington Mutual listed in the MLS.
You are going to list it with a realtor after
the rehab. You are paying full price 6%
to the realtors to sell it.
_________________
"The only place success comes before work
is in the dictionary."
[ Edited by JeffreyAdam on Date 02/19/2004 ]
[ Edited by JeffreyAdam on Date 02/21/2004 ][ Edited by JeffreyAdam on Date 02/21/2004 ]
77K
Will you be holding or flipping? It changes the dynamics.
Holding it to retail. You obtain new financing from a private source at
3pts and 12% interest. You also sell it
with a realtor at 6%. I will give you a hint.
$77k is too much!
Good Luck,
Jeff Adam
[addsig]
Well, if you're going to hold it, and your financing is coming from a private lender, I'd say pay 65k. HML's only pay up to 65% ARV.
You could also maximize your profits by offering a seasoned discont mortgage to the seller. It provides him with a steady monthly income he can use to help pay his new mortgage.
You can get a 50k face value mortgage for 35k cash, payable at closing.
Using that along with cash at close can put an additional 15k in your pocket. All with no money out of your pocket (except for the points on the loan, but that can be negotiated into the close)
@ 77K this is how it pans out.
100 less 6% realtor(actual 7% with closing)
-7
93K Less 6months @ 12% interest only 770*6=4620
88K less 7K in repairs
81K-77K
profit 4K in 6 months not counting you 3 points. I don't work that cheap. That is worse case but count on that and anything better is profit.
Just a thought
Sire
Sire:
That was good, however you forgot a
couple things. What was the acquisition
cost to purchase this property? You have
escrow, fire ins, title, etc... to consider.
Also, selling cost is typically 9-10% if you figure in escrow, title, home warranty, termite, taxes, etc...
You are right! I dont work that cheap either. I posted this as a good excercise for people to go thru.
Best Riches,
Jeff Adam
[addsig]
Not a bad exercise Jeff, but you don't give enough info to get a real good response and you constrict the resell too much.
Is this house a REO, pre-fore, or just a seller needing out?
Are the repairs for fairly major items like kitchen or a/c-heat, or just some paint, patch and carpet type repairs?
Different answers to these questions would require different responses to make $10K.
But, making a few assumptions, I give you a possible. Bank owned property, FMV of $100K, asking price that or close, $7K repair, mainly P,P&C.
Offer $70K, get financing for $80K (not hard with a good mortgage broker). $10K difference covers repairs and closing costs.
1 month to fix. Your total PITI shouldn't be more than $600/month.
Sell owner financing for $110K, $10k down, $800/month PITI, 2 yr call.
Total out of pocket about $1200.
Total return: $10K upfront, $4800 on the spread, and $20K on the backend.
Roger
Quick run through the numbers brought my top end at 70K.
It will vary from place to place also. In certain areas you may pay as much as 2 - 3% transfer tax.
Other costs mentioned above such as cost of the money, holding costs, extra money for repairs because it is never what meets the eye, holding cost, advertising, etc.....
Roger and Thomas:
The property is vacant, owned by the bank. The repairs total 7k, just basic
paint and carpet. You are going to sell it for $100k with buyer getting new loan.
No owner financing. Roger, give the others a chance to post their reply. I know you have the solution.
Come on everyone, give it a shot! You need to start from the beginning:
-Purchase price
-Acquisition Cost
-Rehab =7K
-Carrying Cost (figure 6 mos)
-Selling Cost =9% x 100k
Best Riches,
Jeff Adam
_________________
"The only place success comes before work
is in the dictionary."
[ Edited by JeffreyAdam on Date 02/21/2004 ][ Edited by JeffreyAdam on Date 02/21/2004 ]
just a few of questions on this one guys. where did the $1200 out of pocket expense come from(posted by roger) and why not owner finance/ what is owner finance? what is offering a seasoned motgage?
the new guy
joe
OK Jeff, here's my try. This is my first post, please be kind, and I'll include all costs as I see them.
100k ARV minus
8.5k Repairs (I always include 20% extra)
6k Agent commission
3k Closing costs twice
3k Points to HML
10k PROFIT
5k interest for 6 months holding
1k Insurance
So, my answer is 63.5k MAO. Don't know if it's close or not, but that's my answer.
Hi Joe:
$1200 for 2 mos payments. Owner financing is when the buyer does not get a new loan and assumes existing mortage "subject to". A seasoned mortgage is one that typically has 12 mos payments on it. Some lenders consider 6 mos, it varies lender to lender.
Jeff Adam
[addsig]
Paul:
I am impressed. You don't know how many times I have thrown this drill at
people who want to get into the business and say the answer is 80k
Remember the 5 things you always have to consider when flipping:
-Purchase price
-Acquisition Cost
-Rehab Cost
-Carrying Cost x 6mos
-Sales cost 9-10%
On the sale end of it, you are going pay
around 9-10% of sell due to all the garbage cost such as homewarranty,
termite, taxes, title, escrow, reconveyance, FHA non-allowables, etc..
So your closing cost will be a little more than on the purchase. You figured 3k
total. It would cost you around 3k on the sale in closing cost to cover items mentioned above. Your insurance can be a forced policy by the lender for around $400.00. You upped your carrying cost, so you were fine! Great job!
A suggestion to cut your cost is to find
private money. List with an MLS service
or 1% agency or sell yourself. Work a deal out with an escrow co. for flat fee.
Work a deal out with a title company for a good rate and always purchase title insurance with a binder! Will save you
a ton. When you receive an offer, counter back that you will pay only $1100.00 in FHA non-allowables. These are garbage fees by the lender. If you see a house in the middle of the block and you know you can sell yourself and you really want to buy it, then pay more if you have to and sell it
yourself! Be flexible. Great Job
Best Riches,
Jeff Adam
_________________
"The only place success comes before work
is in the dictionary."
[ Edited by JeffreyAdam on Date 02/21/2004 ]
[ Edited by JeffreyAdam on Date 02/21/2004 ][ Edited by JeffreyAdam on Date 02/22/2004 ]
Only problem I see is making sure repair cost and purchase price don't go over 65% to 70% of ARV as this is all a hard money lender will finance.
Good information here! My thoughts would have been:
100K FMV
10K sales & closing (although I would a way to do it for less than full commission).
10K profit
7K repairs
73K is the max I would pay, although this would be mitigated by what I figured my closing costs to be.
-e-
someone meantioned title insuranse with a binder, and said this saves money. What is this binder? and how will it save money?
I close in 2 weeks on a rehab I'm doing, 20k in repairs, selling it myself when I'm done. so far, I was estimating 4,500 for closing costs on the sale, as my purchase closing costs are 3,900. does that sound right?
Just to clarify a point, owner financing is not just taking the property "subject to" the existing mortgage, though that is one form of it.
Owner financing is really any time that the owner/seller chooses to take some form of payment from the buyer other than a complete cashout sell. A Contract for deed, trust deed, a 2nd mortgage, and even a lease option are all forms of owner financing.
Roger
Good point Roger! I was just trying to keep it simple. I will let you explain the dynamics of: lease option, 2nd Trust Deed, Contract For Deed, AITD, etc,etc...
Best Riches,
Jeffrey Adam
[addsig]
Jeff,
Lets ad this into the equation.
lets say you are a broker so your commission costs are 1/2.
lets say you are a cash buyer and you dont have to pay the steep points AND interest.
1. would you fiqure this deal as if you had to pay a third party these figures but pay them to yourself instead.
2. would you raise your MAO offer to be able to get your hands on more propertys and beat out the guys that have these expenses even though you wiould make the same money as they would if they had gotten the deal?
Good point Wheeler. When I first started out in 1995, I noticed a guy at a HUD auction paying a lot more than I was.. I thought he was crazy. Guess what? He was paying cash! I was paying an average of 7-8K on loan and carrying cost after all the dust settled.
To answer you question, yes if you are paying cash, you can destroy the competiton! I would also recommend
that you use one of those MLS listing companies or a 1% broker. I have a deal worked out with my broker and pay her 1% for volume. I also use one of those MLS services. In the summertime, I let my broker handle all
sales, so I can go play!
However you can cut cost is the way to go. You have to be that "transaction engineer" and make it happen. A nice house that I really want, I switch my strategy and pay more, sell myself, use cash or a credit line to purchase.
I also recommend all investors to build a repore with an escrow and title company and work out discount pricing for volume. You want to also build a repore
with a termite company believe it or not.
The deal I have worked out is I handle all the wood repairs and the termite company handles all the chemical work.
This will save you a bundle!
Best Riches,
Jeff Adam
[addsig]
FMV 100,000
-minus Max Bid $47,000
-minus Realtor and Closing Costs $8,500
-minus Clean Up $7000
-minus Misc. $4500
= Profit of $32,700
I would pay no more than $47,000 for the property.
I would like all thoughts, comments, questions or www.concerns.Thanks and God Bless! -Ron
Man, this thread's been around awhile, hasn't it? Let me take my shot at it:
100k
-10k Profit
-7k Repairs
-6k Realtor
-4k Acquisition and holding, Ins. incl.
73k = purchase price
To clarify a couple questions:
-A "Binder" means you only pay for the title insurance you use. Lets say for example you purchase this house for $65,000. Three month's later you sell it for $100,000. If you had a binder policy you would only pay for $35,000 in title insurance! What a savings.
-Jam200- You forgot to include you miscellaneous sales cost I have listed below, otherwise great job!
-Dont forget when you sell a house you are going to pay 3%-4% for items that are always overlooked:
-FHA Non-Allowables
-Title Insurance
-Escrow
-Property Taxes
-Home Warranty
-Closing cost for buyer if any
-Termite
-Misc repairs after their home
inspector comes out and
rips the place apart!
The key is to have deals worked out with your escrow company, title company, termite company, real-estate broker or MLS listing service so that you can benefit from a substantial discount.
Best Riches,
Jeff Adam
_________________
"The only place success comes before work
is in the dictionary."[ Edited by JeffreyAdam on Date 06/14/2004 ]
i always try top sell myself for a couple of weeks if no bites i go a different route :-D
Ah, so you're saying I shoulda subtracted from my offer perhaps another 5k for miscellaneous? Yeah, that's probably right, but, it's almost like we're confusing reality with a school book question. lol Schoolbook would have been what I said, with perhaps 5% for miscellaneous, but reality would be I would have offered about 60k, keeping in mind my max offer amount, and we'd have exchanged counters until we either got to my max, or they'd have taken an offer.
Hi Jeff,
Great post! Can you give a break down of "FHA non-allowables"? What do these entail?
Thanks!
hi all
let me try,
100k x 70% = $70,000 - 7000 = MAO $63,00
one answer was 63,500 & one was 73,00 a difference of $9500
What should be the MAO ???
amynewbie( no deal done yet) :-(
100K x .70 - 10K Repairs = 60K MAO
Jeff,
Is the 100k value now, or fixed up? I don't want to asume anything.
Great Post!!! But for a house that only needs 7k repairs, do you think bank will let go that cheap? it does not matter how much you offer, matters that bank won't accept it!!!
World888:
Great information! In today's market this
deal probably would not happen. Unless of course:
-The BPO came in lower than actual value and their repair estimate was substantially higher. I have seen this happen very often. For example, bank says house is worth $90k based off of an appraisal done 5 month's ago and the Broker said it had $20k in repairs based on estimate by a contractor.
-The house is in an undesirable area making it a hard sale and it has been on the lenders books for a long time.
This excercise was posted for the newbies to realize their "actual" costs associated with buying/selling. All input is appreciated. Thanks!
Best Riches,
Jeff Adam
_________________
"The only place success comes before work
is in the dictionary."
[ Edited by JeffreyAdam on Date 06/15/2004 ][ Edited by JeffreyAdam on Date 06/15/2004 ]
Hey,
If the bank takes an offer or not depends ALOT on how the deal is structured and WHAT the house looks like. If the house looks horrible, it will not sell retail.
So if the $7k in repairs is a bad HVAC and water heater, the house looks okay and will receive retail attention. If the house is painted bright orange in every room and has numerous holes in the drywall, retail buyers walk away, but this is still only $7k in repairs.
If the retail buyers are coming to the table, the house is just sitting on the market, so banks will accept offers.
Great point Bruce.
I totally agree with you! I have also seen fully rehabbed houses sit on the market for 6-12 months and not sell. They were in undesirable areas and the bank could not sell them to a retail buyer. They ended up selling to investors. One of the problems is that a lot of times banks do not get creative when retailing their REO's, where as an investor can offer no-money down deals to the end-users by utilizing programs like:
-Nehemiah
-Hart
With these program real-estate investors donate 7% to the non-profit organization and in turn the non-profit organization will donate 6% to the retail buyer to purchase the house. I would highly recommend these programs. You can advertise in the newspaper:
"No Money Down"
Watch how fast your phone blows up!
Throw that in your bag of tricks!
Best Riches,
Jeff Adam
[addsig]
I typically pay 50% to 60% ARV on all investment properties. This one would be no different.
I wouldn't offer more than 60k
Josh
1ST... $10K in profit is not worth all the trouble of renovating the house. $20k Minimum. 2nd I wouldn't list it with a realtor I would sell it myself.
3rd I would pay LESS THAN $63,000. (much less)
Just my 2 cents
JB
Quote:
On 2004-02-19 19:42, JeffreyAdam wrote:
If you were to find a house worth $100k,
with $7k in repairs and you wanted to
make a profit of $10k, what would you pay? The house is a vacant REO owned by Washington Mutual listed in the MLS.
You are going to list it with a realtor after
the rehab. You are paying full price 6%
to the realtors to sell it.
_________________
"The only place success comes before work
is in the dictionary."
<font size=-1>[ Edited by JeffreyAdam on Date 02/19/2004 ]</font>
<font size=-1>[ Edited by JeffreyAdam on Date 02/21/2004 ]</font>
<font size=-1>[ Edited by JeffreyAdam on Date 02/21/2004 ]</font>
[addsig]
JB:
Again, this is just an excercise for all to benefit from. Also, when you are doing volume to the tune of 40-50 deals a year, $10k is not a bad profit. If you are a one man operation doing a couple deals a year, I see your point.
Best Riches,
Jeff Adam
[addsig]
I must of course side with Jeffrey, anyting other than his figures are wishful thinking. That measly 10K profit can be eaten up in a myriad number of ways, unless everything else is factored in you are in effect, paying for an education. An education would be cheaper in book form, Buy it Fix it Sell it & Profit by Kevin Myers or one of the ones by Jay Decima would be much cheaper.
Ignorance will soon separate a newbie from his money and put him out of business forever..
[addsig]
Assuming a fix and sell.
If you have to go with hard-money, and have no cash of your own, you won't be able to pay over about 50K, assuming the lender's inspector agrees with the 7K repair estimate. Closing costs typically run about 7-8K, so a 65K loan amount leaves you with only about 50K for purchase. (65-7-8=50)
If you have enough additional credit to cover the amount above the amount financed, you can figure about 14K for closing and carrying costs, 6K for real estate commissions (if you're not a realtor), and 10K for rehab. It always costs more than you think.
Pay no more than 60K for this one, unless you can get conventional financing, with reasonable closing costs. Then you might be able to go up to about 65K.
MDF:
Good point! My figures on hard-money are as follows:
4pts (2400.00 approx)
$1500.00 garbage fees
$1500.00 title, escrow, fire insurance
Total: $5400.00 (approx.)
This is why all super-successful real-estate investors I know have a millionaire in their back-pocket that they can call up at any moment and request funds to close a deal. They typically pay 10% with monthly payments or 12% fee simple meaning they pay the interest occurred when they sell the propery. This is with no points of course. If you have someone with an IRA, they can use it as long as a 3rd party administrator such as Equity Trust is involved.
One other thing you can do to avoid the high price of hard-money is to place an ad in your weekly paper:
"Real-Estate investor with proven track record looking for investors who want to make 12% interest secured by a First Trust Deed".
Watch your phone blow-up especially after the fall of the recent stock market.
Best Riches,
Jeff Adam
_________________
"The only place success comes before work
is in the dictionary."[ Edited by JeffreyAdam on Date 07/28/2004 ]
Interesting..I just closed on a house like this ...FMV was 96K. It was a bank repo that was listed for 77.5K. My realtor 's husband was the lister...she was the buyer realtor so I got first shot at it. It had 11 showings the first day and 3 offers! Ended up getting it for 73,500 and they would throw 750 towards closing. It needs paint and carpet and some flooring all of which I do myself. >
The main point is where the house is located as I rent them ...never flip. I have a house a mile away same area...When I put a for rent sign in the yard I had two couples show up in two hours and 16 different calls by day two. It was leased that week so I could be picky and choosy. There are way too many variables just throwing out formulas. without knowing what kind of area it's in. Yeah you can snag a 300K house for half that but if it's surrounded by trailers (very common to see that here in GA) and no one can afford a 300K house guess what...your going to eat it. I have to finance this one...so it will be 420.00 a month for taxes, insurance and P&I wiht 20% down...rent will be around 750-800 so on to the next one!
[addsig]
Use the (Maximum allowable offer) MAO to calculate your offer.
ARV * .7 - repairs = MAO
In my opinion you should go no higher than 63K.