How To Figure Cost Of Repairs Before Making Offer
Hello!
I live in Chandler, AZ (suburb of Phoenix) and I'm ready to begin my career as a real estate investor. I would like to start out wholesaling.
I've read a few books about wholesaling and I have been reading posts in this forum for a few days, but I'm still sketchy about a few things, that I would like to get some feedback on, if possible.
My main question is, once I find a house that I think might be a wholesaling possibility, and I've contacted the owner/ seller and actually done a walk-through,etc., how do I accurately figure the cost of repairs so that I can figure an good purchase price? I realize that I can ask the seller what his/ her opinion is regarding the repairs that need to be done, but obviously I'm not strictly going to "take their word for it".
The books that I have read state that you can take a list of possible repairs to the house with you when you walk through it and fill in the blanks with repair amounts that you think would suffice.
However, since I've never done this before, I would not trust mysef to notice every repair that would need to be performed (especially plubing, electrical, foundation issues), let alone accuratley estimate the cost of these repairs myself.
So, should I hire a local "handyman" to walk through with me and estimate the total cost of repairs before I give the seller an offer? Are there any other options that anyone has tried that worked? If I do need to find a local handyman, what is the best way to go about doing that and how much should I pay them? Should I pay them a flat rate every time they look at a possible deal with me, or should I pay them a fee (flat rate or percentage?) only on the deals I actually end up going through with?
Please help! I really want to start finding houses, but I'm nervous about this particular step in the process. Thanks so much!!
Sandler :-?
I have not done as many of these deals as others so this is just my view.
I always try to get a quote (1 and sometimes more then one) from the person who will be doing the work if I get the deal. I want them to be comfortable with the numbers before I lock them down with the seller.
Sometimes the quote is before I make an offer and sometimes the quote is after I have an accepted offer. Here is my preferred approach.
Find deals that look good and sign an earnest money for a great price and terms based on what you know.
If you put very little into the earnest money and agree that the deal is subject to inspection or subject to review by your partner then you can lock up the deal before you worry about the repairs.
The idea here is you only have to bring out your handy man or the investor who is interesed in buying from you after you know the seller has signed the deal (you have control)
1. If the numbers look good after the inspection then move forward.
2. If the numbers look bad (more repairs then expected), you can decline to move forward (if you wrote the subject to clause correct). Expect your earnest money back. The earnest money could be a note that you just terminate.
3. If you are heading down path 2 you can always say to the seller that you are going to have to walk away unless they can make some adjustments to account for the unexpected repairs.
You do not need money to sign an agreement in principle subject to due dilligence.
John
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Thanks, John!
So, if I were to put the house under contract subject to inspection, what is a typical fee for a handyman to come in to check it out? (I would rather have a handyman come in before I take the contract to a rehabber for my first few deals, so that I can build a good working relationship with the investors on my buyers list. I don't want to waste their time getting houses under contract that need too many repairs that the selling price wouldn't work for them.)
Does that make sense?
Does anyone else have any suggestions?
Thanks!
One day I walked past a home that was in the very beginning stages of rehab; in fact. none of the work was even done yet. Like you, I was just starting and had no idea how to figure out prices for repairs and how/what to look for. I figured what the hell, so I poked my head in the door and called to the guy standing in the living room with the tape measure. I introduced myself and told him I'm just getting started in the business and I was wondering if I could walk through with him to see how he determines needs. He was very receptive. Big Eagles fan too... they had just beaten the Giants, so we were both in good spirits.
We walked each room and he told me what he looks for. He also gave me price estimates as we went. When we were finished he also gave me some advice for doing this on my own.
Collect as many home improvement catalogs as you can for prices of supplies. Generally the charge for work would be the price of supplies x 2 + 10-20%. Walk every room thoroughly and take nice big notes on a legal pad for each room. Let the owner see that you're diligent by noting every single fault. Take you notes home and start loking at prices for the things you need; sheetrock, carptet, kitchen cabinets, paint, etc. Apply the formula to the total price of supplies. That should give you a good working number... then round it up to the next 5k. From here you can determine where you should be as far as MAO after repairs factored into the ARV and holding costs for the rehabber.
Do all of this before making your offer. You can do an option, or just use a standard purchase contract... but be sure to include an approval clause which will give you an out in the event another investor cannot make the numbers work.
When making your offer, keep your MAO in mind, but never mention a price first!!! He who mentions price first, loses.
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A seminar selling the Ron LeGrand program laid out the flipping as very simple.
1) Find a property needing rehabbed, well below ARV after repair value, not in war zone.
2) Ask the 3 questions to get the lowest price seller can accept.
3) Place a simple ad: Handyman Special Cheap Cash Phone in the daily paper for 3 days.
4) Write down every caller and what they can do to purchase, what they are looking for, build a buyers list for later.
5) Callers who are rehabbers, make sure they have cash and can close quickly, send them to the address, say to look inside, call with an offer quickly because you've sent several other rehabbers.
6) Accept the highest offer, close immediately. Simultaneous close.
$1 or $10 binder to seller, $500-$1000 earnest money from buyer.
NOTE: I'm going to start saying "Rehabber Special, to hopefully weed out the calls from the ad.
Ron says to get $5,000 really $10,000 on a simple flip. Just choose the highest offer. If there's not enough profit, the contract states a way out. Tell the seller you should know within 10 days if you will be able to fulfill the contract and close the sale. If not enough profit, tell the seller, as quick as possible, you're an investor and there just is not enough profit for me. Here's your property back. If they truly want to get rid of it they will ask what price you need. Ask what is the best they can do. You already know where your rehabbers sit.[ Edited by bollinproperties on Date 05/28/2004 ]
They oversimplify the process to entice seminar attendees to plunk down a couple grand for the "Three day intensvie bootcamp we will conduct when we come back to town in a month! Get your checkbooks and follow me!" If it was that easy, everyone would be flipping.
BTW, Ron LeGrand is a glorified mouthpiece for a success development company who teaches CREI and other SD type programs. His program was recently liquidated and reduced from the $1500 tab down to $250 to $300.
They don't bother to tell you about the importance of contracts, title searches, comps, walk throughs, building buyer lists, among many other things. Also, repeating those magic 3 questions will usually result in the phone being slammed down in your ear. It's irritating. The best way to get a price is to determine what your seller needs for satisfaction, not beating him down.
If you're going to rely on a 2 hour seminar to educate you in wholesaling, you're heading down a path of frustration with no net results. That's why they sell bootcamps!!!
Educating your self is the most important thing, even if it takes months. It's easy to do. The hard part is finding a system that works for you. Don't rely on the advice of LeGrand, Allen or other used car salesmen as your sole source of information.
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