Anyone Doing Inner-City Rehabs?..JPiper and Irwin For Sure. - Posted by MN~Chicago

Posted by MN~Chicago on September 06, 1999 at 20:48:47:

When this situation was proposed, I met
this person for coffee because he sounded
enthused and serious, which he is.

What I lacked was the pragmatic experience,
which is what I figured you could provide.

Which is what you did.

Which is why I value your reasoned input.

Many thanks, again, Jim.

Anyone Doing Inner-City Rehabs?..JPiper and Irwin For Sure. - Posted by MN~Chicago

Posted by MN~Chicago on September 06, 1999 at 13:53:05:

The situation arises out of a search for note
business. I was asked if I would take back
notes on inner-city rehabs. The scenario made
sense for doing rehabs, less so for notes.

Jim Piper’s dueling lease options with Ed Garcia
below already addresses the issue of carrying
notes on the end which may never pay off. Thanks,
Jim for answering that question before I could
ask. Your prescience is appreciated.

This person is of the belief that he can get
5 - 10 properties per month for rehab, in
admittedly dicey areas, and get buyers for
them, as well. He works for a mortgage broker.

It seems more of a knee-jerk response that
advice is offered to stay away simply because
of the areas under consideration. There is
some merit in caution, a given. However,
not everyone can afford to live in trouble-
free areas, and there are many people who
want and need a place to live, if one were
available and affordable.

This is not a do-gooder plea, but a pragmatic
posing of a question: Is inner-city rehabbing
wrought with too many problems/headaches that
one should concentrate elsewhere in that the
problems/headaches do not make ANY profit
worth the time and effort?

My end would be getting the financial backing,
and not my exclusive area of interest. This
individual has contractors, etc.

As Ed Garcia so eloquently stated, “With the
available financing today, you can even finance
the dead.” That is not what I am proposing.

Live example. He has a property available for
$15,000, another $15,000 in fix-up, estimated
after-fix-up value, $60,000, 80% financing,
and originally proposing notes for the balance.

Allowing 25% for financing/closing costs, there
is about $8,000 +/- left, not including taking
back 20% in notes, which I would expect to be
paid, but prepared for them not to be in all
instances. Integrity and willingness to pay
is not exclusive to better areas.

My thought would be to do one or two, have a
track record, and get 90% financing to have
far less exposure.

Jim, I have seen your posts about properties in
marginal areas, so I know you speak from on-the-
site experience. Irwin, you have knowledge in
these areas as well.

All input is appreciated.

Re: Anyone Doing Inner-City Rehabs?..JPiper and Irwin For Sure. - Posted by Irwin

Posted by Irwin on September 06, 1999 at 21:12:52:

Since we all know the upside of investing (you make money), with this type, one has to look at the negatives, because those factors always impinge on the upside potential. What I see as the negatives are:

l. Difficulty in protecting the rehab work as it’s being done.
2. Finding QUALIFIED buyers who want to live in that paticular neighborhood. THIS IS THE BIGEE. You can pro forma deals all night long, but when all the prospects tell you they like the house, and they’d love to live in it, if it were just in some other neighborhood, you get a really sick feeling in the pit of your stomach. Therefore, you have to analyze the whole neighborhood carefully, not just the home in question, before you buy. If the majority of homes are rentals and not owner occupied, I pass.

  1. Your carry back paper is pure gravy, if and when it is paid. In your example though, I’d be thrilled to pay $15k plus $15 rehab, if I could find a good 80% buyer for a $60k appraisal. Your net would be about $14K plus interim rent, plus the “if come” carryback of about $15.

  2. Every city is different, so what applies for medium sized cities might not be applicable in larger cities or smaller towns.

  3. I doing real hard core inner city rehab, I prefer areas that other’s (including the city itself) are also rehabbing. Avoid areas where you think it’s a good one to bring back, but you seem to be the only one doing it.

Hope this helps.

Re: Anyone Doing Inner-City Rehabs?..JPiper and Irwin For Sure. - Posted by Dan

Posted by Dan on September 06, 1999 at 19:57:38:

I agree with much of what Jpiper had to say.

Finding plenty of product (motivated sellers) in the inner city areas/ lower income areas the easy part.

Selling them is another issue - in fact it can be out-right exhausting, you will have to respond to lots of phone calls from potential buyers to find the few who are credit worthy. I returned over 70 calls this week, I begin to sound like a broken tape - as I quiz them on thier income, down payment, credit etc.

There is a lot of “hand holding” to help buyers secure financing.

In my area I can net as much in the city as in the suburbs, but you have to be “very involved” with each buyer, helping them put thier documentation (i.e alternative credit etc.) together can takes hours and hours of time.

Also, unlike surb. properties some inner city areas can change street by street - so you have to know your area very well. I agree with the advice to try one and see how it goes - if it goes well there will always be plenty of deals waiting for you.

Re: Anyone Doing Inner-City Rehabs? - Posted by JPiper

Posted by JPiper on September 06, 1999 at 16:45:52:

Michael:

I’m not really sure what your function in this deal is?..but here’s a few general comments.

Marginal areas can be worked profitably?..but whether any particular person can accomplish this is another question. Marginal areas require special talents, talents which are not necessarily developed overnight.

Marginal areas typically involve older houses. The rehab of an older home is often more problematical than newer type homes. Sometimes in the process of correcting one problem, you’re confronted with another, or perhaps 10 more. Many problems are hidden?that is, they’re not obvious through a visual inspection. The result of this is that rehab costs are sometimes difficult to estimate?.and in my case almost always seem to exceed my estimates.

There are contractors and then there are contractors. Working on older houses takes ability that some contractors don’t possess. Many times contractors will take on jobs because they THINK they can do?but when confronted with the reality of an older house either are required to raise their estimates or walk off the job. This creates contractor turnover?.something I’ve experienced a lot of.

So when you start talking about 5-10 rehabs per month?.I start to wonder?.who are the contractors? What are their qualifications on older homes? Who will be supervising all these contractors? And remember, doing 5-10 at a time requires special talents in and of itself. This is not going to be an easy task even to monitor. I start to wonder just what the qualifications of this rehabber are?and whether anyone knows whether he is up to this task. What looks good on paper sometimes differs sharply in reality.

Then there are the buyers. Typically the buyers are lower income people?..many times with credit issues. People from this income category often have problems, despite the best of intentions?.things like job injury, job loss, layoffs, and no sick pay or sometimes other benefits. This means they’re vulnerable?and therefore so are you. It takes time and effort to work with these and other problems. It’s time intensive.

Not everyone has the ability to work with buyers like these. It takes flexibility, the ability to at times be pretty hard core, and decent knowledge of the legal system at times. Some people don’t possess all of these qualities?.or even some of those qualities.

Having said all this, marginal areas can be lucrative?and the spread can be there to more than compensate the difficulties. But of course that presupposes that if you’re compensated you can perform the things that are needed. A somewhat poor comparison might be that someone could offer to pay me to be an olympic high jumper?.but that doesn’t mean I can do it.

If this person proposing this idea to you doesn’t have hands on experience in these areas?..I would be quite reluctant to deal with him. If he does have hands on experience?.I would want to see it. See the houses, see the closing statements, talk to some of the contractors, etc In short, make sure you do your due diligence. Marginal areas aren’t areas to learn basic investor skills in my opinion.

Again, I’m not sure just exactly what is being proposed to you?.and how you fit into this. If you care to post that perhaps I can amplify somewhat.

JPiper

Hunger Distortion - Posted by MN~Chicago

Posted by MN~Chicago on September 07, 1999 at 18:11:38:

You are absolutely right about looking at
the downside. The appetite for making deals
sometimes hazes vision. I knew some of the
caveats, but I always prefer trusted information.

Thoughtful points, and appreciated.

Back to the hors d’oeuvres.

Re: Anyone Doing Inner-City Rehabs?..JPiper and Irwin For Sure. - Posted by MN~Chicago

Posted by MN~Chicago on September 06, 1999 at 20:51:22:

Dan:

Thanks, I appreciate your sharing the
information.