Ideas for selling ugly houses - Posted by jasonrei

import · December 29, 2003, 10:26am

Posted by Sean on December 29, 2003 at 23:58:38:

Oh I agree carpeting can be expensive, (too expensive in my book)…

Boggles my mind that manufacturers sell the stuff for 60 to 70 cents a sq ft for low/medium grade, and best I can find it installed with medium pad is about 12.50 or something a yard.

Of course if the house has relatively nice hard wood floors, which the vast majority of homes I work with tend to have (lots of older homes around these parts 70-100+ years old, predate by far wall to wall, so often if you rip out the nasty carpet (if it has been carpeted) you will very likely find decent hardwood underneath… unless they have allowed a pet or other issue to stain/ruin them).

Carpets definately help sell a retail house, (unless the hardwood is immaculate, or parque) but as I said before, if sweat equity, giving them a deal, wall to wall isn’t as big of a deal to them. In newer overpriced largely crap homes, you really don’t have a choice, when the only thing under the carpet and pad is plywood or OSB you really don’t have much choice but to recarpet or put down floating floor or hardwood… in the old gems though, you can be a bit more flexible.

Also keep in mind just because I take 2000 of their 2500 they have at the time they close, doesn’t mean they don’t have money in their monthly budget to afford more work in the 60-90 days or whatever I give them. IE they may make 3-4k a month net, their rent + utilities may be 1000-1200, other misc may add up to another grand… but that still leaves 1-2k for them to put toward repairs… and also, the neighborhood this is in is definately more blue collar, so they may know someone, or be related to someone, who works as a carpet installer by trade so for them it truly is a straight cost… etc.

As I said these are my first two that I am doing this way, and so far so good, but darned if I am not getting more action and interest on these than I have had on immaculately finished products. I hadn’t done any marketing for these homes in the least, other than putting them on my web site as possible sweat equity deals and I am getting as many if not more calls on these 2 than I have been getting on the ones I have completed and are actively marketing… Now obviously this approach won’t work with all properties, but for a 5-10k rehab where you are talking most of the work being painting and finish work (cabinetry, updates etc) but no real major issues… I definately will be keeping this option open in my arsenal provided these go well.

Moving the completed product has been more of an issue for us so far than anything, so having someone in the property who we know we can get some sort of financing lined up before we even close on the property ourselves is definately a HUGE plus. And frankly the profit margin doing it this way is larger than if we rehabbed and retailed it ourselves… so more money, doing less actual work ourselves, definately has advantages.

Haven’t been to Weirton in a while, don’t get there often. But I’d be more than happy to get together for a drink and swap experiences next time you are this way.

import · December 29, 2003, 10:26am

Ideas for selling ugly houses - Posted by jasonrei

Posted by jasonrei on December 29, 2003 at 11:26:20:

Common scenario for me: Buy a house for $35k, put in $10k work, offer for sale for $65k. Probably looking to net $10-15k after all’s said and done.

Then I see these REO properties come up for sale. Would retail for around $70k after $10k repairs. They sell for $60k AS-IS!

So I’m thinking of taking title to houses using a dummy corp, and using my own finance company. I foreclose on the corp that bought it, and list my property for sale as an REO. Seems like I’d net about the same, with WAY less work and risk.

Rehabs are okay, but repairs hardly seem necessary the way the market is right now; maybe the added work and risk aren’t worth it. It would take only a little longer to foreclose than it would to rehab, less time if I executed a deed in lieu thereof. Besides, lenders don’t seem to care about title seasoning when the seller is another lender.

Any thoughts?

import · December 29, 2003, 1:35pm

Re: Ideas for selling ugly houses - Posted by rm

Posted by rm on December 29, 2003 at 14:35:47:

Why not just set up a corp. with a name similar to Homesteps or Homecomings or FNMA, etc.

Then, you could call the company a financial institution.

Put in the remarks section, “Proof of funds from endorsed lender must be submitted with offer. Buyer must sign a special addendum.”

Have an overly long disclosure and 10-page addendum typed up and suddenly, you’re a big REO company!

import · December 29, 2003, 12:07pm

Re: Ideas for selling ugly houses - Posted by Rob FL

Posted by Rob FL on December 29, 2003 at 13:07:58:

Why not just wholesale the property to a rehabber instead? I normally can wholesale my fixers within just a week or 2 without ever even having to close on them - except for bank REOs that often require a double closing.

import · December 29, 2003, 10:41am

Re: Ideas for selling ugly houses - Posted by Sean

Posted by Sean on December 29, 2003 at 11:41:51:

Why go through all that? Why not Sell them on “work for equity, sweat equity” to buyers?

IE Buy the 65k house for 35k, needing 5-10 in work, do the big stuff (major systems, windows etc) but leave the putzy stuff, carpet, bathroom update, kitchen update drywall and paint for the Retail buyer?

IE sell it to them with sweat equity, IE if I finish the house it will be 65k… however if you do the little stuff, we’ll credit you 5k for it, and you’ll be getting it for 60 (65k - 5k credit for the sweat equity)…

I am working on 2 deals like this right now, and so far so good. And its great, because I get my payday a lot sooner and have someone else paying the financing charges while the fix up is happening etc.

I am putting them into the house with Lease/Option they are giving me a few thousand option consideration, paying me rent while they do the repairs, and the lease spells out exactly what they are to do, when they are to have it done and WHY they are doing it (credit toward sale price). No foreclosure needed if they default. They do the work, and we work to get them cashed out… make way more money this way IN THE RIGHT neighborhoods than fixing them up to sell myself I am learning.

Just have to be comfortable they can do the work that you are leaving for them to do, make sure the schedule is spelled out and followed up on and I also require them to do some of the work as well as option consideration before they move in.

Just a thought.

import · December 29, 2003, 4:00pm

Re: Ideas for selling ugly houses - Posted by jasonrei

Posted by jasonrei on December 29, 2003 at 17:00:31:

The rehabber, unless they were an absolute beginner, wouldn’t pay what I wanted. I see a lot of beginners overpay for wholesale deals, and end up making nothing. I buy wholesale myself.

If I can flip a deal and make $7k, or rehab it and make $17k, I’ll do the rehab. What I’m talking about is doing less than $4k work and selling to a retail buyer for a net that’s very close to what I’d get if I’da actually done the rehab.

import · December 29, 2003, 10:46am

Re: Ideas for selling ugly houses - Posted by jasonrei

Posted by jasonrei on December 29, 2003 at 11:46:58:

I’ve tried the “work for equity” deal and didn’t have success, at least not in the limited situations I tried it in.

Yes, it might make sense to do roof and foundation for the retail buyer, maybe even central AC.

I’ve got 2 houses right now that I’m offering before repairs.

import · December 29, 2003, 6:46pm

Re: Ideas for selling ugly houses - Posted by Rob FL

Posted by Rob FL on December 29, 2003 at 19:46:42:

Then list in MLS or advertise it as a retail property. In the past I’ve called these type of properties a “retail flip”. The only problem I’ve run into on occasion when trying to sell retail without doing much in repairs is the old monster called “title seasoning.” If you can get around that you shouldn’t have a problem. I’ve done several retail flips in 2003. It’s a heck of alot easier than rehabbing and pays just as well.

import · December 29, 2003, 10:55am

Re: Ideas for selling ugly houses - Posted by Sean

Posted by Sean on December 29, 2003 at 11:55:42:

Jason,

Yes, I do all the major stuff, unless the buyer can convince me of their skill. I make sure the house is livable (furnace, electrical updated if needed, and I do the windows too, just because that way I know they are done.) I leave the more mundane stuff, new floor coverings, drywall, plaster, paint, fixtures etc… for the home buyer.

I find it to be well worth the trade off, the two I have tried this with I had sold as soon as I closed on them. Basically I find out what amount of cash the buyer has available, say for example its $2500… so I’ll say something like, ok you give me $2000 when we sign the paperwork, and that will leave you with about $500 which should be more than enough for paint and supplies to get the drywall and painting done… We will plan for a move in date of say Feb 1, that gives you a month to get the painting done… (and I make it quite clear they are not moving in until some minimal amount of work is done, and I have a schedule of everything that needs done and the time frame it needs to be done by) I know their income and expenses so I know they can afford to get the rest fo teh work done, especially if all they are doing is paying for supplies out of pocket…

I also know that I won’t be worrying about having to finance out of my bridge money if I don’t get a buyer in 6 months or a year, because I know going in if they keep their word, I’ll have no issue finding them some sort of financing to buy the house…

Obviously in the upper markets this doesn’t work, but I am finding more than enough buyers hounding me in the lower markets that I will definately take this route when it makes sense in the lower markets.

import · December 29, 2003, 11:10am

Two questions… - Posted by randyOH

Posted by randyOH on December 29, 2003 at 12:10:35:

Sean,
In your scenario above, I have two questions:

What about carpeting. That is expensive, a lot more than $500.
How do you keep them from moving in before they are supposed to? They already have the keys, right?

Thanks,
Randy

import · December 29, 2003, 9:54pm

Re: Two questions… - Posted by Sean

Posted by Sean on December 29, 2003 at 22:54:00:

Oh and I forgot to mention, if they choose or have an issue not doing the carpet… it doesn’t affect me as much… if I am trying retail the house after rehab I definately want the carpet done, but since they are the buyers anyway, house just has to be good enough for the bank to feel comfortable with the loan and the appraisor to justify the price. Older carpet won’t affect either of those two things… but leaving older carpet in in a rehab that definately could slow down my selling…

So the level and amount of rehab may not be as great, or need to be, as I know I would have to do if I were going to complete all repairs and retail it personally…

import · December 29, 2003, 11:51am

Re: Two questions… - Posted by Sean

Posted by Sean on December 29, 2003 at 12:51:26:

Randy,

Well I don’t have them do ALL the work before they move in. Say a house needs plaster, paint, carpeting, new fixtures in bathroom and lighting fixtures throughout, a new furnace and new windows. And I am flexible, I have no problem putting in the carpeting, but if I do it, the cost for the house goes up, and the discount they get for sweat equity goes down. Remember this is a home owner, generally looking to do the work themselves or their buddies and friends will help them, so to them most of the costs are materials to them… and as we all know materials are a lot less than labor… so if I discount the price by what basically boils down to materials… I am still sitting pretty at the end of the day. Say the repairs I leave for them are around 3k in materials, I deduct the price by 5k… but if I had to have my contractors do the work that work would have cost me 5-8k or so… so I still wind up in a better position and the buyer is happy too because he’s getting more house than he knows he could get otherwise.

Lets face it if I credit him 5k for the work, let him live there as he does the work (ie 60-90 days to get the rest of it done) and he already has 2k to me, that’s a total of 7k credit toward purchase price/down payment for what equated to 5k-6k in his monies over a period of a few months… so he’s 10% into the purchase price… He’s paying his down payment in over time, just like a lease option with rent credit, its just he’s doing it with his elbows as well as his pocket book. Don’t ask me why, but there are people in this world that if they could honestly afford to put $500 a month into an account to save up a downpayment never would manage it, but if they had to spend $500 to fix up their home will stick to the program… (cash just burns through their pockets). And if they want to put the carpet on a credit card they have, so be it, or finance the carpet, so be it, its in their name, not mine… etc. So you see its up to them to get it done, not me.

I would do the furnace and the windows and make them responsible for everything else. They tell me they have 2500 in cash today, and because I know what they make and what there bills are, I know what they can afford to put into supplies in the future.

So I would do something like this:

House is appraised at say 65k after repair,
They give me $2000 option consideration of their $2500
Rent payments begin say Feb 1, 2004, for $700 a month
They can’t move in until plaster and painting is done, rent is due either way Feb 1 either way.

That gives them more than enough time and money to get it done.

Now part of their lease will spell out exactly what else needs done and the time frame it needs to be done by and WHY they are doing it… if they violate any of that I simply evict (remember they are on a lease, not a purchase agreement… and the lease and option are tied together if they violate the lease in any way the option is dead and they forfiet their 2k in cash)

Then since I know what they make a month and what there bills are, I know they can afford to do the rest fo the work in the time frame provided… and yes I do check up on them and if they don’t live up to the agreement they are in violation of the lease. So you see that $500 isn’t for the carpet too, just for the paint and plaster, but I know they have enough money every month to do the rest of the work… otherwise I wouldn’t rent to them.

Now as to keep them from moving in early, if they move in early, they are automatically in violation of the lease agreement, they forefiet their $2000 option consideration and are evicted.

Yes they do have keys, but before they get the keys I already have their money, and since if they move in early they are in violation of lease and face eviction.

Now obviously you have to screen them just like anyone else, and you better believe I am checking up on them routinely to make sure the work is done.

Certainly there is some risk, but honestly not any more than putting a regular tenant in a completed property… they can’t do any more damage than a standard tenant could do, and frankly they have more to lose if they do screw up… Tenant I get their sec deposit and get some judgmenets, I don’t know where you live but $2000 plus the time and materials they put into the house definately is a bigger club than losing their piddly $700 security deposit.

So yes, there are some risks, certainly, but the pay off is worth it with the right buyers. Remember, I am working with people who want to buy, not rent.

import · December 29, 2003, 9:57pm

My experience… - Posted by randyOH

Posted by randyOH on December 29, 2003 at 22:57:54:

Sean,
I have done a couple of these and they went fairly well. I agree with your thinking completely.

I was just looking for some idea on carpeting because it is so expensive. My thinking is it is in the same category as the furnace, something you have to put in for them.

If they have $2,500 and they give you $2,000, no way they are going to be able to have the place carpeted.

Anyway, I surely appreciate all the advice you have given me. I am only about 100 miles away from you when I am in OH. In fact, I use the Pittsburgh airport. Maybe we can have lunch sometime, on me. Do you ever get over that way? Wierton, Cadiz?

Take care,
Randy