Working with Real Estate Agents - Posted by Geoffrey Faivre-Malloy

Posted by HR on December 07, 2000 at 07:51:50:


Phil is giving you good advice (as always). Here’s a few thoughts about using re agents to find rehab deals.

  1. You need to be real specific about what you want. I don’t see any comment in your search criteria for condition of the house. You should only be looking at stuff in fair, poor, or maybe good condition.

  2. there is no substitute for looking at properties. The key, though, is to have narrowed down the properties you look at as potential good deals so tht you aren’t inspecting to just calculate repair costs, but the very listing as it now stands in the mls itself suggest it already may be a good deal.

  3. you or your wife become a realtor. Want it real easy? Try searching from home, in your pjs, for these things. Bite the bullet. The benefits far outweigh the costs and risks.

  4. specialize in a neighborhood. that way if you see something that looks like it may be a deal, you then are just going to calculate repair costs. Note: this is definately the hard way. Better to chase motivated sellers in whatever neighnorhood they arise than wait for you in your limited, target area. Solution: #3 above.

As far as rehab costs, offers, and mls listing price, you need a reliable formula to help calculate these things. First, whatever the list price is is irrelevant. In fact, it’s only relevancy is whether or not the list price appears to be near the mao or not (more on that in a moment)…

Let’s look at a real rehab deal I’m working on right now that may help.

I bought a duplex out of an estate last month for 10k. The owner inherited a few properties, some worth 100s of k, and this was the oddball. Good! She contacted a realtor who I have done a few deal with, and he contacted me before it hit the mls. Outcome: I buy cheap, he gets 6% commission, and owner gets this dung heap off her plate with an all cash, no contingency offer. Win, win, win.

Ok, the fair market value of the thing fixed up is around 70. (As is, 20k) Here are three formulas many of us you. If you look at the purchase costs, holding costs (taxes, insurance, utilities, permits, etc), and sales costs (6-7%), these will typically eat up about 15% of your after repaired profits (assuming a 6 month holding time to rehab, list, and sell at act of sale). A lot of guys want at least a 15% profit, so when you add the 15% profit with the 15% break even costs, you get 30% (am I a genius, or what? :wink: Now, take the after repaired value and multiply it by .70 (100% of after repaired value - 15% break even costs - 15% profit = 70% or .70) and deduct from that your repair costs and that should give you what many call your MAO, maximum allowable offer.

I run my numbers a little differently. I multiply the after repaired value X .85 (100-15) - whatever profit I want - my repair costs and that’s my mao. I don’t like my profit as a percentage. I like to factor a number into each deal.

Ok, so on my deal, 70,000 after repair value X .85 - 30k repairs - 15k profit = $14,500. So how did I get $10,000? That’s method #3: offer what you think is the least they will take. I use combos of methods #2 and #3. (By the way, when I met the owner face to face, as I requested to the realtor, she, the owner, told me they had another similar house like this one, in slightly better shape, that sold for 12k. I offered 8, we settled at 10, but having calculated my mao, I felt real safe).

As far as 10% or 20% being air, I agree: 15-20%. Given all the costs of just rehabbing to break even (15%), you HAVE TO BUY WELL BELOW 15% JUST TO BREAK EVEN! And that doesn’t even begin to account for the rehab costs or your profit… that’s just your cost to buy, sell, and hold it for 6 months. It’s also “air” in the sense if you need to sell fast, you will need to discount the price to give an obvious good deal to a buyer so they will buy it sooner.

Some final thoughts:

  1. If you don’t have some of the rehabbing seminars, buy them. They are wortht their weight in gold.

  2. you have a great reia club in Atlanta. join it today. You will learn more than you ever imagined possible.

  3. I use realtors to give me leads, and I always use them to sell, but I rarely have a realtor find my deals for me. They just don’t know what to look for in the mls. It’s more than just handyman, etc. And they just don’t get it. Figure out what the red and pink flags are in the mls listings and get access yourself and you will have no trouble finding deals and making super-efficient use of your time.

Hope this helps.


PS. Come to the creonline convention. Buy Phil and me a beer at the bar and we’ll give you a few more tips and war stories, guaranteed to be at least 30% true! :wink: Cheers.

Working with Real Estate Agents - Posted by Geoffrey Faivre-Malloy

Posted by Geoffrey Faivre-Malloy on December 06, 2000 at 17:45:01:

A few observations and then on to my challenge for today…

  1. There are a LOT of real estate agents in Atlanta (and probably other parts of the country).
  2. There are also a significant number of properties listed.
  3. Some of these properties are listed at about 75-80% of their ARV.
  4. I’ve been told that you should never offer more than 65% of the ARV - depending on the amount of repairs that need to be done.
  5. Real Estate Agents (like other people) don’t like to have their time “wasted” on useless offers or offers that would appear to be useless to them.

Now, on to my challenge. I have located 2 real estate agents who have sent me some listings. I’ve got about 20 MLS listings now. Some of them are 75-80% of their ARV from what I can determine with the comps.

Now, I would think that my next step would be to determine what the repair costs are for each house. Unfortunately, I can only do that by driving to each property and looking at it.

If I do that, I will be doing a LOT of driving and significantly less time making offers.

HOW do I determine whether the property is even worth a drive by to calculate the repair costs and thus have calculate my MAO?

I don’t want to have the real estate agents frustrated because they can’t find what I’m looking for and yet I do want them to continue searching.

WHAT type of parameters do you give the Real Estate Agents to use when searching? Thus far, they’ve pulled up stuff for; handyman special, as is, fixer upper, foreclosure, bank owned, and a couple other keywords.

As usual, thanks for all the great advice!


Re: Working with Real Estate Agents - Posted by SCook85

Posted by SCook85 on December 07, 2000 at 08:03:25:

First of all, Realtors feelings need to be respected. (Phil, you are a good friend of mine but I do have to disagree with you). If you churn and burn your realtors then you will always be looking for new ones. If you have a relationship where there is a mutual respect for each other then it is a relationship that can grow and take off- a whole lot better then always looking for new realtors to work with. In time your realtor will know what you are looking for.

As far as those 20 listings go, the first thing you need to do is get all of your comps together. Look at all 20 of those houses and look at all of the comps. You are at a stage in which you have to pay the price of driving around. You need to get to know your neighborhoods. I’ve looked at 1000’s of homes before I have become comfortable with making offers site unseen. But the bottomline is I know the neighborhoods. I know what the homes look like, I know the typical repairs and the worst case scenarios. I know what they sell for, I know how long they take to sell, I know the demographics, the style, the typical number of bedrooms, I know street names and block numbers better then the taxi drivers in my area, etc… You need to become an expert in the area that you are dealing in. You should probably focus on one upwards of 3 neighborhoods to start out with before trying to learn the entire city.

I would get out and look at all 20 homes, look at the comps and make an offer on every single one of them. FORGET ABOUT THE LIST PRICE. I have said this at least 100 times to beginning investors and I hope that you will implant this in your brain. The list price means NOTHING. You need to offer what works for you. I have bought homes listed in the 80’s and 90’s for $50k. Do you know why? Because I offered $50k. If I would have not offered because their list price was much higher I would never have bought the home. Their is a number that works on every property (sometimes that number has the seller paying me, but hey if they want me to take their home they need to make it worth my while).

Treat your realtors with respect, make offers and produce on those that get accepted and you will develop a great working relationship with them.


Re: Working with Real Estate Agents - Posted by Mike-BC

Posted by Mike-BC on December 06, 2000 at 23:48:46:

I have used real estate agents on numerous occasions. From my experience beyond wanting to make a sale, they want someone who is serious about committing to a sale. That is, they are willing to put in the effort to help me find a place as long as I was serious about buying.

Have you purchaed any property through either of the agents? Having done it once will motivate them to search for you again.

Finally, making an offer that the realtor is reluctant to make…I tell them it a starting point in negotiations, and if they won’t rpesent the offer, I will find someone who will! That usually gets them going. Remember, who is the realtor working for…the seller or for you?


Re: Working with Real Estate Agents - Posted by Janice (OR)

Posted by Janice (OR) on December 06, 2000 at 18:57:57:

You could ask, or have your agent ask the listing agent if any T & D inspections have already been done on a property. I always recommend to sellers that they have inspections done so potential buyers know what they are up against. As a buyer, I wouldn’t necessarily rely on the inspection, but just use it as a way to screen out those that have too much damage. Contractors are not going to want to inspect a bunch of properties for free.
Good luck

Re: Working with Real Estate Agents - Posted by phil fernandez

Posted by phil fernandez on December 06, 2000 at 18:13:21:

Your statement, " I don’t want to have the real estate agents frustrated", illustrates to me that you are more concerned with the agents feelings than your own financial well being. Do you think the agent even cares about you. Think about that. Of course not. They are only thinking about their next commission.

Saying that. These properties that are offered to you through these agents at 75 - 80% ARV are probably not going to be deals. First off as Joe Kaiser says. the top 20% of value is often air. Meaning that the equity is not really there in the real world.

Also to determine ARV, you will have to get into the property with a realiable and experienced contracter to nail down the repair costs. Taking your example of 80% ARV and the fact that the top 20% might be air, where is the profit. This is even before you factor in the repair costs.

You better be down in the 50 - 60% area to ensure your profit. And even then you will have to nail down the actual repair costs plus the holding costs to justify doing the deal.

Re: Working with Real Estate Agents - Posted by Geoffrey Faivre-Malloy

Posted by Geoffrey Faivre-Malloy on December 07, 2000 at 14:38:22:

I haven’t purchased any investment properties yet…key word YET :slight_smile:

Is the realtor working for me or the seller…depends on whether it’s the listing agent or not :wink: In either case, as I understand it, they’re required by law to present all offers.


Re: Working with Real Estate Agents - Posted by Geoffrey Faivre-Malloy

Posted by Geoffrey Faivre-Malloy on December 07, 2000 at 14:04:43:

T & D inspections? What does that stand for?


Re: Working with Real Estate Agents - Posted by Geoffrey Faivre-Malloy

Posted by Geoffrey Faivre-Malloy on December 06, 2000 at 18:20:11:

Oooh. Ouch. Gotta love the honesty of strangers. You’re right of course. OK. Time for an attitude adjustment for me :wink:

To paraphrase you, if I look up the comps for each property and the asking price is not 50-60% of the ARV then I shouldn’t bother looking at the property or making an offer. Correct?


Re: Working with Real Estate Agents - Posted by Janice (OR)

Posted by Janice (OR) on December 08, 2000 at 12:30:57:

T & D inspections stands for termite and dryrot inspections, which here in Oregon are almost always required by lenders.

Re: Working with Real Estate Agents - Posted by phil fernandez

Posted by phil fernandez on December 06, 2000 at 18:32:49:

Hi G Man,

Not trying to ouch ouch you, just trying to be realistic and honest. Some fixer uppers just need some new paint others need $30,000 worth of rehab. You will not know until you get into the house with a qualified contractor.

Let me give you an example on how I look at one of these.

FMV after repairs $100,000
air 20,000
repairs 15,000
holding costs 5,000
profit 15,000

I can pay $45,000 for this property. Back your numbers out from what you can sell the property for after repairs. The top $20,000 may or may not be air. But at least its a nice cushion to factor in. Hopefully some of that air will be in your bank account after the sale.

Re: Working with Real Estate Agents - Posted by Geoffrey Faivre-Malloy

Posted by Geoffrey Faivre-Malloy on December 06, 2000 at 19:24:10:

Heh. I want realistic and honest! I’d rather have that than some airy fairy answer that isn’t even close to reality! :slight_smile:

Sounds like I may have to do some driving.