Posted by HR on December 07, 2000 at 07:51:50:
Geoffrey,
Phil is giving you good advice (as always). Here’s a few thoughts about using re agents to find rehab deals.
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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.
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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.
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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.
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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? 
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:
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If you don’t have some of the rehabbing seminars, buy them. They are wortht their weight in gold.
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you have a great reia club in Atlanta. join it today. You will learn more than you ever imagined possible.
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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.
HR
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! Cheers.
