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Real Estate Investing => Rehabbing, Fix and Flip, Rental Properties => Topic started by: alexthegrape on December 11, 2004, 09:41:59 pm

Title: What is Rehabbing?
Post by: alexthegrape on December 11, 2004, 09:41:59 pm
hi guys just wanted to know what does rehabbing mean.
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on December 12, 2004, 03:06:41 am
Hi alexthegrape,

Rehabbing, in my opinion is one of the safest and most rewarding ways to make money in RE and is currently the only area I work. It's a lot of fun to buy a junker house and see it through to it's finished product. Don't get me wrong, I am not a handy person. I work with a contractor and just write him a check to do all the work for me. But I still oversee everything and make sure it's running smoothly.
You should be able to avoid buying a "money pit" if you properly inspect the house and have a licensed contractor go through it.

Let me give you a run down of how a "rehab" loan works. Go through a mortgage broker. My lender pays 80% of the ARV (after repair value). I bought a house this week (REO) for $40,000. It needs $12,000 in repairs. Thats $52,000 total that I'll need a loan for. The house appraised for in the 80's. So 80% of $80,000 is $64,000. That's the maximum they'll loan me. But I only need $52,000. If I am able to sell the house for $85,000-$52,000=$33,000 profit. I didn't factor in closing costs and realtor fees but you get the idea. All I had to put into the deal was a $2500 dollar deposit when I made my offer to purchase.Rehabbing is only one of many ways to make money in RE, but it's one of my favorite. Hope this helped.
Title: Re:What is Rehabbing?
Post by: alexthegrape on December 12, 2004, 04:25:26 am
Hi Mr.fancypants,

Wow, what a great deal. Yes, it seems like the REOs would be the best investment for me. I also enjoy remodeling homes. Did you do the inspection with your contractor before the earnest money or after? And how did you find out the appraised value for the property?
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on December 12, 2004, 06:17:09 am
Yes, I always use my contractor to do a walk-through of the house before I make an offer to purchase. I also get comps from the realtor. I compare the comps and CMA to the tax appraisal that I get at the county tax appraisors office. Mine is online. The key to being successful in RE is doing your homework. And you have to be kind of quick about researching a property, because you need to beat your competition to making the offer. If you offer 80% of the list price and are the 1st to make the offer, you'll pretty much have the deal in the bag eventually, even if the bank counters.
Title: Re:What is Rehabbing?
Post by: alexthegrape on December 13, 2004, 12:29:41 am
Hi Mr.fancypants,

How many properties do you purchase a year? How long does it usually take to eventually sell the property and make a profit?
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on December 13, 2004, 12:46:09 am
Depending on the repairs needed, the rehab could be finished within a month and put back on the market. But it's really kind of a crap shoot when it comes to knowing how long the house will sit on the market. My goal is always to sell a house within 3 months after it's repaired. At closing I usually ask my lender for a repair buffer and I'll take my monthly mortgage interest-only payments out of this, just to keep out of pocket expenses to a minimum. It's a pretty safe way to make money. There's a lot of niches in RE that you can work. But honestly, this is the only one I understand. I am trying to branch out into pre-foreclosures. Good luck.
Title: Re:What is Rehabbing?
Post by: alexthegrape on December 13, 2004, 12:57:18 am
During those monthly period, are you paying for the monthly mortgage with your own pocket money?
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on December 13, 2004, 01:07:15 am
Sometimes yes, sometimes no. It depends on whether or not my repairs are under or above budget. If my repairs are less than what I budgeted well then I have extra money to pay my monthly mortgage. If not, then I'll have to pay out of pocket. But interest only loans are much cheaper than traditional loans. To make $10k or $15k on a flip I don't mind spending $300-400 month, out of pocket. Hope this helped.
Title: Re:What is Rehabbing?
Post by: alexthegrape on December 13, 2004, 01:30:37 am
Thanks it help very much. I dont think I can make anymore mortgage payments that are over $1000. What kind of loan do you use? Are interest only loans higher rates than others? Is it a 15/30 year loan?
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on December 13, 2004, 05:44:21 am
You'd be surprised at how much house you can buy with an interest only loan. A lot of normal people who aren't investors use interest-only loans because for a few years they're really cheap. This allows them to afford more expensive houses. But if you're an investor and you plan on flipping a rehab it's ideal, because you're not paying any principal, only the interest. My lender, which is a bank, only charges me 6% with no prepayment penalty. Here's what you need to look for in a loan:

-up to 80% ARV
-no prepayment penalty
-as few points as possible
-no downpayment
-very low interest rate
(some of these criteria depend on your credit rating, obviously)

I probably forgot some stuff. But yah, if you think this is something you want to do, just go to a mortgage broker that deals with RE investors and find the one that works best for your situation. It's called making money with other people's money. Have fun and good luck.
Title: Re:What is Rehabbing?
Post by: alexthegrape on December 14, 2004, 12:45:16 am
Yes Mr.fancypants, I am very excited. I really want to get started on REOs ASAP now. What are some problems you can run into with REOs?Title problems? inspection problems?
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on December 14, 2004, 07:33:32 am
Clear title should be easy to establish, because the house is fully owned by the bank. But your lender will still require you to carry title insurance (usually less than $500). But if you want to do REO's the only good deals your going to find are those houses that are run down. All other REO's will be sold at FMV. If you find an REO that needs rehab, be sure to get as low a price as possible to allow for repairs. As far as inspections go, just include the phrase "contigent on acceptable inspection" in your contract to buy. That way if you pay your earnest money and find out the house needs $80k in repairs, you can back out of the deal and get your money back. In RE you'll find that every deal is a little different and will require seperate judgement. Hope this helps. Just get out there and start making offers.
Title: Re:What is Rehabbing?
Post by: Crickett on January 09, 2005, 05:08:51 pm
Wow that first reply to such a general question was one of the BEST replies I've seen. Thanks for such a clear, spelled out approach to what sounds like a great way to invest in properties.
Title: Re:What is Rehabbing?
Post by: schielke on February 03, 2005, 05:09:38 pm
I too would like to add my thanks for such great responses Mr. Fancypants.

A couple more questions that are burning in my brain if you don't mind:

1. What resources do you use to identify bank owned property?  Are some more effective than others?

2. How did you go about finding good contractors that you can rely on?

Thanks for the insight!

Title: Re:What is Rehabbing?
Post by: Mr.fancypants on February 04, 2005, 12:01:09 am
Hi shielke,

There are some pay websites that supposedly offer current REO listings. I had very poor success with those starting out. Plus, they were expensive. Now I search listings on the MLS and then take that address to my on-line tax appraisers office. If it says "foreclosure" on MLS, then you know it's been repossesed by the lender. If you see a banks name under where it says "owner" on the tax appraisal, you know it's been repossesed. Those are my 2 tricks. Also, check out REONETWORK.com. Just email all the realtors you find there and tell them you're an investor that buys reo's. The more realtors you work with, the more will want to start selling you houses. If they know you want reo's, they'll show you reo's. Hope this helped.
Title: Re:What is Rehabbing?
Post by: Mortgages on February 06, 2005, 06:50:53 am
Hello everyone!  I was away all last week so I am catching up on posts this weekend.  Mr. Fancypants has got the goods on this one and we have been discussing loans that help rehabbers.  True rehab loans also help with the problem of seasoning issues when selling the property, conventional banks don't want to finance flipping! But when you purchase a bank owned or distressed property the rehab loan helps you get from point A. (purchase) to point Z (sale) without seasoning issues.  During the renovation phase it will require inspection of progress and title updates which will allow you to sell legitimately at a much higher price.  Also good rehab loans will allow you to escrow Mortgage payments so that you don't pay a dime during construction.
Title: Re:What is Rehabbing?
Post by: Ivseenproof on February 10, 2005, 05:38:29 am
Hey Fancy,

Do you mind sharing which financial institution you've been working with to get your 80% ARV, no down pymt, low interest rate and no prepayment penalty.  I have a pretty strong debt to income ratio, solid credit history and nice amount of cash reserves and the companies I've talked to act as if I'm speaking a foreign lang. when I start mentioning the conditions of the loan I'd like.  I've only talked to 4 institutions so far but they all act as if these terms are impossible and I'd like to save myself any unnecessary wheel spinning.  I realize that your experience in the market prob has your lender comfortable w/ extending you these terms and that a newbie like myself will prob have to settle for a little less but I'm just trying to find a company that acknowleges that these kinds of terms exist and one day, when I've proven myself as a savy REI, will extend them to me as well.  Thanks in advance!
Title: Re:What is Rehabbing?
Post by: thob77 on February 24, 2005, 05:08:53 pm
Bring out the "ole dog and pony show".  On my first rehab, I laid out my plans for my REI.  It also helped that I had a standing offer on the table for a property with 2 rehabs on it.  Bankers Like to know that you are serious.  My first 5 rehabs were with the same banker.  We had never met before my first visit.  I laid out in detail what I wanted to do to the properties and how I was going to do it.  I also gave him an itemized cost "gestimate" sheet.  It also helps if you do your best to sound confidant and secure in your plans.  Hey, I was really nervous the first time.  Now me and my banker are on first name bases and I value his opinion on my projects.  I hope this helps!
Title: Re:What is Rehabbing?
Post by: acoolmariner on February 28, 2005, 01:11:08 pm
Mortgages/Mr. Fancypants,

I'm capable of doing very nearly all work on rehabs myself (elect. plumbing, heating I won't do myself). The lenders that I've been working with say they want licensed contractors to do the work. Is that standard operating procedure or are there lenders who will let me do the work myself? Do I need to get a license or is there a way to work around that?
Title: Re:What is Rehabbing?
Post by: Mr.fancypants on February 28, 2005, 04:51:55 pm
I've heard lenders say the same thing. My thinking is that they do it that way for risk protection on their loan. Any joe-blow could run a scam. The thing I recommend is to buddy up with a contractor. I use the same guy on all my deals and we're informal partners. Hope this helps.
Title: Re:What is Rehabbing?
Post by: acoolmariner on March 01, 2005, 02:42:04 am
Mr. Snappybritches,

Yeah, this is what I've been doing and that's been working out just fine. I have the time and the background, but maybe it's better this way anyway.

I just purchased a 3Bd, 2Bath home on a small Island. 1/2 acre, 1200sq. ft., Mountain and Water view on both sides, 135K. Largest lot, but smallest home on the Island, cheapest on the Island by 350-ishK. The shape of the house and the plot it sits on, lend themselves perfectly to the additions necessary to bring the home to neighborhood value, but without looking like they were an afterthought.  I have some experience in home design and have drawn up plans that will increase the sq. ft. to 4000. Comps in the area are going for 490K with 1K less sq. ft. and the last four sold were on the market for 4 days, 7 days, 9 days and 19 days. If I'm already in possession of the property and most of the work can be done by me, if all the permits are in place and it's all to be inspected anyway, would protection still be an issue? Are 'construction loans' looked at differently or does all that money fall under the same type of loan?  Any details are yours for the asking.
Title: Re:What is Rehabbing?
Post by: joehagan222 on March 01, 2005, 05:41:50 pm
If you are capeable of doing all the repairs, find a (PLUMBER<ELECT<Heating & Air>etc person who has a license,and get them to inspect your work. Then you can get them to sign off on your repairs!!!! Useually mine just charges a couple hundred (OR SO) to sign off. According to the distance they have to travel.
Title: Re:What is Rehabbing?
Post by: sestep on March 04, 2005, 12:11:38 am
Mr Fancypants,

Do you know the name of the loan program you are using?  I have 1 rental that I bought in Aug 04 and am clearing $150 a month.  I also just bought a house that I am rehabbing as we speak.  (closed 12/31/04).  anyway, my loans are thru homecomings financial, I have 100% investor financing, I pay slightly higher interest rate for this, and to avoid a prepay penalty I pay a little bit more on interest.  Homecomings will allow you to have 1 million in loans.  Your product sounds better though since I am paying principal.  My husband and I have very good credit, so I would like to check out the same type of loan as you have on my next rehab.
Title: Re:What is Rehabbing?
Post by: acoolmariner on March 06, 2005, 10:46:02 am
joehagen222,

That is a damn fine idea. I never even thought of that as a possiblity. Have you done this before? Is it reasonable to assume that a contractor would put his name to work he didn't do, provided it's done correctly? As a contractor talking to an ex-contractor, I suppose he could tell if it was done right....I could with a Fluke and a few other tools. Great idea. Thanks. -acoolmariner
Title: Re:What is Rehabbing?
Post by: joehagan222 on March 06, 2005, 05:40:47 pm
Hey Cool;

There may be some contractors who will sign off on a job they didn`t do,but I was talking about an indivdual licensed in there field who would like to make a few extra bucks! There are many who work for a large company for wages! They are lead men who usually have a crew under them. I know of several in the D.F.W.Tx. area! You just need to look and ask questions! (OK)!!!!!
Title: Re:What is Rehabbing?
Post by: moke on March 16, 2005, 03:53:29 pm
hi

coolmarine

wen you buy a place you can get a licence from city hall

to fix the place,in a lot of states that is.

if the lender wants you to get a contracter tell them to drop dead.or

#$$^^& off.

go for it!!

moke
Title: Re:What is Rehabbing?
Post by: joehagan222 on March 16, 2005, 08:49:13 pm
 Hi,

Rehab is to rehabilitate a house that is in need of major repairs.
Title: Re:What is Rehabbing?
Post by: Inittowinit on May 24, 2005, 03:42:36 pm
Wow that first reply to such a general question was one of the BEST replies I've seen. Thanks for such a clear, spelled out approach to what sounds like a great way to invest in properties.

The responses are great!  Very informative and helpful.  I even printed a few out!!!!   :D
Title: Re:What is Rehabbing?
Post by: suzcooney on May 29, 2005, 10:31:52 pm
Hi Mr Fancy pants.

I just bought a house in Baltimore City.
that needs work.
As I dont live there i live in New York City.
I find it hard to get to know contractors.
And I have been totally stung in the past for eg with pluming,gas .
I already have a house rented and I eventually had to pay 3 plumbers to fix a simple job.
I wanted to know if u could help me with my new purchase.
It needs total rewiring and plumbing all the walls need plastering what is a rough estimate for each one of these the house is about 1400 square foot. Please respond I would really appreciat it.Any baltimore people out there ?????????>? ;D
Title: Re:What is Rehabbing?
Post by: AKwldlndfirefghtr on May 31, 2005, 02:32:08 am
To go a bit further, how do taxes come into play?  What are you paying on taxes from your sale, and at what rate?  Some sort of short term capital gains right?  You can claim expenses, such as contracting fees, but say you did some work, you can write off the supplies as an expense, but isn't there some way to also write off the time (aka pay your self) for the work done.  

Just curious how the whole picture comes into play.

Thanks in advance.
Title: Re:What is Rehabbing?
Post by: philmiller on May 31, 2005, 10:05:04 pm
the last post is exactly what i was wondering.  At some point i guess i was going to ask my lawer and hope he knows, but hey this would be free advice, I'll just double check with him later.
Title: Re:What is Rehabbing?
Post by: WilsonTaylor on June 02, 2005, 09:58:34 pm
Any profits on the sale of property that is held for less than 1 year should be taxed as ordinary income (unless I have misunderstood my accountant).

Wilson
Title: Re:What is Rehabbing?
Post by: kdhastedt on June 03, 2005, 07:44:53 am

That is my understanding, too WT!  If you hold it 1 year and 2 seconds, you get the lower 'capital gains' rate...

Keith
Title: Re:What is Rehabbing?
Post by: aak5454 on June 03, 2005, 12:39:56 pm
unfortunately, you can not "expense" your time again the project for tax purposes.  the gain from your labor is taxable whether you are rehabbing a house for resale or collecting a paycheck from your employer.  its all the same.
Title: Re:What is Rehabbing?
Post by: shadowmaster on June 10, 2005, 05:56:01 pm
To go a bit further, how do taxes come into play?    You can claim expenses, such as contracting fees, but say you did some work, you can write off the supplies as an expense, but isn't there some way to also write off the time (aka pay your self) for the work done.  

Just curious how the whole picture comes into play.

Thanks in advance.

This may sound like a dumb follow up...  but:  If you pay your self for your work, or you have money left over that goes into your pocket..  What's the difference?  The money still comes your way.

If you were to pay yourself (perhaps as a corporate company for example), you would have all the wages taxed as straight wages.  If you deal with the profits (that are higher because you didn't have your labor expense), then you will either break even, or perhaps have less taxes because capital gains are usually cheaper then straight income tax.
Title: Re:What is Rehabbing?
Post by: CCC on June 19, 2005, 10:18:15 am
Fancypants,

"There are some pay websites that supposedly offer current REO listings. I had very poor success with those starting out. Plus, they were expensive. Now I search listings on the MLS and then take that address to my on-line tax appraisers office. If it says "foreclosure" on MLS, then you know it's been repossesed by the lender. If you see a banks name under where it says "owner" on the tax appraisal, you know it's been repossesed. Those are my 2 tricks."

Good thread, so FP, when you search MLS, what do you look for to give you the clue necessary to determine house listed may be in foreclosure or repossesed by bank?
- - - -
Mortgages.

"Also good rehab loans will allow you to escrow Mortgage payments so that you don't pay a dime during construction."  

Can you actually get such terms?  Guess, during my research I'm only finding hard money types, and they are EXPENSIVE! from an interest standpoint and other fees & charges.
- - - -
Ivseenproof

"Do you mind sharing which financial institution you've been working with to get your 80% ARV, no down pymt, low interest rate and no prepayment penalty.  I have a pretty strong debt to income ratio, solid credit history and nice amount of cash reserves and the companies I've talked to act as if I'm speaking a foreign lang. when I start mentioning the conditions of the loan I'd like.  I've only talked to 4 institutions so far but they all act as if these terms are impossible and I'd like to save myself any unnecessary wheel spinning."

Goes to above ... who are these loan companies who are so nice to work with??
- - - -

As for taxes and such, have a handle on this.
- - - -

Anyone  . . .

I seem to live in a community where sellers are somewhat sophisticated.  Meaning deals are apparently hard to come.  Appears I may have to go out to smaller towns to find rehabs.

I've gone to several local REI Club meetings and was surprised that many find dealing and finding deals in the city much harder to come by.

Has anyone else run into this phenomenon in a larger town, city?
Title: Re:What is Rehabbing?
Post by: CHIRODOC on July 19, 2005, 11:50:43 am
 ;)

I'm no Fancypants but something I would add is if an REO is listing with a lazy realtor.  We just bought a foreclosure that is really a nice house for $30K under market for ourselves just because the realtor was too lazy to even stick a sign in the front yard.    

I'm sure it was listed on the mls but I don't think they had it listed as a foreclosure, according to my agent.  I spotted it on a drive by with the usual (this house has been winterized sticker) in the window...It's JULY.  Lights went off and I knew that puppy was sitting for 7 months.   They dropped over $28K on their asking price with just my 1st counter offer so it needed to move.  I wouldn't call this an investment, per say, b/c we want it to live in it but it does show nobody needs to pay retail EVER for anything.    

My first house was a HUD foreclosure (didn't seem like a great place for REI) but we pocketed $20K in equity and $7K off of the rehab loan.  Basically, like the other guy said do the work yourself (subcontractor) and find someone to o.k. the work.  I bought our "GC/Electrician" lunch every now and again and he signed EVERYTHING.  In a nutshell we bought all our furniture with the rehab loan money-technically I guess we didn't pocket that money but hey it worked.   I'm not sure how to become a GC yourself (maybe it's complicated-I don't know) but you may want to do that or find one that's semi retired who might just "direct" you on what to do.

The websites were kind of helpful to me but another way is to just do a "name search" on the tax appraisal websites for bank names, fannie mae etc. and it will list every property where the title has changed over, ie. it is now bank owned and will eventually be listed.  Maybe you can approach them directly at this point, again I'm not sure.   ???  At least it's free.  

Or better yet find out what property management company cleans these houses (winterizes) them and see if you can get a contact on which homes they have done and reverse search back to the bank, etc. Other contacts, appraisers, small town (who ever handles the lis pendens stuff) etc.

I was suprised when I talked to one guy about a foreclosure house how much he knew about everybody in the neighborhood's business (pre foreclosures).   :P