While I have been doing lonnie deals for almost a year now I want to try and tackle my first rehab. It’s a bank owned property thru a realtor that I’m working with. Here are the numbers.
1200 sq foot home-2 bedroom
Purchase price- 38K (offer pending)
Rehab costs estimated at 15K. Needs carpet, paint, flooring, old garage torn down.
AVR=70-75K based on comps sold the past year
Realtor fees= 2.5%
Holding costs for mortgage at 365.92 P&I taxes=160 Ins=30 totalling $555.92 times 6 months holding= $3335.52
The holding costs I put out 6 months cause I went with the worst case scenario (hopefully anyways) Realtor is bringing me this deal so I want to give him my business in return. My exit strategy is to advertise with my realtor. Could use owner financing as a tool. Could use a rent to own as a tool as well. Realtor is an investor himself and knows what I’m trying to accomplish, therefore knows how to be creative with terms, mortgages, etc.
I think my bid might be a little high but in the ballpark where I can still make some money. I want to know what you guys think good or bad. Thanks in advance,
Nate - The realtor fees look a bit low to me. If the agent is going to market the property for you when repairs are complete, they need to offer payment to the buyer’s agent as well. I think you are looking at 5% in commisions. 2.5% to your agent, 2.5% to the buyer’s agent.
It doesnt look like too bad of a deal. You will probably end up with 10-12K after taxes. While we are all in this create wealth over time, one point I like to make to folks doing a tight deal:
If you were to make very little to no money at all on this deal. would the experience gained be worthwhile?
The realtor fees are correct. He told me 2.5 realtor fees as I asked him point blank how much he was going to charge me. He wants to create a fair business relationship and a lasting one at that. I was expecting the 6% which is standard where I am at for realtor fees. You make a good point about gaining experience. Not only do I want to make some money but I WANT the experience as well. It will only make me sharper on my next deal. If I make 5 grand I would be happy. Disappointed a bit but still happy that I would have taken that first step, made some money, gained some experience, and know that it can be done.
Hey Nate. I’m kind of in your shoes, too. I’m in no hurry, but have a realtor friend who is looking for stuff for me. The realtor found something already, but the margin seems a little thin, which means that a careful eye on ALL costs will be important.
I just need to make sure and know all of the costs that are known - there’s all sorts of weird fees, costs, etc. before you even talk about rehab.
Thanks Ekhtr. The lender did not accept my 38K. They wanted 47K to begin with. I then countered at 39K. The lender then came back and said for 40K it’s mine. I said done deal. 40K was my limit. When I told my realtor that I wanted to give them 38K he laughed at me. I knew right then that my bid was right cause I was embarrased by the offer and he laughed at it. When we settled on 40K I asked him if he thought we would ever get it for 40K and he said “hell no”. He was pretty excited for me and I think that he learned a little bit. Plus we found out that the lender is kicking in 1500 bucks towards my closing. Merry x-mas to me.
Do you know of a list somewhere of all the possible fees there are - independent of the rehab itself? You listed some things in your original post, but is that it?
Rehab seems the most uncertain/quasi-controllable, so I’d like to see all the other things everyone scrapes off the deal(s)
I’m going thru a small bank here in town. I’m getting a construction loan where they roll the purchase price and rehab costs into one loan. I need a mortgage for 39K and 21K for rehab costs and holding costs. The loan is a 9 month note at 7.25% with interest only payments. My closing costs should be covered since its a small loan thanks to the lender that I’m buying the house from. The lender fee’s are going to run me 1.5 points. From what I understand is that smaller banks are “nicer” in regard to fees since they keep the loans in house. Whereas a big lender like Wells, Chase, etc. package the loans and sell them before the ink is dry. On a deal like this I would get taken to the cleaners by a broker who works with big banks. This is my belief cause the lender that I was going to do this with told me that he should go to this bank to save me broker fees. Of course this bank is where his daughter works A nice gesture on his part none the less.
Thanks for running the numbers. I’m getting this house appraised subject to repairs and my lender said it should come in at 80K. And that’s not an inflated appraisal. Well see what it comes in at. Everything I have there is all on the high side. I hope to clear 10K. Maybe less rehab needs to be done, maybe more. Closing costs on my end are covered. The lender is paying 1500 bucks for my closing costs. My bank said that should cover it. All of the faucets, sinks, toilets, fixtures, I am getting at cost. My buddy said don’t contract that out cause he will do it with me to not only save me money but so I learn how to do it. I’m sure there will be hiccups along the way. That’s to be expected. But I feel comfortable that if the appraised value comes in at 75-80K then I should do ok. What do ya think?
Dude, I’m excited for you. Let me know how it goes.
I’m getting my ducks in a row to be able to pull the trigger when I need to. I’m still trying to understand all of the ditzy costs - outside of rehab itself - that can add up.
Well, there are different approaches to this. One approach is if you clear 10k and it takes you 500 man hours to do the work yourself then you’re only making $20 an hour before taxes. So you’ll clear roughly $13 an hour for your time after taxes (20% tax bracket, 15% self employment taxes).
If, in your current profession, you make say $7 an hour then this is probably quite desireble. But if you normally make $150 an hour this is peanuts. Most likely, you’re somewhere in between, but in reality it’s all just relative for each person.
To some it’s the ‘raw dollars’ that matter because in addition to being work, it’s actually interesting to them and in many cases can be considered fun so the $$ is just lagniappe.
To others it’s the amount of money they make based on the time / effort they have to put into the transaction. To them, it’s a matter of getting paid for the process.
Neither approach is right or wrong, it’s just what you feel.
Often times it’s not necessarily that the investor has to make $20k to even do the deal, many times it’s that the chance to make $20k gives a good buffer if something drastic happens and you make alot less than you thought. If you started with a $5k buffer, if anything drastic happens you may actually lose money.
150 bucks an hour? If I was making that I wouldn’t be trying to make 10-15K I understand your viewpoints. The drywalling, painting, carpet, I will not be doing. Its not a huge house (1200 sq ft) and actually most of it is already drywalled, taped, and mudded. People were living in this place as it sits today. Wild stuff. I work full time, make 41K a year (big whup) so 10-15K is ALOT of money in my book. I’ve done some lonnie deals with mobile homes and have had great success with that in a small amount of time, so I guess that’s given me confidence to go to a bigger project. I’m still gonna do the lonnie deals cause I can buy the mobiles so cheap and turn them for quadruple of what I have in them. Great cash flows.
For those who have replied to this post would you like me to keep you up to date on how things are proceeding? Not weekly updates but updates every other week or so? Maybe you can learn good things and bad things from my endeavors. I will share everything that I have learned and the good and bad decisions that I have made. No or yes?
Ok guys. Sounds good. So far I’m set to close on the 18th. I’m looking for builders risk insurance for the house and getting my financing squared away at the bank. Were meeting this week to get the final terms set into stone. It will be interesting working off a draw to pay for materials, contractor fees, etc. I guess the money is held in escrow at the title company and when I need to withdraw money that’s who I have to go see. I’m all ready cutting corners on my rehab, meaning doing more work on my own and getting some friends to help. Example…I need to tear down the exisiting garage. Cost for a contractor would be in the 750-1,000 dollar range. My brother who does new construction and remodeling said that’s a waste of money. Get a dumpster dropped off, get some friends over with claw hammers, sawzalls (sp?) and sledgehammers and save a bundle of money. A friend of mine’s Dad works for a plumbing outfit and can get me all the toilets, tubs, sinks, faucets, at cost and this same friend said don’t subcontract. He would do the work himself with me there to learn. He has done work for me before and is top notch. So far into the early stages is that I’m learning to surround myself with good people who care about the work and the outcome of the property. I’ll keep you posted on the banks terms and how closing goes. Till then,
