I have an idea...check this out!

Soon after graduating university I’ll have obtained my RE license solely for the purpose of becoming a real estate investor. As we all know, agents have access to the MLS system which is where my idea/question is coming from.

Here it is…

If there is a house on the market that has expired in the MLS system the seller will generally be somewhat motivated or at least discouraged, unimpressed with the services of realtors, and usually have something wrong or not desirable about the house they are selling.

Now, if the reason the house is not selling is because the house is just unattractive (i.e. paint colors, landscaping, and other minor esthetics) wouldn’t it be possible to negotiate a selling price that is structured like this…

For example

FMV $150,000 - Realtor commissions of $9,000 - 15% discount for work needed and quick cash close of $21,150 + approx $10,000 worth of cosmetic work needed = $129,850

As for getting the 15% discount this does seem high but if the offer is presented with a list of work to be done and presenting a cash in hand close, not to mention that the seller has most likely dropped the price of the house a few times during the course of the listing I do think this discount is possible (but then again I haven’t tried it)

After all said and done if the house is in tip top shape I’m sure it could be listed at $155,000 slightly above FMV for a selling price of say $147,000 - $150,000. This would bring a potential profit of $17,150 - $20,150.

I’ve been viewing houses recently to get a feel of what’s out there and this is what I’ve been able to determine. When a house is finished in neutral cosmetics, there is apsolutely no work to be done, the property is in a good neighborhood, the house has new appliances, and it is priced fairly the house rarely sells for a lot less than what the seller is asking and is rarely on the market for more than a month.

So with that being said, do you think this theory is feasible???

A handful of points for you…

  1. You might check your province laws (you’re in Canada, right?) on being a real estate agent. I know here in Pennsylvania one of the requirements for getting a realtor license is that you have to be employed by a broker.
  2. 15% isn’t too much to ask, it’s not enough. Here’s the formula all successful investors I know use, with your numbers.
    $150k (ARV) * .7 - 10k (repairs)= $95,000 (max offer)
    Does this seem low to you? It does seem so at first. You might be thinking you’ll never find a house like this. But seriously, you can. It might take a while, but buying a house at 87% of retail, which your figures reflect will never make you any money in this business. Your project profits don’t include buying costs (assuming you need to take out a loan since most new college grads don’t have $150k cash) or holding costs (for monthly mortgage payments). On a $130k house (your proposed purchase amount) your purchase costs would likely be $7-10k and holding for 4-6 months would be $5-8k. So IF you manage to not go over on your rehab, you sell it fast, sell it for the high end of your ARV and get a good deal on your loan, your profit would more likely be around $8k. And that’s best case scenario.

how would purchase costs be $7-10k?

Purchase cost can easily be over $7-$10k.

Home inspection $300
Bank Appraisal $300
Attorney for offer & P&S Review: $500-$1000 (sometimes less if you also use the closing attorney)
Closing Attorney Fee: $500
Title Search: $200
Courier Fees: $25
Registry of Deeds Fees: $300-$500 depending on what gets done.
Prepaid Interest: between $30-$900 depending on day you close.
Bank Underwriting fee: $400-$800
MLC document fees and courier fee: $90
Mortgage processing fee: $400-$800
Title Insurance. Here’s it’s $3.65 per 1k plus $175 for dual issue so $150k is $722.50. You could decline owner’s coverage and it’s $2.50 per 1k so it could be $337.50 assuming 90% financing.
Homeowner’s insurance, one year in advance depending on lender: $800
Three months Escrow of Real Estate taxes and Insurance: ???

Those are things we deal with here in MA. Your state may be different, add those up and you could easily hit $6-$8k depending on what things are like in your state.

Oh and don’t forget if you make 8k profit in less than a year, then who knows how the taxes work in your state/province. Also here in MA you do need to work for a broker to earn a commission, but that usually isn’t a problem, they’re always looking for fresh meat. You might need that to gain access to your local MLS. However I don’t think there’s any split involved with the broker because it’s just a FSBO situation where there’s no commission involved.
There’s a lot more

Terrific breakdown. All I would add is the loan origination fees, which could be a few thousand by itself. Quick side note on origination fees: I was cleaning up my filing cabinet this weekend and I found a stray Hud-1 from a property I sold in the spring. The sales price was $131k with a $3500 sellers concession and the buyer ended up paying almost $4k for the loan origination, plus another $1k for loan processing. So it can add up fast.

Wow, I had an idea of the fees involved but didn’t realize how fast they added up.