Please forgive me if this is not the appropriate place to post this question, I’m more than a little out of my element. :help
We are selling a property that seems to be ideal for an REI.
Two questions:
The house is on a spectacular lot in a very desirable HNW community. The home is very unique and used to be gorgeous inside and out.
Due to a catastrophic illness in the family, the house has become very very run down. We are moving to another part of the country to be near family, and would like to sell as quickly. It’s attractively (below market) priced and we’re realistic about what we can get.
Several builders and buyers have been through for second showings, bringing along contractors and engineers. They all say the same thing … it would be the same cost to tear down and build the house anew as it would be to rehab. But they all LOVE the property/lot.
But no offers.
It would be a great buy whichever way a buyer goes – rehab or teardown/re-build.
How do we market this to REIs? As a great lot with a free house, or a house that, with lots of work or re-build, would be spectacular – and worth twice its price now.
What is the best way to find and market the property to REI clubs? Send a letter, flyer? Include photos of what it looks like now and how it looked in prime shape two years ago (shows what it could be again)?
Please, any advice would help. Many, many thanks (and my apologies, again, if I broke any rules in posting this question)!
Unfortunately because of all the foreclosures in the market you’re competing with a ton of houses in great condition at better prices. That being the case all is not lost. If you can lower the asking price of the house far down enough for a person to buy and rebuild it can be sold. For rebuilds the formula works like this:
The purchase price must be no more than 25% of the value of the property that will be built in its place. That being the case, if the new house will be worth 100k then the buyer will need to get the place for no more than 25k
As for marketing, use newspaper ads, signs and a website. Consistently used you’ll get all of the exposure that is needed (if the price is right)
The purchase price must be no more than 25% of the value of the property that will be built in its place. That being the case, if the new house will be worth 100k then the buyer will need to get the place for no more than 25k
Hassansr - how did you come up with the 25%? I am curious to understand the logic behind the number. Thank you.
It’s based on what lenders in many markets are willing to do on a total rehab or rebuild, its not a hard rule but an accepted norm.
Let’s say you are wanting to get get bank funding to buy a house, tear it down and rebuild. Many lenders will only lend on the type of project where each phase fits into their model, with the total loans being no more than 65-70% of the value of the new construction. Within that amount a lot of thing have got to happen including your profit, the cost of rebuild and acquisition.
The math:
Value of new construction: $200k
Max LTV 70%: $140k
Builder or rehabers profit margin %15: $30k
Cost of Construction 35%: $70k
Max acquisition AND teardown value @ 20% of ARV: $40k
The 30-35% equity spread between the total cost of the project and the value of the new construction is used to cover the cost of selling the property (realtor commissions, seller concessions, marketing expenses, etc), recouping holding costs, ongoing maintenance and gives the cushion needed to lower the price to fit what the buyers in the market are qualified to purchase. Trust me, just because you have a $200k house doesn’t mean that you’re going to wait for the $200k buyer to appear to and buy it. You’ll sell to the first person that can get a deal done that pays off the debt and gives you a profit (or at least a break even).
To make money in this biz selling houses, you have to earn your profits within the 70% of ARV, because you don’t know how long you’ll be holding a property or how much your buying will be willing or able to pay. If you try to earn it within the remaining equity spread you will be in for an unpleasant surprise.
One more thought behind that number. Most of the time you are getting a hardmoney or construction loan with high interest to get the project done. That being the case you’ll want to refi the house to lower your monthly holding costs. In todays market the max you’ll be able to refi for is about 75-80% of value so that there is enough equity left in the deal for the lender to be happy.
Seeing as to how there is a ceiling on what you can sell houses for, a ceiling on the loan to value percentages that a lender will provide, a floor on the amount of profit that you are willing to accept, and only so much you can do about the cost of rebuilding, where do you think the only place that you can push costs down are? The initial purchase price.
hassansr - thank you for the response. I am not disputing the fact that you need to buy right. I agree with you. My question was really around the 25% guideline you quoted. In your own example, it seems that you should offer only 20%. So if I understood your approach correctly, there is no firm %. You really need to look at the numbers of the deal to figure your max purchase price. Am I correct?
The math:
Value of new construction: $200k
Max LTV 70%: $140k
Builder or rehabers profit margin %15: $30k
Cost of Construction 35%: $70k
Max acquisition AND teardown value @ 20% of ARV: $40k
Yep. It all depends on the topline, the lender and the market. All three of those things plus the cost of rebuilt force a purchase price in the 20-25% range (unless you dont like profit)