Cash deals - Posted by claude

Real Estate Investing Real Estate Financing
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Posted by Brent_IL on July 04, 2003 at 13:05:55:

Although my offers are formula-driven, I’m not a rehabber and this isn’t my formula. Several RE courses suggest using it. I don’t know where it originated, but I’ve read it so often that I believe that repetition has made this the defacto “standard” for apprentice rehabbers. Successful rehab specialists buy for less

Several people I?ve met who do this kind of thing have told me that they have a worthwhile deal when, after deducting all costs of acquisition, holding, repair, refurbishment, and resale, they net an amount of profit equal to the total that they have spent on repairs, including labor. So if they subbed out $20,000 to bring the property to ARV, and had $20,000 left in their pocket after the closing with a new buyer, they said they did O.K.

This example is used when flipping.

$100,000 ? After Repair Value X .70 = $70,000

less;

$2,000 - closing costs
$1,500 - 3 months interest, insurance, and taxes, say $500 a month
$15,000 ? Total repairs
$5,000 ? flip profit
$8,000 ? cost of resale

$31,500 ?subtotal

Your offer price when using this formula would be $38,500.

This implies that for a $5,000 assignment fee you could sell the contract to a rehabber because there is enough room in the deal for his or her profit.

When you?re planning to rehab and hold, you can afford to pay a little more. I used this example in the prior post just to illustrate that one doesn?t have to pay a whole lot more. In an all-cash sale, $500 or $1,000 higher than the next guy may suffice.

Cash sales notwithstanding, I?m still a cheerleader for the buyer-on-terms faction, don?t you know?

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Cash deals - Posted by claude

Posted by claude on July 03, 2003 at 14:54:32:

I have about $65,000 saved and want to start buying properties cash and then go to the bank to put a mortgage on the property after I have purchased them. My goal is to get homes at 70% of the FMV and fix them up and get my cash and fix up money back from the bank on a refy and section eight the properties for long term cash flow and to have assets to sale when I’m ready to retire. Is anyone doing anything like this that maybe able to give me some advice?

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Re: Cash deals - Posted by Matt (MPD) IL

Posted by Matt (MPD) IL on July 03, 2003 at 21:18:41:

Claude,

We are currently doing what you’re talking about with minor exceptions. We don’t use any “hard and fast” rule about what % of FMV we pay for a property. Also, we sell rent to own to anyone that qualifies regardless of section 8 or not. As long as their background checks and they have the cash to put up for the option consideration and monthly payments, we’re pretty good to go.

In thinking on this and why we don’t use an exacting rule for percentage I’m reminded that this is a very fluid business. Sometimes we will find a property where money can be made but we can’t get it for less than 80% of FMV. Instead of throwing those deals away we look at each one on it’s individual merit. If there is money to be made then we find a way to make it work.

When we refinance we are looking to get at minimum 95% of our total cash outlay with the remainder to be made up on the option consideration payment. Any more than that is an early bonus to me. I am able to do a few more deals this way and still keep my cash available.

I am not having any problem with seasoning issues when mortgaging a property that I bought for cash. The bank/banks I use call in their own appraiser to determine market value and we of course can show recipts of all the labor/materials put into the property as well as justify our purchase price from a distressed seller. As long as you can account for everything the banks shouldn’t have any issues. It’s when you try to collect too much for your efforts that it begins to scare the bank.

Hope some of this helps.

Matt

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Re: Cash deals - Posted by Brent_IL

Posted by Brent_IL on July 03, 2003 at 16:00:47:

It’s a good idea, but I think that you’re being too generous on your offering prices, especially if you’re paying cash out of the box. The most well touted formula to arrive at an offering price on a building needing major repair work is FMV times 70% minus all costs of repair minus holding cost minus desired profit. This includes a fudge factor for the profit intended for a rehab buyer.

If all that the property needs is patching, painting, and carpeting, I think you’ll grow rich if you stick to your plan. If a mistake is made, cut your losses quickly, and try again. If you can use CRE techniques to minimize the cash that you have to tie up, and can still get good deals, conserve the cash.

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Working good for me - Posted by randyOH

Posted by randyOH on July 03, 2003 at 15:56:56:

Claude,
I have been doing pretty much what you suggest. The only difference is I lease/option the houses after they are fixed up. I use a small local bank that does not require seasoning.

I have been able to get all my money back out of the property plus about 5 to 10% when I get the financing. Then, of course, I get an option fee from the t/b (usually 3 to 5% of the option price) and have positive cash flow while I am renting to them. I really don’t care whether they exercise the option or not.

It is sort of like buying with no money down, but you do have to have that initial capital to work with.

Good luck,
Randy

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Re: Cash deals - Posted by Terry-MD

Posted by Terry-MD on July 03, 2003 at 15:14:35:

My partner and I did something similar in Cincinnati before I left. We would buy properties below FMV that needed to be fixed up. We used a business line of credit that charged interest only to purchase the properties.

After the fix-up stage, we rented out the property, went to a local community-type bank, applied for a refinance, took out enough to pay off the business line of credit and enough extra cash to pay ourselves.

However, we never tried section 8 rentals. We always had friends lined up that wanted to rent our properties.

Terry

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Re: Cash deals - Posted by Tom-FL

Posted by Tom-FL on July 03, 2003 at 15:02:06:

You may have seasoning issues. Check the finance board.

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Re: Cash deals - Posted by Trent(MS)

Posted by Trent(MS) on July 04, 2003 at 08:42:41:

Can you give a real world example of how to arrive at an offer price wtih the formula you suggested?

Thanks alot,
Trent

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Which Community Bank…? - Posted by JT-IN

Posted by JT-IN on July 03, 2003 at 22:49:50:

Terry:

Which community bank(s) in Cincy did you use…? How long ago did you leave Cincy, and what part of the area did you reside… and invest? (just curious).

JT-IN
Now in Cincy (Blue Ash)

PS. I use 5/3rd Bank most frequently and First Financial Bank, (formerly 1st Nat’l Bank of SW Ohio) for my LOC needs…