Need help with a couple of deals. (LONG) - Posted by Tim (Cleveland, OH)

Posted by steph in tex on November 30, 1999 at 07:16:14:

Hi Tim,
I am not yet an expert–but i do see why your rehabbers might not want to bite.
Are you sure about your repair cost?
What about the “oops” allowance?
Have you thought of holding cost?
How long does it typically take for a home to sell in this area? how many payments will you have to make?
Realtor commissions? 6% of 55K is $3300
Marketing cost? 2-3 months worth?
I have seen it mentioned a number of times here on this site, and i myself have adapted this reasoning:
the 1st 20% off the top is never counted. If you recoop
some of that - it’s gravy, but don’t count on it. Your buying price has to be low enough to support all those things, and then a little bit more–just in case.
I would think you MIGHT want to consider, since the repairs you say are minimal, rehabbing one of these, and going for retail. BUT ONLY if you are confident about your repair cost and what is needed. Rehabs aren’t the best place for a newbie to start–but many people can handle it. You need to make that choice as you know yourself better than anyone.
you might have to let one go, our you could assign your contract and try to pull your money out.
Personally, I agree with the rehabbers. Too Skinny.
Good Luck, and don’t give up. This is just part of the learning curve. Even if you loose a little $, you will learn SOMETHING priceless.
steph in tex

Need help with a couple of deals. (LONG) - Posted by Tim (Cleveland, OH)

Posted by Tim (Cleveland, OH) on November 30, 1999 at 04:45:31:

Hi all.

I am having some problems with a couple of deals. I put a couple of REO’s under contract about a week ago that I was hoping to get help with. Both are in good shape with ARV’s of around $55K. Both are partially rehabbed with some new major systems (new furnace, updated electrical, new roofs, one has a new security system etc.) They each need about $2,500 to spruce them up to get them to the $55K. About $5,000 each would make them very nice. Both need new water tanks. Would be good rentals for those who are a mind to do that. Part of the problem is that no matter how much work you put into them, they are not going to be worth much more than the $55K I mentioned, based on comps.

Looking to wholesale. One under contract for $38K and one for $40K. The one for $38K needs a little more clean up, paint, carpet etc. than the $40K. The one I have for $40K is very livable with lots of updates rigth now, but could use new wall paper and carpet cleaning and the water tank.

Over the last several months I have been attending REIA meetings and building a network of rehabbers to flip to. I put these properties under contract and called my rehabbers to go and take a look. In discussing with them, I am being up front with them about what I am trying to do. If I could get $3K on each I would be thrilled. $2K would be fine before costs and woudl cover my costs. These are my first deals, so I am really trying to get my feet wet. My $1K earnest money plus an additional $1K TOTAL would be fine.

I ran a couple of ads stating “Handyman special. Area. Partially rehabbed. Asking $50K but will accept first reasonable offer. Must be able to close quickly. XXX-XXXX.” I have only gotten a couple of calls from these ads that ran last weekend. Mostly investors looking to do L/O or land contract etc. I know this is fairly short period of time, but I am getting pretty anxious.

In talking with my rehabbers, I am either not getting called back or when they ask me what I am looking for, they are telling me that I pretty much have them under contract for too much. Now, these are houses with a potential $10K in equity with very little put into them. Also in improving areas with good rent rates. Lots of big updates. All the hard stuff is done. Is beating me up over price just the thing that rehabbers do, or should I really be shaking at this point?

I am thinking at this point that if I don’t get a serious inquiry in the next week. I am going to call the seller and tell them I am going to break the contract. I have 45 days to close (close first week of January) but I am already getting very anxious.

The bank selling offers good financing 10% down 8.25% fixed for 30 years even on nonowner occ proeprties bought from their REO list. Which I coudl try to get, but I don’t have teh $7800 needed to close. I have thought about trying to get $10K each from a buyer to get closing money, have a little extra and sell to the buyer on L/O but this has not garnered any interest either.

I would lose my $1K earnest money if I break the contract, which I really can’t afford and I guess they could try to force me to honor the contract. There are no weasel clauses as the bank insisted I use their contract. I was fine with this as I thought for sure I would get more interest. If they tried, I am pretty certain they wouldn’t get far as I am pretty much judgement proof.

Any advice or just plain old encouragement would be greatly appreicated.



Re: Need help with a couple of deals. (LONG) - Posted by Jim Kennedy - Houston, TX

Posted by Jim Kennedy - Houston, TX on November 30, 1999 at 12:17:09:


I have to agree with Steph, these deals are way too skinny for most rehabbers. IF your figures are correct, ARV of $55K and repair costs of $5K, the absolute maximum I would pay as a rehabber is $33K. Most of the rehabbers that I know in my area would be in about the same purchase price range on these. Rehabbers who do more volume than I, can work on a slightly smaller profit margin per transaction and some rehabbers pay slightly less to get the repair work done, but generally we all are pretty close due to the competitive nature of the marketplace.

The only suggestion I can offer on how to make these work is to market like crazy for a retail buyer that is willing to put in ?sweat equity? in order to get into a personal residence. Also, you wrote in your post that they would make good rentals. Are you sure? How much rent would they realistically command? If indeed they would make good rentals, target your marketing to attract a buyer looking to purchase rentals. Work your tail off to try to save these deals. If at all possible, you want to close on these, even if you don?t make the profit you had anticipated. Not only so you don?t lose your earnest money, but also, so you don?t establish a negative reputation with the bank and the real estate agents (if there are any involved in the transaction). You don?t want to get a reputation for making offers and subsequently not performing. If however, you are unable to close, make sure you learn from the experience. Also, understand that everyone makes mistakes. Almost every successful investor I know has at least one ?war story? to tell about mistakes they have made. I posted one of my own here recently.

For future reference, make sure the numbers work and fit your chosen exit strategy. Since you knew going in that you wanted to wholesale these properties to rehabbers, you should have known what rehabbers in your area would be willing to pay. Once you know what rehabbers would be willing to pay, you can make an offer to the seller that leaves you enough room for a wholesale profit. I frequently tell wholesalers in my area what my parameters are for buying rehab deals and I don?t care how much the wholesaler makes on the deal, as long as I can make my required minimum profit margin.

Also keep in mind that a contract can easily be modified prior to acceptance, whether it is the seller?s contract or the buyer?s contract. It is much more difficult to change an agreement after acceptance. While I am not a strong proponent of using a ?weasel? clause just for the sake of having the ability to get out of a deal, I suggest you either use one OR know that you can definitely close the deal. In my opinion, the latter is the much better approach. I make a lot of all cash offers where the only contingency is that I receive clear and insurable title. But every time I make an offer like that, I KNOW that I can close.

Hopefully some of the more experienced investors who visit this site may be able to offer some other solutions to your situation. Whatever happens, don?t get discouraged, keep at it, and just do your homework a little better next time.

Best of Success!!

Jim Kennedy,
Houston, TX