| The comparable sales in a one-mile area around the | | | | needed more money to handle. The reality was that |
| property will be the ones you want to be looking at. | | | | the contractor had actually returned for a refund all |
| This is a general rule. There are many areas where | | | | the supplies or sold them and took off to parts |
| you have do comparable sales block-by-block, or | | | | unknown after going through all the allotted money |
| street-by-street. A comparable sale would be a similar | | | | my investor had supplied for the rehab. |
| property that has sold in the last six months | | | | Or this one---my partner researched the property at |
| compared to the one you are buying. For example, if | | | | the city but "Oops, I don't know why the |
| you were going to buy a 1000 square foot, 3 | | | | condemnation notice wasn't in the file but it is |
| bedroom house, brick, with attached 2 car garage, | | | | condemned and now requires a city team inspection |
| and full basement, you would want to look for similar | | | | which quadruples the cost. In addition, we are now |
| properties in that one mile radius or closer, in some | | | | on our third contractor-each of which requires money |
| cases. If you are looking at a house that differs in | | | | up front to get started. |
| size, square footage, bedrooms you will need to | | | | Or, you are almost done with the rehab and |
| make adjustment in pricing to have a comparable to | | | | someone breaks in and steals all the Kitchen cabinets, |
| the target property. For example if the target | | | | the furnace, or all the siding off the house. At one |
| property has a 3 bedroom house with basement, and | | | | point in my life I found out that rival contractors that |
| you are using a comparable 3 bedroom house with | | | | I hired were breaking into each other's jobs and |
| no basement, you might have put a downward | | | | stealing everything. (Not a good idea to have them all |
| adjustment factor of $10,000 to compensate for the | | | | meeting on one day of the week to collect their |
| missing basement in order to get a real value of the | | | | checks-it gives them opportunities to know their |
| comparable sale. You need to look at the amount of | | | | rival's business.) |
| time the house was on the market (the number of | | | | Or, oops, I am sorry the city water department read |
| days it took to sell the house). You don't want to be | | | | the wrong meter reading and you house is the one |
| basing your buy on a house that was on the market | | | | that had water flowing for a year because of |
| for long periods of time. If you use comparable sales | | | | squatters and you owe $3,000.00. |
| that all took 10 months to sell and you are looking to | | | | Oops, that wall in the basement that just needs to |
| buy the house, fix it up and sell it in 3 months, you | | | | be straightened out and supported is actually |
| sure don't want to use these houses as "comps" that | | | | crumbling from a chronic water problem and you will |
| took 10 months to sell. So we now know how to | | | | have to dig a new basement. What if, half way |
| determine what the house we are looking at would | | | | through the rehab you find out you have a problem |
| sell for. | | | | that requires you to "quiet the title" to make it clean |
| I am going to suggest that if you are getting into this | | | | and sellable?e. Don't forget you might have mortgage |
| business to be a landlord that you treat your rental | | | | costs for the buy and sell. You will also have other |
| business as if it were the business of finding, fixing, | | | | closing cost like commissions to realtors, title |
| and reselling. I say this because most landlords will be | | | | insurance, title fees and recording fees. All these |
| selling at some point in time. So don't just look at | | | | need to be figured in your cost on the buy.f. Don't |
| buying houses based on cash flow, or tax benefits. | | | | fool your self into thinking you will be able to buy fix |
| You need to look at it from the point of view that if | | | | and sell a house in 6 months. Base your buy on cost |
| you were to get sick tomorrow could you resell the | | | | over runs! If you do bring your project in on budget |
| property at a profit. | | | | then you are going to be smiling. |
| Let's talk about profit, after all this is a business and | | | | OUR EXAMPLE OF SETTING MINIMUM BUY PRICE: |
| that is what you are after. So what is the profit you | | | | $60,000.00 |
| want to make in this business? That's right; profit is | | | | Real estate commissions based 6% (3,600.00)closing |
| where you want to start! Let's assume that I am | | | | cost seller pay 6% allowable closingsubject to |
| looking at houses that sell in 3-month period for | | | | appraisal (after repaired value)project profit |
| $60,000. Let's say we are looking at a house that | | | | (12,000.00)cost for buyer, (title insurance, recording |
| needs a new kitchen, paint and carpet. If all those | | | | fees etc) ( 4,800.00) |
| repairs were done, the house would sell most likely | | | | Cost of mortgage on buy (appraisal, mortgage cost) |
| for $60,000.00 in three months based on comparable | | | | (4,600.00)use 12 months (taxes, gas, electric, grass, |
| sales. So another way to say this would be that the | | | | mortgage payments) ( 9,600.00) |
| after repair value of the home would be $60,000.00. | | | | Rehabilitation cost - est. $7,000.00 (Double cost) |
| Some nonconforming lenders and HUD 203-k | | | | (14,000.00)price you purchase property for: |
| mortgages use what is called a "subject to appraisal" | | | | (11,400.00) 60,000.00 |
| (which is another way of saying the after repair | | | | This may appear as extreme example of cost over |
| market price). So we have a minimum profit goal for | | | | runs. I have doubled your cost and assumed that you |
| this $60,000.00 after market value home of | | | | had a realtor sell the house. I am clear as a person |
| $12,000.00. | | | | who has seen a lot of people come and go in this |
| So we now build the model to determine what the | | | | business, you need to figure your cost high and you |
| maximum $ we want to pay for the house we found | | | | need to be able to do your own comps (comparable |
| are. You now have to start adding in your cost? The | | | | sales) I recommend that people get real estate |
| costs you need to add up are as follows:a. Your time | | | | license. Why? Because the advantage is that it will |
| - What is your time worth? How much time are you | | | | give you access to MLS (listing service), which will |
| personally going to be spending on the buy, rehab | | | | give access to sales reported to the MLS. More |
| and etc? Put a dollar figure to your time.b. How much | | | | importantly, it will train you to be a knowledgeable |
| is the rehab going to cost? I have seen a lot of | | | | buyer and know first hand what is required to have |
| people in this business that are very experienced. | | | | your real estate transactions comply with federal, |
| The majority of them will tell you that their | | | | state, and municipal restrictions. Plus, you will learn |
| rehabilitation cost will run 1 ½ more than they | | | | what is necessary to have the transaction be |
| expected or estimated. It's a must to build in cost | | | | complete and within integrity guidelines. In addition, |
| over runs. If you are a new investor take your | | | | you will be putting you license with a broker who will |
| estimated cost and double them for figuring your | | | | be there to train you while doing your beginning deals. |
| rehab.c. What is cost of your holding time? You need | | | | It requires 40 hours of classroom on Michigan real |
| to look at how long you think it will take you to | | | | estate, plus passing a test to get your license---even |
| rehab the property. If you think it will take you 3 | | | | if you don't end up getting your license. The |
| months to fix the property up - double the time to 6 | | | | knowledge you get in these training courses is |
| months when doing the financial analysis. If | | | | invaluable. |
| comparable sales show 3-month selling time - double | | | | I prefer to work with licensed investors, especially |
| that time and cost. So if your property insurance, | | | | with challenged properties, because it assures me |
| lights, gas, gas cutting, house cleaning, alarm system, | | | | that the person you are working with has at least a |
| mortgage payment are running you $800 month you | | | | basic level of knowledge of Real Estate. The more |
| need to take that cost times 12 months since we | | | | knowledgeable a person is, the more likely they are |
| have double our 3 month rehabilitation time, and | | | | to achieve their goal. In fact some of the investors |
| double our 3 month expected selling time.d. What | | | | that have worked with me generally end up getting |
| kind of reserves for breakdowns have you figured | | | | their license and sometimes even become licensed |
| in? I once had a partner in the rehab of a house | | | | under the same broker I am. There are many |
| where he put up the money for rehab up as his | | | | reputable real estate schools. |
| contribution. I chose a contractor (this one actually | | | | If you are not a realtor and you are looking for |
| had been with me for awhile and did good work) and | | | | comparables, you can go on to your Internet server |
| purchased the supplies. The contractor kept giving | | | | and look under real estate, there will be comparable |
| me updates but coming up with problems that | | | | sell section you can use. |