A good friend of mine called me yesterday to continue a discussion we started about an abandoned home in his rural neighbourhood. Most of his neighbourhood lots are 1+ acres. The abandoned home sat on 5 acres and had a 20’ x 40’ shop next to the house. The 2,100 square foot home, the shop and the 5 acres just sold for $199,000!
There are plenty of good deals out there just like this one. If you’re interested in finding them, there are plenty of creative ways to go about that task. Just be careful because there seem to be more horror stories than fairy tails when it comes to successful home rehabs.
Well, here are 6 must do’s for anyone in the market for a home to rehab and sell, or for anyone with immediate plans to rehab a home they already have.
Limit your potential exposure: If you’re looking for a home to purchase and rehab, keep in mind that should you need financing, current lending guidelines limit financing to 70% to 80% for investment properties. This means that in addition to the money required for any updates and repairs, you’ll need a 20% to 25% cash down payment. Don’t forget to include 6 months of total payments (principal, interest, taxes and insurance) as verifiable reserves. Most likely the underwriter will require that much for each investment property you own. It’s probably best that you settle for properties with a maximum sales price of about 70% of the current appraised value. The property my friend and I were discussing was sold for about 72% of its value. But the necessary repairs would be minimal, so it was a great deal for the person who bought it.
Be conservative about what the home will be worth after affecting repairs: The correct industry lingo is After Repair Value (ARV). Our local real estate market is relatively steady, even still, changes regularly take place. It’s unwise to trust sales comparisons from over 6 months ago. Use sales within the past three months to establish the ARV. Also limit your search to one-half mile or less and only use home that are very close in size and share many of the same amenities. The local MLS will show the active listings and pending sales, but these are less effective comparisons and should be used discriminatively. There are plenty of REO (bank owned) sales and these should be included in your comparison to establish what the home will be worth after the repairs have been made.
Get multiple bids for the necessary repairs: Do yourself a favor and get at least three bids for the necessary repairs. If you don’t have a ready list of reliable and quality construction professional, contact several realtors you know and trust and ask them for referrals.
You’re the coach; build team consensus: America still has a capitalist economy and the contractors and real estate agents you hire want what you want. Maximum return on a minimum investment. Contractors want to do the least amount of work and make the greatest possible profit. Agents want to do as little marketing as possible and earn as much commission as possible. So why not commit to contractor bonuses if work is finished on time and under budget? Why not pay the agent their full commission and bonus them $1,000 if they sell the home by a specific (realistic) date? You’re the coach, so lead the team.
Plan for multiple exit strategies: In any building/remodelling project, there are always surprises, delays, added expenditures and the potential for disasters. Make sure you visit with your property insurance carrier and that you have correct coverage for your project. It’s also a good idea to have additional cash reserves to cover any cost overruns. What do you do if the property doesn’t sell? Make certain that the property cash flows well so you can rent it and hold onto the property.
Begin marketing the home for sale immediately: It’s never too early to begin letting everyone you know that you’ll soon have a home for sale. Tell your friends at the coffee shop, let your realtor friends know. Tell your friends at work. Attach a flyer to your email messages. Use Twitter, Facebook and LinkedIn. Take advantage of every available avenue to advertise your project. Market early, market daily, market often and market continuously!