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Last Updated: May 14th, 2012 - 22:24:01 |
To read Part I of this article, Click Here
Another thing to be careful about - more so in the smaller cities - than in the bigger cities. Is the septics and wells. My city still has a lot of septics and wells. When you get into the larger cities where everything is on city water and sewer itĄŻs not as big a deal.
To replace or fix a failed one of these can be really cut into your profits. I will ask for a seller to give me a septic inspection and or well inspection sheet.
IĄŻll give you an example of one fixer that I ran into. I had put down five hundred dollars as earnest money. And then began my inspection. I thought I was doing pretty good - I came up with an estimated repair of twenty-five thousand. But it ended up being more like sixty thousand.
How did I end up being so off? It had several things wrong that I didnĄŻt catch. Like the septic, well, the furnace, wiring, plumbing problems, and some major earthquake damage which I thought was only minor. I already knew about the roof, kitchen and bath, but the rest kind of took me by surprise.
Anyway, to make a long story short, I had to back out of the deal. I lost my five hundred, and IĄŻll go over ways to prevent you from loosing the five hundred, but at least I didnĄŻt buy this house and discover later how major my judgement was off.
I just point this out to show you how easy it can be to be off if you are not careful. Have well and septic inspections. And hire a house inspector if you donĄŻt know fixers well.
If you make a big mistake like this, you can take it in the shorts financially.
I lost my five hundred dollars but you shouldnĄŻt loose your earnest money. To avoid this, you should you an escape clause giving you a certain amount of time in which to do the inspections. In other words, I give myself 14 days in which to do the inspection - I refer to it sometimes as a feasibility study - and then donĄŻt give the earnest money until my inspection or study is completed.
I usually use two escape clauses - the first is the 14 day inspection - and the next is contingent upon finding financing acceptable to me, the buyer.
Those are the best two I use - I donĄŻt think you need any more.
The reason I donĄŻt give the money up front is - one, because I might make ten offers at the same time. If I made ten offers and put five hundred down for each - thatĄŻs five thousand dollars IĄŻm tying up. So I donĄŻt want to do that.
And secondly, I like to be in control of my money. I donĄŻt want someone to argue about my earnest money and make me fight to get it back. This way, they havenĄŻt even received it yet - IĄŻm in the driverĄŻs seat.
If I made ten offers maybe out of those ten IĄŻll get three responses and only one will be acceptable to me after inspection.
So that is just one of the tricks I do to stretch my money even farther.
Now, jumping ahead. To determine how much you can pay for a fixer. You need to be familiar with your farm area - the farm area is your area you want to work for finding the deals.
You have to know the fair market value of similar houses in that area. You have to know how much a house fixed up is going to sell for in that area.
That is called the "after repair value".
So, in that area, if a perfect house with similar amenities is selling for one hundred thousand, that is your after-repair value.
Once you have the after-repair value multiply it by 70%. On a hundred thousand dollars that would be seventy thousand.
So to determine how much you can pay for the fixer take its after repair value - multiply it by 70% and THEN subtract the repair costs from that.
From that seventy thousand dollars subtract your repair costs - if the repairs were ten thousand - you shouldnĄŻt pay more than sixty thousand dollars.
IĄŻm going to repeat that because itĄŻs very important that you understand this.
Take the after repair value, itĄŻs fixed up value based on perfect houses in that neighborhood, subtract thirty percent from that, subtract the repair costs from that. That is the amount you should NOT exceed on your purchase price.
Jumping ahead to contractors. Finding good contractors is probably even harder than finding the fixers.
I would recommend referrals. If you have neighbors or friends who maybe had some one do work on their house that they were pleased with - ask for the name of the contractor.
Some people suggest that you call up three contractors and have them do estimates then take the lowest price. I donĄŻt really recommend that. Some of the best contractors I know, are much to busy to go around doing bids.
If you are familiar with the cost of construction - you should know when a contractor is trying to rip you off. You can ask for an estimate before they start work, and I hope you do - but I donĄŻt ask them to place a bid.
If I had to choose between cheap or good - I would choose good. And so should you. Ask them to tell you the projects theyĄŻre working on. Drive by and take a look - donĄŻt make a nuisance of your self. But get a feel for their quality of work.
You can also ask for referrals at your REIA club; but be forewarned, most investors are pretty tight about their contractors. They want them working for them not you. You might get some referrals for special types of jobs, roofing, wiring, plumbing and the like.
IĄŻve been asked do I use a general contractor - and my feeling is yes and no. It depends on what you are comfortable with. If you are familiar with construction why use a general contract.
I myself would prefer to use a general contractor. I donĄŻt want to micro manage a project and coordinate the different subcontractors - itĄŻs not my thing. You might prefer to micro manage.
Another thing to keep in mind if you DONĄŻT use a general contractor is that sometimes if you have several subcontractors and all...sometimes they might not feel any responsibility to the project.
IĄŻll give you an example of something that happened to me. I had a contractor doing sub flooring and such inside, and then I hired a contractor to do the foundation.
Well, the floor, when the foundation was completed, was about 2 inches off on one side of the room in the kitchen. This caused a slope to the floor. It was easy to remedy, the flooring just needed an extra angle of plywood at one end - not hard to fix. But the guy who was doing the flooring didnĄŻt feel it was his responsibility to level, and he put flooring and cabinets on before I discovered it. Not a pretty picture.
So that is just something to be careful about.
Another example I know of, was a house being built, it was not an investor who was having it built, it was for their own use. Well...the roof was not done right. More than one contractor noticed it, but said nothing.
After all, they were just hired to do the sheet rock. So the sheet rock was put into a house with a bad roof. I donĄŻt know the end result - but I can imagine if it rained all the work was destroyed. So does the owner sue just the roofers? - are the roofers responsible for the ruined sheet rock? The contractors who put in the sheet rock did their work - right? They expect to get paid for what they did even if it got ruined. Who knows - and I donĄŻt know what the ending law suits resulted in.
Just some last thought on fixers. The size you should be concentrating on is about 1200 square feet - starter homes- 3 bedroom. But it does depend on your location. I guess in Florida they like 2 bedroom houses. But in the northwest, where I am from, the 3 bedrooms sell a little better. YouĄŻll also hear them referred to as bread and butter houses.
I would concentrate on the kitchen and the bath during the rehab. I wouldnĄŻt get the lowest price items, I would stay in the middle of the road for most.
But, on your faucets, door knobs, and lights, get top of the line. DonĄŻt skimp. It probably wonĄŻt cost you more than a thousand extra for this - but will make a real impact on the looks and add sizzle to your finished product.
free articles and resources on real estate investing at his online "Academy of Advanced Real Estate Investing Techniques" at www.AAREIT.com
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