In dealing with real estate investors for over ten years, a lot of
them sometimes stumble over the questions "Is it a good deal?" This
can be asked for rental properties or. For anyone that's ever spoken
with me, read my articles or looked on my website, you'll know that I'm
not a big believer in appreciation. That's what Robert Kiyosaki, the
author of Rich Dad Poor Dad coined the "buy, hold & pray" theory of
real estate. That's not to say that I don't believe appreciation exists.
Of course it does, but you can't count on it. You never can truly
know when or how much a property will appreciate. When I talk about a
"good deal", I'm talking about what's a good deal today.
Let's start with properties that you want to flip. If we have time,
maybe we'll get to rental properties. If not, that may be next month’s
article.
There are only a few things to know when considering buying a property
to rehab & flip.
How much do you have to pay to get the property?
How much will it cost to rehab.?
How much will it sell for when finished?
How long will it take you?
Sounds easy? Trust me, its not. If it were, I wouldn't have been
inspired to write this article. I have seen investors make mistakes in
each of the 4 questions. So let's go through each one and determine how
we're going to come up with an answer. By the way, that's the first
lesson. You need to come up with the answer and I do mean YOU... Not
your realtor, neighbor or whomever else you're discussing these things
with. Your realtor gets paid when the sell you a home. Their
commission doesn't change if you make a fortune or lose your shirt. As
Dr. Al Lowry says, if you're neighbor was that much smarter than you,
why would he live next door? Wouldn't use his brilliance to make a
ton of money and buy in a nicer neighborhood? Think about it.
Question #1 How much do you have to pay to get the property? This is
the easiest & hardest question at the same time. It’s the easiest,
because the seller has an asking price and after you do some
negotiation, you have a number. It's the hardest, because this is the
only one of the 4 that you have any major impact on. Keep reading and
you'll see what I mean.
Question #2 How much will it cost to rehab.? The first thing you should
do is go through the house and make a list of what work needs to be
done. To do this you need to have a few things in mind. 1. What is
the condition of the similar properties that have sold that you're
using to come up with your value? If all of your comparable homes have
brand new hardwood floors, you better plan on putting in brand new
hardwood floors if you expect to get the same amount they did. 2. Who
is your buyer and what quality of work do they expect? This can be
determined by looking at the MLS (Multiple Listing Service) sheets on
properties that have sold or by going through open houses. Make
sure that the quality of your house is the same or slightly better
than the other homes that you're up against. Keep in mind big items
like bathroom fixtures, kitchen cabinets, counter tops &
appliances, and of course, hardwood & tile floors. Always
paint & pick neutral colors. Don't get too fancy or creative.
I usually like nice, wood kitchen cabinets. Keep in mind things
like heaters, air conditioners & the roof. Once you have your list
together, get at least three estimates from licensed contractors.
Only use contractors that you've gotten good references on. When
the estimates come back, do you know which own to pick. Always
pick the contractor that you trust the most, but all things
being equal, don't go with the cheapest price, pick the one in
the middle. One of the very few things I've learned is that you
get what you pay for. I usually end up regretting when I go
with the estimate that sounds too good to be true.
Question #3 How much will it sell for when finished? You need to
learn what similar homes are listed and, most importantly, have sold in
the last 6 to 12 months. Keep in mind the following factors: location -
comparable properties (comps) should be similar in design and appeal to
your property. If your property is on a busy street or the wrong side
of the tracks, then the comps should be too. You can't compare a
condo in a 100 unit high rise to a 3 unit row home. In a typical
urban area, the comps should be no more than 1 mile away. You can go
up to 3 miles in the suburbs, but the closer, the better. Don't kid
yourself to think that your property is going to sell for more than
any other similar property just because you want it too. Keep in
mind, size of the property, number of bedrooms and bathrooms.
Unrealistic property values are one of the biggest "destroyers of
deals" that I see. When doing research to determine the value,
just make sure you know why a property is worth what its worth.
If someone asks you why a property is worth a certain amount, have
a better answer than " my realtor..." or "my neighbor said so".
Remember my thoughts on them. Be a professional. Have the comps.
Question #4. How long will it take you? When getting estimates from
contractors, always ask their time frame to complete the job. Whatever
number they give you, double it. I don't care what promises they make,
double it anyway. Also ask your realtor, how long it will take to go
from listing agreement to closing. You probably should double that too.
Now that you have some realistic numbers, run some numbers and see if
what you have is a good deal. By the way, don't forget to price in
your profit. Most investors I know make a very minimum of 20 thousand
dollars per deal. If it’s not a good deal, don't waste too much time.
Either offer the seller less money or just walk away.
If you have a hard time figuring out the numbers, go to the real
estate investors section of my website,
www.GeltFinancial.com and look for the profit calculator. (sorry
for the plug, put investors need help with the numbers)
That's enough of your time for now. Look forward to my next article
That's enough of your time for now. Look forward to my next article on
"Is it a good deal? - Rental properties"
Ari Miller has been with Gelt Financial Corporation, Southampton, PA,
since 1993. Since 1998, Commercial & Investor Rehab. Loans are our
specialties. phone: 800-355-4358, ext. 275; fax: 215-357-7250;
email: AriMiller@GeltFinancial.com
