Yours should be, too. Let me explain why.
Although, in a perfect world, we'd all fix up properties as if we were going to live in them-you know, copper roofs, Jacuzzi tubs with rainfall showerheads, and so on-the reality of the investing business is that, in order to make money, we have to do the work that will raise the rents (or minimize the ongoing maintenance) or increase the sales price (or decrease the days on market) by enough to justify the repairs and upgrades.
Since each property is different, in terms of what "could" be done to it, we've come up with a system that, roughly, tells us what the likely exit strategy might be for any given property, what kind of buyer (retailer, landlord, turnkey rental seller) is likely to buy it from us, and therefore what level of upgrading the property will probably get.
We base our repair estimates on those assumptions, and thus our pricing, so I thought I'd take a few minutes to outline the details of the system for you.
Neighborhood types and buyer types.
We, like you, basically deal in 3 different types of neighborhoods in our day-to-day investing. They are:
1.Pure retail neighborhood-Type "A" Properties. These neighborhoods contain properties that can ONLY realistically be renovated and resold, because the neighborhood and price range are such that they'd be unlikely to cash flow as rental. These properties are in bread-and-butter or move-up areas. We call these type "A" properties. Examples of local areas that contain large numbers of these properties are Oakley, North Avondale, Hyde Park, West Chester, parts of Bridgetown, and so on.
2. Low end retail/middle end rental/lease-option neighborhoodsType "B" Properties. These are starter homes in bread and butter areas that could be retailed, but would also cash flow as rentals or lease/option deals. These are type "B" properties, and there are a lot of neighborhoods that contain them-Forest Park, Delhi, North College Hill, Norwood, Covedale, etc.
3.Pure rental neighborhoods-Type "C" Properties. In these areas, selling to a retail buyer or even lease/optioning is not a reasonable exit strategy. They're lower-income rentals that are purchased purely for the cash flow, or occasionally for resale as turnkey rentals. These properties are type "C", and neighborhoods include Price Hill, Evanston, Madisonville, East Westwood, Fairmount, and others.
We recognize that these are loose descriptions of neighborhoods; in Northside, for instance, there are Type A, B, and C areas and properties all within a 2 mile radius, and in the same zipcode. In these cases, we sort of rely on 2 decades+ experience in the Cincinnati market to make a determination about the most profitable exit strategies.
So, anyway, we've also discovered that we have three different kinds of buyers, as categorized by HOW ya'll get repairs done to a property. Interestingly, you loosely divide yourselves by the kinds of properties you buy. Which one are you?
1.The extreme do-it-yourselfer. If you're in this category, you are literally hands-on with pretty much every repair there is to do to a property. DIYers, sometimes with the assistance of "helpers" (as my dad, a dyed-in-the-wool do-it-yourselfer called them), can be found any given day shingling roofs, hanging drywall, wiring, installing a furnace...not to mention the "easy" stuff like painting. The DIYers are the ones who buy trashed Type c properties from us for a few thousand dollars (no kidding, we recently sold a guy a house for $4,900...he used his credit card to buy ...), put $15,000 in materials in, and rent the resulting property for $700/mo. God bless 'em.
2.The "all contractors, all the time" buyer. No calloused hands or picking drywall mud out from under YOUR fingernails (or worse, blowing drywall dust out of your nose for a week...if you're one of these, everything from the cleanout to the mechanicals to the cosmetic details are done by paid, licensed contractors, all permits pulled, all details managed by you but not DONE by you. If this is you, you probably retail Type A properties...and good for you for not being a control freak.
3.The "some me, some them" buyer. Most of our buyers actually fall into this category. If that's you, you leave the hard/dangerous/labor intensive/licensed stuff (wiring, plumbing, HVAC, roof) to contractors with crews and experience, but do the easy/fun/rewarding/ can be done evenings-and-weekends part (painting, hanging cabinets, tiling) yourself. You probably buy Type B deals.
So given our experience buying and selling umpteen properties (it's in the multiple hundreds, but it cracks me up when wholesalers can say, "I've done 713 deals"-if you can keep track that closely, you're not busy enough finding new deals!), we base our repair estimates on what the most likely buyer is most likely to do to maximize the profitability of any given type of property.
And This is What We Figure You'll Do To Maximize Your Profit...
You probably buy one property at a time, but we buy an average of one a week-some for rental, some for retail, and some to wholesale.
That means that we, like you (unless of course you just let us do all the work and buy our already-evaluated great deals), look at about 20 properties and make about 20 offers to get a deal worthy of offering to you.
Imagine the challenge of viewing hundreds of properties a year and trying to figure out what you're going to do to them, and thus what the repair costs will be, and thus what the sale price to you can be so that you make lots of money and come back for more, and thus what we can offer.
That's why we came up with this system for evaluating properties. It makes our life easier, and lets you know HOW we "came up with those numbers". Here we go: see how closely this relates to your actual rehab strategy.
Type A Properties are meant for retail to a homeowner. We know how picky homeowners are today, and that they don't want to think that theyll have ANY major repairs for the next 10 years or more. Therefore,
When looking at type A properties, we do repair estimates as if:
All work will be done by licensed/qualified contractors
All cosmetic issues, no matter how minor, will be resolved
All mechanical systems will be upgraded/repaired as necessary
Roof replaced unless <10 years old and attractive
Furnace/ca replaced unless <10 years old
Windows replaced unless already replaced or historic
Cast iron soil stacks replaced
Glass block windows in basement
Wiring upgraded to minimum 100 amp, circuit breakers, grounded
Kitchens and baths fully upgraded
High-end carpet or refinished hardwood; ceramic in kitchens and baths
"designer" paint colors
Good landscaping
Type B properties are more of a challenge, as you might choose to retail, rent, or lease/option them. In any case, the end user is pickier about bells and whistles than renters in lower end areas. To get to the right combination of "pretty", "working", and "affordable", we deal with these properties like this:
In type "B" properties, estimates are as if:
All mechanical work will be done by licensed/qualified contractors
All important cosmetic issues will be resolved
All mechanical systems will be upgraded/repaired as necessary
Roof replaced with dimensional shingle if more than 15 years old
Furnace replaced if more than 20 years old or not working, c/a added if necessary
Windows replaced unless already replaced or historic
Cast iron soil stacks replaced
Glass block windows in basement
Wiring upgraded to minimum 100 amp, circuit breakers, at least 1 grounded outlet per room
Kitchens and baths upgraded only if in poor condition
medium-end carpet or refinished hardwood; ceramic in kitchens and baths UNLESS vinyl is in excellent condition
"designer" paint colors
Moderate landscaping
In Type C properties, the goal is rental, which means maximum cash flow, minimum maintenance problems, and the smallest possible up front investment in repairs. At the same time, a house that needs a roof needs a roof, whether it's to be rented or resold.
After years of watching successful landlords accomplish all of these goals (while not being slumlords), we've discovered that long-term hold properties typically get a different treatment than properties that are intended to be resold within 5 years. Specifically, you folks who buy these properties tend to REPAIR and MAINTAIN rather than replace, where possible.
And this makes a lot of sense, financially. A new furnace is going to last 15 years and cost $1,500 whether you put it in today or 5 years from now. If you can get another 5 years out of it by spending $300 on maintenance, it makes sense to do so, because what you're effectively doing is setting the depreciation clock back by 60 months. Once that new furnace goes in, it loses $100 a year in value. If you can wait 5 years to put it in, you've effectively saved that $100 a year (and, I hope, ACTUALLY saved the $1,500 replacement cost from your cash flow so that you have the reserves to replace it when it, inevitably, goes out on Christmas day).
Thus, for these kinds of properties, we estimate a little differently.
In type "C" properties, estimates are be made as if:
Only mechanical/structural work will be done by licensed/qualified contractors
Cosmetics will be upgraded only if absolutely necessary, otherwise repaired
Mechanical systems will be REPAIRED unless missing, failing, or unsafe
Roof replaced only if 18+ years old, badly degraded, or leaking
Furnace replaced only if non-functional
No central air
Windows replaced only if broken, leaking, or storms/screens not present
Plumbing replaced only if missing or failing
Glass block windows in basement
Wiring upgraded only if missing, service upgraded only if less than 60 amp or on fuses
Kitchens and baths cosmetically repaired only (refinish tubs, paint cabinets)
Low-end carpet, refinished or painted wood; ceramic in kitchens and baths only if vinyl is in poor condition
Neutral paint for easy touchup
No landscaping-basic yard cleanup and grass planting only
If you've bothered to read this far, we'd love to have your feedback on whether this system matches up to what you're doing in real life. Leave it here, and don't forget to check out our current money-making deals!
Vena
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( 3.1 / 96 )It's always in our best interest for our buyers to become more educated about how to buy, fix, and manage real estate so that we can, well, sell you more properties.
The annual OREIA convention is an event that we always tell our buyers to attend, and the 2011 Convention is no different. Here's why:
1. You'll learn to get the money you need to buy properties (from us, preferably) at Jillian Sidoti's all-day "The Money is the Easy Part: presentation. She'll teach you how to legally raise (and pool!) private money so that we never get that, "Oh, it's a great deal, I just don't have the cash" excuse again.
2. You'll learn to rehab more cheaply and more effectively AND sell faster at Robyn Thompson's "How to Turn an Ugly House into a Pot of Gold" presentation. When you don't go over budget, you make more money, and then you buy more houses from us!
3. You'll learn to manage your rentals more or less on autopilot with Mike Butler. When he shows you how to collect ALL of your rents, and do it without breaking a sweat, you'll want to buy more rentals, and we've got 'em
4. We're hoping a few of you will become hard money lenders to give financing to the rest of you. George Antone will teach you how to do that, even if you don't have any money of your own.
5. Chris Johnson will tell you about government grants and loans to rehab the deals we sell you.
6. Shaun McClosky will share how he buys and owns all of his properties free and clear with equity partners--how many of our deals could you buy if you knew THAT?
7. And since the cost of the entire event, including the pre-convention workshops, is less than $200, you won't spend as much as it costs to BUY some of our houses, the way you do at other events.
Vena recommended, Drew approved, and it's all at www.OREIAConvention.com...
P.S. We'd really like you to AVOID seeing Dwan Bent-Twyford, who will teach you to do what we do, and Marko Rubel and Peter Kolat, who will teach you to become killer marketers and find your OWN deals, and Dave Alexander and Joe McCall, who will teach you how to flip pretty houses with no money and no credit. Thanks.
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( 3 / 98 )If you have gotten a million emails about "Product Launches" over the last year like I have you will probably laugh out loud several times at this short, animated video.
I have no information to share about where it came from but it really nails the point and should be shared far and wide.
/http://www.xtranormal.com/watch/8050609/
So, a realistic game plan. We are adding buyers every week to our list. That's great, I like buyers. They give me money and I sure like that.
I have noticed, however, that many of them seem to think that we are somehow magic and if they ask for the real estate equivalent of the Bengals winning the Super Bowl that we will able to produce it.
Here's an example: I got an email from a newly signed up "buyer" the other day asking why he had not been offered a deal from us yet. He had been on our list for 6 weeks and was expecting prompter service.
I took a quick look at his profile and he wants a house for less than 70 cents on the dollar that doesn't need a "ton" of work...in West Chester or Mason. Oh, he may be willing to stretch out to Hyde Park/Mt Lookout.
So, do you see the problem? Deals like that are not thick on the ground. Sure, we've had deals in Hyde Park. It's happened, but it ain't all that common and certainly not in the form of paint&carpet jobs.
We all have a perfect deal in mind, but we have to remember to do the great but less than perfect deals along the way or we will have to content ourselves with one transaction every ten years or so.
I'm certainly not suggesting you be in such a rush that you do a deal that's less than very good or great. You don't have to. But try to be a little flexible. Expand your mind a just a tad.
We get everything from great retail deals in nice neighborhoods to trash-flow rentals in sketchy ones. The thing that they have in common is that they will all make money.
This is a great time to buy, fix and rent especially with an eye to reselling when the market recovers fully. Don't get fixated on a particular kind of investment. We're happy to advise and help you if you want to expand your horizons a little.
The more kinds of deals you are willing to consider, the more deals we will be able to offer you which equals more money for you and more money for us and the world goes round with everyone happy.
Stay Tuned,
Drew
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( 3 / 574 )I got a call yesterday from a guy who was really, really interested in a 4 family that he heard me talk about at REIA...3 weeks ago.
He was VERY disappointed that it was already sold-his comment was, "you didn't tell me you had other people looking at it!"
This is probably the 10th time this year that either Drew or I has heard this kind of comment from potential buyers (sometimes they're even mad--some of them apparently think we already have the property sold before we call them, or that we're "only selling to our friends", as one once said. Here's a clue, buddy...if you buy a house from us, you ARE our friend!)
And I know exactly where all this confusion is coming from.
You're used to seeing properties--especially bank--owned properties and junkers--sit on the market for months and months while the price drops and drops. You've gotten accustomed to the idea that it's never important to run out and see a property RIGHT NOW, because it'll still be on the market when you "get around to it". You've heard and read that average days on market for real estate in Cincinnati is around 6 months. You just don't see any reason to put aside what you're doing and go see that house TODAY.
I've got some news for you, people-that's the RETAIL investor market.
Those properties that sit and sit are always overpriced, and the seller is willing to leave them that way for months (or sometimes years- we recently flipped a property that had been on the market for 1,117 days before the bank finally broke down and sold it to us!), hoping to get some sucker to overpay.
The WHOLESALE investor market-the one that we deal in-moves much, much faster, and here's why:
1. We've already negotiated the rock-bottom, no-brainer price that every other investor in the city has been beating their heads against the wall for months to try to get. How? We're magic.
2. The property has already been evaluated and the repair costs estimated
3. The title search and termite inspection have already been completed before we ask you for a dime
4. There are a whole lot of buyers out there who'd rather have all this done FOR them, avoiding the whole "make 20 offers to get 1 deal" slog- especially when they're paying the SAME AMOUNT to us as they would have paid to the seller
5. And this is an important one: we'd never offer you a deal we wouldn't take ourselves. Thus, if you don't buy it, we'll buy it ourselves. Thus, if you don't act pretty darn fast, it's gone baby gone.
The last 2 deals we sold were gone in 3 days and 4 days, respectively. And to EXTREMELY experienced investors, by the way- one has done more than 50 rehabs and the other has bought and sold well over 1,000 units.
So here's the lesson: when you get a call, or an email, or hear about a property of ours at a REIA meeting, and it's in your farm area, I ABSOLUTELY GUARANTEE you it's a great deal...so you'd better go look at it ASAP.
The wholesale real estate market waits for no man. This is the best time in our lifetimes to buy properties for cash flow and appreciation, and bread-and-butter properties ARE still selling on the retail market. So snatch some of our pre-evaluated properties up, and don't complain to me if the one you really wanted is gone before you see it.
-Vena
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( 3 / 498 )A buddy of mine owns a successful small business. 4 years ago he bought a new piece of land and stated getting bids on building an entire new facility there. The best looking bid came in right around 3.5 million. He starting hearing rumblings of the the economy taking a downturn so decided to sit on his project awhile.
A couple of weeks ago, he got the job rebid. The same specs, indeed, the same contractor came in at 2.6 million. He is pretty happy.
Times are tough, especially in the building trades. You may not be planning a big commercial construction project but even residential rehabs are being done cheaper than we've seen in years.
Let's take a look at the situation: The real estate market in this part of the country is still depressed. Should you wait to buy until it recovers? NO! You should buy while things are on sale! Buying while prices are depressed and then selling when values recover is slam-dunk investing.
I'm not suggesting paying full price for anything, not even at the current lowered value. Investors need to buy at a discount of the current After Repaired Value. What I'm saying is if you buy a house now at, say 70% of its current value, fix it up, rent it for a couple of years and then sell at 100% of it's recovered value...you will be grinning.
So, it's smart to buy now. Check. It's also smart to fix now. There are a lot if highly skilled guys out there looking for work. If you have the work to offer, you can get a great deal. I'm not suggesting cheating anyone or picking someone's pocket. I am saying the law of supply and demand is going to work in your favor. You can get better work for less money than anytime in recent history.
Let's take a minute to talk about negotiating with contractors. I think it's a mistake to let the contractor name the number. I always show him the job in detail and then ask if he can do it for x dollars. That way I don't have to work at moving him off of his price, he has to try and move me off mine, and he knows I'm serious about my number. By the way, all of our deals here at YouBuyHouses.com come with a professional Statement of Work that specs the job out completely including cost estimates. It's easier for you and your contractors.
So there you have it, folks. Tis the season to buy and fix and then buy and fix another. This market won't last forever, get in the game.
Stay Tuned...
Drew
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