First (Potential) Deal - Am i on the right track here?

Question

I found a hot lead in my area and the preliminary numbers look great!

i received rent and sale comps from my realtor and have received pre-approval from my lender.  The home is solid and livable, just needs updating, hence why I'm pursuing conventional financing.  I am pursuing a BRRRR method here if the purchase price is right.

Lastly (the big one)...REHAB!  i have set up a meeting at the property with the owner and a referred contractor from a BP member (i have already requested and received some references and will be following up with them tomorrow most likely).  I have an overall scope of work written up and i plan to walk the property with them to get a prelim idea of the rehab costs (to which i will add a contingency).  i already have been to the house through an estate sale and took a bunch of pics, so this property is not sight-unseen as of now.

Is this approach reasonable?  Once i get the prelim rehab $$, i can wrap up my numbers and get my maximum offer price.  Property is not under contract yet.

Is it weird to meet with the owner and a contractor together?  Don't see what choice i have here.

I appreciate any input.

Thanks,

Miles Stanley · Answer

Thomas S.,

yea i thought about that too.  but tell me, if you get it under contract, wouldn't that mean an offer price was made?  so if the due diligence and inspections made during the option period reveal something that would require an adjustment to the contract price, would that be an issue?  i know everything is negotiable, but i didn't realize you could just alter the contract price that easily.

can you elaborate on this?

So should i just make the owner an offer prior to this meeting and see if the owner will sign it?  How do you break that barrier of making an offer price without knowing what they will ask for the property?  Should i ask her if she has a price in mind?

Thanks!

John Leavelle · Answer

@Miles Stanley

You always have the possibility of someone else jumping in their before you.  Your trying to be cautious and not go too fast.  Understandable, we've all done that.  If you have an idea of the estimate range you can develop your offer and send it in.  But, that's purely up to you.

Have you picked up J Scott's book "The Book on Estimating Rehab Costs "?  If not you need to.  It will give you the ability to walk the property yourself and develop your own ruff estimate and be able to put together a detailed Statement of Work (SOW).  That way you can submit an offer quicker with an inspection contingency.  Less guess work involved.

Having a contractor walk the property with you is preferable (like you did).  But the time lag of waiting on their price estimate may cost you a property in a hot market.  If you can develop your own ruff estimate, with the understanding it could be more or less, then you can get under contract sooner. The other advantage is you can get multiple contractor bids based on your SOW.

What I do now is walk the property, taking pictures, fill out my estimating sheet, develop an offer based on my ARV and submit an offer with inspection contingency.  I then put together a SOW so I'm ready to go if I get under contract.  I walk the property again with the inspector to see if I missed anything.  Adjust my estimate and SOW if needed.  I try to get three contractor bids while in due diligence. Once we close the deal I'm ready to go.

Only problem is I haven't been able to close on one since starting this process.  But, it helps me since I have very little time away from my W-2 job and family comments.

Hope this answers your question.

Miles Stanley · Answer

@John Leavelle

Thanks for your valuable input!

i have considered the ARV and have a rough offer price in mind...after the walk-through today and upon receiving the estimate, i will have a solid idea shortly thereafter.  i plan to ask the seller after the walk-through if she a price in mind.  if she turns it back on me..i will just tell her that i need to review the estimate first and verify the sale comps before i can give her a number...i really want her to give me her number first.  i hope to have my offer drafted and sent this week if all goes well today.

I am slightly nervous about it not being under contract yet...crossing my fingers on this one that she didn't consider any other buyers.  Would it be better next time to just get it under contract with some offer price and then negotiate it down later pending the option period inspection results?

Thanks,!

John Leavelle · Answer

@Miles Stanley

The problem with using conventional financing on both ends is the Value of the property will not have changed much between the purchase and refinancing.  Both require an appraisal.    If the refinanced appraisal is not appreciably more than the original loan then the chances of completing a BRRRR (100% Cash out) is slim.

The Refinance Lender will give you a loan based on a 70 - 75% LTV (the new appraised value).

Let me give you an example without knowing anything about your property:

Purchase price (Multi family) at Market Value $100,000

Down payment (25%) $25,000

Loan $75,000

We will disregard Rehab, Closing and Holding costs for the moment.

At Refinance a new appraisal will be completed.  If no Rehab was done the Appraised Value will probably be close to original Value.  A new loan based on the new appraisal will be provided (70% LTV for this example) of $70,000.  As you can see the new loan amount would not be enough to payoff the original $75,000 loan.  Much less any of your Cash back.

Now let me modify the example and add in Rehab ($20,000), Closing Costs ($3,000), and Holding costs ($3,000).

Purchase price $100,000

Down payment $25,000

Loan $75,000

Rehab $20,000

Closing $3,000

Holding $3,000 (3 months Rehab)

Total All-in cost $126,000

Total Cash in deal $51,000

Based on the All-in cost the new Refinance Appraised Value needs to be a minimum of $180,000

$180,000 * 70% LTV = $126,000

Payoff original loan $126,000 - $75,000 = $51,000 (Cash out)

Since you plan on doing Rehab it will depend on your purchase price compared to your expected ARV/FMV of the property.  Establishing a good ARV is critical to the process.  Then subtract the estimated Rehab, Closing and Holding costs from the ARV to determine the max offer price.  Remember all-in costs need to be no more than 70% of ARV.  That's the best way to insure you can get your cash out for BRRRR.  Anything over 70% means less cash back.

Thomas S. · Answer

You should have the place under contract first before you start the inspections. Have  contingencies to be able to walk if it doesn't work. Until you have it under contract the seller can go to a different buyer.

Miles Stanley · Answer

@John Leavelle

Just curious, but is there something wrong with using conventional financing on the front end and the backend? Condition wise, the house is livable so I would think they would finance it… Granted it would take longer to get to closing.

Thanks,

Mds

John Leavelle · Answer

@Miles Stanley

Not weird at all.  Very smart!  Be ready to submit offer ASAP if it looks good to you.  Not sure about the BRRRR strategy if you are using conventional financing up front.  I guess post your analysis here after your walk through and Rehab numbers.  Then, maybe it will make sense.

Good luck.