All Forum Posts by: Matt Thompson

Right on. Thanks for the tips Ben and Kristen. I didn't know that a broker can be a bit cheaper... I like the guy I am using, but being a bit of a cynic (realist?) I wanted to ask the obvious and do a bit more homework.

Tim-
If you're just trying to "rough" in costs of repair for rehab work, you're potentially in for a rough ride. Not to preach, but you need to have a very firm idea of costs before you begin your rehab project. Due to the unknowns of any rehab project, overruns are very common. Being in the contracting industry for almost 16 years, I typically see overruns on almost all projects to the tune of 10% minimum to 30% to those who didn't know what they were getting into. That being said, you have a very steep road to climb to learn how to be a carpentry contractor, or any other trade. I hate to say it, but when you're in the trades, they are easy to understand. When you're on the outside looking in, it can be confusing. On this project, I would contact a few contractors in the area and obtain detailed estimates from them, and then diassect them to find out where material, labor and profit costs come from. With what you're doing, you need experience now to help get this rehab done before it sucks you dry. By walking a job with a contractor, you will also gain insights into what they look for by asking the right questions. With their bids, pull apart all quantities and apply costs. (remember that most tradesmen don't always buy from Home Depot- we buy at trade supply stores, usually a little bit cheaper) As a very general rule of thumb, 2/3 of any job (smaller jobs)should be materials and labor, and 1/3 should be profit. This does not mean that the labor and material rates are 1/3 each. Also, given the current economy, this is not gospel because contractors are taking work on 5-10% margins, if not lower. I would also recommend the Hometech book, but in order to have a fundamental understanding of what you're trying to do, you need to undestand exactly how much lumber, how many nails, how much drywall/tape/mud, how long it will take w/how many guys, etc etc etc. By being able to quantify given tasks you will really help yourself in the long run.

I've been perusing a 'hood where I am very interested in buying houses because of the low price/good cash flow aspect... the longer I've spent investigating my target 'hood, I've noticed that there is actually a 'hood within a 'hood. Literally, it is across the tracks, seperated by a major road to the north and in the center. House prices are pretty similar for REO/Short sales, but on the West side (the good side), those houses are gone immediately... I scoped two out 3 weeks ago that I wanted to make an offer on, and they were already under contract as soon as I found them... drove by this morning and one already had a for sale sign on it. However on the other side of the tracks, there are a few houses I looked at 1-2 months ago that have fianlly sold, but they took longer. I have found a few pockets on the "bad" sides that might be promising, but not like the West. The point is to investigate your target hood and really find out who is there and where they are. I was surprised when I finally saw the whole picture, and finally, after 6-7 months of looking, I have identified areas that I am very confident to invest in...and ones that I'm not. Lastly, pay attention to visual cues; pride of ownership, trash, broken windows, etc... even the smallest details can really tell a story in these types of 'hoods. My 2 cents.

Thanks for clarifying all of my questions. I am using a broker this time around- one that seems pretty straight, but I wanted to find out before rather then after. Sounds like I can save myself a few $ by going to banks directly...

I am doing a refi on my house, and just recieved my paperwork from the new bank in the mail. I got a 4.75% 30 yr fixed on my house. I owe $352,000. I am going through the new GFE, and there are a few new fees that popped up that I am questioning... not being a finance guy, I don't know the specific ins and outs of exactly how negotiable these fees are, but from what I've read, there may be some "pork" here. I am doing this loan with a broker/RE agent I am considering doing more deals with in the future, and I want to make sure he is looking out for me. If not, I'll cast my line somewhere else, as I have excellent credit and low debt. Here's the lowdown.
GFE
Origination Fee 3,650
discount 602.65
appraisal 350
processing fee 450
tax service 83
underwriting fee 650
LOL Flood cert 6
administrative fee 675
per diem interest 1282.5
hazard ins 600
county prop taxes 2558.1
settlement/closing 200
title insurance 1,300
misc title fee 150
endorsements 250
recording fees/deed 125

total 12,931.85

I am suspicious of processing fee, administrative fee, misc title fee, settlement/closing, and endorsements... am curious to see what some of you who are versed in mortgages think. I would rather hammer them now then at the closing, and frankly, the $ looks better in my pocket then anyone else's. Thanks in advance.
Matt

Hassan-
Great thread. I appreciate all the great info you've carefully taken the time to post. For the sake of argument, and to pick your brain a bit, my question to you is this, using your example an Sunderland (#1). Why not get the property under contract for your MAO (ok- we'll make a few assumptions here in our "perfect" world) of $29,280. Perform your repairs for $16,160. Once repairs are completed, ARV is $110,000 (assume an appraisal confirms this) If you look at the numbers of what it would cost for P/I, figuring 7% commercial loan, 30 yr, call it $300/mo on a loan value of $45,440- MAO+repairs, all financed. (If you put a down of 20%, figure a payment of $240) Even if you paid yourself your profit of $15,000 (creative financing) your payment is still only $400/mo, P/I based on $60,000. Figure taxes to be roughly $100/mo (guestimate) and insurance to be $75, for a monthly outlay of minimum $475 PITI, and $575 on the high side. If you can rent it out for $1000/mo (the 10% rent rule, $900 might be more likely) you would be in the clear $525-$425, depending which way you ran it. Ok, ok, I know- the 50% rule applies here on all gross rents for maintainence and repairs. For the first year or two, they should be minimal,, but assume $500/mo., which, if the rehab is done properly, I think is on the high side. You are clearing $75 to -$75, not great, but decent. Going back, on the low end, you have $45,440 leveraged, and on the high end (you paid yourself $15,000) you are leveraged roughly $60,000. ARV is still $110,000 (as confirmed by our appraisal). Since the property is cash flowing, (the first year it will because there is no deferred maintainence) why couldn't you do one of two things. 1) using the low side #'s, pull a 2nd/LOC against the positive equity on the house, while I'm not very well versed on finance, and may very well be totally off track here, I believe banks will loan 80%LTV, which in this case would be $88,000, but since we have an existing note, subtract $45,440 of existing debt for potentially $42,560. This gives a platform to use money for down payments on other properties. Yes, it potentially puts you upside down on this house, but if you make the right choice on the next 2-3 properties, it will come around in the end becauase you now have financing for the next fix/flip. Once the next 2-3 properties are financed and sold, dump this one as well, and move on, or keep the cash flow once the LOC is paid off from prodfit from the sale of the next properties. 2) Lease option it to a buyer, take $4,000-$6,000 down, payments of $1,000/mo on a 3 year option, redeemable after the first year. Since you are a finance guy, you could double dip the buyer by helping them repair credit and possibly get into a loan down the road. Now you also have cash for the next property as well. As a newer REI, this is my simplistic view of how things could work, and like I said before, I could be off one way or another. However, it would be great to get feedback from someone who has already done what I would like to do, that way if I am off track I can realign my thinking... Thanks in advance...