One of my favorite real estate agents just called with what she thought was an awesome deal on an ugly house for me to buy and rehab in Norfolk, VA. This happens all the time. In this case, it was 4 bedrooms, 2 bath brick house that would sell for $260,000 fixed up. The agent thought I could get it for $199,900. To most people this sounds like an awesome deal. To an experienced real estate investor, it sounds like a sure way to lose money. Coincidentally, just yesterday I bought a 4 bedroom, 2 bath, 2 car garage, brick home in Virginia Beach that will retail for $265,000 fixed up, so the numbers were right on the top of my head. Here’s how I explained why I couldn’t pay anything close to $199,900.
$260,000 – The price the house will sell for when it is fixed up
$28,600 – What it will cost to sell this house to the end buyer. We budget 11% for the cost to sell. It could be a little more, or a little less. 6% goes to the agents, 4% goes towards assisting the buyers with closing costs. (In our market we have lots of VA buyers, and VA allows the seller to pay up to 6%.) Almost every realtor contract has a 1% contingency expense added in for flaws found by the appraiser, etc. That 11% ads up quickly!
$30,000 – The amount it is going to cost to update this house with a new roof, windows, kitchen, baths, paint, floors, and probably HVAC. Because it is brick, we won’t have to side it, but if the moisture/termite inspection finds anything this $30,000 can go up to $40,000 in no time.
$8,000 – The cost to close it on the buy side and the cost of money to fund the purchase and rehab.
$193,400 – The price I would have to buy the house for to BREAK EVEN, with no contingencies built in for the unexpected.
So, as you can see, what sounded like a super real estate investment deal was a recipe for disaster for a real estate investor. That said, this would be a great price for a home buyer who wanted to live in a home. They could buy it, spend their money and invest some sweat rehabbing it over time, having built-in equity from day one.
Want to learn more about real estate investing? Join your local real estate investing groups. In Hampton Roads we have Tidewater Real Estate Investors Group that meets in Norfolk (www.meetup.com/trigofva), and the Peninsula Real Estate Investors Association, that meets in Hampton (meetup.com/va-preia).
Want to hang out with real estate investors? In addition to the formal investor club meetings, HomeVestors hosts an Investors Networking Night once a quarter in Virginia Beach. All real estate investors, and wanna be real estate investors are invited. Vendors who support real estate investors (mortgage brokers, contractors, insurance agents, etc.), are invited too, but their price for entrance is to donate a door prize for us to give out in exchange for us plugging their business at the event. Our next event is April 12, 2010. To learn more about the location and RSVP, click here. http://www.meetup.com/homevestors/calendar/12918634/?from=list&offset=0 You’ll have to hit “JOIN US” to RSVP, but membership is FREE!
Patti Robertson is a HomeVestors (We Buy Ugly Houses) franchisee in Hampton Roads, VA. She is also a licensed real estate agent and President of TRIG, Tidewater Real Estate Investor’s Group. To see the houses I have for sale and sign up to be on our investor list, check out our website at www.ptr.homevestors.com. You can reach me direct @ 757-472-2547.
Happy real estate investing!
HomeVestors Franchisee & Development Agent