Last month, we shared webinar content related to determining your ARV and the offer price to sellers among other pertinent topics. We continue here with inspection-related and other real estate investment matters.
Glen: If you’re rehabbing a house and you don’t get a home inspection, you get surprises that come up.
Glen: We probably all know about the oil tanks, you’ve got to have all the properties swept. Be careful about who’s sweeping those properties. Make sure they’re licensed and insured.
We’re not fans of flood zones because the buyers need to get flood insurance. And in a meat and potato market I like to be in, it could be an extra couple of hundred dollars a month, and can affect someone’s ability to get a mortgage.
Do you get surveys on every property? And my answer is no; I don’t. But when you have retaining walls, garages, especially sitting right next to the property line or in the back corner, then I would get a survey. Or if there’s anything funky, the yard is slanted or anything like that.
Paul: If you’re increasing the footprint of the house or doing anything that would, then yes.
Glen: Some other things to be careful of with a rehab: Is the house consistent with the neighborhood? You don’t want to get stuck with a house that’s difficult to sell. Another one—tiny bedrooms, especially that master bedroom. Another is a rear yard that’s sloped in, and it can get a little swampy.
How much do I charge for my fee? You have the 70% rule, 65-70. I like 65, but you can go to 70. It’s your after-repair value, minus your 60-70%, minus your repairs for the investor.
For example, your ARV is $250,000; you’re going to subtract 70% which equals $175,000; your repairs are $30,000 which gives you a $145,000 maximum allowed offer. If you want to get a wholesale fee, make your offer to the seller at $130,000.
For the rehabber, same thing; your maximum offer is going to be $145,000. The lower you get it, the more profit you make. The key, though, is to have the right ARV.
Some final advice. Don’t be a pioneer. Don’t go into areas you can’t support with comps. If you can’t get good comps, you need to just pass on that deal.
Paul: Then it’s all about minimizing risk. It’s very tempting now to go into that million, two- million-dollar market. The houses are selling. But when the market cycles, the first area to get hit, and they could get hit hard, is that million-plus.
Glen: If you’re a wholesaler and you want to get into that market, that’s fine. The rehabbers have the risk.
Okay, financing options. Wholesalers, if you’re going to put a house on the contract and you want to assign it, and it’s a bank-owned property, you’re going to need some funding.
I want to touch on 100% financing. It doesn’t mean that you’re putting up all the money; you can bring in gap partners. Gap funding is someone putting up that initial deposit for you, and your lender is putting up the rest. The other way is you can get credit lines, and then get your lender. When you’re getting that gap, depending on who your lender is, they’re not going to allow that person to have any type of lien on the property.
Paul: If you are a rehabber or a wholesaler transitioning into the rehabber, you want to have your financing lined up right. Get as much money as you can at the cheapest rate. I think you should have a couple of financing options in your tool belt.
Eddie: Does Peak fund new investors?
Glen: Absolutely, that’s how we started 20 years ago.
Eddie: New underwriting regulations are making it tough for my end buyers to get title insurance on assignment of contract transactions. Are you guys still getting or lending on deals through assignment?
Paul: Yes. Obviously, you have to abide by the regulations of the title company. We’re lending on the deal, and we do allow the opportunity for a wholesaler to make their fee. From a lending standpoint, certain lenders could cap the wholesaler on the amount that they can make. We don’t have any such thing.
Eddie: I know you use the 70% ARV rule, but to be competitive in today’s market, what is a good ARV percentage?
Paul: If you go higher than 70%, what’s the first number that’s going to be affected when you go to sell the property?
Paul: Correct. I think you can’t really deviate from the 70% rule. Maybe on higher-end properties where the numbers are a little bit bigger, and the profits are a little bit bigger.
Glen: When in doubt, stay out. I’d rather pass on the deal.
Paul: In this market, if you bought in January and you sold at the end of the year, it’s very l likely you could be $10, $20, $30, $40,000 over your ARV. But you’re projecting what the market’s going to be like in September or October. And that’s if you come in on budget with your rehab and sell it on time. You’ll talk yourself into a higher ARV and if you are wrong, it’ll sit longer, and you’re paying interest on the money. I could see it squeezing to a tough end.
Glen: Many times, people get an offer to sell it at this number, and they didn’t. Four months, five months later, carrying costs, taxes, interest, everything else, they ended up taking this lower number. A lot of times, I say you got that offer, dump it, sell it, get out. It’s a great business; follow the rules.
Eddie: When you bring a contractor in to get ARV, some are investors. What do you do to prevent them from circumventing you to get the deal before you make your offer?
Glen: Just tell them that you have (a non-circumvent agreement) on the contract.
Eddie: Which geography are you limited to for private lending? And can I please have an idea of your rates?
Paul: I like to stay in New Jersey. Most of our lending requests come from the northern to central part. We try to stay away from the rural areas with the high days on market, even though we’ve seen a little uptick in those areas. We look at these deals on a loan-to-loan basis.
We’ll look at our town-by-town data. But we won’t go above most likely a $750,000 loan amount, we’re not in that luxury market.
As far as rates, we also review that on a loan-by-loan basis. I think rates will start at nine percent and two points, depending on terms you need, down payment, and risk level we think the deal is. But most rates go out between 10 and 12%, that’s what the current market is.
Glen: It’s not just rates, it’s also what you need to apply for loans. It depends on where you go. Again, these are our funds and we’re very flexible; we don’t require a lot of paperwork. We’re not running your credit, we’re not making you show us reserves and bank statements. We’re really looking at that asset and who’s doing it, that’s what’s important to us.
Paul: These are short-term financing projects. So sometimes the difference between a point could be irrelevant when you weigh what you are getting with this loan program.
Eddie: Where do we submit our wholesale deals for JV opportunities with Peak?
Paul: If you go on our website and you click apply now, there is a drop-down that says JV opportunity, so you could put your deal right in there. You could also email our office. Or call, and set up a phone interview with me,Glen, or somebody that could run a desktop view of your project and your numbers.
Glen: We do a lot of JVs, so we can put a program together that’s very advantageous. Go on the website; we t like the information so that when we do speak with you, we already have an idea. We’ll do a quick evaluation. We can set it up; we have all the professionals to get everything done, and that’s again what we bring to the table as a JV.
Eddie: Where do we access your workshops, Glen?
Glen: They will be on our website. We’re now lining them up. We’re just waiting to get clearance. We don’t want to push and rush. We are working on some things to be online, some educational programs as well.
Eddie: Cool. Any final statements, guys?
Glen: This is a great market; I want to see you guys in it. Just make offers, get out there, don’t worry, put things on the contract. Put your contingencies in. We can help you with analysis, get you all the funding. We just want to see everybody succeed.