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Sometimes You Can’t Buy & Hold: Do a "Buy, Fix &
Sell" Rehab
As many of you know (and have found out the hard way I’m
sure), lending guidelines have drastically changed in recent months. In 2006, an
investor with a middle credit score of 620 could obtain a 90% Loan to Value
(LTV) mortgage with low or no income and asset documentation (know as
"Stated Income" and "Stated Assets"). Needless to say, due
to the abundance in foreclosures and the resulting subprime fallout in the
credit markets, such a scenario no longer exists. Now, most lenders require Full
Documentation (normally a couple years of tax returns, W ‐2
statements or 1099s, rent rolls and/or leases, and a personal financial
statement) in order to accurately approve borrowers based on their Debt to
Income Ratio (total monthly debt payments divided by total monthly income). They
also require much higher credit score criteria than in the recent past, normally
a 640 or better. And the real kicker, even for the seasoned investors who make
good money, borrowers are often limited by the number of loans they have
outstanding, both with that specific lender, and the total number of loans
outstanding will all lenders. Oh, and if that isn’t enough, loan to values now
range from 70‐80%
(max) for investment properties, so you need a lot of equity to refi or a lot of
cash to use as a down payment on a purchase.
These updated lending guidelines have made it very difficult for
most investors to obtain long term financing for the buy and hold strategy.
While this strategy is a great one, especially now since home prices are so low,
it is simply not an option for an investor who doesn’t fit into the above
mentioned criteria. So what are the other options? The two most common are a)
Wholesaling and b) Buying, Fixing, and Selling. Wholesaling is a great option,
especially for investors looking to make a little cash quickly. Last month’s
speaker, Than Merrill, shared with us his great ideas on wholesaling, so for the
purpose of this article we’ll discuss option #2: Buy, Fix, and Sell.
The "BUY" is not the most difficult part of the
investment equation but it is by far the most important. Bank owned properties
on the market are at record high levels providing numerous opportunities for
investors who are ready, willing, and able to pull the trigger and invest. As
astute investors, you still need to carefully do your homework before you buy
because neighborhood values continue to fall. Some traditional value benchmarks
no longer are accurate. For example, the county Auditor’s tax value may not
keep pace with the declining home values because they do not want to curtail the
property tax revenue for the city by immediately lowering neighborhood values.
Also, keep in mind that sales comps provided by the seller or the seller’s
Realtor may not represent the accurate value of the neighborhood. The seller is
motivated to try to obtain the highest possible price for his property.
Accordingly, the comps provided will likely be the higher sales, older sales, or
may be further away from the subject property than is recommended. Our company
recommends only considering comps that are within 6 months and are 3/10 of a
mile or less from the subject property. For our customers’ benefit, we use
these same guidelines when performing thorough in house valuations and
inspections as part of the loan application process. This helps insure that they
are not paying too much for the property and will therefore achieve a greater
margin of profit. The most recent comps reflect the subprime mortgage fallout
and the change in market conditions, and are therefore far more accurate. If you
do not have any recent sales then it is best to factor the older (2007) sales
downward by 15 ‐20%.
A situation where there are no 2008 comps in a neighborhood is indicative of how
the subprime mortgage collapse has hurt sales. Staying within 3/10 of a mile
keeps you in the same neighborhood, because values can change drastically from
neighborhood to neighborhood. To other important factors to consider when buying
is 1) the cost associated with the remodel, and 2) knowing that you will have to
sell the property below market value to move the home quickly. You must buy very
low in order to fix up and sell at below market price. It is far better to be
patient and invest in a better deal, than to purchase too quickly without doing
the due diligence that your time and money warrant.
The "FIX" portion of buy, fix & sell rehab has
also changed dramatically. The rehabber must be thorough in his cost estimate to
include thorough updating, particularly if you expect to sell your investment
quickly for top dollar. We have seen too many properties sit way too long
because the
investor cut costs and chose not to do a thorough remodel.
Buyers are much pickier than tenants and they have lots of houses to choose
from, so having a keen eye for detail is important. Determining the proper
updates and having an accurate budget for the remodel will enable you to
determine the maximum price you can afford to pay for your investment property.
Well, that leaves us to the "SELL" portion of the
project, which has become the most difficult part. Many people would like to buy
a newly remodeled home, but the number of qualified buyers who can get
approved in today’s lending market is much smaller. With very few quality
buyers, and many home on the market, your rehab must be very well done &
priced less than the other houses on the market. If you follow the steps above
by doing your homework and a establishing a realistic sales price below market
value and an accurate repair budget for a thorough remodel, you will buy the
house low enough to be well positioned to sell your house quickly.
As discussed earlier, an investor may choose this strategy because he or she
can’t get approved for a traditional loan. So how does one finance a project
like this in today’s lending market? Ohio Rehab Loans has introduced a Profit
Sharing program tailored towards the buy, fix, and sell rehab for those
investors who may not have a high credit score or a large down payment. For more
information visit www.OhioRehabLoans.com
or call 614‐433‐0570.
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