Competing for rehabs

[Jose Garcia]

I have been consistently beaten on my bids by this local investor with deep pockets who is part of a real estate agency which I'm not going to name. In either case, I've gone to his homes and they do a terrible job at rehabbing them but there selling. One I visited today did not even have a hood over the stove just a big hole. I can see why he is willing to pay so much more for the properties. He is not doing much more than painting.
I don't want to veer off of the 70% rule especially since I'm fairly new to real estate investing.
Any advice

[Brian Burke]

Obeying the 70% rule in California, while not impossible, is very difficult. Most properties generate enough awareness to receive bids higher than that. If you do your own direct marketing you can find deals off-market where you don't have to bid against anyone.

Your other option is to seek properties in areas where the competition isn't buying, or property types they avoid (condos, country property, older houses, luxury homes, etc).

The final option is to bid higher. This squeezes margins and adds risk. You would have more success in this area using an 80% rule. It just depends on how much volume you want to do. If you only want to do a few deals per year, you have the time to be picky and wait for the 70 percenter.

[Jose Garcia]

Thanks for the advice Brian. Greatly appreciated.

[Braulio C.]

Hey Jose, I experienced the same thing myself in Kings County. Although I don't invest in that area for that particular reason I still have a few rentals in the area. I started investing out-of-state maximizing my profits way better then Califorania. It's hard to beat local people that are very well connected. Hang in there and like Brian suggested look where there is no competition. Good luck. -Braulio

[Glenn Espinosa]

Brian Burke

Are my assumptions correct in that in order to successfully use the 80% rule you have to:

1) Be doing more volume, accept smaller profit margins
2) Buy materials in bulk for bigger discounts
3) Continuously roll crews to new projects therefore justifying a greater discount in labor
4) Find an agent willing to accept less of a cut (< 3%) in order to have the rights to all your listings
5) ???

[Brian Burke]

@Glenn Espinosa, the short answer is no to all. While I have some of the things you mentioned, I've used an 80% multiplier (plus or minus depending on some other factors) for many years. It's worked in times of low volume and high volume, when I've had crews and when I haven't. Materials discounts don't count because the multiplier is computed on ARV and repair cost is subtracted after that.

The reason it works in CA is because the prices are higher, so a 10% profit in terms of dollars is a meaningful number. If you are under somewhere around $150K ARV, 80% doesn't work so well because the profit in terms of dollars is so small that there is little room for error. In lower price ranges you have to trend down toward 70%.

[Kevin Yoo]

Jose Garcia
We had our real estate company meeting today with couple of agents to strategize how we are going to work this market where we too are getting beaten out of so many properties and find that other rehabbers are doing not nearly as good work as we feel needs to be done.

We came up with three strategies.

1. We realized by taking into account the rapid appreciation of the CA market we can go above the 70% rule and still come out at 70% when the home is finished and sold at an ARV higher than we predicted. This is what is happening in San Diego so much so that sometimes we make more money on the sale of a home just by holding onto it longer. Before, we were always trying so hard to get the rehab done and property back on the market in as short period of time as possible. This is no longer the best strategy.

2. We also realized we need to spend less on rehab than we did before. This will help with our numbers so that our offers will be more aggressive. We don't plan to sell homes where we have done shoddy work, but we do not need to make the homes beautiful. Just making them clean and safe is enough in this market to sell at top dollars.

3. We plan to start a real estate brokerage where we will offer sellers to do rehab on their properties with our money if they will list it with us. We will place a lien on the property for the rehab work and charge a GC fee that will come out of escrow. This way the seller will get top dollars and we generate income from Contractor fee and listing commission. There is one company doing this in San Diego now and they are swamped with work. We do have a licensed broker on staff and our own construction company with a GC.

With these three strategies, we are changing our business model in order to better compete in this market. You are doing what we were doing a year or two ago. We have to accept what the market is giving us and face reality. Our old business plan of buying conservatively at less than 70% ARV and doing a top notch rehab work is keeping me and you out of the market. Now, the market is going to change again. It always does. I want to be better prepared when that occurs and I am constantly thinking of how to do this. No brilliant ideas yet. Hope all this helps.

[Jose Garcia]

Thanks for all your insight guys. I hate to go into some of these rehabs and find so many obvious problems where they've taken short cuts. But they're selling for the asking price.