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The “Affordable Custom Home” Real Estate Rehabber/Investor Niche?

by Ryan Hartman on December 6, 2009 · 9 comments

  
real estate contract

When I was active as a Realtor working primarily with investors in Philadelphia, most of my business revolved around finding “Propertunities” for investors to rehab and hold or sell for a modest profit, usually in the that 100-200k range where there were always plenty of buyers. Of course, one of the most stressful stages of the process was the weeks and sometimes months between completion of renovation and settlement day when the investor could replenish the tied up cash or pay off the hard money loan.

What follows below is a game plan for how an investor might eliminate or reduce the costs associated with that uncertain marketing phase. It all starts with implementing fundamental web marketing techniques to build a list of prospective buyers willing to buy your next renovation before you even acquire it…

The “Affordable Custom Home” Real Estate Investor Niche

Basically, instead of acquiring, rehabbing, and suffering through the resale of a property, you might establish yourself as the guy who finds the buyer first, then finds the target property and rehabs/”builds” it to that buyer’s specs.

Here’s how it might go down:

  • You could start by driving traffic to a simple site/blog that revolves around displaying your past projects via pictures and videos. Over in the sidebar of each page you’d have your “Learn More About My Affordable Custom Homes” program lead capture box. A fairly fundamental web marketing approach is being taken here – You offer something unique, the “Affordable Custom Home,” then site visitors feed you a name/email in return for a PDF that describes your program.
    Picture 138

  • As folks are added to your list, you systematically follow up (via email, social media, phone, direct mail) to see if you can’t get the prospect pre-approved for financing.
  • Many of the folks who end up on your list will need help getting credit/cash ready to buy their home. You can either help them directly or refer them to credit specialists to be incubated for the future, but, a good number of the folks will be able to get a mortgage right away.
  • With the Buyers that are ready, start a dialogue about potential locations, search criteria, etc. You might even want to bring solid buyers along to look at target properties with you.
  • Once you’ve identified a property, you can start to draft a broad purchase contract that lays out scope of repairs and sets limits for the finishes that will be chosen. Example – Your purchase contract might specify that the buyer can choose any type of flooring that retails for under $4/sq. foot… or any fridge for under $900.
  • At this point, there’s still a lot that can go wrong, but once you’re confident that you’ve got a good buyer in hand, that the purchase price is set, and that the renovation costs are as nailed down as possible, then go ahead and execute the contract and start working with your Buyer partner on the project. Sync your closing date with your estimated rehab completion date and cut out a lot of that resale stress.

Wishful Thinking or, Nicheful Thinking?

Probably a little of both, I know. I’m sure there are a lot of reasons why this strategy wouldn’t appeal to many, but for the investor looking to reduce risk and establish a large source of buyers for their prospective projects, I’m thinking the “Affordable Custom Home” might not be a bad way to go.

I’ll leave it to you to point out the downsides of this approach in the comments, but I’d like to close by recapping the potential benefits of an “Affordable Custom Home” System

  1. You should easily be able to get a few hundred prospective buyers following the progress of your projects via the E-Newsletter that is regularly sent out from your blog.
  2. Every time you have a new deal you’re considering, you can take it to your list first, checking to guage interest in the location, target disposal price, etc.
  3. You’ll always have a pre-approved buyer for your projects, even before they’re completed, and even with the inevitable disputes/contract defaults that will arise, you’ll be able to cut out a large portion of your carrying costs (most notably the Realtor’s commission) much of the time.
  4. You’ll waste less time at Home Depot agonizing over which cheap bathroom tile to go with.
  5. You might have an easier time getting funded for more deals. I imagine the hard money guys out there would be excited to see your buyer’s pre-approval letter as well as the scope of work/repair plan you’ve put together with the new buyer?
  6. You’ll do more deals, because you’ll be spending less time waiting to close on the ones you’re working on now!
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{ 9 comments… read them below or add one }

Michael December 6, 2009 at 4:18 pm

Good ol’ outside-the-box thinking.

Great article!

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Joshua Dorkin December 6, 2009 at 4:34 pm

Awesome first post here on the BP Blog, Ryan! As Michael said, that’s some out of the box thinking, and a great way to separate yourself from others. I’m looking forward to many more outstanding posts to come!

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Bill December 7, 2009 at 3:30 am

Concept is fine.. implementing it is a bit more difficult.

1- are you a licensed contractor? In my state, you would need to be a contractor to perform this sort of “flip”
2- do you own the subject property(ies)? If not, then seasoning, title and many other issues must be managed. If you do own it currently.. for how long? Again, check with lenders in your area and see what they say about seasoning.. and if seasoning isn’t the issue, do they have a problem with you selling for a profit substantially above your cost +improvements? Our country and banking industry has become quite anti-capitalist over the recent past (as if you haven’t noticed…)
3- If you don’t own the properties you’re trying to “flip”, you should check with a real estate attorney to find out just exactly what licensing may be required. You may be shocked to learn how the state is interested in licensing any activity involving frrequent buy/sell transactions. Doesn’t matter if you do it all as a “principal”.. ask qualified attorney to make sure you know the boundaries. Just remember, we are evolving from a free market, capitalistic system into a far more Statist/contolled market where government is a partner whether you like it or not.

Thinking through the entire process- I agree that it’s straight forward in concept.. but if you’re relying on outside financing at any stage (including sale to retail buyer), you best understand exactly what today’s financial institutions will and will not do. You may find that the only players are VERY expensive and offer quite low loan/value ratio loans.

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Justin Pierce December 7, 2009 at 11:07 am

I have built numerous spec homes that I immediately sold upon completion. I like doing that in certain markets (not right now) but I don’t recommend it for newbie’s. There is a lot to consider here.

1- Like Bill said, you’re going to have to be very careful of how you market yourself. In every state I know of (except maybe some areas of Texas) you can go to jail if you’re leading people to believe that you are a builder when you are not a licensed general contractor. The way you suggest doing the contract would immediately put you in the wrong if you’re not a licensed contractor. You could be on the contract with a licensed contractor or bring the homebuyer and contractor together.

2- Believe me you do not want to be on a construction contract. You’re obligating yourself to something you have little or no control over.

3- Next is warranty. This has been a huge issue for me with spec homes. By law, in most states, new construction has to be warranteed for up to 10 years for structural items. If you don’t make the right deal with the right builder you just might be letting a contractor off the hook while you’re left holding the bag for poor work.

4- Pricing. Large builders have huge departments to keep up on the rapidly changing costs of materials and labor. You will have to be very careful. Once you sign a contract with someone to build a house you are obligated to deliver a house to industry standards for your agreed price. If you can’t find someone to build the home for that price then you’re going to have to make a generous contribution to the building of someone else’s dream home.

There are a staggering number of different trades that contribute to the construction of a home. This plan puts you smack in the middle of a builder or contractor and a home buyer. That is not a good place to be. You better get a good lawyer and bone up on your local lien laws and collection processes. Once a construction deal goes bad the injured party looks for anyone to hold accountable. If the contractor doesn’t perform and disappears then tag you’re it. If the homebuyer doesn’t pay and disappears then tag you’re it. They don’t go after the guiltiest; they go after the easiest target.

This is not a bad idea. There are a lot of small builders who might really like a source of projects. It’s just a little too scary for me.

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Judah Hoover December 8, 2009 at 8:22 am

I, just like Ryan live/invest in PA.
-no contractors license is needed unless you are the one doing the work.
-using a 203(k) loan or the homestyle loan you can include the cost of rehab in the buyers loan.
-all you have to do is find a good loan officer that understands how these programs work…

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Bill December 8, 2009 at 10:31 am

Judah:

re: 203k loan… Do you “own” the home that you plan to sell to the retail buyer? And if so, does it matter how long you’ve owned it, or how much you bought it for before your lender will consider financing that transaction to the end buyer? Most lenders with competitive rates/terms (FHA or conventional) look first to seasoning of title and what you paid for it.. and only after passing the sniff test will they then CONSIDER doing the loan. Most will allow you to resell for what you paid for, plus documented costs- AFTER a seasoning period.. and will basically not allow you to earn a profit in exchange for giving a loan to the buyer. Government has decided that the solution to stopping fraud is to take away common sense and lump all transactions together- they’re all fraud, unless proven otherwise. And even then, some “policies” are simply used to remove judgment from the evaluation-hoping seasoning cures the “possibility” of fraud…

IF you DON”T own the home, your buyer is not going to get a FHA 203k loan through underwriting if you signed as seller under the sale agreement … unless you have some form of a “side” agreement with the seller – where he agrees to pay you for deliverying the buyer.. which will almost always requires a real estate license in order to comply with state licensing laws. The license introduces another troubling set of considerations and risks.

There are all kinds of clever ways that transactions CAN be done- the problem is that few, if any, are compliant with your local laws AND satisfy today’s loan underwriter.

I am always looking for ways to overcome these obstacles- and if you have discovered the magic solution- please do advise!

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Judah Hoover December 8, 2009 at 12:23 pm

I use the term “flip” when you buy fix and sell,
And “wholesale” when you never own the property but sell/assign the contract.
Mostly when I wholesale I sell to an investor, so they are using cash, Line of credit, Hardmoney or commercial paper. In any case they don’t care about seasoning.

What I was talking about(my first comment) is when you buy the home, fix it up and re-sell it. Most of my rehab/marketing time take longer than 90 days to accomplish, so the seasoning hasn’t really come up. if I am doing a light rehab I am usually just going to put local financing on it and hold it for a rental. The magic you seek is a relationship with a good mortgage broker. A good mortgage broker is 4 things 1)invests in RE himself, 2)has his FHA license (not just conforming), 3)has local bank relationships and knows how to do commercial and non recourse loans, 4) has access to hard money or is a hard money lender.

Talk to someone that has all that and will help you structure your deals going in, and you will have no trouble with financing. This obviously assumes you can find the comps you need.

One of the things to remember is this. FHA or VA or Fannie may or Freddie mac have very general or liberal guidelines. The more stringent rules are at the lender level, the key is to work with medium sized regional lenders… or a mortgage broker that is signed up with them. If you are taking your loan business to a direct lender handicapping yourself, you will get better pricing and more options if you talk to a good mortgage broker.

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Dennis December 8, 2009 at 12:39 pm

Ryan,

Been there done that, it almost worked out too. Unfortunately the meltdown occurred wiping out the buyers 100% mortgage commitment. I used $10k of the buyers money to do a few extras before closing, he got that money back as well. This beautiful over renovated home is now in my rental portfolio. Next time I will be a non refundable down payment (if that is legal).

What I do now is buy them for cash, renovate them, market to sell, and if they don’t sell they become rentals. I buy all of my properties for dirt cheap, actually for less than dirt cheap.

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Dennis November 19, 2011 at 9:00 pm

Your idea works, I have been doing this for a while. Yes there are issues that come

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