Everyone has seen the programs for “flip this” or “flip that”, and those programs have brought many new people into the rehab business. This has resulted in a lot of competition in the bidding process at auctions. All these amateur newcomers are now bidding auction prices up to retail levels. Back in the day auctions would sell for a fraction of assessed value. Now they are selling for 50% to 75% more than assessed value.
In other words, these new bidders are destined to lose money before they start. This is all because they don’t do their homework before bidding.
To make matters worse some rehabbers wind up bidding on houses with settlement or sink hole issues, or “Meth” drug production houses with toxic chemical residues.
They must personally inspect each house before bidding on it to know their rehab costs.
The next thing they need to do is to determine a most probable successful selling price, taking the neighboring home values into consideration. This is a process that involves looking at all the comps for active homes on the market, pending contracts, and sold contracts; within a mile and 3 months. The best source for these numbers is a Realtor. Some amateurs think they can do this with Zillow; forgetting that Zillow says their numbers should be within 20%. In other words, they can be a potentially disastrous 20% off.
Then they must determine their total acquisition costs (including legal fees to get clear title, past due HOA fees, capital contributions, and taxes), and their total rehab costs. Rehab, repair, and landscaping costs include dumpsters, demolition, permits, construction and holding costs until sold: including HOA payments, taxes, insurance, interest, electric, and water/sewer. Then they must get lien releases from all contractors and suppliers.
To this they must add marketing, sales, and closing costs. Closing costs include title search and title insurance policy, state deed stamp tax, tax prorations, CDD prorations, and closing company fees.
Then they must determine the area's average % discount to selling price, as well as any additional repairs required by FHA or VA lenders, to get to their probable net sales price.
Once they have all these numbers, they can subtract all the projected costs from the probable net sales price to see their projected profits or losses. That’s how they should determine their maximum bid price.
They need to have a spreadsheet set up with all these calculations in it before and while they are bidding so they know when to stop.
You'll get these projects half started at a discount when they run out of money after the first or second change order...
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