Why My Favorite Real Estate Deals Have Not Been Full-Blown Rehabs

6

Many real estate investors talk about the great deal they got at a great price, and then over the next several months, they did a major renovation and either sold the property at a retail price, or maybe they just did a refinance with the hopes of at least getting their capital back and keeping the place as a rental.

Sometimes this can make more sense since the place has just been all fixed up. It might actually be better to keep this newly renovated property, avoid the high taxes on a short-term capital gain, and maybe sell a property you’ve held longer in your portfolio instead.

Maybe the property you choose to sell has increased in value or the mortgage tied to it has been paid down some. If you think about it from a tax standpoint, maybe it’s a property that’s losing its depreciation deduction or one that doesn’t have much mortgage interest to deduct anymore.

Related: Rehabbers Beware: 5 Big Issues Distressed Properties Hide (& How to Detect Them)

Of course, taxes will be less if you’ve held the property for more than a year and a day (long-term capital gain). Maybe you’re even starting to entertain a 1031 exchange option again, if it might make sense.

But these full-blown rehabs and major renovations can also carry an element of risk.

For example, there’s the possibility that repairs may cost more or take longer than expected, the appraisal may come in low, you may have trouble selling the property, or the bank’s terms may be lousy when you refinance. Or what if you run into problems paying back the hard money lender?

All these can be concerns for the modern-day real estate investor. But if you’re just looking for a buy and hold property to expand your portfolio, maybe the best deal isn’t a full-blown rehab. Maybe it’s just a retail deal with some twists.

In fact, some of my best deals were bought as a retail buyer.

Download Your FREE guide to evicting a tenant!

We hope you never have to evict a tenant, but know it’s always wise to prepare for the worst. Navigating the legal and financial considerations of an eviction can be tricky, even for the most experienced landlords. Lucky for you, the experts at BiggerPockets have put together a FREE Guide to Evicting Tenants so you can protect your property and investments.

Click Here For Your Free Tenant Eviction Guide

What Strategies Make a Retail Deal a Great Deal?

One multi-unit I purchased (as an owner occupant) in my early career was purchased just under retail with a seller assist. I was the realtor (so I received a commission), and I had a lengthy, thorough home inspection. Today, this is one of my best cash flowing properties.

Another time, I bought a property after the listing had expired. I convinced the seller to sell me the property with a 6% seller assist instead of relisting it with a realtor.

Seller Assists

Keep in mind, the seller assist enables you to indirectly finance your closing costs. When I think back to the last 30 properties I bought, at least 29 of them had a seller assist. This is extremely important, and whatever you do, don’t let a realtor tell you otherwise. The less capital into a deal (as long as it still cash flows) gives the investor the highest yield. I am so adamant about this point that I’ll even pay over asking price to leave in the seller assist. Yes, you heard me right.

Home Inspections

There’s probably no better way to save money on this than having a great home inspector on your team get a repair credit from a seller (to your contractor, of course) or at least get a seller to fix stuff up for you. It’s much easier to convince the seller when a third-party is pointing out the defects and the costs.

Another great way to leverage this is to remind the listing realtor and owner that if they don’t take care of the issues reported in the home inspection in some way, the defects would need to be disclosed to the next potential buyer on the seller’s disclosure. Talk about ammunition in a negotiation.

Ensuring a Deal When There Are Multiple Offers

Sometimes you run into a great deal where there’s the potential of losing the property because it’s such a good buy or it just needs a little low-cost work. So, how can you ensure the deal?

Well, if you are a realtor, you could give up your commission. Now, you may think I just committed a mortal sin by saying that. But there have been many times where by doing so, I got the REO or I got a tight deal to go through. Some real estate investors just don’t think of this. Personally, I would gladly give up a few grand to make $20 to $30 grand on the flip.

Cash Offers

One of my favorite strategies to ensure getting a deal is to make a cash offer. This works great when there are multiple offers involved, or if I’m just trying to get the seller to take less.

Related: The 5 Things You Will Probably Forget When Rehabbing a House Flip

All you have to do is show proof of funds. I’ve even proceeded to bring a mortgage to the closing table. You should see the shock on the seller’s and realtor’s faces sometimes; it’s great. They’ll say, “I thought you were paying cash.” And I’ll say, “I am. I just changed my mind about how I’m paying cash.”

So, over the years, I’ve utilized these strategies to purchase some of my favorite deals and best properties, which were not full-blown rehab projects that took a lot of money, time, and risk. They were quick, little, bank financeable retail deals with seller assists and repair credits that were rent-ready in less than 30 days. After all, sometimes time is money.

What do you think? Do you agree or would you rather do the rehab work?

Leave your comments below, and let’s talk!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

6 Comments

  1. margaret smith on

    Hi Dave- Great little article here- Yes, time is indeed money, and this is a really different way to consider buying properties on the retail market while whittling down the price a bit, and being ready to rock and roll with rental income. I like to talk about the end product-when you buy, you’ll need to know whether you aim for “fully tricked out” (retail sale) or “good enough” (sell to landlord or rent it yourself)? I am curious, as I have seen this term “seller assists” used lately, but not sure what that might mean in practical terms. Do you have any examples of seller assists you have loved in the past, or that we buyers might think to ask for in the future?

    • Dave Van Horn

      Hi Margaret,
      Thanks for your comment. I agree that it’s very important to know what you intend to do with a property when you purchase it, having the exit strategy in mind.
      Regarding your question about seller-assists, I have utilized that strategy when buying many of my properties. For example, seller assists is the seller paying for certain expenses, such as transfer tax, points on your mortgage, etc. It’s when the seller agrees to pay a certain percentage of the closing costs, although they are typically not allowed to cover any pre-paid expenses, such as your mortgage application fee.
      One of my favorite seller-assists is the repair credit. Also, I like seller-assists that cover my transfer tax, my points, or even a home warranty.
      I hope this info helps!
      Best,
      Dave

  2. Pavel Sakurets

    Andrew, if you ever bought properties from Fannie or Fredi, you can not simply
    get a loan and wire funds to closing, because it will show up on the HUD and both Fannie and Fredi require to see buyer’s side of the HUD and switching from cash offer to financed closing will not work. You will need to get an approved amendment signed by the seller to do that. Agents hate when somebody is doing that because it delay things.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php