It is our goal to keep our investors, borrowers, closing agents, and other stakeholders informed and in-touch with the latest developments at TF Management Group LLC. We aim to accomplish this by providing you updates, education and industry news through this Monthly Newsletter. We hope you enjoy it and welcome your feedback.
This month features:
- Recent deal examples
- Commonly asked questions
Mike Zlotnik, Managing Director
Recent Deals Examples
- Tampa, Florida
- Purchase price $65,000
- Rehab $37,500
- After repair value $150,000
- Loan Amount $112,500.00
- Funded March 30, 2015
- Los Angeles, CA 90043
- Purchase Price $255,000
- Rehab $15,000
- After repair value $380,000
- Loan Amount $270,000
- Funded May 22, 2014
- Repaid March 27, 2015
Commonly Asked Questions.
The Spring is finally here!
The Winter has been brutal in many regions of the US. It was both long and cold, and it just wouldn’t end… As the result, Real Estate activity has been delayed or reduced in many towns. But the good news is coming with the warmer weather. The US Economy is still improving, and the American dream of home ownership is still there. So, we should see a fresh way of first time home buyers as well as an upgrade cycle in the Spring/ Summer of 2015.
If you are a professional rehabber (or aspiring to be one), now is the time to be selling completed projects, and the opportunity to pick up some fresh light/ medium rehabs to be able to bring them to the market quickly during the peak sales months. But rehab projects carry certain risks that every investor should understand before venturing into this business:
- Rehabs take longer than planned
- Rehabs cost overrun the budget
- ARV gets overestimated and the property sells for less than planned
This is why it is strongly recommended to always use very conservative numbers when it comes to estimating rehab project costs, duration, or the After Repair Value (ARV).
As part of our ongoing conversations with many very successful rehabbers, we have been able to formulate a basic formula that one should consider before jumping into any project:
(Purchase Cost + Rehab Cost)/ARV<80% on a light rehab (2-3 weeks max). Try getting it below 77% – this makes the deal fairly healthy
(Purchase Cost + Rehab Cost)/ARV <77% on a medium rehab (up to 2 months). Try getting it below 74%.
(Purchase Cost + Rehab Cost)/ARV <75% on a medium rehab (up to 4 months). Try getting it below 72%
The LOGIC behind this is fairly simple:
Every extra month is costing you 1% per month @ 12% annual rate on a hard money loan plus taxes and insurance. So, you need to be buying the property at least 1% cheaper for every extra month of the rehab. I would suggest that you are even more conservative than 1% per month because of other risks. In all consideration this is a framework to estimate
IMPORTANT: ARV must be estimated conservatively (price for a quick sale – 2 weeks to get a solid offer). Rehab Cost must be estimated with a 20% cost over-run buffer as well.
Also, adjust for seasonal trends. You can be a bit more aggressive in the Spring (or other heavy activity months, with stronger demand).
This formula/ approach should make it pretty obvious to the MAX Purchase price that you can pay for any property given the due rehab, and the ARV.
I realize that dynamics are very different from market to market. For instance, in CA investors pay more to get deals often going over 80% of ARV, and that’s really risky, but the deal flow is so tight there that people overpay for it. In many smaller markets, investors easily get below 75% of ARV even on light projects. Every market is different, but the principles still hold.
GOOD LUCK with your rehab projects, and please feel free to reach out to us with potential projects for a free evaluation and feedback.
TF Management Group LLC