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Assigning Contract 101 - Is a Deal really a Deal?
| | Thursday, November 13, 2003 @ 09:34 AM EST
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Contributed by: Inactive Account
Inactive Account Properties
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I believe that folks looking to assign "deals" are getting as frustrated with the current state of the real estate investment market in the DFW area as many rehabbers are. I understand that many of you are professionals who take the time to look at a deal from the perspective of the rehabber and only put a contract on a house that has enough room, after your assignment fee, repairs, holding costs and selling costs, for the rehabber to make a decent profit (typically 15 - 20% of sales price). I also realize that many of you are frustrated because you will assign a good contract to a "rehabber" who tells you they can close, who then turns around and assigns
your contract to someone else who may or may not be able to close. The process takes the profit out of the deal so that if it ever is shown to a "real" rehabber...there is nothing left in it for them...no one closes you don't get paid and you wasted your time.
Another problem that I see happening all to often is that new folks that don't have a good understanding of this business yet are out-bidding the "pros" for the property without taking into account all of the cost associated with rehabbing/selling the property. Then, what could have been a good deal for all ends up either not closing, because a hard money Lender (HML) will not fund enough or a "real" rehabber will pass on it for the same reasons listed in the preceding paragraph...no profit.
With all this being said I want to try again to help the new Real Estate Investors and those "pros" that are getting frustrated because their contracts are not closing, see what they can do differently to ensure that most if not all of the properties they place under contract will be assigned and will close.
Assigning Contracts 101 - Is a Deal a Deal?:
Treat this like a real business: This means you may have to make an investment in your business in-order to make money. If you want to earn a $2000 - $3000 (or more if the deal warrants it), assignment fee you had better do the legwork required for a rehabber to quickly evaluate your deal.
You need to be able to est. repairs accurately (within 20%). If you can't, then how will you know if a deal IS a deal?
You need to know how to "comp" a deal. This does NOT mean that you grab the other "For Sale" listings in the neighborhood and call those prices "comps". It means you will need to use the Dealinator or other MLS driven service to see what the recent SOLD Comps in the SUBDIVISION are and what is the avg. Days On Market (DOM). When you est. the selling price (to see if there is enough room in the deal for everyone) please use the Lowest or Average selling price per square foot NOT the top end. "Real" Rehabbers will want to sell the property fast (at a discount) since they are often paying HM rates...that means they will look at the potential selling price based upon the Low to Avg. Selling price of the Comps.
Also note that I said "SUBDIVISION" level comps. I know that many of you believe it is easier to pull comps based on 1/4 mile radius. This is NOT accurate. As any lender or Appraiser will tell you...comps are based up houses "most closely resembling your house". That means SUBDIVISION level comps.
Understand how Holding Cost effect a deal: If I am buying the house for $100,000 plus your $2500 assignment fee + $7500 in repairs that means I may be trying to borrowing upto $110,000 from a HML. At 14% Annual Interest that house will cost me $1283.33 every month I own it. This is why the DOM is so important for you to know when you are evaluating a deal. You need to know that if the Avg. DOM is 90 days....your rehabber will need to spend $3850 in loan payments (using the above example). That amount needs to be calculated in the deal.
Only assign your contract to a "REAL" Rehabber not someone who is going to flip it again. If it gets flipped again the odds are good that you have wasted your time and the deal will not close.
Use a TREC contract. WHY? Because the rehabber will probably need to borrow the funds to purchase/repair the property and the HML/Bank will want to see a REAL real estate contract.
I know that many of you think that I am asking too much of you. You want us to pay you $2000 - $3000, or more, dollars for finding a deal. We want you to only bring us deals worth looking at otherwise we have both wasted out time. I have spoken to many "REAL" Rehabbers over the last few months. People that can and do actually close on deals every week/month. We are all frustrated by the type of deals that are being offered to us and consequently these deals are NOT getting closed...by anyone! All we are asking of you is that you spend an hour or less doing your "Due Diligence" before you put a contract on a house that you want to later assign. Treat this like a business and don't try to assign something that no-one wants to close on.
A typical deal by the numbers (this is how I and many "real" Rehabbers look at a deal)
Max Selling Price* : $150,000.00
Acquasition Cost** : - $7,500.00
Repairs (estimated) : - $9,000.00
Four month Average. Hold Cost : -$4,900.00
Min Profit (15%) : - $22,500.00
Misc expenses (5%) : - $7,500.00
Cost to Sell*** (5%) : - $7,500.00
Max Purchase Price : $91,100.00
Additional out-of pocket amount : $7,500.00
(Not covered by loan)
FYI: Max HM Loan amount**** $105,000
* based upon selling it fast and based on the low to avg selling price/sqft
** Title work, Dwelling Ins., Loan Fees & assignment fees
*** Listing with someone like MyCastle.com for 3% plus $500, Closing costs, etc.
**** hard money Lender loan amount based on a max of 70% ARV
If you are not doing this math on every deal you are considering putting under contract then you are not earning your assignment fee. This is a business. Like every business you are only paid when you sell your product or service. Make sure you sell every one of your deals by only doing deals that can be bought by a real rehabber.
This post may seem a bid harsh to some of you. I don't want to insult anyone or hurt anyone’s feelings. You may not agree with what I have said but believe me when I tell you if you want to sell a deal to me or 99% of the other "real" rehabbers that can close...you will need to keep what I have said in mind. I do this same math on EVERY deal I look at buying...if it doesn't work...I walk!
Good Luck!
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