Real Estate Investing with Brian Evans Jr.
"Do Your Due Diligence at the Property"
Last week we discussed doing your pre-visit due diligence on a home. Now comes the fun part.
Now we’re going to do due diligence at the property. That’s the pre-property due diligence.
We go out to the property and with the intentions of after doing our due diligence to have some idea of what we want to do with it and hopefully get a commitment at the property. That’s the plan.
Now before we get commitments and make offers, the first thing I like to do is you need to determine the repairs. They told me one thing, but it could be completely different. What $5,000 to them could be $25,000 or the other way around. They could say $25,000 but really it’s only about $5,000. That’s a good game of poker right there. You’ve just determined that you hold a better hand, because they think it’s more than what it really is. It could be something simple, who knows.
You must be able to determine repairs first before you can construct and present offers. We have a repair estimate worksheet that we follow when we go out to a property to determine accurate repair numbers. Filling out this sheet is not difficult. It’s determining a fair estimate on what it’s going to take to get this property in excellent condition. And again, it’s wood, it’s drywall, it’s nails, it’s some tile. There’s nothing to it. I mean, that’s a property, but it is scary because you’re talking about having to write checks and pay money for things and repairs. If you can avoid it, by all means avoid it.
If we were to pay cash for a property, then we would go through here and just quickly run down the repair estimate worksheet, we’ve got a brief list for you. Does it need a new roof? Exterior paint, furnace, etc. Does it need it? Yes or no. There’s a check column there. Next to that, we have a column that lists the approximate cost based on what it needs.
When in doubt, get an opinion. Contractors will go out there and give you free estimates. If you’re not sure if you’re going to take this property over subject to or seller financing, what it really needs in repairs you should know something like that, get a few estimates and compare them. Use your common sense and your brain!
The final step in filling out our repair worksheet is including a margin of error including 20% of subtotal. So, we come up with our total from the repairs listed on the top of the sheet and then we add an additional 20% of miscellaneous costs that you don’t think about, because repairs can come up later that weren’t expected.
If it’s $10,000 in total repairs, we’re going to add another 20% so now we’re at $12,000. That’s approximately what we’re going to do. Miscellaneous costs comes out to things you don’t think of such as maybe piece of broken glass or something that broke, or door hardware, window blinds, fixtures, faucets, minor plumbing, shower curtains, toilet, little stuff like that that you really don’t think about in regards to major repairs.
My best advice is don’t try to budget individually for all of these miscellaneous repairs. It will drive you nuts. Just throw in 20% and that should cover you. Remember, there are two ways to buy properties here, cash or terms. Right now we’re talking about buying a home with all cash. Now just because we’re paying cash doesn’t mean we will have to pay cash. We will get there, but this is how you estimate repairs right now.
So here is an even simpler form of Algebra for you to do to determine repairs. The properties you look at are either going to need $5,000, $10,000, $15,000, $20,000, $25,000 in repairs. Take a guess and it’s probably pretty darn close. Even when you estimate repairs the long form way it’s not going to be exact. You’re creating an estimate to determine a budget which allows you to see if the numbers are going to make sense for you.
So when in doubt it’s going to come down to one of these things $5,000, $10,000, $15,000, $20,000, $25,000. With a little practice and some common sense, you’re going to be pretty darn close about 90% of the time. Have some faith in yourself.
There is one section on the property value worksheet that I didn’t discuss in this article and that’s called the MAO formula. Check back next week to find out what this formula is all about!