Finding a San Jose or Los Gatos Fixer Uppers is harder than finding a needle in a hay stack these days specially with the tight inventory of homes on the market. But let’s assume you were able to find a Fixer Upper from REOs or Short Sales or at the Court House Auction. In fact, you can refer to our previous article about the Foreclosure Trends in Los Gatos for 2013 to find out more. These are the top 5 questions you need to answer before you sign your name on the dotted line find a purchase it.
Rehab Costs: Unless you are savvy flipper you will be very reliable estimates for your rehab. Make sure you allow 10-15% for contingencies since you will run into repairs that you were not anticipating. Also, make certain you include the cost of the delays associated with securing Building Permits from the City where your fixer upper is located.
Holding Costs: Some towns have horrible Planning Commissions who will take their sweet time to review your remodeling projects. And there is no guarantee that they will approve it even if you meet ALL their requirements. Unless you are buying cash, you need to allocate about 8-10% interest for your loan from a Hard Money Lender in addition to points they will charge.
Determine After Repair Value (ARV): Calculate the resale value of your Fixer Upper before buying it. property. This will also help you avoid over-building your immediate neighborhood. You can will need help from a realtor to find you remodeled comps that have sold in the last few months with similar floor plan, age, and proximity to your investment property.
Commission Costs: Allocate at least 3-4% of the After Repair Value to sales commission. We offer our investors discount on listing their fixer upper after they have been remodeled.
Determine Maximum Offer Amount (MOA): Once you have your Repair, Holding Costs and your ARV you can use the following formula to determine your MOA.
MOA = (ARV x 75% ) – Total Cost
For example if you are purchasing a fixer upper for with ARV = 2,000,000 and your repair costs are $400,000 you should not be paying more than
$1,10,000 to purchase this Fixer Upper. Do you use a different formula that has worked for you!?
Let us know how we can help your and your friends.