Working a deal from beginning to end

Warning: This gets a little long so unless your a newbie you probably wont want to read on.

So i have a little bit of time on my hands tonight and i thought i might write up how i work a deal from begining to end that newbies may be interested in. There will be some variation on some deals but this is my basic outline when buying an IP. This is just one of many possible ways to approach it and everyone will have their own way/style which works for them. Below is just a rough example purely made up and not real numbers. The example is just to show 1 possible approach/strategy from many. Hope some find it useful.

Scenario- Goal for next acquisition: Buy a house that has room to add value (via reno) to 10-12km from a CBD in a state thats cycle is 7-9 oclock. After reno, retain and extract equity to leverage into next IP.

Chosen Area: Brisbane, Holland Park West,
Strategy: cosmetic renovation revaluation to extract equity
Due diligence: Use REA and Domain etc to research what renovated homes are selling for in the area, their land size, house size and amentities. After doing this research and talking to REAs you determine that newly renovated 3 bedroom homes are selling for 700-725k, renting at $620/week. You then research via same methoods above what older 3 bedroom comparable homes are selling for and you determine that their sale price is around 550-600k.
Renovation feasibility: You then work out how much a cosmetic renovation might costs after speaking to a few companies, builders, tradies etc and determine that for a paint job,basic kitchen, basic bathroom , change floors, lighting and nice tapware comes to around 70k. You determine that after renovation costs, the margin between old and renovated 3 bedroom properties is worthwhile the effort to make it financially feasible.

Renovation: $70,000
Holding costs:$4,000 ($2,000/month for 2 months)
Stamp duty/legal:$20,000
Contingency: $3,700 (5% of reno+holding)
Total: $97,700

Target: You then become totally obsessed with looking all over the suburb and close by for your target property at the price range around $550-$570k mark. Using websites, networking with agents, drive around etc you target not 1, but multiple properties that are acceptable and fit into your target, say 3.

Dwelling Due diligence: Before calling agent, you use RP data to try and work up a vendor profile eg, what they paid for it, when they bought it, in how many names is the property, current rent (if rented) etc. Sometimes you are able to work out key motives by this process, eg, the place was bought last year for 620k and now they are asking 590k. Bells should start ringing at this point. So you do your DDD using rp data (or similar) on all 3 properties to get your vendor profiles. Sometimes it wont reveal much, and other times it will have useful infomation you can use in negotiations.

Call agent: Introduce yourself, be confident, ask about the property and ask questions to try and work out the vendors motives for selling, let him/her know your a serious buyer who is ready to go, finance in place and if it can be bought at the right price you won't waste their time you'll just buy. Sometimes i like to give the impression i am buying with another person (so if need be i can make the partner 'look bad' in negotiations while i remain the good cop). The agent says that they are asking offers over 565k. You let the agent know that its above your budget and just wont work. Your able to make an offer of 550k. (There are so many different strategies/approaches to negotiate its impossible to write many of them here and it will also depend on the market how you will need to negotiate). The strategy i am trying to show here is that you make the same kind of offers on all the 3 properties, same approach to the 3 agents.

Back and forth, back and Forth: Agent on property #2 says vendor counters and you accept a price of 560k. Property bought.

House: $560,000
Stamp duty/legal: $20,000
Reno+HC+contingency: $77,700
Total: $657,770
Revaluation after Reno: $720,000
Rent: $620/week
Equity increase: $62,230

You may be able to actually pull out 45-50k from that amount. Hooray! Now you have an IP that you added vaue to and is in great condition, increased its rent and its value, able to manufacture equity for your next IP deposit and its slightly Negatively geared only. I have used this basic framework (with some variations) many times with great results.


Mission accomplished.

 

Great stuff , Very good thankyou

 

Great write up!!'
One question, given bris is on the move (I have 2 myself), what are houses not renovated in holland park renting for?
Just wanted to know your calcs on yield before and after reno..

Good work

 

Thanks @Greyghost

The suburb and numbers are just an example mate not saying that HPW is a suburb suitable - I don't know. From a quick look I think unrenovated 3 bed homes are renting for around 480 and renovated around 550, more for 4 bedrooms.

 

I really don't mean to sound negative but is it just me or does spending $70k on a renovation to unlock an extra $45-50k in equity seem counterproductive?

You could simply not renovate and use that same $70k as a deposit on another IP instead. I know you'll get higher rental income afterwards, but you'll need it as the mortgage has also gone up

 

HI Jamie,

Usually in a cosmetic reno ppl look for around $2.5 dollars return for every $1 spent, so yes the scenario above is really conservative . Being savvy with reno costs and buying under market value helps.

But the best reno deals are when you can get around $2-3 return in my experience. That would allow you to comfortably recycle the equity. Edit: An example would be a place we bought in Sydney in 2013, did a reno for around 35k and were able to pull out 120k 4 months later. We did buy a bit under market value which helped. I have noticed sometimes when you buy a place BMV banks are hesitant to revalue at a higher price if the sale was recent, but when combined with a reno, suddenly they are more inclined to increase its value, so the BMV factor + reno increase can be counted together. A good valuer friend of mine discussed similar with me in the past.

 

Good example Leo, I like it, where do I sign up?

 

HI mate, Sign on the dotted line that says "super effort involved"

 

Couple of flaws in this strategy

1. What people pay and what the valuer values are two different things.

2. Current lending environment - its not that easy to get an equity extract any more.

3. Where does the funding for the reno cost come from?

4. The assumption that every $1 of reno equals $2 return.

5. If an area has that much difference between a reno and non reno'd property, then every other man and his dog would attempt to jump on it, resulting in "renovators delight" being closer to $650k than your suggested $550k.

Every now and then you will pick up a property for cheaper than what properties are selling for in that area. But for those, you have got to be quick and know your market. These properties are on for about 48 hours before they disappear. You don't have the time negotiate back and forth, usually they are sold at asking price or slightly over.

This is also why other say buy at below the median as it makes it easier for an equity extract.

 

hi neK,

I agree with you mate its not easy, and depends on the market as well. As you said if a deal looks good usually its gone fast (but not always, iv'e bought many deals you would think why aren't others seeing the potential and snapping it up...but it just happens mate). But its doable. Especially if you are able to buy BMV as well. Buying BMV say 30k for example, valuers are not happy to revalue something at a higher value if it was only bought few months ago, especially if the BMV is not THAT great in difference. I have seen though and experienced that when coupled with a reno, suddenly they seem more willing and slightly more generous with their valuations.

But I completely agree with you its not as easy as many people think it is, but definitely doable.

 

Not all houses have renovation potential.
This is where "good bones" actually do make a difference.

 

Hi Leo
Do you manage the renovations personally?

 

Hi Vasa,

When the reno is not far from my place I PM most of it. I have done a few that were in other states and I organised everything few weeks before. I got the REA to help me manage the tradies and some friends I trust as well. Its not the most efficient and can be frustrating at times but you gotta make do with what you got. I did fly down at times to see the progress, usually in the middle and at the end.

 

Hi Leo

I guess the variable to consider is the area that you're buying in and whether you would look to also achieve organic CG over the short/medium term. If so then great and that would sweeten the deal, but if it is a genuine buy to hold long term decision, I'm not sure I would put myself through the stresses of a major renovation when the outcome is that is the equity release is lower than or equal to the costs incurred. If the property absolutely needed the work, and those are the figures, maybe you are not actually paying BMV?

That being said, it is horses for courses. Being no expert with this type of project, this old horse would look for a different track to race on!

Is this scenario hypothetical or one that you are planning/undertaking right now?

Cheers

Jamie

 

HI Jamie,

Yes it really depends on the individual, as you said horses for courses mate. With regards to not actually paying BMV, it really depends. If your buying a place that cannot be rented due to the poor condition of it and absolutely needs to be renovated then it could be. For eg if market value was really 600k but they are asking 560k and the reno for example would be at least 50k then your right, after you do the reno you wouldn't have any advantage, probably worse off. From my experience it works best when the property is really bought BMV and you are able to add substantial value for a fraction. Sounds too good to be true I know but it does happen, just not very easy to find and need to look at many properties. Also depends on the market. I'm no reno expert either its not my main forte, but I do take on projects from time to time. From memory.. best I ever did was get back 4 times my investment in revaluation. Worst one I did was break even! I misjudged that one big time., I think it was my second one..

Yes mate the above is just a hypothetical scenario and in all honesty the margin is probably not enough to make it worth while for many as you have rightly pointed out. But the way I approach it is much the same as outlined above, just need to make sure there is a little more margin then that.