Hidden Remodeling Cost
By: Greg McKinney Mineola TX
When I first started investing in
real estate almost 30 years ago, I was shocked at all of the costs that were
associated with purchasing and selling real estate. If you are just getting
started investing in real estate and you intend to purchase your first
investment property for a rental or to flip, there are many costs people tend to
forget when starting a home remodeling project.
I'm Greg McKinney from Mineola
TX and I have been remodeling houses in East Texas for almost 30 years and one
of the big costs people tend to overlook are closing
costs. I'm not referring to just closing costs when you purchase a piece of
property but also closing costs when you sell the property. Depending on the
purchase price and resale price of the home can add up to thousands of dollars.
If you use a realtor to resell the property for you the cost can go up
significantly.
Before purchasing a piece of
property, investors should do their due diligence and speak with a closer at
their local title
company. Ask them what the average closing costs will be for the
approximate purchase price of the home you are considering. Next, ask them
approximately what the closing cost will be for a higher priced home which will
hopefully be what you will be selling your home for after the remodel is complete.
For example, if you purchase a home for $50,000 you may have $2,000 in closing
costs. When you go to resell the home for let's say $100,000 you may have
approximately $3,000 in closing cost if you do not use an agent. As you can see
from the example you will need to calculate about $5000 into the cost of your
project.
These closing costs can vary
greatly from one title
company to the next and the costs will be significantly higher in some
areas of the country as opposed to others. Another thing to keep in mind are
the lender fees. If you will be financing your project speak with your loan
officer and obtain a detailed cost breakdown
on your loan. Also calculate approximately how much your daily interest will be
during the time you have your loan. Always calculate you will be paying 12
months’ worth of interest into your expenses. This should give you plenty of
time to remodel the home and then resell it. I always like to overestimate
expenses on a project so I’m not as surprised when the project runs over
budget. Which it always does. That is why it is so important to purchase the
home at the lowest price possible to give yourself a cushion incase things do
not go as planned.
Spend as much time as possible
analyzing your market as well. If you have a good relationship with a local real
estate agent, I will ask them to pull comps, or comparable sales, on
properties that have sold within the past 6 months in your area. I would specifically
look at the comps located nearest the property you are considering buying. You
can also speak with local appraisers in the area who might be willing to help
you. An appraiser would be a great person to build a relationship with. I
strongly suggest hiring them to appraise your properties after you have made
the repairs. They can give you an accurate value of the home prior to putting it
up for sale but they can also be a very valuable resource when you are looking
for investment property to purchase. However, you do have to be careful with
appraised values of homes. When an appraiser does and appraisal on a home, they
are allowed to pull comps from miles away when preparing their appraisal. This
is nice when you are trying to sell a home and you need it to appraise for top
dollar, but it can also give you an unrealistic value for your home in your
specific neighborhood. So, when you ask a real estate agent or an appraiser to
pull comps for a home you are interested in purchasing make sure the comps are
as close as possible to the home you are interest in buying.
So, in summary, make sure you contact
several local title companies prior to purchasing your first investment
property for a more accurate breakdown of the estimated closing costs and also get
detailed costs from your lender. Also, get to know a local appraiser in
your area.
I just wanted to pass along this little
reminder to new investors. Hope it was helpful.
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