Buying a Renovation Property That You Won’t Regret
Part 2 of a 5-Part Interview with Professional Renovator, Caroline Vass
Last week, I introduced you to Caroline Vass, a Geelong-based investor who focuses on renovating, subdividing and developing as a primary strategy. Having been trained by Steve, she’s also started a business helping other investors renovate their old and tired properties.
In Part 1, “Finding a Profitable Renovation Deal,” we concluded that the two most crucial aspects of getting started are to clarify your deal profile, or know exactly what you’re looking for, and network with quality agents, so the deals will come to you.
Caroline gave us some examples of how she’s found some of her personal deals – one from last year, and one that she’s working on now.
We’ll pick back up this week, and dive deeper into a discussion on how she conducts her due diligence, makes an offer and negotiates the terms on a renovation deal.
1. Caroline, Thanks Again For Giving Us Your Time. You Briefly Mentioned In Our Last Interview That Once You Find A Property That Has Potential, You Then Prepare An Initial Cost Estimate. Can You Take Us Through That Process?
My initial cost estimate involves three steps:
- Conduct Market Research – First I research the specific area to establish a realistic post-renovation resale price.
Determine Acquisition, Holding, And Sales Costs – Knowing your strategy from the beginning is crucial, as your initial cost estimate will reflect this.
For instance, if you plan on buying a renovation property and holding it, sales costs are not an issue. But, if you’re planning a quick flip, then knowing your sales costs are crucial. These costs are all quite predictable and fixed.
Once subtracted from the estimated post-renovation resale price, I’m left with a dollar amount that must cover my profit margin, and the renovation and construction costs.
I generally work on a profit margin of 10% of the project cost for a quick flip. Once I subtract out my desired profit margin, I know my maximum budget for the renovation costs.
- Conduct Preliminary Costing For Renovation – Step three is to turn my planned scope of works determined during my first inspection into an initial renovation budget. I achieve this initial costing by referring to my spreadsheet that has hourly rates of tradies, quotes from previous renovations and subdivisions and material costs.
When I first started, I didn’t have the network of tradies to call on for rough estimates, nor did I know the cost of materials, such as door handles. In the early days I had to ring three people of each trade to get a rough guide to what different aspects of my renovation would cost.
2. The Last Time You Mentioned The Geelong Property That You Renovated And Sold Earlier This Year – The One That Had Two Houses On The One Title. What Did Your Initial Cost Estimate For That Deal Look Like? Why Did You Feel It Was A Winner?
This property was attractive because it combined my two passions – renovation and subdivision. The fact that it had been on the market for a while meant the vendors were motivated to sell, which really helped in the negotiations. They were seeking offers in the range of $400,000 to $430,000, so our initial offer was $390,000.
I knew from my initial cost estimate that based on the renovation scope and our target market, we couldn’t pay more than $390,000. Our strategy was to cosmetically renovate both properties, and then subdivide, so we could sell the properties individually.
Here were our initial rough figures:
- Purchase $390,000
- Acquisition costs $ 20,000
- Holding costs $15,000
- Renovation costs $20,000
- Subdivision costs $15,000
- Selling costs $15,000
- Proceeds from sale $520,000
- Potential profit $45,000
This deal was unique in that it required our skills and knowledge in subdivision to make it work. We felt that $45,000 was a good profit for the time and risk involved.
3. What’s The Next Step In Your Due Diligence Process? I Assume It Has Something To Do With Pinpointing Your Renovation And Subdivision Costs.
Yes, once I determine that the deal has profit potential, the next step is to confirm that my initial budget is accurate. Because this process takes time and costs me money, before going any further, I make an offer subject to a due diligence clause.
If my offer is accepted, this gives me typically ten calendar days to accurately cost the project and confirm my initial estimates.
Once the offer is accepted, I’ll get firm quotes from my tradies, research compliance requirements, such as that of city councils and utility providers, and arrange for an independent valuation to validate the potential resale price for the end product. If we decide in those first ten days that the costs don’t stack up, we can pull out.
4. What Kind Of Interaction Do You Have With Your Local Council Town Planners During This Due Diligence Phase? Did You Meet With Them On The Geelong Subdivision From Earlier This Year?
We have a lot of contact with our council right through our due diligence phase. When we are initially investigating a property, we speak with council to ascertain a rough idea of what the planning requirements will be.
We also do a lot of work to understand the current zoning and overlays and their impact on how the site can be developed.
It has been crucial for us to get to know our local town planners and develop a relationship, so that council requirements can be confirmed informally prior to lodging permits.
Most councils allow pre-application meetings with town planning officers to review the proposals in light of requirements of their planning scheme.
However, it’s not only town planners that you need to know. Council infrastructure officers will also confirm what physical works may be required related to cross overs, driveways, storm water retention and drainage, and water sensitive urban design. We’ve learned to budget for the worst-case scenario in our due diligence, as councils will not give a final confirmation on all requirements until they grant the permit.
5. You Mentioned Before That There Were Some Problems To Solve With This Property That The Previous Owners Were Unable To Solve. Can You Elaborate On That?
Our understanding of easement requirements for sewer and drainage infrastructure allowed us to save thousands of dollars on this deal. There was concern that some existing structures would need to be modified in order to accommodate sewer and stormwater drainage connections.
Our knowledge enabled us to adopt an “implied easement,” meaning in the end we could get away with carrying out the infrastructure works without pulling down the veranda.
Understanding what to ask for when speaking to council and contractors and having a team of experts behind you can really take pressure off your bottom line. The outcome was that we were able to complete the subdivision works and keep the large deck and pergola, which was a huge asset to the property and would cost around $15,000 to rebuild.
6. How Many Times Do You Typically Inspect A Property Before Making An Offer? What Do Second Or Third Inspections Involve?
I think of inspections in three phases:
- First, there is the initial inspection where I look at the potential for renovation and or subdivision. I will film the property on my smart phone.
- The second phase occurs after I have completed a preliminary budget and a more detailed scope.
This is where I refine my thinking and confirm what can and can’t be done. This inspection can take one to two hours to do, as I also take critical measurements to refine my scope.
- The third phase is generally during the 10-day due diligence period and this involves a series of inspections where my team of tradesmen quote specifically on my scope. I’ll also carry out a building and pest inspection. In some cases, such as at auction, a due diligence clause is not possible.
In these circumstances, I inform the agent that I’m going to need access to the property to get quotes. I also arrange for a building and pest inspection to be done prior to auction.
7. Can You Take Us Through Your Process Of Making An Offer On A Property? Are There Any Other “Subject To” Clauses That You Include?
Making an offer is fundamental to securing the deal. There is truth in the saying that if you are not making offers you are not making money.
Hence we try to make as many offers as possible when we are in the purchasing phase. We do this both verbally and in writing.
Our primary “subject to” clauses are for building and pest inspection, as well as for obtaining finance.
As I’ve mentioned, we also ask for a due diligence clause of ten days, which gives us the ability to withdraw from the contract if we discover anything that would negatively impact our profit margin.
We find, however, that there are not many agents that understand or embrace the due diligence clause, as they can be difficult to sell to vendors.
This means sometimes the offer must be attractive in other areas to be accepted. Sometimes we’ll provide several offers with different scenarios of price or terms to give more options to the vendor.
We try to have as long of a settlement period as possible, ideally 90 or 120 days. This allows us to purchase our materials, schedule our tradies and have our council permits prior to taking possession of the property. Obtaining permits requires the vendor to consent to sign any documents required to progress a permit, so this needs to be worded clearly in the contract.
8. How Did The Negotiations Go With The Vendor On This Renovation And Subdivision Deal We’ve Been Discussing?
The vendor was motivated to sell, as the property had been on the market for over six months. He was therefore willing to accept our initial offer with a due diligence clause.
We did find some concerns that threatened our profit margin, so we had to go back to the vendor with a lower offer.
Because we kept the agent fully informed of the situation and our cost findings, he was able to clearly communicate our reasons for a price reduction to the owners. This subsequently led to the acceptance of our final offer.
We’ve found that one of the keys to successful negotiation is to be open, honest and clear about your objectives and the rationale for your offer. When you demonstrate that you are a genuine purchaser, the agent is more likely to be on your side, and will help to influence the vendor to proceed.
It’s also important to help the agent understand your vision for the property. A good agent will clearly articulate the needs of the vendor, which will help you tailor an attractive offer.
9. Are There Any Helpful Tips You Can Offer For Obtaining Finance For A Renovation Deal?
The most important thing is to establish a relationship with your local banker or a good mortgage broker. When we were starting out, we organized all of our own finance.
There is nothing worse then spending hours on the phone with the banks and getting the run around.
Being an investor means you have to be smart with your time and use it in the most productive manner. Being on hold and talking to call center staff for hours to obtain finance is not smart.
The best way to find a good mortgage broker is to ask friends and family if they know of anyone. In the end, we interviewed a few different mortgage brokers and identified the one who understood our vision and what we required of him.
Having a reliable tax accountant will also save you time in providing financial information and tax returns to banks, which they require for processing loans.
10. How Do You Typically Structure Your Property Purchases? Do You Use Any Company Or Trust Structures?
When we decided to become investors, we sought legal and accounting advice, and subsequently set up a company. As we had young children, we wanted to ensure that we protected our family home.
The advice we sought helped us to identify the best way to do that. All of our property is now purchased within our company as trustee for a trust. This provides protection of our private assets.
Each individual will have unique requirements. We highly recommend that they seek advice from a financial adviser or accountant on structuring their purchases.
11. Are There Any Updates That You Can Share On The Offer That Was Accepted Last Week?
We are in the thick of due diligence and negotiation. Hopefully we can provide an update in the next article.
One of the repetitive themes that you’re probably picking up is the importance of having a strong team and building quality relationships.
So far, we’ve heard of Caroline’s network of quality agents, skilled tradies, mortgage brokers, accountants and town planners. She has clearly been very deliberate about fostering mutual trust with those she partners with regularly.
Finally, I hope you’ve picked up on the level of precision with which she conducts her due diligence. She’s not taking stabs in the dark, or buying and hoping for the best based on back-of-envelope number crunching.
She is very thorough, and only proceeds after confirming her budget through third-party quotes and appraisals.
In Part 3, I’ll quiz Caroline on exactly how she conducts the actual renovation of her properties. The goal of any renovation is to add more in perceived value than actual cost. She’ll share with us how she gets the most bang for her buck and avoids over capitalizing.
You can learn more about Caroline and request some free training videos at her website: http://www.smartchoicepropertydevelopment.com.au