The Property Voice Podcast - Musings: ‘Give and get’ Listener Tips - Refurbs & Valuations
Today's show is prompted by two listener contributions. Pete asks: how do you value a property before and after works and how do you estimate and price up the works as well? Helen shares some of her top tips with us to help us stay on the straight and narrow. The give is me providing an answer to Pete's question along with my '40% golden rule' and the 'cost-plus' or 'required profit' refurbs assessment methods. The get is some top tips shared by Helen, an experienced property investor, and show listener.
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Resources mentioned
Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series
Today’s must do’s
When thinking of refurb projects, consider how you will estimate the costs and valuations involved. Will you buy in this knowledge, do it yourself, or as I do, adopt a 'mix and match' approach instead? Adopt some guiding principles or 'golden rules' to help quickly assess whether refurbs deals are viable for you, or what price would make it so. Also, make sure that whatever you choose to do in property in terms of strategy that it actually fits in with your personal situation Finally, as Helen one of our listeners says: don't listen to others, stick to what you know and keep going!
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
Today, I wanted to share a ‘give & get’ listener tips. The ‘give’ is me giving a few tips in response to a listener question and the get is to share some tips sent in from a listener recently, which I think are very worthwhile listening to. So, on with the show and Property Chatter.
Property Chatter
First of all the ‘get’ and this was prompted by a voicemail that I received a couple of weeks ago from Pete from Warrington. Firstly Pete, sorry that it has taken a couple of weeks to get back to you, but I hope that more or less dedicating today’s show to responding to your questions may go some way to offsetting that 😉
So, let’s have a listen to what Pete’s dilemma is and then we can pick up what is actually a common problem for many property investors I have to say. Over to you Pete…
So, thanks for that question Pete – pricing up properties that we intend to add value to via refurbishment or 'refurbs', whether we plan to sell it on or refinance it, is a very common issue that we all face, especially when starting out.
Let’s start by breaking down the questions into parts…
- First, we have a question around before and after works valuation
- Second, we have specifying and then pricing up the works required in refurbs
You may have noted that these two questions are somewhat interlinked and so we have to adopt a general principle to scan properties initially I would say.
I have a general principle in this respect, which I guess we can call one of my ‘golden rules’…it is the 40% refurbs rule.
The 40% refurbs rule goes like this…
Purchase price + 40% <= end valuation, which is a cost-plus method
In other words, for refurbs projects to be viable there usually has to be enough of a margin on top of the purchase price of at least 40% to make the deal profitable.
Before we discuss the merits or otherwise of this, let’s show an example:
If we can buy a property for £100k, then for it to be profitable as a refurb project it has to have a post-works valuation of at least £140k.
The £40k difference will be eaten up by buying and selling or refinancing costs, the finance costs of holding the property, refurb works, including a contingency and profit.
In reality, I may expect this type of ‘light refurb’ project to have a works cost of something like £10k to £15k, some are more and some are less.
I have another way of looking at this and that is starting at the end and working back.
End valuation less my minimum profit figure, less cost of works, finance, buying & selling and holding costs must be below the purchase price payable for the project. I call this the ‘required profit method’
In the same example above, we have an end valuation of £140k and let’s say my minimum profit figure is £10k. If I estimate the costs involved before works as around £10k as well, that would mean my maximum works budget would have to be £20k if I can secure the property for £100k
In reality, £10k for both holding costs and profit is a little on the light side I find, so it is more likely to be around £25k in total, meaning I have a maximum refurb budget of c£15k to play with.
OK, so now we have two ways of estimating the values required in refurbs projects…the cost plus and required the profit method if you like.
Next, establishing the values
Here we have two basic methods…the professional’s approach or the DIY approach.
The professional approach is quite straightforward really – we pay a surveyor to undertake a pre and post-works valuation on our behalf. Of course, this comes with some drawbacks. Firstly, cost – we will have to pay a surveyor several hundred pounds to undertake the valuation. Doing this for every deal we view is not going to be feasible and even if it was, it would take too long. The other drawback is that we need to have an idea of the works involved in order to ask the surveyor to correctly estimate the end value for us.
The DIY approach is going to be a more practical method, if one that involves more risk and effort on our part of course.
This approach at the simplest level means looking for direct comparable sale values for our target property. Ideally, a directly comparable sale value should have the following minimum characteristics to be reliable:
- There needs to be some sale values recorded within the past 6 months
- The recent sales should be of the same type of property (e.g. 3-bed house, 2-bed flat, etc.)
- Ideally in the same street, or if not within ¼ mile of the target property we are looking at
We can find this info from one of the portals, such as Zoopla or Rightmove and / or auction listings to some extent.
In addition, we need to assess the condition of the property that was sold to establish if it was in pristine condition, or ‘in need of improvement’ say and adjust for that.
This will give us a guideline to work from in terms of establishing a fair end valuation.
In the absence of suitable sale comparisons, we enter into greater risk and uncertainty but can consider some of the following variations:
- Slightly longer completed sales values but no more than 12 months really
- Current properties on the market, probably discounted by 5% to 10% to allow for offers and / or auction listings
- Any ‘sold subject to contract’ properties
The first two alternatives will be available from most of the portals, however the last one can only really by obtained via estate agents or auctioneers direct.
We should also keep in mind where we are in the property cycle – on the up or the decline and make an allowance for that too.
In terms of estimating the cost of works for refurbs
This is not an easy thing to do, especially when you don’t have the experience or background in building works. Here are a few ways of going about it:
Employ a professional – for example a builder or quantity surveyor…again at a cost and many good builders will be booked up for several weeks or even months ahead, so taking them out for a viewing for a half day may not work too well for the occasional property investment purchase
Get a ‘trusted advisor’ – I have been using the term ‘trusted advisor’ for a while now. Basically, it is as it suggests someone you can ask advice from that you trust. It could be a friend or family member, someone that has a background in building, or someone with other experience in undertaking these types of projects, such as an experienced property investor.
Still, it might be an idea to not be dragging them along to several viewings each week, especially if you don’t intend to convert many into a sale…unless of course you are paying them to do that for you!
DIY Approach – as with valuing a property, so to can we look to scope out a list of works and price them up ourselves. We can do much of this research online, or we can join organisations like LNPG for example, who would have prices for standard spec kitchens and bathrooms and that kind of thing to check out. We can Google things like costs of a rewire, central heating replacement, new kitchen, new bathroom and so on. However, you may have guessed there are a couple of major flaws with this approach. First, correctly scoping out the works – we can easily estimate a standard light refurb scope of works that includes most of the major parts, such as
New kitchen
New bathroom
Flooring
Decoration
Rewiring
New boiler and central heating
Garden tidy up
Etc.
However, it is what is missed that could really catch us out…things like replacement windows and doors, a new roof, correcting damp or other hidden property problems, or on the other hand, it could be the case that some things don’t need doing right now. Similarly, the quality of finish is going to have a huge impact on the final pricing. Flips may need to have a better quality of finish to rentals for example.
So, there are some of the approaches we could adopt to tackle the challenge faced by Pete and by many other property investors looking at adding value to a property through refurbs.
However, I would say this – property investing is a business or profession and so, unless you really do have a background or experience in the building trade, then the better alternatives are going to be using people whose time and experience you pay for. These could be surveyors, builders, trusted advisors or even other property investors through joint ventures if you cannot find any that will guide you for free. You can also mix and match a little as I shall share in a minute.
You could always try networking with other investors and picking their brains but always remember a couple of principles here…not every investor is an expert and not every project is the same as the one you are looking at undertaking. Plus, sometimes free advice can end up costing you the most!
Here is what I now do with my own refurbs projects:
I use the DIY approach to estimate a project’s viability using my 40% refurbs rule, desktop before and after valuations and estimates of typical works spend.
If a deal stacks up in principle, I have a ‘trusted advisor’ that can sanity check my numbers and visit the property to further scope out the works required
I would then make an offer and enlist my own surveyor to give me a before and after valuation based on the scope of works I planned to do.
I pay the trusted advisor and the surveyor for their time and expertise, but I reduce the requirement of doing so by doing my own pre-screens and test the viability before I get them involved.
Will every project meet my 40% refurbs rule…no they won’t but it is a useful guide for me to follow. I know that if the property is in pretty decent nick that I won’t have a large works budget, but equally if it needs some structural works that it will need more. I then flex the rule to see if the property stacks up. I can then use the general rules and principles to make offers on properties accordingly. I then use the more experienced trusted advisor and professionals to support my decision.
Finally, as I alluded to earlier, we as professionals or business people need to either acquire the skills and knowledge to undertake these tasks, or we need to buy them in instead – that is the best way to be successful I would say, adopt a business-like and professional approach.
There you go Pete, I hope that is of some help to you, and also to the other Pete’s out there who no doubt have a similar dilemma.
I want to draw a line on this discussion for now though and instead turn my attention to the ‘give’ part of today’s share. Let’s hear that in the Your Voice segment now…
Your Voice
I recently heard from another listener called Helen, who wanted to share a couple of her thoughts and they are very good, so I thought I would share them here with you too…These are some of Helen’s top tips:
Don't listen to other people
It's so easy to get distracted in your plans by everyone else's opinion from
your mother in law to your best friend. They invariably don't invest
themselves but it amazing me how so many people have such strong
opinions....
Stick to what you know!
Having set up a reasonable sized portfolio which has worked well for me, I
tend to go for similar properties as they've worked well for me in the past!
Sounds obvious, but I think a lot of people feel they must diversify and
it's really not necessary, so I say, stick to what works and what you know!
Keep Going!
This sounds like a repetition of the above two, but more to do with
determination. So many times I've been told (particularly by lenders) well
you can't do this that or the other and I've found there's nearly always
another route. Also, the amount of paperwork required by lenders now is
exhausting, and off-putting, but keeping your eye on the prize will
encourage you in this somewhat lonely journey. You will win in the end if
you simply keep going.
In summary then:
- Don’t listen to others
- Stick to what you know
- Keep going
These are certainly some excellent tips from an experienced property investor.
I do want to add just one more to this general list today though…
Do what is right for you…
This often gets overlooked I have to say. I hear of many people jumping onto the latest craze, bandwagon or hot strategy in town. However, what is right for one may not be for another. For example, if you have no cash and need a rapid income replacement, then standard buy to let is not going to be ideal for you.
Similarly, if you have no or little free time available, then it is no use considering a strategy that requires lots of hands-on time input like managing HMOs or rent to rent say.
And drawing a link back to today’s central theme raised by Pete, it is no use doing refurbs if you don’t have the experience to evaluate such projects, or you can’t acquire the experience some other way to do them. There is always a way, but sometimes we have to sift through a lot of the information out there to establish the best way for us at this present time.
So, thank you very much to Helen for sharing your tips with our listeners, do you have any top tips of your own you wish to share? Or do you have any golden rules, similar to my 40%refurbs rule for example, which was prompted by Pete’s question? If you do, then I would love to hear from you…send me an email podcast@thepropertyvoice.net
That’s all we have time for this week and next week, the show notes will be over at the website www.thepropertyvoice.net and feel free to drop me a line anytime for a chat to podcast@thepropertyvoice.net
So, all that’s left for me to say is, thank you very much for listening and until next time on The Property Voice Podcast…it’s ciao-ciao