The Refurb makes or breaks the deal!
In my experience the Refurb makes or breaks the deal and the reason I say this is because it has the highest chance of variation.
I have seen so many people over the years underestimate the amount of time and money that has to go into a refurbishment and I include myself in that during my early days from coming off the tools to becoming the main contractor and trying to run a business at the same time.
My advice would be to get wise with the refurbishment costs and processes because it can bite you on the bum if you are not clued up.
A few years ago I was talking to a gentlemen at a network meeting in Birmingham after I had just delivered a talk on Refurbishments and he was telling me how happy he was that he managed to find two properties in the same street and he was going to convert them both into HMO’s, he was just going through the conveyancing for the purchase of them. He went on to explain that he had run his refurb numbers and wanted my opinion on it, I naturally asked him what he was doing, how many bedrooms, bathrooms/ensuites etc and he said they were both going to be 5 bedrooms all with ensuites, a communal area and kitchen. What he said shocked me!
Investor:
“I have budgeted £50k for the refurbs, that should be enough, right?”
Me:
“How are you going to run the project? Are you doing some of the work yourself?”
Investor:
“No I am getting contractors to do it”
Me:
“Have you had quotes for that price? And are they going to do them both together for £100k?”
Investor:
“No quotes yet, what do you mean £100k?”
Me:
“I’m confused about £50k per property, right?”
Investors:
“No, what do you mean, I have budgeted £50k for both properties!”
Me:
“Oh right, in my opinion you will struggle to get them both done for that price, £25k will cover materials and maybe a small amount of labour, you are probably looking at a few grand for furniture. So if you haven’t had any quotes how have you come to that price?”
Investor:
“It was a guestimate by me”
Me:
“If it were me I would walk away from these deals unless they still stack with a higher price for the refurb, I personally think £50k per property still isn’t enough, what ROI do you have?.”
Investor:
“Oh about 15% ROI and I have got an investor putting the deposit and refurb money for a return”
Me:
“So you have 15% ROI based on your original numbers, if it is your own money and you are happy with 15% that is ok but would be the lowest you should go, but with using other people's money it isn’t high enough, and now you need to add at least another £50k to the deals, you really need to go and have a seriously look at these deals.”
Investor”
“I appreciate your concern but I think it will be alright”
Me:
“Are these the first deals you have done?”
Investor:
“Yes, why?”
Me:
“How long have you been trying to get one over the line?”
Investor:
“9 months but they are like buses haha”
Me:
“Yes they do sometimes, promise you will go back and have look at these deals and if they aren’t stacking please cut your losses, it takes time to find good deals and I don’t want you to become a motivated buyer, just because it is your first potential deal, I was keen when I first started to and it took longer than I expected, if you need to run through them reach out.”
Investor:
“Ok thanks Dan I will go back and have a look catch up with you later”
I will let you come to your own conclusions, but in my opinion he was far too emotionally attached to getting his first deal over the line and was ignoring the facts.
Remember to not be a motivated buyer but find motivated sellers and make sure you are well informed when it comes to your refurb costs.
Have a great weekend
All the best Dan