Dennis Favors Notes

Dennis Favors:

- Contractor for 20 yrs, Rehabbing for last 2 years

- Why? He saw a need for basics in rehabbing

- Will be talking about pitfalls in rehabbing for new investors

- He wants to set a precedent for a process each rehabber should go thru with a new property

Topic: What is that process when you get a new prop or potential deal? How do you analyze it?

Purchase process:

3 Costs:

- What is will cost you, what they are selling for, and what you are willing to pay

Soft Costs:

- Financing

- Cost to rehab

Who do you get to do the rehab? Yourself or contractor?

Contractors:

Hiring a contractor is one of the most important parts of rehab

- Likens it to a marriage

- Hire someone that you are comfortable with; this relationship needs to be fostered long before the first deal

- Harder to find a good contractor than a good deal

4 kinds of contractors:

- Contractor who has a city business license but no contractors license; can do projects up to $1,000 legally

- Class C contractor: has license from Board of Contractors awarded based on sound business ethic; can legally do a project from $1,000-$7,500

- Class B contractor: test is more rigid, must submit financial reports, show proof of level of performance; can do projects $7,500 - $75,000

- Class A contractor: test is even more difficult, higher level of testing involving codes and construction, must produce financial reports and customer referrals; can do projects with no money limit; when getting a loan from a bank, mostly they require this class and many times they must meet them in person

How to Find a Contractor:

- Get referrals

- www.dpor.com will give you referral and complaint information; this shouldnt be your only referral

- USE word of mouth!

- Angies list is another useful site

- See "Did You Know" page on handout

Permits:

- Many times Dennis has been called into projects that have gone wrong; the first thing he does is to check what permits have been obtained; the city will stop the work if its not done properly; you want to stay on their good side so always check to see what permits you need FIRST

- If you hire a contractor to do the work, have them get the permit. You can the permit but you are held responsible for the work personally. If the contractor is on the permit, you can recover your funds put into prepayment easier if something goes wrong; they carry more responsibility for the project. This way, the city will help you put the pressure on if the contractor neglects the job.

- This is even more important if you have a hard money loan because the bank will want it back in a timely manner to ensure future loans

- Make sure you always check with the city to see what projects require permits; the city can be very accomodating if you just communicate with the city and find out what is required of them

- Some things don't need permits (see handout)

Inspections:

- See Inspection Sheet in handout; this should help you know when to call for an inspection

- Some cities do curtesy inspections but James City County tends to be less friendly

- Hampton and NN are a little more flexible

- Its a good thing to develop relationships with local inspectors; they want to teach not to fail with the exception of James City County - THEY ARE NOT FRIENDLY

- Inspectors are assigned to certain areas in most counties; not James City County - its a random assignment but this makes it difficult to build a good relationship with individual inspectors; a new inspector may find a new violation and fail you again; their codes tend to be very strict comparitively

- All this said, James City County tends to yield good returns - its worth hassle!

- Get the city inspector out BEFORE the project is finished so you can troubleshoot any problems in advance

Hiring a Contractor:

- A good contractor will stucture their payment schedule based on the progess of the project; therefore you get to see what you're paying for

- NEVER NEVER NEVER pay a contractor all the money for the project in advance. NO MATTER WHAT!!!

- It becomes difficult mentally for a contractor to return to a job that will no longer yield financial gain. Contractors get lazy and stretch out a project unreasonably. Use payment as incentive and leaverage

- Dennis speaks from experience, not negativity; he cannot stress enough that you must find a contractor with a good work ethic that you can trust!

Flood Zones:

- When dennis mentioned his speech, he got this suggestion from several people: In your initial analysis of a property, consider where its located in reference to water levels. Is it near the Bay? Wetlands? Flood zones? All these factors could cost you money in the future.

- Consider this when considering a deal; it may not be a good deal afterall; that's not to say that you cannot work with the property, but it will cost more to get things done; permits may require that you go before a review board for your plan; this can be costly

Example: Dennis was called in as a contractor to rehab a house. The guy had based everything on his estimated rehab costs - got the deal and closed on the house. The time had come to rehab and Dennis went to get a permit, but he found that the property was in a flood zone. The rehab cost would have been about 50 percent of the VALUE of the property. The value of the property was what the house would SELL for. The house's value was assessed at around $50,000. Once the city established that the work was at least 50% of the value of the house, the rules changed. The finished floor had to be above the BFE and only plumbing could be under the floor. This house's floor was 5 ft under the BFE. What was once a deal, became a major financial problem. The ducts and gas lines had to be removed from under the floor; the floor had to be raised. The house stood on a substandardized lot and he couldnt tear down the house and rebuild. He ended up selling the house to Dennis who had to jack up the flooring; it wasnt cost effective for the investor but dennis could get around it.

The Message: DO YOUR HOMEWORK BEFORE YOU BUY.

What to look for:

- Check the area around the property; is there water anywhere near it? Does that water move (rise and fall)? This could cause you a problem. See the handout on working in a Chesapeake Bay area. Taking something from the property may require you to give something of value back to the property.

- Dennis is not promoting that you stay away from water properties. the return can be fantastic. but DO YOUR HOMEWORK. KNOW WHERE THE ZONES LIE.

- Its good to get a "buddy" in each of the cities to check out a property for you it ends up working out for the inspectors as well - it saves them from extra work. It takes a little extra time on your part but it saves a lot of heartache in the end

Example: 50 acre property in York County. Why hadnt it sold yet? The owner would not allow people to walk the property before purchase. Turns out that 90% of the property was wetlands. This means that the core of engineers get involved with soil tests. You would need to show proof of how you can fix the wetland problem before you can even submit to any other review boards.

- THIS TAKES A LOT OF TIME. and time is money, especially if you have a hard money loan. It can take months for you to get before all the different review boards before you can even rehab or build on this type of property. BEWARE

- Each city has also enforced that if you plan to do any additions to the property that you must have a surveyor's report. Make this part of your closing conditions.

- Whenever dennis gets a potential deal, the first thing he asks for is a plan. This puts the ownness on the property owner and helps ensure that the deal is a good one.

- The city of Hampton gave him a plan review checklist. Please see handout.

Rehabbing to increase returns:

- Sometimes adding square footage to a property will put you in a better market; this can make a home a more enticing deal. Dennis almost always adds this to a home. Another bedroom = more sq. ft = better return when you sell

Example: He started out with a house that 700-800 sq ft. 2 bed, 1 bath. Added a master bed on the back end to make it a 1500 sq ft house. Extended the porch and closed it in; this also added sq ft. This yielded a much better return.

- Stay away from crazy roof designs; they are more costly to work; it increases curb appeal but may not add value to the house; a simple gabble roof is functional and looks nice; will give you the most "bang for your buck"

What Dennis considers COST DRIVERS when looking at a deal:

- Foundation: This costs alot of money to repair; does the house lean? This can indicate damage; look at the house from the front and the side; two story houses make this easier. Bumps in the flooring? Doors that won't close? Cracks in the corners? The house's foundation is off

- Roof: Look at roof shingling - are they curling? They need to be replaced; Are there shingles under the shingles? Layers of shingles? This could cost you more to fix/replace; Does it leak? Look for leaks in chimneys and skylights, look where the roof changes pitch; water dams up in that spot and could cause a leak; look for waves in the roof? Something caused this and it could cost you money; look at the ceilings - brown stains? Could indicate a current or old leak; look at the soffets; check under the vinyl siding. Does the wood sag?

- Look at the condition of the brick

- Look at the paint outside - is it peeling? This sometimes indicates moisture problems or something more serious

- Wood: Look at the wood? Does it look soft? Wet? Moldy and white? Poke it - if its soft it could mean termite or water damage

- Termites: check out window frames and floorboards - do you see termite trails? If so, they've eaten through the sheet rock

- Gutters: Do they sag? Look behind the gutters - the shingles should go over the gutters - otherwise the water runs behind the gutters and causes problems

ALL THESE THINGS DRIVE REHAB COSTS. THEY COULD BE NEGOTIATING POINTS ON PURCHASE PRICE.

Q&A:

1. Is there a financial requirement for the different classes of contractors?

Class A does - not sure what that is

2. In an older house with asbestos and lead paint problems, what is your solution?

Abestos can be expensive. If its under the house in the pipes or in the siding as long as you don't mess with it, you're ok to leave it - if not, it can be costly; lead-based paint - strip down or encapsulate it (box it in with another piece of molding) or remove it completely and replace - hes heard of a paint you can apply right over top of it - hes not researched it but its rumored to fix the problem

3. Whats the difference between a class A contractor and Class A builder?

Just that the builder is authorized to "build" only - Does not cover plumbing or electrical (a class A builder must farm this out) - a class A contractor can do it all

4. How concerned should we be about poly pipes?

We should be aware - they can cause problems

5. What is the procedure for making payments to contractors for the duration of the project?

Dennis does 1/3, 1/3, 1/3 payments for a $20,000 project. Above that cost, the payments are broken into fourths. Customers respond well to well-defined project/payment checkpoints

6. How much do you typically charge to build a master suite?

600 sq ft - city calculates your permit by $70/sq ft. Bathroom - $30/sq ft

7. Is the "Did You Know" page for Hampton only?

yes, but hes talked to other cities and they also go by a similar format

8. I had some electrical work done without a permit. Did i need one?

If you run an electrical line, then you should have a permit. The inspection may catch it.

9. Where can I get information about what's required for permits?

The city can give you the best information - they are equipped to answer beginner questions

10. What do permits do aside from informing the city? Do they protect you against liability from injuries?

Yes they do. They act as a third party proof of progress in the project if there was ever any controversy. If something goes wrong they act as a paper trail. If a city inspector has come in and ok'd a property then its a good checkpoint

11. What's the deal with steel roofs? Are they more expensive and have more longevity?

Yes. They are 100 yr old roofs. Cedar roofs are about 50 yrs old.

12. Are steel roofs easily repaired? What's the best way to repair?

No because of the paneling. You can burn a patch, spray a fibrous coating that may get you by for a while but its very weather dependent. Its a temporary solution. When installing it really important to get the right applicator. This is costly but will save time and trouble in the end. Ask yourself, will you gain that money back? It won't add to the appraisal much - a $10,000 roof wont get you much more than a $2,000 roof

13. What are the rough estimates on cost of rehabbing vs. cost of the sale based on square footage?

Way to specific to answer. Depends on property and market.

Whats the basic costs on wraps?

depends on sq. ft. anywhere from $1.50 to $2.00/sq ft. that would include the labor and materials

14. As a builder, what have you noticed about the market? Is it easy lately to flip a house?

Dennis' rehabs are moving slower than the new builds. He's selling the same new model over and over, not even customized. Just a few personalized choices that dont cost much different. Cheap tile and expensive tile appraise the same

15. How much do you charge per sq ft?

Market driven depending on the neighborhood. Same house in one neighborhood could sell for far less or more in another neighborhood

16. What is your primary occupation?

Investor. Once in a while he'll do a job

17. What got you into investing? What took so long for you to transition?

It was simple. Credit was shot. Paid off taxes and moved into investing

18. Are you looking to buy more land? Peninsula? Southside?

Sure! Anywhere the deal is good

*Check out Dennis' MasterMind Meal

Conclusion:

Theres a lot involved with rehabbing. It takes time and experience to be good at it. You can't learn it overnight. Learn from each other and each other's mistakes.

Email Dennis at dennisfavors@aol.com

Table of Contents

Page title Most recent update Last edited by
PR Page January 26, 2009 1:27 PM former member
Dennis Favors Notes August 13, 2007 12:07 PM former member
What We Can Offer You March 15, 2007 4:56 AM former member
About VA Peninsula Real Estate Investors Association (PREIA) March 15, 2007 4:57 AM former member

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