The Best article ever for Rehabbing Houses

Construction VS Renovation

There is a difference between construction and renovation. Construction basically means that you are
doing something from the ground up. You are constructing something, which doesn’t exist and you
are adding it. Renovation means you are working with an existing structure and walls there.

There is a terminology called a footprint, which is basically the footprint of a building. You have got
your building and you have kind of drew everywhere juts out. You can kind of draw a little footprint
when you are looking from the top down. So, I am looking down on the lock and I am trying to outline
a lock. Finally, I’ll draw outline of the building with juts out and everything as I am looking down on
that. That’s going to be termed as the footprint of the building.

Now, when I am doing renovation, I am not changing the footprint of the building. I am leaving it the
way it is. I am not adding a storey or a basement or stretching walls out etc. Everything I am doing, I
am doing within the existing structure that’s there. If the basement is unfinished, then I finish it. Is
that considered construction or renovation? That is considered as renovation because renovation is
when you are doing the stuff within the existing walls that are currently there. Construction would be

building something from the ground up.

If I am finishing a basement, that’s not there or if I am putting in a bathroom, that’s not there or if I
am putting a new roof, new carpet, new paint or new carpet; that’s all is within the existing footprint
or the existing structure of the building that is already there. You could be adding a bathroom, that’s
not there but as long as you are not changing the existing footprint and adding another room to the

house that’s not there, then you are doing renovation.

Now, construction means either you are building up from the ground up or you are adding to the
existing footprint. Construction would be adding a level or putting an addition on the back etc. Most
of the time, we are not going to help you if you want to do construction and that may be change. But
right now, not a lot of people have an appetite for construction.

There is a big difference between renovation and construction. If you are adding to the footprint or
square footage, then you are talking about construction rather than renovation. It is really important
to know the difference between the two, so that you can do the very best possible in being successful
and in getting money to make these things happen.

Right now, there is a BIG appetite for renovation and a little appetite for construction.

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Who holds the earnest money?

Typically, your broker is going to hold that earnest money in earnest money escrow account, where the
money sits there. The only way it gets out of there is if the buyer and the seller agree how that money is
going to be distributed. I think it is really important that when you get into it that you put some
contingencies in place, so you know how that money is going to be distributed.

I have just got off another call where we were giving a loan offer and the buyer for whatever reasons
wrote the offer as a cash offer and then he was thinking it won’t be a problem if he is getting financing

and sometimes it isn’t. But I would say half of the time, it is a problem.

If you are making an offer, you shouldn’t make it as an all cash offer but make it as a private or hard
money offer because you are not going to pay all cash. The only time you pay all cash is if you really have
cash in your pocket to pay. If you are getting any type of loan or if you are borrowing money from
somebody, even if it’s from your brother, relative, friend or cousin and they don’t want to quote

anything against the property; you’ve got to make a financing offer.

Lots of people gets concerned thinking, “Hey, if I am making a financing offer, the bank would be not
that excited to accept it.” That’s such a myth. If you think about it, the banks right now are getting the
money from the Federal Reserve with 0% interest.

If you have made an all cash offer to the bank for $300,000 and I made a financing offer to the bank with
$320,000 but I am going to close two weeks later, what do you think, which offer will the bank take?
Let’s think about this. We are talking about 2 weeks. We are talking about 0% interest rate that the bank
has to pay on their money. What the bank is going to take? Is it tough? No, the bank is going to go with
the higher one i.e. $320,000. There is no doubt about it. They would also do it for a couple of grand

higher because couple of weeks doesn’t really mean a lot to the bank.

You may say that the bank always push you for the close. Yes, they will absolutely do that because
that’s their job. The more the money they can recover faster, the better things are off. But at what loss,
they are going to do it? None! They are not going to take a loss to take a couple of weeks faster off or in
the form cash offer or anyway.

I think banks are also smartened up and they know a lot of people write an all cash offer but they are
getting hard money lending. It’s really has a contingency anyway. That’s why; it’s very important that

you make an offer as financing.


The other thing is don’t botch yourself into time period. You don’t want to get into a commitment and
lose your earnest money. One thing that makes a big deal is to make sure that you have enough time. I
would recommend that you make your offer with 5-7 days for inspection, 5-7days for loan denial and 5-
7 days for loan closing. If you are new, you might want to go 10 days for inspection, loan denial and loan
closing.

These are all contingencies that if you have written your offer properly, those contingencies are going to
help protect your earnest money. The last thing that you want to do is lose your earnest money. It
makes me sick to my stomach that many people are losing their earnest money. I have NEVER lost my
earnest money. Why? Because I like to protect my money as it is a VERY IMPORTANT deal. What you
should do is:

You want to make sure that you have your inspection or evaluation or due diligence deadline. It basically
gives you the opportunity to look at the property, reevaluate everything and make sure that you really
want to move forward on it.

While you are going to the property, look at everything, get your contractors in and get firm bids from
everyone. We would be looking at the property determining what we think the value is and working at
the loan offer for you. It takes us about couple of days to about a week to get these things done. That’s
why; you are going to give yourself 5-10 days to do that.

And then, if we like it and you have got all of your stuff taken care with bids and everything else like
that, then the next thing would be loan denial. During the loan denial, we are going to go through and
get all the information that we need from you including title, just to make sure that there is no problem
with the loan.

It’s very rare that after we have given a firm loan commitment, the loan doesn’t close. It’s pretty rare. I
would say 90-95% of time they get close but in case if there is a problem and something happens, then
you can get out of the contract due to loan denial because we have denied the loan if we are not able to

fund on it, which means that you’ll get your earnest money back.

One question that a lot of people ask is that I want to make sure that I am bringing good clear title to
the property.


The bottom line is that in most of the contracts, the seller requires to give “marketable title”. They have
to give title that is free of incumbencies and all that type of stuff. They can’t just give you a property
with ----- (13.06), they will have to give you title and they will have to buy insurance.

I am buyer, what happens if the seller doesn’t close on a contract?

In most contracts, if the seller doesn’t close; there are a couple of things you can do:

1. You can sue for performance, which means that you are asking the judge to make them follow
through on what they have said, they would do.
2. You can sue for damages, where you can say that I incur damages because of this. Therefore, I
am entitled for these damages.
3. You can sue for the earnest money and say, “I want my earnest money” and in most cases,
you can get equal to that earnest money back.

With any of these, obviously it’s not a good situation because you are going to have legal fees. You
could probably win a lawsuit on any of these types of things but it is not the best course of action. For
example, if you want to sue for damages; you will have to show the potential profits and other things
like that. Sometimes you have a problem because they want to know that it is actual and not
projected.

More than likely, you don’t have to do deal with that. It’s pretty rare that sellers don’t perform and
usually what you have got to do is just to get an attorney involved, have him write a letter, have him
make a phone call and make sure they know the superiority of the matter.

The thing is when you get into a purchase contract, in most cases; you are the one who can pull out. If
you don’t like the property during your inspection, you can pull out and get your earnest money back.
If you can’t get your loan, you can pull out and get your earnest money back. You have some ways to
get out.

The seller on the other hand, doesn’t have a way to get out. The seller can’t say, “Oh, I don’t like you
guys. I want to get out.” They don’t have the right to do that. There’s going to be an important
distinction between these two, which I think is REALLY important.

What’s included and what’s excluded in a purchase contract?


Anything that is affixed to the property is included. For example, if there is a night chandelier, it’s
included unless it is specifically stated that it is not included. In most cases, they say the things that are
permanently affixed to the property such as carpets, hot tubs etc are automatically included. Things like
appliances aren’t going to be included because you can just pull that one thin line, the plug comes out
and you can take that with you. If you want those things, you will have to include them in purchase
contract and then those are going to be included in a separate bill of sale at closing.

Frankly speaking, I like to ask for things. If you are working on a bank owned property, there’s probably
nothing there. But you can always ask for different things and lots of the times, you can end up getting

some of that stuff; especially if it’s a regular buyer.

Let’s say that there is a situation that you are getting into where you need to extend your closing
deadline. There are few ways to do that and everybody have little tricks. You can either make the
closings on or about rather than on or before. That would be up to a judge who will have to decide how
that works.

What I think is the most important thing is just make your contract and give yourself enough time to do
the closings, so you don’t have to worry about the extensions. That’s the best thing. But if you are going
to request an extension on a closing date, you have got to think as if you are going to the court. There is
a judge that’s up there and you are trying to plead your case on why the extension is necessary and then
the defense on the other hand is saying why you shouldn’t get an extension. You have got to go and
really plead your case on why you should get an extension or what happened etc. Most importantly, you
can show that your appraisal has been ordered or that you have a loan commitment but you are just
waiting for them to draw docs.

Anything that you may have as evidence is going to make a BIG difference. The other thing that I like to
do is putting business days. Instead of just saying, “Hey, we are going to close this thing”, I like to use
number of days rather than actual dates. The reason for that is if I make an offer and say, “Hey, we are

going to close on April 30th”, and then we can do counter offers back and forth for the entire week, I’ve

lost an entire week. That’s why; I would like to say, “I am going to close 20 or 30 days after acceptance
and I have got 10 days inspection, 20 days loan denial and 30 days closing after acceptance.”


If you really want to be technical, you can put 10 or 20 or 30 “business days” after acceptance, which
basically means that holidays and weekends are out. These things are really important to realize as you
are making contracts.

It is important to know that how the property should be left. There is a common phrase, “broom clean,
free of debris and personal belonging”, which basically means that the seller should leave the property
broom cleaned, free of debris and personal belongings. If you are buying it from a bank, they would
probably trash the property but if you are buying from an individual, there is a good chance that there is
a bunch of stuff there. When you are making an offer, you need to make a determination of, “Am I just
going to let him leave all the crap and then I am going to hold it all the way or am I going to require that
the seller cleans up all the debris?”

Therefore, if the seller has a whole bunch of stuff and he needs to hauled them away, I am going to
make sure that it is hauled away by giving him a couple of days after closing and what I like to do is to
keep some money into escrow, so if it doesn’t get it done, I can hire a dumpster and we can get it out of
there.

You can also put in the contract that anything left after so many days, is considered garbage and will be
thrown away and have them signed that, you don’t want to throw something away, which is considered
to be a “prized possession” or “heritage of heirloom” for the seller.

You can also put a timeframe saying, “Anything that’s there in the property after 48 hours of closing, is
mine. I own it and I can do anything with it. I can either throw it away or sell it and make millions of
dollars.” Or you can say, “You have to get everything out within 48 hours and we are going to withhold
$500 for a dumpster and if you don’t have it out within 48 hours, we would use that $500 to hire a
dumpster to throw everything away.” You need to get them sign on that.


The Best article ever for Rehabbing Houses

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