Expert: Russel Ray - 12/11/2008

Question
Hi Russell:
I would like to start a Foreclosure home cleanout business.
Any special licenses and what type of insurance do agents and banks like to see?
What payment terms should be used?
How do you recommend finding out about how to charge? By the sq.ft. or do you inspect first and then give a bid? How quickly should you turn around a house? Should you stick to cleanup inside home and yard or branch out into painting, repairing etc.? How many people do you generally use? Do you recommend getting into this type of business?
Thank you in advance for any help you might give me.
I live in Santa Rosa California. Sonoma County

Answer
Hey, Michelle.

Congratulations on your entrepreneurial desire! I think small businesses are the road to an improved economy over big bank and big company bailouts, so let's see if I can give you some help here.

First, I'm not aware of any special licenses for such a business in California. However, you will need a standard business license, and here's where it might get a little expensive. Technically, if you work in a city, you should have a business license for that city. So if Sonoma has, say, 100 cities, you might need 100 business licenses. Generally business licensed are not expensive; let's say that each city charges $25. Now multiply $25 times 100 cities and you see how expensive it can get -- each year. Some cities will allow you to get a post-dated business license so that you don't have to buy all 25 business licenses on January 1. Rather, if you do business in their city on June 25, get a business license then. A simple phone call to the city should get you that information.

There are two types of insurance that you would normally have for such a business: general liability and bonding insurance.

General liability would protect you if you went into a foreclosed home to remove the occupants' belongings and wound up breaking their antique Louis XIV chair -- which they should have sold for hundreds of thousands of dollars to pay for their mortgage!

Bonding insurance generally protects you from someone saying that you took their grandmother's $50,000 antique ring.

Both types of insurance can have all sorts of fine print in their policies, so read them closely or have an attorney analyze them for you.

Since you're going to own the company, you get to set up the payment terms. Generally, you don't want to give credit to a bank that owns a foreclosed property, especially in this market where so many banks are failing. If I were starting this type of company, I would offer a "10 net 30" invoice, i.e., there's a small discount if you pay within 10 days, otherwise the net amount is due in 30 days.

Most companies here charge by the square foot. It simply makes it nice and easy to provide a quote, and the square feet is always accessible via public records. Note, though, that sometimes you'll find a vacant home that has been left in good condition, and other times you'll find a home that is just a mess, so presuming that there are an equal number of each, you should be able to come up with a good average price to charge.

As you gain experience, you'll be able to adjust your prices accordingly. For example, let's say that you charge $1 per square foot. As you gain experience, though, you realize that 75% of the homes are trashed, so you could increase your price to $1.75 per square foot to take that into account.

You'll also find that there are certain economies of scale that come into play. Although it will take longer to clean a 5,000-SF home than a 500-SF home, you might find that dollars per hour is better on the big home because they generally are left in better condition than the 500-SF homes.

You could also inspect first and then bid, but I think you lose time there because you have to make a trip to the home first with no guarantee of income.

As far as turning around a house, if the bank has a requirement, meet their needs. If they don't, I think within 3 days would be acceptable, or you can tell them a specific date.

You could offer several different levels of service:
A - removal and general cleaning, i.e., vacuuming, cleaning counters, bathtubs, showers, toilets, and floors - $1/SF
B - A plus repairing light damage to drywall, floors, countertops, window glass, etc. - $1.25/SF
C - B plus replacing cracked floor tiles, painting, door/drawer/cabinet hardware, etc. - $1.50/SF
D - C plus exterior maintenance such as pruning, watering, etc. - $1.75/SF

Try to offer lots of choices and you'll get lots of business.

The number of people you use is totally up to you. You can be a one-person company and hire people as needed. I bet there would be some high school and college students that you could hire as 1099 employees.

I recommend getting into any type of business if you have the enthusiasm and passion for it. 80% of a successful business is enthusiasm and passion for the job. The other 20% is technical know-how.

Enthusiasm and passion include understanding marketing or hiring someone who does understand marketing. Guerrilla Marketing works very well for small start-up companies and the self-employed.

Hope that helps. Feel free to come back as you get started and I'll try to continue to help you.