Newbie rehab questions

Good day everyone. A bit about myself... I'm a carpenter/GC. Thanks to an inheritance, I'm now in a position to get into rehabs, something I've wanted to do for many years. I've spent the last few weeks getting an education (books/forums/guru courses, etc.) though I'm sure that's going to go on for years. I've joined my local REI club (unfortunately, just after their last monthly meeting so I've yet to meet anyone.) I have another carpenter & helper on board & willing to work at reduced rates for the 1st deal in exchange for giving them steady work down the road. Got a money backer who'll qualify for a mtg. if I'll put up the cash for the rehab. Everything's coming together nicely but I had told them up front it's probably going to be a couple of months because I wanted to start out bird dogging to get some hands on experience.

Then this (rehab) 'deal' just fell into my lap.

The house is on the outskirts of a small city (pop. 30,000). It's within 1/2 mile of a prosperous community college. Not a great neighborhood, but by no means a bad one. Quiet. Cookie cutter houses built in the 50's. Small lots - tiny ranch houses (900 - 1500 sq. ft. though 90% of them are 1200 sq.ft. or under).

Per Zillow (take it with a grain of salt, I know) seven homes surrounding mine range from 158 - 195k (4 of these are only 900 sq.ft., 2 are almost exactly the same size with same # of bdrm./bath & values are 179k & 185k, with the 195k being 400 sq.ft. larger. My Realtor puts the values at 200k. There is also a house right across the street on the mkt. for 149.5k that is a flipper (pretty much only cosmetics/updated kitchen per an online virtual tour.)

My house. 1140 sq. ft., 3 bdr./1 bath, 0.2 ac. Needs rehab. (realtor) $59,400. I did a drive by this afternoon. Alum siding in good shape, roofing ok. No broken windows. Didn't look bad at all from outside though I couldn't see the back. I've set an appointment to go see it Tuesday. Nagging fear - per zillow, this house sold for $121+k six months ago! What could've happened to drop the value 60k in that short amount of time? I suspect winter freeze & broken pipe. I'll find that out Tuesday.

Concerns... Scott (my carpenter) & I are going to look at the house together Tuesday. We will immediately see 95% of anything that needs attention. Various inspectors will hopefully catch the rest. Between the two of us, we can fix anything but neither of us has ever been deeply involved in estimates/material costs. How do I come up with a fairly accurate number for the total rehab costs other than breaking out a pad and pencil & spending an inordinate number of hours online checking prices?

70% rule dictates AFR of 160k minimum. I don't want to use a higher number because should I elect to go for this I intend to put it on the market for below mkt. value in order to move it quickly. Comes out to 112k minus cost of rehab. Even paying the asking price (isn't gonna happen) that leaves $52,600 towards rehab/holding costs. I sincerely doubt the rehab will come to 50k for a house this size so the house is already at the formula highest offer price.

58k mtg. (plan to offer 50 cash) = $307/mo. Taxes (comp for sale at 149,500 = $5143.) Approx. PITI - $723/mo. Hold until sale 4 months = $2892.

Inspections - $1200 (just a guess.)

Labor - $1200/wk for Scott and helper. I work for free. City code requires licensed plumber/electricians. (can't approximate this till I get inside.) Regardless of what we find inside it should take no more than 6 weeks max for a house this size. ($7200 labor w/o plumber and/or electrician.)

Closing costs x 2?

Allowing 5k for closing costs & 4k for plumber/elec this leaves a profit potential of approx. 32k provided rehab cost doesn't exceed the $52,600 figure mentioned earlier. (minus anything I've forgotten.) Will put back on mkt. FSBO with online/local paper/bandit sign campaign to avoid realtor fees.

Any costs I'm forgetting here? Suggestions? Is this a good deal like I think it is or am I just an overly excited noob?

I'll give you an update after I see the house.

Thank you for your time.

Tom

Edited: 06/26/2010 at 08:02AM by Thomas Thompson

J Scott

Real Estate Investor · Atlanta, Georgia

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Apr 25 '09, 11:18 AM

A few thoughts:

- A very good inspector shouldn't run you more than $450, so you're $1200 budget is overkill

- In terms of costs, don't forget all the costs on the back end: paying buyer's closing costs (up to 6% these days if you want a quick sale), realtor commissions of up to 6% (if you have an agent), home warranty for about $500 (many buyers are asking for them), a termite letter for $50-100 (if the buyer's lender requires it), etc.

- To do a low-end total interior gut of an 1100 sq ft house shouldn't costs more than $35K, so you're $52K budget should be fine, assuming there isn't any structural work that needs to be done, and the roof is in satisfactory condition.

- Don't trust Zillow for any comps. And don't trust your real estate agent either. Have your agent send you the raw data for the neighborhood and determine your own comps.

- If necessary, hire an independent appraiser to give you an idea of the area comps and also what you could likely get the property appraised for after rehab -- there's nothing worse than getting a property fixed up, putting it on the market, finding a willing buyer, and then finding out it won't appraise for the offer price.

- In terms of materials prices, go spend an afternoon in Home Depot, and get a feel for how much things cost -- everything from lights to faucets, to sheetrock to bathtubs to doors to windows. Even an ballpark figure (like interior doors cost $65, standard windows cost $145, faucets cost $50, etc) will help you put together a budget.

Edited: 06/26/2010 at 08:02AM

J Scott, Lish Properties, LLC
Telephone: 770-906-6358
Website: http://www.123flip.com
http://www.123flip.com

Thomas Thompson

Carpenter · Stanfordville, New York

9 posts
50 influence

Apr 25 '09, 01:05 PM

Thank you sir for your reply. I had allotted $1200 for inspections b/c I'm taking into acct. black mold, septic (still don't know if the property is city sewer) - technically it's the town and not the city.), termites, radon, water and possibly others.

I tried to estimate for worst case scenarios, Everything I install will be top end, plus I'm building kitchen cabinets, bath vanity, & any other cabinetry on site (indistinguishable from top of the line Thomasville type cabinetry) which will save me at least 10k - even more since I'm working for free. It also helps that there's a Home Depot about 3 miles away.

While I was out I remembered I'd forgotten the furnace - that's another $2500 if it needs replacing. I've got an understanding with the HVAC company too - I used to work for him. Price breaks in exchange for continued business. I will not skimp - if there's any question about the existing unit, it will be replaced. I'll not sell anything sub-standard to increase my profit margin. I am honest to a fault & only seek to provide what I would expect were I the prospective buyer. I'll happily decrease my profit margin in exchange for building a good reputation. Call me old fashioned, but I grew up in a time where a mans' reputation was something to be proud of. I'll not do anything to tarnish mine.

Edited: 06/26/2010 at 08:03AM

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Apr 25 '09, 01:36 PM

Thomas, this is a numbers business. You have too many descriptions and too much "top end" and "top of the line" in your posts. You're talking about a $160K house here. No idea what the market is like in Stanfordville, NY, but I see its less than 100 miles to NYC., $160K sounds like a low end property. That sounds like the cheapest cabinets you can find and pre-formed countertops.

You're not working for free. Forget that. A fix and flipper does no manual labor. The profit comes from the property. Pay yourself a reasonable wage for the manual labor, and make sure the property still makes a profit.

Its all well and good to say "I'll happily decrease my profit margin in exchange for building a good reputation." I understand what you're saying that you want to provide a good property. But if you lose you a**, and that's what you're about to do, you won't provide ANY product. There's a LONG ways between sub-standard and Thomasville. You MUST, MUST, MUST make the property fit the market. I could put "top end" cabinets and granite countertops in a $150K house here. It would be a waste of money, because it would have no effect on the selling price. In a $500K house, they would be required. Installing what's expected for the target market isn't "sub-standard". Its the expectation.

This statement: "seek to provide what I would expect were I the prospective buyer." You're NOT the buyer. You must think like the buyer, and do the work the buyer expects you to do. Anything more is a waste of time and money. You will not last long in this business if you waste those two things.

The math is simple. If you're purchase plus rehab costs are 70% of the ARV, you will make a profit of 10-15% of the ARV. There are several assumptions inside that. One is that you can fix it and sell it within six months. That can be a bit tricky, because people have a hard time with financing. It also assumes you're using hard money to fund the deal. Hard money means loans made based on the ARV rather than the purchase price, at very harsh rate and terms. Figure 3-6 points (1% of the loan amount) and 12-18% interest. I figure 10% of the loan value (70% of ARV) as a working number for money. That's 7% of ARV. You won't get a conventional loan on a uninhabitable junker, but these can be the best flips. If you do get a conventional loan, assume 20-30% down, plus you'll have to pay all the rehab out of pocket.

My simple minded calculation is 10% of ARV as the selling costs, 7% of ARV (i.e., 10% of the loan, which is 70% of ARV) for the money, 2% of purchase price for purchase closing costs, and another 2-3% of ARV for all the inspections, insurance, utilities, etc. So, you can see how you get to a 10% profit, if things go well.

Remember, that profit is taxable, and subject to self-employment tax (about 15% of the gross profit).

Edited: 06/26/2010 at 08:03AM

Jon Holdman, Flying Phoenix LLC

Thomas Thompson

Carpenter · Stanfordville, New York

9 posts
50 influence

Apr 25 '09, 08:59 PM

Good God Jon. Just woke up. Raging hangover. Only a couple of sips into my first cup of Joe & I'm having vivid flashbacks of standing rigidly at attention while Sgt. Alford (my D.I. at basic training) chews my butt up one side and down the other with his angry face so close to mine that the brim of his Smokey the Bear hat keeps bumping into my forehead, which only serves to piss him off even more.

In the short time I've been here (lurking and learning) you are one of a handful of people I've singled out for being really on the ball. I was hoping you'd reply to this post & now that you have, I'd like to thank you for a much needed reality check.

You've made me realize that I can't run a profitable business (something I've never attempted) while approaching it with my typical 'Mr. Nice guy' mentality.

I intend to print and laminate your reply then read it everyday until it becomes rote memorization.

Thank you Drill Sergeant!

Edited: 06/26/2010 at 08:03AM