BiggerPockets

Hey Chris,

At first glance it seems like you might be paying a bit too much for the property. Using the 70% ARV formula the most you should being paying is $92,500. (175k x 70% less 30k in repairs= $92,500)

Also, you need make sure that the extra space and additional bath will indeed increase the value 25-35k over the comps you mentioned. I don't know your market but I might suggest finding comps that are similar in size and location unless you are very confident the price per square foot estimate to be accurate.

Whatever you decide make sure you verify the information that supports your numbers.

Good luck

As others stated, your numbers are this deal are too tight. You are all-in at 78% of value and your exit value is questionable as well.

To fill in the pool, you will need to get a permit, have enginerring and soil compaction tests, and any other requirements the city/county demands. You can't just fill in a pool with dirt and not tell anybody what you did. This will all cost money and could put you over your $30k budget.
Also, with only $15k of profit spread, you have no room for error. If your rehab goes over or you can only get $165k or you have to give seller concessions, you stand to make little to no money and have a great risk of loss.

I recommend you re-negotitae price or move on, this is not a deal worth doing from the numbers provided.

Will Barnard

Your question about value is very local, so I won't even try and address it.

As for the GC trying to tell you what the value of this or that is...

UNLESS the GC is a bonafide investor who can show you the HUD statement of the last flip he made with his name on the deed, when he starts talking about ARV you need to PLUG YOUR EARS AND SAY 'LALALALALALA' IN A LOUD VOICE.

In my experience, unless a contractor is also an investor, they are terrible morons when it comes to determining resale value and the value of this upgrade vs. that upgrade. They rarely have any idea what they're talking about, and are usually trying to say whatever it is they think you want to hear in order for you to go forward with the job... especially if you're an obvious newbie who is soiling himself every few minutes from fear and trepidation, and asking questions like "How much does tile cost?"

So in conclusion, don't listen to the GC when he starts talking about ARV or marketability. Do your own research, preferably straight from the local MLS.

Thanks for all the replies. Now I'm more nervous after I got all the replies, so I got that going for me. I do appreciate all of the honest advise, which will help me see things a bit differently now. So to go through all of the posts I got.

1) The 70% ARV is not something I obviously used when determining my purchase price obviously. I live in Northern CA, so it seems like sticking to that 70% rule would be very difficult. I don't think the same rate of return is as likely as maybe some other states. I'm pretty confident re-negotiating a lower price is out of the question, so I'm staying with my $107k purchase price. I feel like I would not be able to find any properties using the 70% rule, as everything I've seen go for and sell on the MLS and when looking at other investors in the area are doing, are not purchased at that point. That seems REALLY low to me. Do any other investors successfully follow the 70% rule?

2) Yes, most of the recent comps are in the $145k range. Two examples I'm looking at: $145k sold on 5/3/11 which is 1045 sq/ft and is a 3/1bath. The other sold on 4/15/11 and is a 3/2bath at 1,050 sq/ft. The problem is there are no recent sales for a larger house like a 4/2 or a larger 3/2 like my place. Again, my project is a 3/2 bath at 1,588 sq/ft so considerable larger than the prior 2 that recently sold and also has an additional bath than one of the flips above.

There were a few larger houses that sold but their dates are a bit farther back. One sold on 1/11/11 for $190k which was a 4/2 and and 1,450 sq/ft. Problem was that is sat on the market for 4 months before pending for 2 and finally selling. Obviously, less buyers at this purchase point. The other larger comp has a sale date of 11/23/10 and sold for $169,000 and was a 3/2 at 1,340 sq/ft. How many months prior to appraisers use? The 11/23/10 seems old, but will the 1/11/11 date still work? How many months old can you use to run comps? There is currently a 3/2bath that just went active for $165k and is 1,250 sq/ft so it will helpful if that sells for asking.

There is also one that sold on 5/1/11 for $182k, which is a 3/2 with 1,350 sq/ft, but this is on the other side of the freeway. The neighborhood is the same type of area, but just seperated by a freeway.

3) The $15k profit includes all the holdings costs, rehabs, utilities, and a 3% credit to the buyer. I think I'm being pretty conservative for all the costs associated with buying, holding, and selling the house. I actually even outlined for a rehab budget of $33k for unanticipated expenses that may come up, so I would be very happy with the $15k profit.

4) House was built in 1963. Had the inspection the other day and nothing came back too crazy. All the work that needs to be done for the most part: new capet entire house, paint inside/out, landscape work- fill the pool, etc, complete new kitchen, gut one of the bathrooms, 1 of the bathrooms we are salvaging some stuff, some termite damage was found on the pest report to the sub floor. The GC I have used to be a pest inspector, so he said he can take care of all the work and said it's nothing crazy- about $4k of damage. So the actual GC work is about $25k, but this does not include the pool issue. I was planning on keeping the pool, but now looks like the only option is to demo it. I don't know how much this will be, but I'm estimating it should not be more than $5k, hence my $30k estimate. Obviously, I have to get a new bid on the demo and landscape work, but I don't think this should be TOO much money.

4) I think the home "fits" the neighborhood. It's nothing outlandish, it's just one of the larger in the area. Others have sold in the area not too long ago, but there is no recent ( within the last 3 months) houses that I can see sold within a 1/4 mile radius at this higher price. Since most of the buyer are FHA, this may make things a little more difficult. It really is pretty normal though and blends right in with all the other houses.

So i'll continue to update everyone and let you all know how it continues to go forward. Thanks for any help and listening.

Thanks for the reply Jeff. Yes, I know I'm not required to listen to anyone, but was just wondering if this is more of a gauge on a deal, or something most flippers use as rule. I'm glad it has been explained to me as I'll be sure to use this for all properties now going forward.

As far as the valuation goes, no I'm not just relying on the GC's opinion. I have an agent and she thinks we are good with our without the pool as far as value goes, but I just personally thought the pool brings a much added value. Was wondering what other peoples opinion on the pool was just for reassurance. My agent primarily works with investors who flip properties, that's really what she specializes in. I'm just a bit nervous and want to make sure I've thought about all the angles, renovations, and budget before moving forward.

I'll have to explore the pool issue more. I obviously did not anticipate a pool removal being thousands of dollars. I understood it being mostly demo work and then filling the remaining with sand. Maybe naive of me, but it didn't seem like a major obstacle. I'll have to explore the permit and testing necessary for this. Anyone go through with something like this?

In all we have written about 15 offers over about a 5 month time span. I appreciate your advise Jeff, and thanks everyone for giving me your input and thoughts on the matter!

Chris

Chris, because you live in California, I would recommend against doing the work yourself unless you already really know what you are doing. The reason is that the market in Cali will quite possibly drop while you are holding the property and you want to flip as quickly as possible. If you end up holding another month or two (or longer), that will likely cost you more money than hiring a GC and getting the work done quickly.

A note on the comp for $190k that you mentioned was on the market for 4 months. You may not be able to infer that houses at that price point take longer to sell by looking at just one example. Did you look at the house yourself? There may have been one or more issues with it that made it less attractive to people. Of course you may be right in that the main issue could have been the price. :)

I have learned from this dicussion too. I would have simply filled the pool in. Fifteen offers to get one bought is really lucky. I use 60% of ARV - rehab then use the remaining 10% during the negotiations. My current project is about 500 sq ft more than the avg in the area. I used a calculation that is 20% lower than the average ARV in the area per foot. If I get an offer that is close to the average, it will be a happy day.
Don

Removing that pool is going to cost you a couple bucks both in removal and unanticipated costs. Hopefully you have enough access to get (at the very least) a bobcat in there that can hammer off all your decks as well as the top few feet. That bobcat is going to need to dump all that material into either multiple rock boxes or into trucks, both of which charge by the load. On top of that, the bobcat is going to tear up both the back AND the front yard assuming there is no rear access on the property.

It's been a few years since I've pulled one (we did a partial) but you are looking at some time because I believe you can only fill to a depth of around 4-5' at a time to 90% compaction. That means having two soil samples done by the engineer in addition to time lost. I also don't think you want to fill all the way up with sand for the obvious reason that you need soil to re sod the yard probably keeping a layer about 2' thick at the top. Between landscaping two yards and the removal, filling, and testing, you could easily run $7500 or more. Good luck.

I'm sure Chris is gone, but here would be my response since I'm in a posting mood today. BORED!
1. Cosmetic you say- thirty thousand!
2. Only making MAYBE 15K on a 1314K investment. 10% is skinny for me.
3. A pool has never been worth zero. If your GC is telling you there is no difference in pool/no pool, I wouldn't trust him.
There are other concerns, but those are first three. Rich

Chris,

Yes, I've noticed the same thing you're describing here in southern California as well. It's definitely better to pass on properties, though, than buy something at a foolish price.

I would suggest you keep on eye on the property you were looking at, and if they lower the price in the future, come in with an even lower offer to see if you can pick it up then. Good luck!