Hey guys, just wanted to share some numbers of a recent deal I've had in the works for a few months. I came across this one via a property manager (non-BP member) that oversaw the rehab project as well. I separated the different stages/aspects of the deal below to be a "kind of" organized :)
It's a 3bd/1ba, 1140 sq. ft Ranch style home.
Numbers & estimates going in: (Pre-Purchase)
Purchase Price: $37.5k + $1.5k Finder's Fee
Rehab: $12k estimate by project manager, 1 month to complete. I budgeted $15k just to be safe.
ARV: Conservatively $70k-$75k based on solid, simliar, recently sold comps in the area.
Thoughts/Aim: My goal was to acquire, rehab, rent, then take out a mortgage to get most of my working capital back in my hands. I lined up financing with a local bank ahead of time so I knew I could do a 5/1 ARM, 30 yr. Amort., cash out refi at 70-80% LTV on the ARV with no seasoning.
Actual numbers/timeline post refinance: (Reality!)
Purchase Price: $37.5k + $1.5k Finder's Fee
Rehab: $19k - 2 Months to complete (@Brandon Turner wasn't joking when he said to prepare for double rehab/time in the beginning lol!)
Appraisal: Came in at $52k only. WHAT? :) The appraiser chose the worst comps possible. He chose neighborhood boundaries that I wasn't expecting, nor do I agree with. With the boundaries he chose, many of the good comps that were closer, more recent, and that were actually retail sales were ruled out. I typed up a rebuttal/request for re-evaluation but the bank wouldn't budge, they are obviously playing it safe.
Rent: $975/mo - Qualified tenant in place pretty quickly.
Refi & Cash Flow: (quick & dirty version)
80% LTV of $52k = $41.6k Loan Amount @ 5.5% = $236/mo P&I
Applying the 50% rule: $975 * 50% = $487/mo - $236 = $251/mo
Lessons, Thoughts & Reflections:
- I'm glad I followed the the words of wisdom shared here on BP about having reserves and being conservative on Rehab budgets. If I had only $12k for the rehab and was spread too thin, I would've been in a bind.
- The attention to detail, communication, oversight on the project, and many other things were not as "on point" in comparison to the smoother projects I had going on with partner and fellow BP moderator @Dawn Anastasi . I am glad though that I got the chance to experience the contrast even though it was frustrating!
- Appraisals can be very subjective, the appraiser may not choose the same comps that you did. The only way I would've chosen the comps the appraiser did, was if I was "trying" to come in as low as possible. Going forward I will pay more attention to different possibilities of neighborhood boundaries and model different outcomes of appraisals based on that.
- I told myself, and was prepared going in to the deal, that I would be happy with the numbers even If I wasn't able to cash out refinance at all. The appraisal coming in low sucked to be honest, but the deal is still a good one to me and I learned so much. I could've just used the roughly $20k I'm into the property as a down payment on a turn-key rental. But the experience I gained from this deal is priceless and has made me a savvier investor moving forward.
- I love this stuff, and I'm more confident and excited about building my portfolio than I was before the project.
Thanks for reading :)
Thanks for sharing this, @Mehran K. . I'm sorry that this thing ran the wrong way for you, but I'm sure you'll turn this negative into a positive. This is a post every new investor must read . . . always be prepared for things to go against you!
Thanks for sharing.
I wish I could borrow at the rates all you American do haha
Sucks being a foreigner.
Numbers look good.
I'm assuming its a solid B class area?
This is a great write-up and makes me want to do my own "thoughts/reflections" post -- both for the duplex and for the recent single-family purchase I made. Thanks so much for the idea and also for the kind words!
Is there a reason you went with a 5/1 arm vs conventional loan? Is there a cap for when it resets? I'm guessing it was a combination of seasoning and being able to get to 80% LTV?
Awesome write-up @Mehran K. ! It's amazing how even our "conservative" estimates change so quickly during a remodel.
I've had the same thing happen so many times with the appraiser. It sucks, but not much we can do except re-finance 6 months from now and get your cash out then! :)
@Joshua Dorkin Thanks for the words of encouragement. It didn't turn out as planned, but the deal is still pretty good in my books! I feel the same way about new investors being exposed to this, not everything goes smoothly but I'm still making huge steps in the right direction :)
@Engelo Rumora Yes we are fortunate to have better financing options as Americans :) I'm not too savvy on neighborhood classes, but off the top of my head I'd say upper C to lower B.
@Dawn Anastasi Can't wait to hear your thoughts & reflections :) Kind words well deserved!
@Bryce Y. The more lax underwriting and seasoning requirements are definitely the reason I went with the portfolio lender. 2% Max jump per rate increase, 6 % max jump lifetime. Even at 11.5% I'm still cashflowing $100/mo
@Brandon Turner Thanks! It's nothing compared to the articles you put out there. It does feel good to get all my thoughts out in front of me though, I should do this more often. Glad to know I'm not the only one in the "bad appraisal" boat. Great idea on the refi later on, I'll look into a HELOC as well.
Thanks for your reply.
@Mehran K. congrats
Where did you pick property up ( Wisconsin , Kansas city, or Indiana ) ?
@Mehran K. congrats!
I think the initial purchase price and the fast refinance had a very big impact on the appraisal. These days the appraisers are very conservative, if the value is much higher than the purchase price and there are some comps lower in value, they have to give a lot of explanations.
What a winner
Okay -> sounds good
Thanks for sharing @Mehran K. . Very inspiring to see you build your portfolio so quickly. I hope to emulate this strategy soon.
One question for you or @Brandon Turner about clarifying the following:
"I've had the same thing happen so many times with the appraiser. It sucks, but not much we can do except re-finance 6 months from now and get your cash out then! :)"
Do you mean Mehran could refi again in 6 months?
Or are you suggesting he could just wait 6 months, get another appraisal and hope that comes in higher and do his first refi then?
Sorry, new to the "refi and get your cash back" strategy, but want to learn.
Thanks @Mehran K. for posting your story. It is always helpful to see real life scenarios. It is still a success story but not as great a one as you had hoped for. A home run is great, but a double hit is still not bad. Good cash flow, and another good horse added to the stable.
Hey @Jason Carter - good question. I was kinda vague :) I suppose either would work, but I was thinking re-refinance, so do it again in 6 months. There is no guarantee it will be better, but I imagine it should be, especially if you follow the advice in Podcast #7 with @Ryan Lundquist on getting higher appraisals.
Makes sense. Going to revisit podcast #7.
Thanks @Jonathan Jimenez ! I wrote this post hoping it would be helpful to someone in the future when they read it. Means a lot to hear it's helping :)
If you have any questions, don't hesitate to reach out.
@Mehran K. , I love this post! Thanks.
This is what I tell real estate investors when they borrow money from me. They have to be conservative with their numbers. They need to cover their downside first and not be enamored so much by the upside that they forget to think of things that can go wrong.
@Wendell De Guzman So true! One common denominator I've heard and read over and over is - to be conservative, have reserves, and prepare for the things not to go as planned. The more deals I do, the more I see how important this is :) It makes it so much more important to find awesome deals that will still be "healthy" even if things don't turn out the way you expect.
Great post Mehran, thanks for sharing :)
Update for everyone on this thread! I am refinancing out of the commercial portfolio loan on this property, into a 30 year fixed rate portfolio loan. The appraisal just came in at $88k. This is much better than the $52k it appraised for a few years ago with that crappy appraisal mentioned above.
I had the same troubles as you had initially. In my case, I purchased a couple homes for around 45-50K each (cash) and invested 5-10K in each for small renovations/clean-up/make-ready. Realistic comps would have pointed to 60-65k appraisals, easily. Not so. They both came in at the initial purchase prices...to the penny. (FYI: I am certain I did not overpay.) I got the feeling that that is/was the M.O. of that particular appraisal team/bank in cases of cash-out refi's occurring immediately after acquisition. It was not a crisis; but it was a *bummer* and a head-scratcher.
M.K.--sure, it would have been cooler to get that cash back a couple years ago, but I'm really happy it finally worked for you. Thanks for the update. Onward and upward, my friend!
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