Hey everyone! Long time listener, not much of a forum guy but I thought you might have some good advice.
Back story: Renovated my own house. Grew up in contractor family. Ready to branch out and invest like a saavy investor. I met a partner through BP and we have around $45k to invest collectively.
Looking to make my move into real estate investing, I jumped at an REO last month in the hot Brewerytown area of Philadelphia. Did lots of research and planning, but I may have bit off more than I can chew. Let me know your thoughts:
3/1 Philly row home. 904sf. ARV $125-135k.
Needs a full renovation $60-70k (using GC). (3-month renovation)
Net potential profit after closing closing, holding, taxes, etc: $6,500-$26,500
There were a dozen or so cash offers from investors and I edged them out and got the property under contract for $30,500. Two days later I was submitting 10% escrow ($3,050) and started looking at detailed renovation quotes.
Here I am, excited, nervous, and ready to make it happen. My credit union is willing to do a renovation loan for me at $100k (20% down and $80k in draws)
While this planning was going down, partner lines up a much easier property and we get that too under contract:
3/1 Philly row home, 960sf. ARV $115-$120.
Needs LIGHT renovation $20k (using GC). (3-week renovation)
Net potential profit after closing closing, holding, taxes, etc: $13,000-$18,000
So while we were ready to stretch ourselves thin, we are feeling it's our best interest to drop the first property and walk away from $3,050. Yes, $3k, burned to a crisp before I even start my real estate journey.
It's painful, but a more focused effort on the second property and the better risk/reward make this the right decision.
Hey, that's the price of education I guess. It's still cheaper than some guru course!
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Its a no brainer here. That first one represents a ton of risk given the size of the rehab. When you do rehabs that big, you never know what new stuff you're going to find and have to address.
I would strongly recommend staying away from those size rehabs early on. Not unless you can afford to take a loss. In this case, walking away from the 3k is tough. But sometimes you just need to chalk it up as the cost of doing business.
If they were both smaller rehabs, I'd say see if you can find a way to take them both down. But given the particulars of the deal, I'd walk from the first one and eat the 3k. You'll make it up on the other deal and your risk will be far less.
45k in capital won't go very far on two rehabs when one is that large.....
Keep in mind too that I'm fairly aggressive so for me to give up a deal is saying something. But I can definitely say that of my bigger disappointments on the 32 houses I've done, the worst ones were definitely the ones that had the bigger rehabs......
Leave that first one and bite the bullet. If you think you can wholesale it to another investor at that price, you might want to give that a try. See if someone can take your place on that deal. Sounds like they were pretty close to your number. Not suggesting you'll be able to make that work but it can't hurt to try. Even if you can get them to pay 28k and assume the contract, then you'd only be out 2k instead of 3k......
Again, not sure how the contract was setup and whether you'd have to double close. But if there's a chance you might be able to offload that deal without giving up on that 3k, it might be worth exploring....
Thanks @Mike H. - I appreciate the words of wisdom. It's very enticing to look at a project and think that if everything goes right I can make $$$. Chalk it up to naivety or over eagerness.
Even if I take a loss on this and move forward, I feel good about knowing I'm in the game instead of sitting on the sidelines. Onward!
I think wholesaling would be an option.
Hey all - thanks for the suggestions. Wholesaling isn't really an option because it's an REO. The agreement of sale is assigned to me. From my understanding, the bank does not allow these to be re-assigned or wholesaled.
They're not going to let you redo the contract or assign it. But doing a double close to wholesale it might be an option. Sometimes banks have time limits on re-selling the property, but not always. If they don't, find a transactional lender, buy, then immediately resell to your end buyer with a second closing.
You have two properties now and an agreement to perform on each. If you walk away from the first, you might be impacting your future ability to purchase REOs through that agent/office/lender.
Another option is to find yourself a private financier to cover a portion of the rehab costs. Even though you mostly need their involvement on property one, I would bring them in either on the easier property (#2) - if you believe you can discharge them quickly - or on both to mitigate their risk a little.
You can then get the easier property (the second one) turned around and off the books quickly - and payback your private lender - while slowly working your way into the more involved rehab.
David, your comment "I'm in the game" says a lot! You should be proud of yourself for making the first play. That's the hardest one to make. If you've made a mistake, move on to the next one. $3k +- loss is a lot of pre paid education. Sounds like you are on the road to success as an investor. Persevere!
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