Potential flip, worried about bad timing & surrounding REO homes

7 Replies

So I am looking into a 3b 1.5 ba 1500 sq ft with 2 car attached garage. This would be my first flip, but newer REO home, built in 2004. Fair condition, needs AC, updating in kitchen. clean up and landscaping. Asking price is 95K, ARV is 135k, with rehab at $8500. Concerns are going into fall being able to sell quickly, as all fixes are able to be repaired in 12-20 days. Also, it is in an area of town that in the 2003-2005 range was an "in-fill" area of town and all homes are like build, but with 3 just like this on the market now. One of the properties is sale pending, the other is on market for 1 week now. If not sold, how difficult can it be to refinance and keep for rental? Rents aren't great but it would clear 2-300.
My experience is general handyman around home, basically doing a flip in my first home while I lived there only hiring mud/tape and refinishing wood floors. I have a friend willing to help who is a contractor and a brother who is a licensed electrician. Using VA loan so cheap to get into and market in this area is good, though the time of year is a concern for sure.

Going into fall and homes not selling is a common misconception. Spring, yes, is the best time to sell, but if your home is priced right from the start, it can sell anytime of year.  $8500 includes what exactly?  That's awful low for what you are saying with the A/C, kitchen update, clean-up (assuming paint, maybe flooring?) and general landscaping. 1500 sq.ft. home should be a 2.5 or 3 ton central air unit. If you know someone, you could get a new 2.5 ton unit, line set, a-coil, new disconnect box (if needed) installed for around $2000-$2500. If you don't have a friend in the business, it's going to fun you around $4k.  Are you just going to re-use the kitchen cabinets and put a new counter top on or what exactly does the kitchen update include?  I'd like to know more about what you are actually going to do. I can eat up $8500 in a kitchen with ease on a flip.  What sort of clean-up are you going to perform? 

You need to have someone pull comps back 1 year and look at the DOM (days on market) to determine what you should set aside for holding costs. If I were you, I'd set aside at least 6 months holding costs. I see a lot of new investors and experienced people think, 2-4 weeks rehab, 1-2 months marketing till sold... I'll have it gone in 3 months. They budget 3 months holding costs exactly to actually hold it for longer and they starts burning into your profit. Especially if you're running on a tight margin of error from the start. If they're asking $95k, ARV is $135k... factoring in 6% commission for the sale of the property, 6 months holding costs and your estimated $8500, I'd be very careful. The gross profit may look like $18k-$23k but that's not much of a margin if instead of $8500, you find out there's a structural issue and now it's $18,500. Your gross profit just dropped to $8k-$13k assuming the structural issue doesn't scare buyers and your holding costs is enough to cover the additional repairs. While that's a extreme case, it can happen. I've watched several people estimate, myself included, rehab costs to have $5k more actually be spent. It's very common for you to estimate $8500 and it take $12,500-$15,000. The little things when flipping a house that most new people miss, or don't factor in, really add up big time. If you're really wanting to pursue this house as a flip, I think you really need to study the homes currently for sale, especially the one that is pending. See what that interior looks like verse yours and the pending sale price. I'd have to say that if your $8500 rehab budget is solid, and I mean solid, I'd suggest not paying a dime over $86k. And that's if, and only if your budget for rehab is spot on. I'd try to get it for a good amount less but that's just me. If you could pay cash I'd say start out in the $70k's, financing the house is going to leave you a little less room to "low ball" the bank.

When asking about how difficult it will be to refi if not sold is a tough question to answer. People are going to tell you it won't be a problem do xyz but answering a financial question without knowing more about your financials is a hard question. If your DTI (debt-to-income) is already high now, getting a rental financed may prove to be difficult. For example you say there's enough money to clear $200-$300 net profit. That's after setting aside everything and includes PITI? Mortgage payment on lets say 75% of your stated $135k ARV with a 25 year amortization table, 4.75% interest is going to run around $577 a month. I don't have much experience with VA loans but have heard the "fees" involved are high. Lets say you rent it out for $1250-$1350 a month, after PITI, vacancy, reserves etc. you're spending give or take $1000-$1050 a month. When going through a residential loan, since this isn't on your taxes and is a hypothetical, worst case scenario, they're going to take 75% of the stated lease amount rent or appraisal rent analysis, whichever is lower. Let's say the appraiser says $1300 should be the fair market rent (picked the middle for an example), 75% is going to give you a $975 "credit" of what they'll count towards your income. So you'll only have a $25-$75 negative when calculating your DTI.

I hope my response helps answer your questions and wish you the best of luck in your adventure!  Hope I was able to shed some light on a few things.

I would agree with @Justin Thompson that $8,500 sounds low for the rehab.  It's pretty tough to get anyone to move in our market (Denver) for that kind of budget with what you're talking about.  Can you provide more details on the work that needs to be done?

@Matt Markel How sure are you about your rehab and ARV? Not sure about construction cost in Iowa but in Texas, 8500 doesn't get you very far in 1500sf. Don't forget about curb appeal, the back yard and the oh so dreaded carrying cost. If you are planning on selling to FHA buyers they require a 3 month seasoning on the deed. Also, remember it cost to sell. The deal seems pretty slim IMO.

With the VA loan, do you not have to be an Owner Occupant?

Here is my breakdown of this project,

135000 x .75(percent I stay under) =101250


92750-6000( carrying cost for 6 months)86750

I would buy for 86750. If rehab stays in budget (it never does) then you could make about 20000 or refi with bank for a rental. If something happens like someone stealing an AC unit you would still be covered. 

Hope this helps,


You can't use a VA loan unless it is your primary residence. Can't use it for a rental property. Also, unless you can get a buyer to pay cash or conventional loan, you're going to have to wait 90 days after the title transfers before the new buyer can get and FHA loan.

@Justin Thompson   @Chance Housos

Your input is much appreciated. Talk about an awkward position to be sitting in walking into bank and banker looks across the table and tells me no on VA loan, as you guys stated. So the numbers are solid, as ARV comes from 3 realtors, who work with investors. Rehab budget has to be flexible I know, which those numbers come from contractors, who are investors and work with investors as well. AC is being done by a friend of mine, which is a 2.5 ton for $3K installed, kitchen is only counter top and stove only. Which that number may come in lower as I spoke with an old Menards boss of mine and he cane get me a better price on counter then contractor was getting. Also in kitchen they have no hardware, and I am back and forth on putting in hardware as that can be expensive and people may not like what we chose. The house is in really good shape actually, no damage, and carpet was only 1 year old when divorce went through and couple just gave it up is what neighbors say. I know things can come up anywhere at any time, I felt a little more comfortable with this one as it is newer figuring less surprises.

For financing, I have had a friend who has wanted to get into REI, and he still lives in apartment so no home loans. He was looking into using a rehab loan to purchase and finance repairs on home, then sell it. 1st question-Hearing what you guys have said, may be same case where would need to hold it for 90 days before FHA loan could purchase it?

2nd- Would you partner with a friend like that?  I am good with business being business, and blood is thicker then water, so I don't have a problem with working with family, but I know how people get about money, and don't want to loose a good friend over a bad deal.  

Cash sounds like best option, obviously, have an option but it's a tough route and a very conservative person. My mother in law has liquid assets of around 500K. I have thought about showing her the deal and the options to get out of it too, flip or rent. I wonder what ROI would be enough to get her to jump but not give up to much profit. Just thoughts from a new guy. Thanks for your time and education.

For the FHA friend, are you looking at wholesaling the house to him? How would you purchase it?

If you are thinking of partnering up with him on the loan keep in mind you have to live in the property for a year before you can sell/refinance it as well.

I recommend partnering with the mother in law for down payment and rehab cost. Offer her 8% annually or 50/50 split in profits. 

Get the deal for 86k. Buy it conventionally with 20%(17200), plus closing. Add in rehab 9000, at a 50/50 split she is in at 28k with a 10k payout and you make 10k without any of your own money. Looks like a pretty good ROI. She will then probably want to repeat the process. Could make for a great partnership.

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