How to determine scope of remodel

Question

Hey BP,

Iv got a house i close on tommorow! Its a 3 bed 2 bath 1200 Sf on Half Acre in washington state. I Paid $135k for it but it needs quite a bit of work. Im debating if i should do a full remodel, or just keep it simple and make it FHA/USDA loanable. Here is my scenario...

1. Purchase $135,000

Rehab-$40,000

ARV-$250,000

Net After Closing costs(excise tax, title insurance, escrow fees and 2.5% to a realtor)--- $63,000

Time line would be 3 months to get the remodel done and hopfully sell in march. $250,000 would be absolute dollar in this neighborhood, but since there is no houses for sale that are fixed up, i think it would sell quick.

2. My other option would be...

Purchase $135,000

Rehab $17,000

ARV-$210k

Net After closing cost-----$47k

This renovation would be about a month, and do just simple thing to get it financable like roof, new texture/paint, new floors, trim and doors, dump fees and make sure all electrical and pumbing is in good shape. Basically reuse all the bathrooms and just clean them up and leave them looking dated but try and lean toward a first time home buyer.

Is it worth it to spend the extra $23k to do a full remodel with new kitchen, bathrooms ect? Its $14000 i would be leaving on the table...... but for 2-3 months less work and quicker turn around im kinda leaning toward the basic remodel

Paul Bowers · Answer

I think the second scenario can be a little dangerous.  If you are hoping a first time buyer using FHA/USDA financing is your target market they typically have the least money available for rehab.  If you can do the additional rehab for $23,000 that means at retail a consumer will have to figure closer to $30,000.  That may scare off the exact customer you think is the target, low cash available first time buyers.  I'd lean towards the higher end rehab personally.

Robert Freeborn · Answer

I have several offers in right now for multiple flips. Getting the ARV and reno costs is definitely the most critical. For the first, you have access to the MLS, which should making it easier to look up. For the second, just be sure to walk it with your GC so you have an accurate bid, and leave plenty of wiggle room in the budget. Good luck!

Dave Foster · Answer

@Clancy Catelli, that QI is wrong.  You can and the timeline is 180 days not 9 months.  The new house does not have to be completed but worth at least enough to absorb the amount of your 1031 sale.  it's called a reverse construction exchange.  We do them for clients all the time.  The one thing he's right about is that the time lines are critical.  But they can be overcome if properly planned for.

Clancy Catelli · Answer

I wish you could 1031 exchange a house for raw land and then build a house for the same amount you sold your other house for. I meet with a 1031 specialist and he said they won't let me do that since the timeline is 9 months

Clancy Catelli · Answer

I wish you could 1031 exchange a house for raw land and then build a house for the same amount you sold your other house for. I meet with a 1031 specialist and he said they won't let me do that since the timeline is 9 months

Clancy Catelli · Answer

@nghi let think I'm going to go with the full remodel. It's so hard to start a project and only make half the house look new. I tried that in the past, and it just makes you look like you don't know how to remodel. I do all the work myself so my reputation is on the line as far as quality goes.

@kevin R.

My projections for ARV are slightly lower then what houses are actually selling for in the area. I like the idea of 1031 exchange to save on taxes, but I have a unique scenerio right now. I bought this house free and clear, so if the market tanked, it wouldn't matter to much, I would just have to rent it out. I'm about to start building my own house next month and trying to do it without financing. I'll have enough money to build my house , but I was kind of hoping to have the money from this deal available in the spring to help pay for landscaping and a RV garage that is gunna cost around $100k once the house is done. I figured if I sell the house in early spring, that gives me a whole year to invest the profit in other deals/stock market to help make back some of the taxes I will pay in 2019. I love the idea of building wealth through rentals, but the numbers just don't work in my area. I would be lucky to get $1300 a month for that house when it's fixed up. Mortgage alone would be $1000 on $170k, so it would not cash flow. Rentals are a hard think to find and run efficiently on the Olympic peninsula.

Brian Pulaski · Answer

I would lean towards the higher end remodel. Not redoing the kitchen & baths will leave potential buyers not loving the house. You want someone to fall in love with it when they walk in. I think you will have a harder time selling it with the cheaper rehab.

Nghi Le · Answer

@Clancy Catelli

If you were a 1st time flipper, I'd probably suggest the cheaper and faster route.  But I think you already have some experience.

I'd personally take the 1st option because we're entering winter season and I'd want to sell in March.

Another consideration is your financing.  Did you get a hard money loan on it?  Is it a 6-month loan?  If so, the longer flip might be more risky.

Kevin Romines · Answer

You should consider a back up option to the sale? What if it doesn't sell for what you want when you want. You will want to look at a 75% LTV on a non-owner cash out. What would rents be?

You might consider selling on a Lease Option if it doesn't sell on a cash out at closing method. If you sold on lease option, you would get 10-15K as an option fee upfront. You would also get about 10-25% premium on the monthly rents because your going to build in the cost for the down payment credit you will give them. You can also price the house for what market would likely be in 2-3 years, so more then at March 2018 would be my guess?

Just make sure you have other options in place in the event the 1st game plan doesnt work out? Also, if you did hold it as a rental or lease option for 1 year or more, then you can 1031 exchange your way into the next deal. Save yourself all the taxes you would have paid or lost and put it into your next deal.

Now that's how to build wealth. Yes in can be a crunch temporarily to your cash flows and down payment monies on the next deal depending? but in the long run, you will gain so much more.

Brandon Wieschhaus · Answer

Congrats on the purchase! To me, I would see two reasons you'd want to do the full remodel, Return on Investment, and experience gained!  Without doing the math, the ROI looks attractive to do the full rehab, and the experience gained will be invaluable. Plus, you've got the time on your side to do a higher rehab, and drop it on the market at the start of a more optimistic season. Good luck!

How to determine scope of remodel

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