How to estimate if a purchase is worth it

Question

I'm a newbie investor from Northern Virginia looking at Baltimore. I'm not new to homebuying as a primary residence but new to flips that need lots of work. I narrowed the best neighborhoods by driving around town (very true about block by block change...lol). But have a question on steps of making an informed purchase decission.

In my past primary home purchases, a house inspector will generally inform me items that need repair. How does it wrk in flips? An inspector tells me what needs work, then I get a contractor to give me estimate, then decide if I want to invest? Am I going to bring multiple contractors to the house before I buy it for estimates or will they be able to quote off the inspectors list?

Am I able to put a contingency not only of inspection but also of repair estimates so I can back out if I get unprofitable quotes? Thanks for your input.

Russell Brazil · Answer

Any property that is in a condition that can be flipped, realistically would not be able to get a contract with an inspection contingency accepted. Look at it from the listing side....why would a seller listing agent allow that to happen when an inspector or contractor can sum it up in 2 words, replace everything.

If you want to flip, your job is to understand renovations, whats needed, and what those costs are.....and to be able to get it done at the same prices and budgets other flippers are.

Ian Barnes · Answer

I'm not sure if anybody that has reponded has worked in Baltimore more than I have from a construction perspective, but it is not an easy city to work in. 80% of contractors are looking to rip you off.  The city is looking to fine you for everything and anything, and you need permits for pretty much everything.  Any good contractor is going to want to get paid to do an estimate do to new investors calling 5 or 6 contractors cause they don't know their numbers.  Most newbie will always take the cheapest quote and 9 out of 10 times spending much more than what the quote is.  If you don't live in Baltimore, you must have a person with boots on the ground managing for you, otherwise your contractor will take advantage.  I've been using the same contractors for years, and I still show up on sites 3 times a week to make sure everything is going right.

John Archer · Answer

Hello Tony,

I'm an educated novice and have just rejoined BP after a number of years. Here are a couple of thoughts that come to mind, not from experience necessarily, but more personal opinion. So ponder with a tremendous grain of salt.

My understanding of contingencies are that you can ask ANYTHING legal in your contract. The seller has the option to accept, counter or reject any offer or contingency. Sort of like Van Halen and green M&M's. A couple of added thoughts are use a buyer's agent who can walk you through your offers and who might know the area better than you, or other members here. I'm looking at Russell from Rockville, MD as a top contributor on the right side of my screen.

I hope this gets you thinking,

John Archer

David Fernandez · Answer

Hi @Tony Hale,

I also live in NOVA and invest in Baltimore. I focus on buy and holds, not flips; however, we purchase value add properties that need substantial work, so its like running a flip.

I will first recommend you to read J Scott book about how to estimate rehabbing costs. Don’t think you’ll get a magic answer about how much a rehabb is going to cost, but you will have an idea of how much things should cost. Also, you will learn a process of mapping out a flip and other valuable lessons needed to run a successful flip.

Once you educate yourself a bit on this topic, you can:

1. Walk a property and start getting a ballpark number of how much it will cost you to flip the property based on the things that you see vs. your goal (you should know what your competition is doing) and how long it should take to complete it.

2. Walk the property with a contractor and understand why he tells you you need to do X or Y.

3. Explain to contractors what you want to be done. It’s different to say “new bathroom” than “gut the bathroom, re-tile the bathtub wall to the ceiling, vinyl flooring, new faucets, new toilet, no new plumbing is needed, etc.” or “we are just switching toilet, vanity, faucets, paint”)

4. Spot contractors that are BSing you

To answer your question more directly, if you are targeting a cosmetic flip, you can bring an inspector, to make sure there’s nothing BIG you are missing. Usually,   in a cosmetic flip, you expect to not having to deal with major issues/costs, it should be a fairly easy rehab, and your margins might not have room for an unexpected expense an inspector should catch (defective electrical, plumbing, roof, HVAC, etc.). If you are going for a larger flip, an inspector won’t help you much. You already know the property is messed up. You should bring a contractor and maybe some subs. I usually walk the properties myself, sometimes with my contractors. If the offer gets accepted, during due diligence, I bring my contractor, an electrician, an HVAC technician, a plumber, and/or a roofer (not all of them at the same time).

Russell Brazil · Answer

Experience, learning.

One of the things I think is most hopeful is looking at what flippers are actually paying to purchase the house, and what they are actually selling them for.

What I find is the greatest mistake is they look at what they can sell it for......then they subtract sales cost, they subtract what they think is the renovation cost, then take a percentage off that number to arrive at what they want to pay for the property.  The problem is....they always arrive at numbers far less than a flipper is actually going to pay for the property, and they keep spinning their wheels and getting no where.

So look at the actual purchase price people are paying, and the actual sales price, you know roughly the sales cost (I estimate 8% in Maryland), then that Delta is your profit and renovation cost.

Now arriving at that renovation cost, its just learning and experience.  And your experience level will largely dictate your renovation costs.  What costs someone $100k, might cost some one else $65k.  But if you want to flip successfully, you have to get your costs in line with what other flippers are paying.

That isnt really helpful in helping you to learn the prices, but is important to point out different people pay vastly different prices for the same job....what makes or breaks a flipper is their renovation cost.  So it isnt as simple as saying I pay X for Y....its I need to figure out a way to get the budget done at A price, because A is what other flippers can get it done at.  If I pay B price, Im going to think the property cant be flipped...then another flipper comes along and flips it.

Ned Carey · Answer

@Tony Hale it simply comes with experience. Try your best to learn from the experience of others. Go visit a rehab in progress from another investors and ask they questions about costs and the scope of work.

In this competitive market if you give me an offer with an inspection contingency i am likely to reject it. I might accept it with a really short inspection period, especially if you put down a high earnest money deposit.

Ritch Bonisa · Answer

@Tony Hale It is likely that a trusted contractor could help you.  There are some other threads that discuss estimating.  Check some of those out, but of course venture at your own risk.

I can share what I do to evaluate.

• Establish a target retail price.

Find some real comps from the past 6 months or even less if you can get them.  1/4 mile radius.

Be conservative.  Make sure your comparison is very close in sf, garage/no garage (detached or not), beds/baths, etc.

• Get an idea of holding costs, insurance, realty fees.

• Look at the distressed property and ask the simple question - What needs to be done to make it comparable or to hit that target retail? Now, put the estimate into your equation.  Consider 10% more for unknowns.

• What is your required % ROI.  Be realistic, because the investors who consistently make money flipping don't always "kill it" on every deal.

• In the end, what you have left is the purchase price.  Now you know what the property is worth to you.  Doesn't matter what someone else says its worth or what the asking price is.  Now you know what it is worth for your deal.

• Get the property for that price or move on down the road. Don't buy something thinking you can make it work.  Rehab costs are what they are.  Don't expect to tighten up the rehab to hit your ROI.  It fits or it doesn't.

Now there are other strategies you can use - example:  you find a duplex in a good area, with solid homeownership.   Can you convert it into townhomes or condo - in essence selling each side or level separately. Is the return greater?  Are there comps for it?  OR, can you convert it to a single?  Are there comps for that?  Is one better over the other?  OR, maybe, none of these work and you just pass.

Make sure it can be parcelled and is zoned for your usage.

It's always OK to pass.  Don't push yourself into a mistake.  AND, always remember you can't make it fit.  Your deal is made on purchase price along with understanding rehab costs and retail targets. Don't let someone rush you.  If you lose the property - that's fine.

Do put together the resources and people to be able to pull these numbers in and evaluate quickly.  In time, you will learn from your contractor - or establish some benchmarks that will allow you to get a better idea on rehab costs.

Hope that helps a little.

Nii Okai · Answer

@Tony Hale

Welcome to the Investor World.

To estimate if a purchase is worth it. It is the same everywhere - check the comps and you will be good to go. However, being a newbie, investing in Baltimore. I will invite you to read and re-read the pieces of advice posted by @Ian Barnes and @David Fernandez -

Baltimore is a peculiar place to do business. As such, you would be better off teaming up with an experienced rehabber/flipper/investor in Baltimore to do at least a deal. You would learn more by doing than just by reading answers on BP.

A few years ago I was in a similar situation in Baltimore City. It was an ordeal trying to figure it all out on my own - I learned my lessons (oh how many? I have lost count) and I am not ready to revisit that chapter.

Remember that you can never learn how to ride a bicycle by reading books.

Wishing you all the best

Nii Okai

Yannik Cudjoe-Virgil · Answer

Hey - It depends on your comfort level and risk. Look up the book on estimating rehab costs by J. Scott. That should give you a ballpark on how much things cost as they vary by market. If you spend an inspection for every property then thats 350 per deal which can add up especially if your putting in multiple offers and then back out the deal.

I would find a couple contractors to walk through the property with to get ballpark estimates. always put 10-15% contingency in rehab budgets as they almost always never meet the projected budgeting.

Find someone you can TRUST thats experienced and JV so you can LEARN while you EARN.

Brian Ploszay · Answer

An inspector is not the right person to hire.  You need to get a contractor (or two) to view the property and help you develop a budget.  So skip the first step and just bring the contractor right away.

If you are not experienced, you might want to start with more of a "remodel" type of project.  Those are slightly harder to find, but you won't get overwhelmed with the construction.

How to estimate if a purchase is worth it

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