First "Deal" Looking LIke a Flop! What am I missing?

10 Replies

Hello Everyone!

I have my first "deal" under contract after a year of education and missing out because of analysis paralysis. The property is 2/1 850 SQFT and has had a 15 year tenant that is currently being evicted. She has smoked in the house every day, every part is run down, and the list goes on. Essentially, this is a total gut and rehab. I have pulled material pricing from home depot, and walked the property with 2 contractors and multiple inspectors. We've found termite infestation and other items that were not accounted for. When I run the numbers, the cost just seems astronomical and doesn't make sense, but at the same time, this is such a small house for a ~$50,000 rehab! At this point, I'm going to go back to the seller and ask for ~$12,000 off but I doubt she'll go for it. Even then, not a great deal..

I know I could make it work if I decided to do the work myself, but that shouldn't be the default. I feel like I'm one of those people that's just "buying something" to get started.

See the brief numbers below:

Original Scope Cost Notes
Demolition Labor Cost $4,250.00 Quoted
Construction Labor Cost $15,710.00 Quoted
Material Cost $12,805.00 Ref - Home Depot
Permitting/Fees $2,500.00 Ref - Development Services (estimated)

Additional Scope Cost Notes
Subterranean Termite Treatment $1,021.88 Quoted
Dry Wood Termite Fumigation $2,659.81 Quoted
Carpenter Bee Treatment $161.29 Quoted
Replace Misc. Termite Damaged Studs $1,000.00 Assume replace 20 EA studs
Rodent Extermination $150.00 Quoted
New Roof $5,750.00 Quoted - Partial re-decking at 10 sheets
New Hot Water Heater $750.00 Assume $500 water heater and $250 install
Replace Aluminum Electrical Wire $300.00 Assume 4 hours @ $75/HR

Total Rehab Budget $47,057.98
Contingency at 10% $4,705.80
Original Purchase Price $45,000.00
All In Cost with Original Purchase $96,763.78
ARV of Home $95,000.00 Based on Comparable

Additional Scope $11,792.98
New Purchase Price $33,207.02
All In Cost with New Purchase Price $84,970.80

Any advice?

The numbers I see don't appear out of line. Full guts are expensive! You will almost certainly spend all of that, and more. At that point, getting in at fair value, you may as well buy one that is already renovated. Keep looking.  I have worked on a lot of houses, and very seldom do they look better after they are demo'd.  I love the idea of low price houses, I just can't make the math work in my head. A bundle of shingles, and the labor to put them down, is the same on a 250k house, and a 50k house. The difference is one is a whole lot more likely to appreciate.   

@DeAnna Henson  I think maybe you could just spend 95k on a turnkey which will produce as soon as you get it rented. Did you calculate any costs associated with paying utilities and taxes during your rehab period? I would pass on this one probably skip a full rehab for your first one. Just my .02

@DeAnna Henson do not do this rehab as your first deal - it will be a loser. Keep in mind that you are going to have closing costs, interest, taxes, insurance, utilities, lawn/snow maintenance costs on top of all of the rehab money you are budgeting. This sounds like one you need to get under contract and wholesale it to an experienced rehabber. In doing so, you will make some connections in the process of talking to rehabbers and you'll learn a few things that you can apply to your next deal.

This type of project is not one for new investors, even if the margins were good (and they are not good from what you are describing).  And don't fall into the trap of buying/rehabbing it anyway just because you did a lot of pre-work and got bids and spent a lot of time on it.  Just consider that part good experience and education.  Some of the best deals are the ones you don't buy.

Matt, I appreciate the advice. The plan was to BRRRR out of it and rent for ~$1100.

Paul, yes I had considered holding costs. That would tack on ~$1500 if I could get it turned around in less than 2 months. I'd like to buy something that I can gain experience on, but this one just doesn't seem to make sense.

Owen, I appreciate the feedback. I had considered putting in a little sweat equity and then turning it around to an investor, but I'd still have to get it well below the $45K she wants. It is hard to let go after putting so much work into it, but I think it'll be the right call.

Thanks for the advice everyone.

This deal sounds like a pass. What a lot of BP newbies don't realize is value add deals are priced for a GC to make a net profit. For example if a GC can fix a property for $30k with own crew and supply discounts then deals typically sell 40-50k under ARV. If you hire out the GC they will often charge you $40-50k so almost no net equity gained.

@DeAnna Henson

Well they say losing money on your first deal is normal and a good learning experience and if that's what your looking for go for it ! (And I did lose a lot on my first deal so just hoping you can learn from mine and BP members experience)

But seriously that is not a deal in any way shape or form. Keep analyzing deals every day and eventually one will come across and after looking at hundreds of crap deals it will be such an obviously good deal you will buy it without a Second thought or worrying about losing money because you'll be like even if I go over budget by 20k I could always sell it make a great profit, rent it, brrr it or do a heloc because I have so much equity here from day 1.

With the numbers you put up you would need to get it for 15k to make it work and my guess is you'll go over budget on material theres a million little things you forget and it will seem like you spend 100$ a day at home depot and can never get everything .

Henry & Dustin, I completely agree. I lowered my offer to $25K so I could have a little margin and learn and the seller's response was "do the work yourself". Needless to say.. it was a no go. I even offered it to my contractor, knowing his costs were lower, and he wasn't interested!

I appreciate the responses and advice. On to the next one!

I would say this deal is really not looking good for you. Hopefully in your offer there was some sort of protection in the contingencies which give you an out. I do not know what it rents for, but putting 50k+ into any 2 bedroom alarms me personally. I would recommend finding one that is ready to rent for even a bit more money and saving yourself the headache. 

Glad to see this deal will ultimately not come to pass and you can focus on much better ones. What's most interesting is wondering if there are $50,000 plots of land where you could build a 2/1 at under 1,000 Sq Ft for a better price than the cost of your rehab and generate an ARV of around $100,000 or even more. concept. There are places in the country the numbers make sense. Not saying I would take on the task for anything less than a finished duplex with 1 - 1.5% rent rule margins, but last year I had someone pitch me their build-to-rent model down near Ft. Myers Florida. Passed for a slew of reasons, but at least plots of land, compared to time of permitting, compared to all costs involved did compute for decent final rent roll.

Bottom line is that when a rehab costs as much as your purchase price and you'll end up with same size and sq footage you started at...pretty much a never. 

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