I'm finally trying to get off "podcast mode" in my BP experience and get off the sidelines. I've learned a lot from listening to others (and some past experience including buying my own house at foreclosure) but worried that I'm so anxious to do a deal that I'll overlook red flags.
So here goes... I'm very interested in an upset bid on a foreclosure in a neighborhood which I'm very confident in. I've run the numbers on my own and on BP's fix and flip calculator, and I'm more than happy with the return if repairs stay below $150,000. That sounds like a huge, and thus conservative, number in my mind. But is it?? How do you know what structural problems lie in an old house (built in the '30s) which you've never been in? (I was lucky enough preview my own foreclosure/home before I bought it). Let's say I don't have time to read 3 books on calculating rehab costs before I have to make the call on this one. If you assume you've got to properly update a home for a nice neighborhood, how easy is it to spend $150k for a house less than 2000 square feet?
That's probably enough info, but here are other thoughts running thru my mind. If I get the house, open the doors and it's worse than I could ever imagine, I believe I can break even by selling the lot and walking away from the rehab. I suppose that's an effective way to mitigate risk. But is it? Am I just looking for reasons to go for it? Am I nuts to acquire a foreclosure without more experience in rehab costs, or do I have enough buffer to at worst learn and not lose my shirt?
The last paragraph notwithstanding, does anybody have any rules of thumb for worst case numbers on foundation issues, mold, outdated plumbing, electrical, etc?
My appreciation in advance to BP nation for your time!
Hi Colin, Who in your local area is doing the kind of rehab you are considering? Yes, $150k is a large sum. This may sound harsh: If you don't have time to learn how to estimate rehabs, do you have the time and money to cover expensive mistakes?
As a beginner (I am there myself) it is tempting to clutch to the first deal we see. But once in a lifetime opportunities come by every week, if you are paying attention. Give yourself some breathing room, and find a local expert.
If you really, really want to know for this deal- call an electrician and ask for a ballpark on rewiring a 1930's , 2000 ft house. They won't want to answer, so give them a number- "do you think it would be more than 5k?" Do the same with a foundations expert, a roof expert, mold remeditation, whatever else is on your list. Any rule of thumb is going to be location specific, to calm those jitters, you need firmer facts. Good luck!
Thanks Amanda G. I have time to learn, but not time to learn before the red or green light decision on this one due to the upset bid period limits. I've made a few of those calls you suggested already regarding foundations. I'll take your suggestion and make similar calls to other trades. Thanks again.
@Colin Perry I think you need to pass on this one until you get enough experience. If you were buying off the MLS or direct from a seller, you would have the time to get your inspections and get contractors to give you bids. With foreclosures, you don't get that luxury. $150k is a lot of money for a rehab and you really need to know what you're doing. It's possible that you can buy that foreclosure, learn as you go, and come out ok but that's a risky move. You could also lose a lot of money. Typically, the ones buying foreclosures have the experience and knowledge of what the rehabs will take. If they don't make profits over the long run, they won't last long.
I suggest that use this as an opportunity to learn. Follow this property and see what happens to it. Contact the winning bidder and ask them to share details. Maybe they'll be willing to do so. Maybe they'll let you co-invest and earn something, too.
We didn't even get into how you were planning to pay for this. That could be a whole other discussion....
@Andy Mirza thank you for your thoughts and consideration. Passing may be the right play, but I can't see how much I'd learn in that way honestly. I agree $150k is a lot of money for a rehab. Doesn't that help my argument for going for it though? By having that expectation going in and being comfortable with the expected profit at that level, couldn't you say I've got my eyes open. If I had a proforma with $60k and it really cost $100k that would sting, but if the opposite holds true and I budget for $150 and come out at $100 then I'm a happy guy that day.
I did get an opinion today from one source that I respect and has experience in rehabs (yes only one so far). I told him the size (1800 sf) and age of the house and he couldn't see electrical replacement costing more than $12k, plumbing $12k, HVAC $10k. Obviously there's a littany of other potential repairs I haven't listed (structural, kitchen update, baths, paint, windows, flooring, roof) - but he didn't see $100k total even if things were bad off. For sure I'm not taking one man's word, but that was good to hear.
Regarding how I'd acquire this one, I've got a nice cash infusion ($140k after tax) from a pending sale on a rental and also a partner who is better funded than me. I'm expecting we'd use our own cash to purchase. For the rehab I can tap into an unused HELOC if need be, but my partner might carry a heavier load on that.
I recognize that I could very well have rose colored glasses and there is substantial risk on the horizon. Please don't let anything in my response deter anyone from persisting in a different perspective.
Regards to all,
@Colin Perry Ok, you have more experience than I realized. A rental counts and I re-read your original post in which you stated that you bought your home from a foreclosure. Things to consider:
1. Be 100% sure that this a 1st position lien that's foreclosing. The $150k margin is huge and this might be because this is a 2nd and there's an underlying 1st that you have to account for. I've noticed that in some smaller counties, there doesn't seem to be much investor activity so it's more reasonable that you can find good deals but $150k strikes me as extreme. If this property is in a county with a lot of investor activity and the location is desirable (i.e. not remote or rural), chances are there's a reason that the other investors are passing up on this. It also could be that there will be more upset bids until it ends up at the market level for foreclosure sales, in which case your potential $150k margin goes away.
If this is indeed a 2nd, you'll have to adjust your numbers.
2. You have to find someone who can put eyes on the property and give you an experienced opinion of what it would take to rehab it. I'd prefer that you get 3 opinions from contractors. If their numbers come in fairly close, you can make a good judgment on what the rehab will cost. To be in the rehab game, you need to have a good idea of ARV and rehab costs. If you don't, you're flying blind and that's no way to run a business.
3. Have you and your partner solidified your agreement on how to do this venture? It's best to do so before you get into your deal instead of as you go. Make sure each party knows what their responsibilities are and be clear on expectations. When things go well, there'll be no issues and no need to refer to a written JV agreement if you go that route. You'll need that agreement if things go south