I have a potential deal and need some advice from the knowledgeable people here on BP. Here's the deal
Existing property 1930's 2/1 bungalo 700 sq ft is sitting on a .12 acre lot boarded up. The county has the property assessed at 30k, 12k for the lot, 18k for structure.
Based on the comps I feel that's accurate, but the city wants the house brought to code or demolished in 15 days. I don't see bringing to code as a realistic possibility because of the condition.
My game plan would be to demolish and rebuild, the lot already has city water and sewer with no outstanding bills owed, the taxes are also current. There are no liens against the property. Since the lot has already been built on I was told there would be no assessment fees to hook into city water or sewer. I would be able to get this lot for $2500, then incur all costs associated with rebuilding.
The neighbor hood is older and the comps are varied, but if I was to rebuild a 3/2, 1300sq ft I would expect to resell for $100k-115K. Any traditional sale newer than 2004 has sold in that range.
Here is a breakdown of what costs I have considered, is there anything I am missing and has anyone done similar?
-utilities cost to disconnect and reconnect
-realtor commission for resale
For anyone who has done a deal like this before, what is the minimum profit you would need to make to consider this a deal?
It looks like you have all the basics covered. I'd also add since the City has a correct/demolish plan in place it is also likely they have some sort of code liens attached to the property, so you need to add those in as well.
I know there's a deal I'm watching in Sanford that has 200-300K in code liens against it, and the property ARV will be 120K+/-. The City's amnesty program will allow me to pay them off for $2000 or 10% whichever is less plus a $400 filing fee, after all the issues are corrected until then the fees keep accruing. The program ends in Dec of 2014 and the seller isn't at the price I need yet. So I know if I buy I must have enough time left to correct everything and file for amnesty or else it's a no go for me.
So look into that, I know in my case it is a historic district so the time to correct also involves historic board review ect again if the time line gets too tight it would be a no go for me.
This deal is not strong enough based on the information provided. I do not see that you accounted for cost of capital, although you might be paying cash.
In my area you would be at about $115 +/- a foot to build if you hired it out, if you GC'd the project (not recommended if this is your 1st go) you might get closer to $100 a ft. You can quickly see that it costs you more to build than it is worth.
Finally to the profit question - minimum 20% net profit on the final product. New construction projects are a different animal and need to be rewarded as such. I think you will find it is difficult to be profitable on new construction with a sales price of less than $200k+.
@Matt Devincenzo good points, I wasn't even aware of an amnesty program like that, I figure it might vary depending on the city. The only code liens I found with the city were for the grass which has been paid off. This property is in St. Cloud, close but luckily not in the historic district.
@Travis Sperr You're right I did not add the cost for capital, I would try to pull the deal off with cash, but I was estimating my building costs as much lower, I was told $50 - $60 a sq ft in my area...but I am in the beginning stages of getting those prices and maybe what I have been told so far is not even realistic. I have a partner who is a GC and works commercial construction in NY, so I would be getting some guidance from him. This is still new territory to me, but I'm being cautious so I don't get caught out there, the margin might be too thin.
With that being said, whats everyone thoughts on just trying to sell the lot, or even price out a modular home for it?
$50 a foot sounds a long way off, even national builders who's whole business is volume are around $85 a ft.
In some places even if the land is free it has no value because of the cost of construction. You can always try to sell the lot, at $2,500 your exposure is limited - but could be tasked with demoing the house, asbestos, etc.
Best case, you're probably looking at about $60/sf to build. So, there's $78K right there. Add in your purchase price and you're at $80K. Expect that all your fees/commissions/closing costs will be about 10-15% of your resale value, or about $15K. All-in, that puts you at about $95K, leaving you with $5-20K in profit.
Even if you were sure you could be all-in for $95K, it's a thin deal. And it's more likely you're on the high-side of that $95K.
@Travis Sperr very good point about the land value, this may be one of those lots. If I did purchase I would still have to demo in 15 days to conform with the city, leaving me with the demo costs also, now I'd be out of pocket about 9k for the lot. To resell that lot to another builder they will face the same numbers I am now and I don't think the lot or neighborhood can justify the building cost. Guess I just needed you guys to point to out to me.
@J Scott Thanks for the input, I was actually just reading your Diary of a New Construction Project to get some ideas of a cost breakdown. It not looking like much of a deal now.
I really appreciate the responses.
You must be a BiggerPockets member to post on the forums
Join the world's largest, most open Real Estate Investing Community online, 100% free forever!