About to put offer on a single family. Would appreciate feedback

22 Replies

Hey everyone!

I've been following the forums here, and I have to say the the info from the community is invaluable. I gathered up the courage to put an offer on a house in Oakland for a superficial flip. I wanted to check with you and see if these numbers and timeline make sense. I would appreciate any feedback as this would be my first flip.

The numbers are conservative. The realtor said we could flip it for 10k more than what the report say, but I'm sticking to the average of the comp. All in all it's a 30k profit if everything is correct.

This is the property:

https://www.redfin.com/CA/Oakland/1745-67th-Ave-94...

These are the comps of properties sold within less than 0.5 mile radius.

https://drive.google.com/open?id=1KmdHLEAISOck9tRx...

This is the breakdown that I went over with my realtor. We covered most things, but I would like to get a second opinion from you guys.

https://drive.google.com/open?id=1gFTjHiJO2tB_mPJn...

Thanks!

@Alon Helman The other comps do seem promising compared to your investment. Everything checks out to me. The only thing I am worried about is the rehab cost. It's definitely possible that the rehab can be under 60k but let's just hope that you don't run into plumbing or electrical issues. Overall this seems like a good investment and I don't think you need to worry about losing any money.

@Alon Helman

This post well illustrates a common beef I have with how Bigger Pockets and other real estate investment education entities encourages investors to think about flipping houses. It's all bloodless numbers and vague projected costs.

@Ryan P. Kotschedoff made a quick point about your projected rehab costs that you have clearly brushed under the table, offering that you have "contingencies" to cover "those unforeseen issues." That is a red flag. Clearly, you don't want to go into the weeds about the rehab, and THE WEEDS ARE WHERE YOU NEED TO BE.

The rehab costs are always the Achilles heel of this and any other spec rehab project. You have one page in your "Property Report" labeled "Purchase and Rehab Analysis." In that report, you have ZERO analysis of the actual rehab. You state that you anticipate the cost to be $52,000 and you add an additional 12% contingency to that to get to $58,240.

This is your second post in Bigger Pockets. You have provided no details on your profile regarding your level of residential renovation knowledge and/or experience and/or contacts. You have mentioned nothing about how you came to the round figure of $52,000 as a rehab cost other than vaguely assure your readers that all your numbers are "conservative." There is no timeline for the rehab. There is no shot at a scope of work. There are even no pictures of the bathroom and only two of the well-outdated kitchen, while we have one of of a credenza and two of a backyard that has seen better days. We have no idea if the shack whose wall we can see in one of the shots of the backyard is this detached garage. I have to go to the first picture and then street view to confirm  that there are apparently no gutters on this house. The selling agent's copy talks vaguely about knocking down a wall and improving a space. There is no floor layout for us to see what s/he means.

These are only a few examples of why you need to get deep into the details of the rehab if you intend to make money on this or any other flip/spec rehab deal. The numbers are only going to get you so far.

The numbers won't tell you if your GC is going to flake out and disappear three weeks into this rehab, if this dubious person hired a trim carpenter who doesn't know how to cope inside corners, if your flooring guy's going to assure you that of course there's no problem with having vinyl flooring in the kitchen of a home that you intend to sell for over half a million dollars, if you have plans on replacing those Lowes bargain bin flushlights in the kitchen and hall with something else, if your drywall guy will eventually tell you that, sorry, he knows nothing about plaster repair in structures dating from the 1920s, if that ceiling in the living room is popcorn, painted popcorn, asbestos-laden old painted popcorn, or just a knockdown texture finish, why there is a washing machine in the kitchen, and the hits just keep on comin'...

Get in the weeds of the rehab analysis, Alon. It's dirty and it's nasty and you're going to have to grub for your money there. If the weeds aren't where you want to be, you can always buy mutual funds with your five thousand bucks of initial investment and see where that gets you.

@Alon Helman “ the realtor said “ Assume everything the realtor said to be a lie 1: they work on commission .they are like car salesmen. They wIll often say or do whatever It takes to get the sale . 2: most realtors lIve paycheck to paycheck and have no clue about InvestIng or flIpping . They often woukdnt know a good Investment from a hole In the ground .

1) don't listen to what the "realtor says"... they want a commission, nothing more!

2) your going to invest $450k for a house in California.... and HOPE to make $30k? - that's NOT investing, thats speculating!

3) Im assuming your brand new (with 2 posts). If you want to get into trouble immediately, proceed with this deal... otherwise spend a couple months LEARNING. THe resources here are good... listen - ask questions, but DON'T go into nearly a half million dollar house looking to make less than what the agents will split a commission for.... a realtor most likely has ZERO clue how an investor thinks. You've got no room for error with that margin - and you'll have to leave some meat on the bone to sell and exit quickly too! (where is that coming from)?

4) remember what happened in the last crash... wiht listing / sales prices being out of whack, ask what happens if THIS behavior goes away while your holding? can you afford that loss?

As they say in poker, if you cant spot the sucker at the table, take a look in the mirror!

1. What the others said, but don't get discouraged, you'll learn a lot from your first deal...as long you get out without losing money or too much to get back in the game. It's called "paying tuition".

2. Your closing costs (1.3% of price) seems low to me.

3. Did you factor in taxes and insurance in your holding costs or rehab? You might have to pay for the whole year, even if you might get some back when you sell. Same for permits, builder insurance (this one is 6 months minimum and non-refundable usually). Utilities? HOA?

4. Did the 3 months include listing time? In other words, will you finish the rehab in 2 months and hope the house will sell AND close in 1 month right after? 

5. House is built in 1923...52K for all the rehab + the above mentioned seems low to me. Did you include any landscaping? Any junk/debris removal? Any cleaning, photography and staging? 

6. Have you calculated your selling costs correctly? Usually is like 8% of price...and I see you have City Tax too...how much you considered in agents commissions % and closing costs? 

"Ignorance is bliss. Knowledge is power, but also a burden. The cure to both - the 4 ions: education, action, progress(ion), not perfection". Good luck!

Do your own due delligence. Get a solid home inspector and go the trouble a good mold inspector too. Than take it from there . Yes of course the realtor wants a commission. But the buck stops with you . Learn to have a keen eye and budget for the unexpected.

Don't listen to realtors, most of them know nothing about rehabbing houses, flipping, investing, etc. They are salespeople. See the property with the GC who is going to be doing the work for you and an inspector (might be the best $400 you spend). Get a detailed scope of work drawn up by the GC, get your prices set before you buy this property. Things will go wrong, there will be cost overruns (how will you cover those?), and don't ever believe the realtor telling you it will sell for more than the comps. Not saying don't do it, just get a better handle on the numbers or you'll get into trouble.

@Jim K. Thanks for the feedback. You're right, I haven't done a full scope of work on the property. I did bring a contractor who look at the property for a good hour and gave me an estimate of $45k rehab. I upped it by $7k plus the 12% overrun. Maybe I shouldn't trust the contractor regarding an estimate that he gave me, and have him do a full scope of work with me? Again, you're absolutely right about scope of work which I should do before putting in an offer. I also should have posted pictures for you guys. I apologize for that. I'm super new to this, so I'm not sure how to approach the forums. Also, reading book about flips isn't the same as doing them. I'll get on that ASAP.

As far as GC flaking and construction not going according to plan, how do you combat or deal with these situations usually? 

@Costin I. Thanks for the information. Those are all things that I just brought up with the realtor. If she doesn't know about these things I might walk away from this property and start all over with the information that I got here. I'm also going to spend a few more months educating myself with the details of it all. 

I also had a question about the loan strategy. The lender I talked to told me that it is possible to do it with a 5% down as FHA and a 5 year fixed ARM loan. She said it might be the best strategy since I'll have more capital for the rehab. I asked her if doing it with an FHA loan is risky, or will it bite me in the *** in the future. She said that since its my first flip/purchase, it should be totally fine, and that she's been in the business for over 20 years and has never seen any problems with that strategy. I'd like to hear what you guys think, since obviously you have probably ran into these things in the past.

Also, the house itself has a title issue. For some reason the owner of the house has put her grand kid on the title (Which is illegal). They now have to take it to the courts to clear it out. It might take a couple of months to clear, but it will be cleared. There's a contingency in the offer that gives them 25 day escrow, plus an additional 30 days to clear the title. In the meanwhile there will be an earnest payment of 2% made to them. If they cannot meet the 55 days, I can walk away. It sounds like a good strategy, but again, I might not be seeing the risks of this. Any thoughts?

Thank you!

@Alon Helman I'm not a lender but that loan seems complicated. If you are looking to conserve cash and plan to hold the property for a short term anyways you may want to consider doing a simple 5% down conventional. Also I thought FHA loans are for primary residences only but perhaps you will be acting as though this is your primary residence while rehabbing, I don't know your situation just my two cents.

@Alon Helman your first error in you analysis is your assumed purchase price.  Your analysis sheet is showing a price below asking... however all of your comps are showing above asking.  It is not clear what strategy you are using to get the $55,000 discount.  Everything expands from that point.  Second issue is the agents analysis does not show DOM.  That is kind of odd, but I would personally want to know that info.  Without getting into the reports on the building the size of your budget tells me that you are thinking about a pretty deep reno, not a refresh.  Assuming that the "bones" are good, you should be able to pull it off with your budget.  But it will mean you will need to be hands on/GC.  Contractors are busier every year and you will not be pulling a first tier guy to do this work.  Most likely you will be reaching for the bottom feeders and even they are scares right now.  Especially with all of the homes that were burned down in the north last year and this year, anybody with a license can probably find a project. Additionally, you really need to think about the timing of your flip and who your buyers will be.  School starts in a few weeks, meaning most families will not want to move once school started.  There are always families that move during the school year for work, but I don't imagine they are the type to live in Havenscourt.  If your closing and renovation work drags out,  you will be lucky to be on the market at the tail end of fall.  If you drag out to winter, every agent out there knows that the people selling in that season are the ones that have some pressing need.

How familiar are you with this area?  I personally invest in East Oakland but not in Havenscourt.  If you are not very familiar with the area, I would suggest you reach out to some people on BP to get some more knowledge.  Account Closed down in Milpitas that you might want to attend.  

Anyway you slice it, this is a really thin deal with a lot of potential downside.  However, if you are doing it to get your feet wet and gain some experience you should really work on your analysis and have more clarity before moving forward.

Good luck to you,

Arlen

Yes, what I your exit strategy? Do you plan to resell it and is the lender aware of this? Usually cannot get traditional mortgages on properties you plan to hold less than two years. There may even be penalties for early exit. Speak with an actual mortgage broker, not just one lender, discuss your plan with them and they can shop around for the best loan for you. Or consider a HML if this will be a quick fix and flip. More expensive money but less paperwork than a trad mortgage. Where is your rehab budget coming from? Is this money you have saved up? You have holding period of 3 mos in your report but it typically takes 60 days to close on a house. Your holding period should be length of rehab time (the shortest we have done is 9 weeks), length of time on market (what is the average time on market in that neighborhood?) plus the two months to close after it goes under contract, so say 2 mo rehab, one month to show and get under contract, 60 days until closing, that is 5 months right there, assuming the rehab goes quickly and smoothly and the house goes under contract in a month. Getting stuck paying monthly loan payments while waiting for a house to sell is scary as hell. Do you have enough in reserves for this? Also, guess I'm not familiar with CA, but it blows my mind that people buy 1000sf 2/1s for half a million dollars!

Thanks for all the feedback everyone! I think you were all right. I held off on the offer to crunch additional numbers with the realtor. She had a hard time justifying some of the things she told me, so that was a big red flag. The house was snatched up a day later. I am wanting to do this as a learning experience, and making a smaller profit margin isn't something that worries me. The only thing that worried me about this was losing a large amount of money.

Now that I know what else to look for thanks to some of the comments here, I feel I'll be way more prepared for the next property.

@Arlen Chou Thanks for the feedback. I'd love to go to the meetup!

@Alon Helman

I think you've chosen a wise path.

A lot of people would have gone stupid and defensive on this. I especially congratulate you for committing to the learning curve. Your head is in the right place. You are in it to win it, and the powers that be are going to have to beat you down completely and conquer you to take your investment goals away from you. You will surrender nothing.

That's the attitude you need to have in this, no childish bravado and chest-pounding and then two weeks later you disappear and the BP community never hears from you again.

@Matt Avila @Jennifer Petrillo   Great advice overall.  Just wanted to comment regarding the thought about "Not listening to Realtors".  Yes, most of them have no clue about how investments work, I've spoken to many.  But not all.  Just wanted to back up the few like myself who understand how these flips/investments work.  I personally want to find my clients the best deal.  

Currently in contract on a property, which I was able to negotiate a counter offer of $105k below original contract offer, a fixer property in the booming downtown SJ.  

Down the street from that property, a few months ago, I closed on another in which a wholesaler was claiming to have the property under contract (my instincts told me he was lying and they were correct, he had nothing) He wanted $690k total for the assignment.  The property was going up for auction, his plan was to have the $690k assignment contract in his back pocket, hope to bid for a lower price at the auction and possibly try to do some sort of double close.  (Because technically, you cannot assign a contract from auction.  It has to be all cash and it cannot be purchased through an entity.) The property ARV is $1m conservatively.  It was his terrible luck that he came across me because I did my due diligence & was able to purchase the property from the bank, who owned the property, for my client, at $562k.  Saved my client just about $130k from what he would have paid that scammy wholesaler.  Im very proud of that sale.  

As I mentioned, there are a few of us who are very rare businessmen/women.  Just because we have a Realtor's license, doesn't automatically mean that individual is unknowledgeable about this business.  Need to have the conversation with people, everyone deserves a chance, you never know you might find a solid person to work with.  If they may not be knowledgeable, perhaps they are looking for that hands-on experience to improve.  I know for myself that is how I learned and am continuing to learn, through my real life experiences with my clients and spending time studying/reading as much as I can.  My goal is to find my investing clients great deals, so they make money, I make money, they are happy and we continue to have a successful, trustworthy relationship for many years.  Im working 24/7. 

@Ramsin Jacob - there are a few like you out there... If you have a list or contacts in my area, send them my way!

Ive got a decent agent at the moment - she really has taken the time to understand how we analyze and proceed through our process. (for example, its all numbers... if they dont work we dont proceed. Ive bought properties 'sight unseen' - once the offer is accepted THEN ill go and see it. Of course we have a couple of contingencies that will get us out if the place is beyond what we want, haven't pulled that rip-cord yet however!). She has 'templated' our standard offer criteria, I can get paperwork to a seller in 20 minutes! she has blank checks that we have signed - ernest money is a snap! She has honed in on what we want, where we want it, and our style. She's learned how we cash-flow a property, and what Im looking for in the 'hidden' numbers that arent listed.

Its been a bit of an education process but she has now closed a few with me - one in fact that went so fast her daughter was with her and simply asked, "mom, what just happened"?.... well honey, he just bought the house... and he WILL close in 2 weeks! "mom, didnt Matt just buy a house down the street last week"... yes honey, he did!

"Mom, you need a couple more people like Matt". 

Brought a tear to my eyes.... I see another budding investor once this kid grows up a little bit.

Originally posted by @Alon Helman :

Hey everyone!

I've been following the forums here, and I have to say the the info from the community is invaluable. I gathered up the courage to put an offer on a house in Oakland for a superficial flip. I wanted to check with you and see if these numbers and timeline make sense. I would appreciate any feedback as this would be my first flip.

The numbers are conservative. The realtor said we could flip it for 10k more than what the report say, but I'm sticking to the average of the comp. All in all it's a 30k profit if everything is correct.

This is the property:

     

https://www.redfin.com/CA/Oakland/1745-67th-Ave-94...

These are the comps of properties sold within less than 0.5 mile radius.

https://drive.google.com/open?id=1KmdHLEAISOck9tRx...

This is the breakdown that I went over with my realtor. We covered most things, but I would like to get a second opinion from you guys.

I am not from Ca, but looking at what you get for $450 amazes me. The first hurdle I have is the amount of money it takes to make 30k. Do you have this kind of cash sitting around? If you are using hard money your are under water.

Costs 2-3 pts to fund = 9k

1% a Month = 4500 

You are going to won this at least 3 months = 13,500

Total carrying costs 22,500

Further, I am not sure what the rest of the transaction costs are in Ca.

I ama not a fan of this deal.

@Alon Helman , so you learned how to analyze a potentially crappy deal and listen to your gut and walk away with your wallet intact--that is priceless education and now you are much better positioned for analyzing the next one. Anyone can analyze an obvious home run, the tricky thing is distinguishing which ones you will regret and when not to jump in (which is really hard, at times my husband has had to talk me out of a property I wanted that I realized in retrospect could have gone badly!). Well done and best of luck with the next one.

Two approaches just do some yard work. Try to sell yourself it to an investor without a realtor through personal contacts or sell to realtors with a buyer.  I have seen people in one weekend make $40-50K in EPA or Union City.

The other approach is spend as little as needed. Remove popcorn ceiling, add granite top, kitchen bath fixtures. and leave kitchen cabinets alone. Add crown moulding, newer doors. The backyard is an eye sore perception issue so you need to replace dry rot, paint, add drought tolerant or add a deck.

If it takes also 60 some days I will be concerned with interest charges etc. In your analysis you mentioned 1 month, 2 month, 3 month holding period. In my opinion you want to put it back in 2 weeks sell it this summer. If you plan to market 2, 3, 4 months, then you need to gradually reduce the asking price accordingly. Like other commentaries you need to outline the rehab costs as I see you are not getting the ROI for the investment mentioned.

This is definitely a FHA type of housing to owner occupied housing so safety code is important.

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