New REI to help out family?

Question

Hi everyone,

Just introducing myself, and, I guess, asking for advice...  Ive been wanting to get into REI for awhile (which ya'll have heard a billion times), but am now being almost handed an opportunity on a silver platter...

My parents have been trying to sell their house for almost a year, with two deals that fell through, and a steady stream of offers from would-be rehabers.  My parents dont want to sell the place at the price that the flippers are offering (which seems to be around $150-200K less than other properties in the area), so, thus, it hasnt sold.

Finally, being worn down from having to pay rent on an empty house, they said they would sell the place to me to flip, and obviously alot cheaper than they were hoping.

Obviously Im very familiar with the house, and know its many faults.  Its a 2 bed 1 bath, 720 sqft house on 2 acres in a suburb of Los Angeles.  To compete in this horrible market, I know Ill need to add a third bedroom, another bathroom, redo all the plumbing (it was built in '57) and electrical, and since its zoned for horses, do something with that.  My husband is, obviously, leery about the whole thing, hes not sure if we can make at least a good enough profit, if any at all in this market.

Im a real estate agent (tho I dont hang my license anywhere currently), so Im obviously not foreign to all of this.....just hesitant.

Any tips on where to start the research for this would be much appreciated!  Oh...and hello  :D

Jon Holdman · Answer

So, are there any real comps?  If its a 2/1, the 3/2's are not valid comps.  From what you say, it sounds like real value may be around $300-350K.  It sounds like you have a huge project ahead of you. If this really a rehab and add-on, or is it a scrape to make it similar to the 3/2's?

If you do $100K of work (which is sort of what its sounding like to me), and you sell for $500K a year from now, then you're net proceeds are going to be only $460K, less the $100K, less the $250K mortgage payoff, less your and their holding costs, you end up with, what $80K?  If the market drops 10% in the next year (totally possible, IMHO), you're down to $30K.  If comps after you complete the work are really $599, then maybe its more interesting.  $500-$599K is too be a range.

Jon

T Chu · Answer

Thanks Wheatie, that is exactly what I needed to know.  I appreciate your help so much!

T Chu · Answer

Youre right, there are no real comps, since this is the only 2and1 in this neighborhood; those are for 3and2.  It is such a big range, because the 500K are the ones sitting on 1.5 to 2 acres, undeveloped, pretty much just the house and acreage (like my parents house).  The house that sold last month for $599k was a totally rehab, 3and2, brick privacy wall around the 2 acres, horse corrals and storage, and I think a pool (I couldnt see much over the privacy wall).  What do you make of that?

Well, your estimates were my own, about $100K in repairs and additions, after they sold it to me for $300K, and with money out.  So, if prices dropped another 10% (which I totally agree with you, is very possible within the next year)  it would be meager, but enough that they would be clear of the shack, and I would get my feet wet in rehabbing.  :roll:

Jon Holdman · Answer

So, for rehabs you need to follow the rehabbing rules.

Max price = (70%*ARV) - cost of rehab.  So, if you think its going to be worth $500K, and you think it needs 100K in rehab, you would want to pay no more than $250K.  That should net you about $50-75K when you sell.  That assumes you're using hard money while you hold it, and assumes you hold it about six months.  And that you sell using a Realtor.

If you just take over your parents loan, you can save both the closing costs for buying and will have cheaper money while you're holding it.

Jon

Eric Foster · Answer

Forget they are your parents when determining what you can pay for it. What you pay for it needs to be the same that you would pay for it if someone else owned it.

If you do something with them still involved.... under estimate what it will sell for!

And you should over estimate what it will cost to fix, and over estimate how long you will have to hold it...

This way it will be less risky as the Ca market is a bit weird now.

Also by doing this, they won’t be asking you why it is taking so long...

I don’t think you have seen the bottom of the Calif market yet... By the time you are done, it may be worth a whole lot less than what you think it is worth now!

These are things that EVERYONE in changing markets should be doing… not just when parents are involved…

It is always better to NOT do a deal, than it is to later regret doing a deal!

T Chu · Answer

Thanks!   Yes, they have a mortgage, 250K.  And they absolutely overvalued it originally, and were trying to sell it at 475K.  I told them they werent going to sell it at that price, but they were adament....now, a year later, its down to $380k, but, again, no "serious" offer.

I guess, the thing is, its not in bad condition.  Theyve done alot of cosmetic fixes, and it is move-in condition....but, in a neighborhood of 3bed 2bath, or bigger, with horse corrals on all the properties, and comps of $500K-$599K in the immediate neighborhood....you can see why rehabbers are itching to get it.  But, they said that they would rather one of us kids profit off it then these "greedy flippers" (their words, not mine).

They moved to AZ, so they wouldnt even be around when I rehabbed it (if I chose to), so thank God that wouldnt be an issue....but, again, Im still leaning toward selling it outright and washing everyone's hands of the mess.  So thanks for the wisdom!

T Chu · Answer

Oh I wish I could divide it, and sell to a builder...you bet, it would sell for ALOT, but the zoning dis-allows it =/

Yes, I agree we havent hit the end of the downward spiral in CA, and esp in this area, it is all over the place.  *sigh*  Well, at least Im feeling better just telling my parents to cut and sell to who'll take it =/

Account Closed · Answer

Have you explored dividing the 2 acres into four or so lots and seeing what you could sell those for to a builder? Or is the market such that not even new homes are selling?

Account Closed · Answer

Hello,

If the house is vacant, you might consider a cosmetic rehab, if needed, and rent it for a while until the market improves. Or, maybe sell it on a rent to own basis to a buyer who might have 5-10% down.If you can't compete with comparable retails deals, then you need to offer great terms like owner finance. Good luck, 
Mike

Jon Holdman · Answer

If you're viewing this as buying the house from your parents, rehabbing it, and selling it, then the fact your parents are selling it to your is irrelevant.  Its a rehab, just like any other, and you have to buy right to make it work.

On the other hand, you might think about partnering with them.  Other posts talk about the dangers of partnering with family and friends.  Small disagreements can lead to hurt feelings and no Christmas cards.  But, if you're willing to take that on, you may be able to help them and you.

They already own the house.  Maybe free and clear, maybe its mortgaged.  I don't get what you mean by "pay rent on an empty house". You don't pay rent if you own it, so you must mean paying the mortgage.   In either case, the money to purchase the house is much cheaper than had money.

Can you put a HELOC on it to get money for rehab?  Or, do you have another way to get the rehab funds.  Could you buy it from them for just what they owe and do a cash out refi to get rehab money?  Regardless, instead of giving them a profit now, you split the profit with them when you sell it, post fix-up.

If they can hold it while you fix it, and can get the HELOC or otherwise supply the rehab funds, the split the profit 50/50.  That's the usual split when you have a money partner and you do all the work.   That would essentially be what they are doing.  If you have to supply some of the money, then maybe you give them a smaller share.  Sort this out up front.

Sounds like a major rehab.  I would be concerned about them being involved with the rehab, and getting upset that you are destroying their baby.  I'd try to keep them at arms length.

If this is in CA, and they have owned it a long time, then I don't see how the can't sell it at a profit.  Honestly, reading what you write, I think they have a mis perception of its value.  They may be thinking of the value when its fixed up (its not) and the value two years ago (this is now, not then.)  IMHO, the best bet is to sell it to a rehabber for whatever they will offer and move on.  If you want to rehab a house, find one without all the baggage.

Jon