Hey guys, based on these pics of the 1300 sq ft home built in 1940, what would you guess the repairs would be? Keep in mind I will have to add a bathroom.
It has a new roof and new electrical. That's it. Furnace heater with floor vents, galvanized plumbing. Old kitchen. All things I can live with while slowly fixing up the place.
Great size lot, great neighborhood. Homes fixed up to the max similar sizes are selling for anywhere from $550K in June, to $615K recently, but those homes were a little bigger by about 300 sq ft. He thinks its worth $500K as it sits, and I still think that's a little high for the work needed, but I could be wrong.
At $500K it's still about $60K out of my price range to be honest, but I could get it under contract for say $480K and flip it to a rehabber for say $500K. Even with $65K in rehab costs, if they sell for $615K that's a nice spread. Thoughts?
So I guess my direct questions would be...
My answer to all three questions would be, "There's not enough information..."
Nobody can tell you how much a rehab will cost by just looking at pictures. To know how much a rehab would cost, you need to consider the scope of work, the finish level, the specific contractors, the location, the time of year, your negotiation skills, etc. You at least need that first piece (scope of work) to even ballpark the cost. If you can provide a detailed scope of work for the project, we may be able to help you get a rough estimate, but a few pictures can't tell us what's in the walls, how the foundation looks, what the level of finish needs to be to compete with other local properties, etc.
Cool looking house, but that spread is so think it only has one side! If you think this is a deal at $480K, I'm going to make it loud and clear for you: IT'S NOT.
Curtis -
Listen to Aaron above and walk away from this deal...
Then start reading here about the 70% rule and formulas for determining maximum purchase price. Then you'll start to realize that this is probably only a deal at a good bit less than $400K (best case).
Well I'm using this as an education if I decide not to live in it myself. The numbers I throw out there could be way off.
So I guess my direct questions would be...
1) What do you think repair costs would be based on these pics? Aaron you said this is not a deal at $480K, so I'm guessing you think this needs a ton of repairs? If it could sell for $615K after all is said and done, I'm guessing you think it needs a lot.
2) If I were trying to live in it myself, and fix up over 2 years and resale, what would you suggest I offer. My first thought was $400K flat. See what he says. He isn't in a hurry but can easily be persuaded to sell a free and clear house if the money was dangled in his face.
3) As a rehabber, what would YOU pay in this situation for this house? He is not asking any price right now. He just thinks its worth $500K as it looks. I'll offer $400K, he'll say no, and I'll show him all the repairs needed to sell through a realtor and how long it would take, and he may rethink it. He already took a $75K loan out on the house to fix it up, and only got a new roof and electrical and blew through the rest. He owes $68K still. That's it.
Thanks guys!
So I guess my direct questions would be...
My answer to all three questions would be, "There's not enough information..."
Nobody can tell you how much a rehab will cost by just looking at pictures. To know how much a rehab would cost, you need to consider the scope of work, the finish level, the specific contractors, the location, the time of year, your negotiation skills, etc. You at least need that first piece (scope of work) to even ballpark the cost. If you can provide a detailed scope of work for the project, we may be able to help you get a rough estimate, but a few pictures can't tell us what's in the walls, how the foundation looks, what the level of finish needs to be to compete with other local properties, etc.
I had a feeling that was coming :-)
So do you suggest me getting an inspector in there to estimate rehab costs? I'm naturally worried of someone snaking a potential deal so I'm cautious about doing that without anything under contract. I can't get it under contract because I don't know what to offer. And I don't know what to offer because I don't know what the repairs will cost.
I paid $400 to get this call, so I want to capitalize if there is anything that can be done. I personally can get away with adding a bathroom and upgrading kitchen appliances. I will then do the pretty stuff over a two year period. Those two things sound like a $30K job at minimum. So I guess if I wanted to live in it I could offer a little more than an investor would have to. Seeing as its free and clear, I'm thinking of creative ways to get into the home with little out of pocket up front. Although I can get financed for about $415K, the down payment will be murder.
Curtis my suggestion is forget about this property and invest your money in two little books BP offers, Estimating Rehab Costs and The Book on Flipping Houses. This $50 will save you thousands in the end. Also you have to watch being emotionally invested in a property like you seem to be, this will lead to disastrous consequences
Hard to tell from just pictures but a ballpark guess from the info you have given would definitely be less than $350K unless some major issues when doing inspection are found, then less. But again, that's just a guess without seeing the property and having good comps.
Thanks for the replies guys.
I think I'm more emotionally invested in the money I spent to get the phone to ring than the property and want to make an offer. Why not. Feels like a waste to have a seller with a free and clear home and WANTING to move somewhere else and me just walk away without an offer.
But in general I'm hearing that under $400K would be the general rule. He's gonna bust out his shotgun when I give him that number.
Just beating a dead horse . . . not a deal. And the numbers you propose scream newbie analysis.
"I could get it under contract for say $480K and flip it to a rehabber for say $500K. Even with $65K in rehab costs, if they sell for $615K that's a nice spread. Thoughts?"
If the rehabber had to pay 6% commissionto sell that's $37K right of the bat. That leaves him with $578K less the $565K he puts into it. That's only 13K profit without adding in holding costs, title costs, etc.
But wait, you said $615K was for a house 300 sq ft bigger, so let's say he can only sell it for say $570K. It may not even appraise for the $615k you propose he sells it for meaning it's a hard sell for most buyers.
This one screams money loser for him, money maker for you if you could pull it off
Maybe could pay more if he will do an owner carry…….
Sale price $615k
Sales costs: $ $30k minimum, commission
Other costs: $5k
Insurance, taxes, interest carrying costs: $30k minimum
Net proceeds after sales//minimal holding costs $ 550,000
Now, you think it's deal at what price?
Hi Kevin,
It screams newbie analysis because it is :-)
I am pretty upfront I have no clue what I am doing. I've always been up front in all my posts, and someone finally said shut up and do something and stop asking questions. So I did since I agreed with the logic.
Man realtors make a lot of money! When I do start really investing my wife is getting licensed. That is just too much money for my taste to sell a house. I understand there is work involved, but it's hard to convince me its $30K worth of work. You better grab a damn paint bucket and pull some weeds for $30K. Ha ha.
So I will offer him a low amount for sure. But if HE sold through a realtor, he would be forced to upgrade to a much higher standard than if I moved in, AND he has one hell of a commission fee to pay on top of that. So if I convince him I save him $30K in repairs and $30K in commission fee, that's $60K right there that is justifiable to anyone to get a price break.
So I'm going to make an offer, but it will be under $400K. And that will be contingent upon what repairs are ultimately found by an inspector if he agrees. He wants to leave, he's over living in the city, and the feeling I get is he's selling one way or another within the next year. Some investor will surely overpay for this area though, hence me wanting to get it under contract first and be the one to sell it to them if they are dying to overpay anyway.
Hi Curtis, I'm a flipper working in the Socal market. It's hard to gauge how much it's going to cost to rehab this property to even come close to the $615K comp, especially without pictures of the $615K comp, but as far as just a middle of the line market goes, I am guessing it would probably cost around $50K to rehab.
Now if the comp is bigger, then adjusted for size and rehab costs, I'd offer somewhere around $350K. But really it's hard to tell without being able to see more.
Hi CK,
Well the comps I saw were not middle of the road rehab. They were high end rehabs on smaller homes. So high end flooring, countertops, appliances, molding, etc.
I am starting to slowly understand why I would have to offer under $400K to make this a deal. The amount of work and materials needed to make this place compete with a home that fetched over $600K is quite a bit. He just doesn't get that, but my goal is to make him understand that he needs to get that $500K number out of his head.
I want to help him realize he has three choices...
1) Take out another loan on the place and make over $60K in repairs to sell with a realtor, whom will take at least $25K in commission. Hope he gets $600K for it. So now he is minus $68K (left on loan), $60K (repairs), $30K (commission) for a total of $158K off the $600K he HOPES to fetch. Net $442K. But he has to deal with all the above himself and he's over 65.
2) Sell it to someone like me for $380K-$400K and I'll live in it. He'll save a ton of headache involved in repairs.
3) Sell it to a flipper for $350K or below.
I guess his 4th choice could be to just say screw it and keep living in it.
Why do I have the feeling that although this is not a great deal that the same people overpaying for properties around here and holding them will buy this from him for $450K in a heartbeat? Am I wrong in thinking that is very likely to happen if I walk away?
What if I offered him $325K cash and he carries the $68K remaining on his mortgage and I make payments to him? And guys understand this is not me trying to make it work. The house is crap and I could walk away easily from this non deal. I'm just trying to see what creative things can be done to make a deal work in thsi situation. I'm also still thinking about asking a local rehabber from my REI club to come walk the house with me and show me how to estimate repairs. I would pay them for the couple hours.
For this size of a home, I could gut the entire inside, redo the plumbing to copper, add HVAC, and all new everything inside, plus new windows and doors for around $50k-$55k depending on finish choices.
Adding another bath - costs depend on if you are converting existing square footage to add the bath or adding square footage to add the bath. Either way, you can do it for much less than $30k, especially when you are already doing the rest.
Two things going on here, sounds like it will be an owner occupant home, but then become a flip later. I don't play that strategy, however, if ever it will be a flip and you do not want to rely on the market appreciation to assist you, then you must buy right now.
Assuming $600k is the current ARV and $60k to get it there, your max offer should be $390k (75% all-in - purchase plus rehab). Now, if you can get an owner carry on this, you can make some adjustments, depending on terms and rate. With a seller stuck on a $500k number, work backwards and show him why that is just impossible. Then, price can be countered with your terms. If he wants his price, you get your terms. If he wants $450k, then give it to him IF he will give you interest only for 5 years at X% (X should be really low as in 4% or lower). Or you can ask for no payments, or you can ask for . . . . . . . and the list goes on.
Will,
That is some great info, and since I know you are in Socal, the repair costs are what you say they are for that square footage in my area. And your advice about adjusting the price up for favorable terms is exactly what I was getting at. I've been told that before, but I didn't know when to ask for what. But you put it plainly. If he wants more money, ask for the terms, but never give him both or it isn't a deal anymore. I don't get what you mean by ask for no payments? I know he wants to live somewhere else so he is going to want at least $300K in cash up front. Anything after that I think I can negotiate terms. Also, he is over 65 so I'm not so sure he is willing to carry anything that is too large a number.
I should mention that I need a place to live anyway, as my lease is up in Feb. I'm paying $2K in rent a month anyway, so this would kill two birds with one stone. My $2K will go towards my own home, and if for whatever reason I don't like it long term (highly possible due to size), I can always sell it two years later and bypass capital gains right?
So after getting a ton of great advice from you all, I will present the seller with a couple offers. Curious what you guys think of them.
1) $380K cash contingent on inspection not finding anything major needed in repairs. It was built in 1940 after all.
2) $429K broken down as such. $240K cash, $100K Seller finance over 15 years at 3% interest. I take over the payments on the remaining $65K left on the loan. We are at $405K. After interest ($24K worth over 15 years) he would clear $429K total for a home he wanted $500K for in the first place. No living in a home being practically gutted for 3 months, no $30K commission fees, no showing the home every weekend, QUICK.
What do you guys think? I will also show him the info I have on homes in his area and what they are selling for and why his is NOT worth $500K right now. I will do so nicely, but he needs to face reality.
I guess the last question for the numbers and finance guys is. Umm how would I get the money on this if he said yes? I am approved for a $415K loan either conventional or 203K renovation style. Would a lender give me the cash amounts in both scenarios for a 1st position on the property?
I want to be clear that I don't expect to get THIS property, so I am not emotionally attached. I just and emotionally attached to getting an education out of this experience.
The 24k in interest that you are suggesting he would make is assuming you stay in the loan for 15 yrs, which it sounds like is not your plan.
When it comes to lender financing, you will not be able to get 100% financing(they will be looking at CLTV). You'll need some skin in the game.
What makes the most sense in my opinion is this: You offer him $380k and attempt a 203k loan. Those will require you pay the 3.5% down payment based on the TOTAL loan amount, including renovations. With renovations you've borrowed $430k total(we will assume). That leaves you with a ~$15k down payment to the lender.
Your seller gets the $380k, he pays off his $68k loan, and pockets the rest.
This is only speaking from a finance perspective, and not at all to whether or not this deal makes sense from rehab ROI perspective.
Thanks Scott!
I absolutely wanted to see what someone thought from a finance perspective. I had no clue where this money was coming from.
My issue seems like it would be that my 203K would be maxed out at $415K (not $430K total) so I would be a little short. I see what you are saying about the interest though, because I probably would pay it off early. I could simply guarantee him the interest though and that would take care of that.
Any other thoughts about my two offers in the above post?
Curtis, my no payments comment meant that you could ask for no payments for x amount of time and then a lump sum or start payments or whatever. Free interest for a period of time is certainly a request that can be made.
As to your offer, you stated cash upfront and then in your follow up post, you mentioned you would need a loan since you do not have that "cash". That being the case, you are now asking the seller to take a second position note behind a new first. That can be a tougher sell. Secondly, with the existing first loan in place that the seller still owes, that would need to be paid off from either cash (which you stated you don't have) or proceeds from a new loan you get. Though possible, it would be unlikely to get the current first to subordinate to a second and then have the owner be in third. In fact, a needle in a haystack in under 3 minutes might be easier.
Your "cash offer" is really not cash if you do t have it, so not really a legit offer at all. Unless you intend to wholesale this to a cash buyer with the terms you negotiate, you can't make an all cash offer without all cash. You also need to re-think your creative financing per my comments above. Restructuring is In order here.
The old adage "a picture says a thousand words" also rings true for the opposite "a picture doesn't say a thousand words."
I've seen some great pics of houses in the MLS that turned out to be real three legged, mangy dogs when I put my eye on them.
Look at any hotel brochure. The rooms look SWEET until you check-in. Then you discover your bed is as hard as plywood and it stinks like some old lady was chain smoking in there the night before. The TV gets 4 channels, there's more bed bugs inside than there are feral cats running around outside screaming all hours of the night, the tub has pubic hair stuck on the wall, and the toilet keeps running and refilling, not to mention the walls that are so thin, you can hear the guy TWO rooms over watching Home Shopping Network all night. You didn't see any of that in those pictures did you?
Will,
Point well taken. I shouldn't say the words cash in my offer if I don't have it/can get it. My thought was if a lender said they will give me $415K, that's where it would come from assuming the home met any lending requirements. Seller would agree, I get the money from the lender, disperse necessary cash at closing, etc. But that's a no go from what you say. I get that.
What I don't get is what would I do in this situation then? If I wanted to live in it and didn't have cash but could get financed, I can't make a real offer? I'm a little confused there. To me it's as simple as him saying yes, the lender giving me what I need up to $415K and the rest can be worked out with me and the seller about how much is given in cash, etc. If it were on the MLS it seems it would work that way, but I'm probably missing something very obvious.
To Aaron,
I took those pictures so I know for sure it's not pretty in there, but livable with some basic repairs. But then again, I have no clue what "hidden things" to look for, so I could be off base. I don't expect to get this house AT ALL. I'm just trying to get as much education as I can off this experience.
Guy isn't even calling me back anymore so who knows. I just don't want to be in a position next time where someone calls me and it takes me a week to make an offer because all the advice I need to get. I paid good money to have that guy call me. I think I'll pay him a visit next week to make sure it's a "no" or he sold to the next guy with cash or whatever it may be.
@J Scott Im trying to see if I understand this correctly.
Using this property as an example. If the comps are at $550-$615
If this sell price is at $525 - $50K (rehab) - $25K (profit) - $35K (fixed costs)
MPP = $415? is my fixed cost off?
$400K good deal?
$380K great deal?
Thanks
Steve
Using this property as an example. If the comps are at $550-$615
If this sell price is at $525 - $50K (rehab) - $25K (profit) - $35K (fixed costs)
MPP = $415? is my fixed cost off?
$400K good deal?
$380K great deal?
Technically, your math is correct. But, I see two issues here:
1. Your fixed costs are likely low. I tend to spend about 10% of the sale price in fixed costs. And these are cash purchases with me representing myself as agent, so there are no loan costs and only 3% commission. I'd be surprised if your fixed costs were less than $50K (though I could certainly be wrong).
2. You profit margins are about 5%. This is much less than I'd be willing to accept for a deal this size. I try to shoot for 15% -- or in this case about $75K. While I might accept a little bit less on a larger deal, 5% is just too thin for me in terms of risk.
I'd say the $380K number should be around where you want to purchase...
$380K is exactly what I offered him when I spoke to him last. I said I can go as high as $415K (since I'll be living in it myself) but other concessions need to be made for me to go that high.
He said he surprisingly got approved for another loan to fix up the place, so it is unlikely he will want to sell low at this point. He is trying to fix up himself and cash out for max value. I don't blame him, but at 65 years old I think he is in over his head. That house needs to be gutted to get max value.
I'm staying on him but he isn't returning calls anymore so I'll probably show up to his house this weekend with a vanilla folder with comps showing him he is NOT getting $615K for that house when he is done, unless he adds square footage AND a bathroom. More like $550K in all likelyhood. Even to get 550K he has some MAJOR work to do. Maybe it will make him think twice, and certainly wouldn't take much time on my part. Maybe he will start the rehab, quit, and call me in 3 months.