I am brand spanking new to real estate investing. I found a SFR 4/1 in a ghetto+ area (I suppose a C-?). 1100 sq ft, 4BR 1bath, 2 minutes to major highway and looks out over a lagoon. It's possible to turn the laundry room into another bathroom.
The property was ravished by termites and seems to have lots of areas that need rehab. Assuming foundation/electrical/roofing is okay, could anyone give a ball-park estimate on the cost of repairs? I will be attempting to do most of the repairs on my own. (I am not handy, but a fast learner and good researcher).
Front area is a bit worn, I saw a few small cracks along the foundation, aswell.
This picture is from the bedroom that had the termite problem. This is part of the roof.
This the bulk of the damage.
More of the termite-infested room. Pretty much 80% of the walls are shot. 20% of roof.
Kitchen looks in good shape.
There was problems like this in a few areas, mostly in doorways.
Those were the major issues I could find. The house is loaded with **** and it will take a day or two to clear it out. The bedrooms may need new flooring and the place needs a paint job. The front/back yards could use some lawn care.
The sellers are wholesalers who just picked up the place before it was sold due to delinquent taxes. Places in the area go for $70-80k but most have 2 bathrooms. and they are asking 40k. I assume that puts the rehab costs around 25-30k.
My next steps are to research the property records in the court house. Also going to check the last roofing permit / flood zone info.
This is my first deal so any advice would be appreciated. I'm no expert, but the interior repairs look to be quite a bit less than 25-30k, right?
My personal opinion - Run away.
Assume you fix it up and sell it for $75k - $25k in repairs - $10k in holding/utility costs - $15k profit/overages = $25k purchase price.
It looks like potential foundation issues if the doorway tiles are cracking - there is force there from the roof load, and if something is awry with the foundation it could exhibit it through cracking in the doorways - but I deal with basements so maybe someone in your area could speak up.
Assuming you need new roof, repair all termite damage and re-drywall, replace all tile due to cracking, probably remodel bath for a few $k, landscape and paint outside you are probably in the $18-25k range using contractors. You might be able to do it yourself and save a few bucks - but your holding costs will creep up every month while you are working on it yourself. Seems like a skinny deal with a lot of potential problems.
Maybe you want to get a property inspector to do an inspection. That $300-400 could save you a lot of money.
Thank you for the advice Dave. I would be looking to fix up and section 8 rent out. They are asking 40k and rents are around 1200-1300 for chapter 8 in the area. I could spend a month or two in the house while repairing. Does the lowered holding costs and high rents make this deal look any better, or still not worth it?
I also think its worth noting that it is a rehabber that works 50-100 miles north of here that is selling the property. This is a bit unsettling as I can only imagine she would not be interested in selling if it was a good deal.
I am eager to get started on something, but I feel this is probably not the best investment. I would love to hear some other opinions.
That looks like quite a task for a newbie to take on. I'm not an expert, however it seems like you're basing your thoughts and getting estimates based on only the issues you see. Who knows how much unseen damage/problems there are. I definitely agree with getting an inspector. That could save you thousands of dollars, hours, and a headache or at least confirm what you're already thinking. That house could be a money pit or death trap for a newbie to work on. You can probably find a similar deal without all the hassle or without such major repairs. I'm not trying to be a downer, but would hate for you to get in over your head especially on your first property. I've heard it recommemded several times for newbies to start with more cosmetic work, not so many major repairs. Plus, this doesn't even meet the 2% rule with your current figures. However, as always do your due diligence. Don't rush. Find out as much info as you can before you make your decision.
First, take whatever you think the rehab costs would be and double them, because you have no idea what you're doing...just saying. Then, take whatever length of time you believe it will take you to rehab the property and then at least triple it, because you have no idea what you're doing. So, your rehab costs are doubled and your holding costs are at least tripled. Now, as you have rightfully pointed out, ask yourself why a rehabber is wholesaling the property. There could be a very logical and innocent reason, such as they already have their rehab pipeline full. Find out! Either way, it doesn't sound like the wholesale deal they are offering you is much of a deal, and that seems to be a common problem with wholesalers. I say that as a wholesaler.
If I were you, and I was seriously interested in the property, I would get the property under contract with an inspection contingency period. That way you can get either an inspector and/or a trusted, high-quality contractor to evaluate the property. It will give you a way out, if the rehab costs exceed your estimates.
Most importantly...don't do a deal, just to do a deal!
Thanks for the advice. The consensus that I've got on here and from a couple friends is that I shouldn't take on this large a project as my first project. I agree.
I should have mentioned in the OP that I would be making an offer contingent on inspection. I thought that was a given (but I suppose newbie investors would be prone to make a big mistake like that).
I actually have what I think is a pretty good idea for this situation. One that helps me and the seller. The idea:
Offer to buy half of the house for X$ contingent on inspection. Work with her (she is a wholesaler with rehab experience) to rehab the house. I could have the option to work on-site at $15/hr and we would also work with contractors. Once the house is section 8 approved or appraised value >$60k, I have the option to buy out her 50% for half of the appraised home value.
The above offer will do a great job gauging if she is selling because its a lemon, or if its for a logistics reason. It also helps me out a bunch because it allows me to get an inexpensive lesson in rehabbing with someone more experienced than me. Any thoughts on my idea / modifications I could make?
1) $40K is far too high
2) Too big of a project for a beginner
Run, don't walk, from this deal.
When you estimate repair costs, always double it to cover unforeseen things like foundation and roof. Also consider the real cost of adding a bathroom to an existing laundry room. If this is pier and beam foundation, cost is lower than slab foundation due the cost to tear out concrete to put drains in and their location to the laundry room.
Adding a second bath would increase ARV (After Repair Value) but by how much, would depend on comps that are 3/2 or 4/2 also depending on where you move laundry.
If you haven't already, see this excellent article on how to evaluate deals:
Like others here, I find it difficult to understand how this deal makes sense.
I smell a deal that could take 2 years to rehab cost you a ton of money. Is it in a war zone? You could have damage and items stolen everytime you do something.
This is a marathon not a sprint. Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and rehabbers.
Two Great reads, I bought both J. Scott The Book on Flipping Houses, The Book on Estimating ReHab Costs http://www.biggerpockets.com/flippingbook
Whoa, thanks again. Really by all the advice I've received. Looks like I'm on to the next one.
I will read that article on analyzing deals. A quick glance indicates its very informative.
I listened to a couple podcasts by J Scott and I've spent hours on his blog. I will have to check out his book!
I hate to jump on the bandwagon, but the method @Dave Savage explained above is really how you should evaluate deals like this. Start at what ARV will be, then work backwards, including firm estimates from your contractor/inspector of what needs to be done, a realistic allowance for holding costs, and your profit margin to arrive at what you should pay. Just as you wouldn't buy a used car for $1000 that needs $3000 worth of repairs when there's $3000 used cars that don't need repairs out there, you don't want to pay for a house like this and find out it will cost you more to rehab than you'll be able to raise the value.
Further more, the (potential) double structural whammy of both foundation issues and the large termite issues you mentioned should scare you. Those are the kinds of repairs that are tough to budget and could be huge costs. They are also the kinds of repairs you are not going to be able to teach yourself.
I'd run away from this deal as well, especially since its your first.
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