Perfect fix and flip property?

Question

Good morning,

I'm generally new to real estate investing, and I chose wholesaling as my niche.

I came across a property which the owner said it was a "perfect fix and flip" opportunity in Sacramento, but later mentioned he still has tenants there. I asked when their lease was up, and he said I'm not sure. What????

I was browsing around BP to see if it was possible to "fix and flip" and a property with tenants there; I don't know much about that area and that doesn't make sense to me.

The only thing I could think of is maybe doing cash for keys to get the tenants out if this really is an issue.

Anybody with experience in that area have any thoughts about this? Is this common? Would this be something I would wholesale to a person looking for a SFR or a fix-and-flip opportunity?

Thanks in advanced.

Robert Williams · Answer

Hi Leyla,

In my opinion, you don't want to fix and flip a property that has tenants in it.  First, trying to do renovation work around a tenant is not going to be easy.  What if there's only one bathroom in the house and you want to remodel it?  Is the tenant going to go without a bathroom for a number of days while you're doing the work?  Are you going to put them up in a hotel?  Second, when it comes time to sell the home, what are you going to do with the tenant?

Instead of thinking about a cash for keys strategy, I recommend making your offer to the seller dependent on the seller getting the tenants out.  Right now the tenants are the seller's problem...have him offer them cash for keys.

If the numbers work, this could be a potential wholesale opportunity.  Just keep in mind that any investor is going to see the tenants as a negative and that it's going to take them time and money to get the tenants out.  That has to be factored into your sales price.

-Rob

Jeff Jamieson · Answer

You're young and will be doing this for a long time, no need to reach too far! I agree with your final analysis, no deal!!! For now

Chris Vail · Answer

@Leyla Simsek

So one thing you can do to help screen properties is reverse engineer everything.

If you know what comps are for the area and you can get close to an accurate ARV for a home you should be able to back into an initial price an investor will be willing to pay for a home, if you know what the investors criteria is for a profit margin.

Lets take your ARV of 180,000

Remove closing costs from this : 2,500 (your estimate, is this an accurate estimate? maybe but I think this might be low)

Remove holding costs: ?????  this will be dependent on how long the flip took or should take, think utilities, Hard Money costs, taxes, all the costs associated with holding the property for the flip time.

Remove Repair costs: 5,000 is a nice small budget and would be amazing if it turns out to be this.  If this is accurate then there must be very little that is getting done to the property. Unless this is just a material quote and again 5,000 does not go a long way depending on what is getting done.

Remove closing costs on the Initial purchase: ????? it is going to cost something to close on the initial acquisition.

Remove your Assignment fee: 2,500

Remove Initial Purchase price: Variable

Left over is profit:  xx,xxx  how ever you haven't accounted for the opportunity cost of that capital or bench marked it against what a "safe" investment would be.  If you can find out what your investor community or buyer pool is willing to accept then you don't need to bench mark it against other investments as your buyers have already told you what they will accept.

Lets say they are willing to accept 20% profit

ARV 180,000

-profit 36,000 (20% on the final sales price)

-Assignment fee: 2,500

-Closing cost 1: 2,500

-Repair cost : 5,000

-Holding costs : Conservative 2,000

-Closing cost 2: 2,500

= purchase price 129,500

I believe most flippers look for more wiggle room than 20% profit (I am not a flipper) just due to the nature of risk that comes about from flipping.

Leyla Simsek · Answer

@Larry T. Thank you for your insight. I rather be educated than just go out, take action, and put every house for sale under contract just because it is for sale; so thank you for your time.

Larry Turowski · Answer

@Leyla Simsek That's not a deal.   8% is too small to have to put work in. And flipping is work, just to manage them. And then there are the risks.  There is very little margin for something going wrong.  Plus you are not considering financing costs. That money invested is not free even if it is the rehabber's own cash.

Leyla Simsek · Answer

@Chris Vail

This is my math; please correct me if I'm missing or did something wrong.

The Profit Potential

Asking price: $155,000

Repairs (estimate): $5,000

Closing costs (estimate): $2500

Property Taxes: $623

Insurance (estimate): $500

Utilities (estimate): $500

Assignment fee: $2500

ARV: $180,000

Total investment: $166,623

Net profit: $13,337

Return on Investment: 8%

(And congrats on your deal, by the way; I came across your post, I hope for the same success as a new investor)

Jake Weir · Answer

@Leyla Simsek Did the owner say what the current rents are?  Do you think they are below market?

I would set a reminder to check in with the owner after a few weeks to see if they are more motivated than before.

Janie Suarez · Answer

Guys all of you been dropping a lot of wisdom, this is an amazing place to learn because of you. Thank you very much.

Larry Turowski · Answer

@Leyla Simsek a shortcut to @Chris Vail 's reverse engineer offer is to use the MAO (maximum allowable offer) formula.  This is also a good question to ask your buyers, what their MAO is.

The typical MAO formula is 70% ARV (after repair value) minus repair costs.

In this case it would be $180K * .7 - $5K = $126K - $5K = $121K.

After talking to buyers you may find that they use a little more than that for homes in this price range and maybe a little less for homes in a low price range.  So, may 75% ARV - repairs. That totals out to $130K in this case and that is right in line with what Chris said.

Buy and hold investors may pay 80% ARV - repairs for properties that need next to nothing and are rent ready.

Julie Barrow · Answer

Leyla-

If you can find a local landlord (Craiglst maybe) who is looking for another rental to purchase, you might be able to wholesale it to him/her.  I've done that in the past for deals that do'nt meet the fix and flip criteria.

-Julie

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