Here is a deal I see and can't figure out whether to flip it or not, is it too risky? Assuming the numbers are all correct.
1. The house is located in an A+ area, best schools, after repair value / neighbor price is around 1.4 million.
2. The house is a REO and the bank treated mold and took away all the walls/ceiling/floor, basically a shell with only wood studs. No electricity breakers, no water pipes and no gas.
3. Asking price is 600K, all cash, no bank would loan it. So only option would be hard/private money. Property Tax is 1.5K/month.
4. My estiamted repair cost is 200K, maybe between 150 to 200, but just to be safe. Luxury interior.
5. Other cost, including all closing/agent/lawyer... 100K
6. It will take 6 month to renovate, and for fast sale, priced at 1.2 million.
7. Market has been proved that private showing session of this house attracted at least 60+ different buyers, very hot market, so selling should be easy.
8. If I have all the cash needed, which is 600K + 200K + 100K = 900K, and sell it for 1.2 million in 6 month, the return is 300/900 = 33.3% for half year. If I can wait a little longer, selling at 1.3 million shouldn't be an issue.
9. Here comes the scenario, I don't have such amount of cash, and planning to go with hard money.
10. Assume hard money rate 12% and 70% of purchase price + 100% rehab cost, and I am able to get the other 30%.
Now the risk is: monthly interest of the hard money + property tax > 6K, which exceeds my monthly earned after tax income, and I will have depleted all the saved cash for this project. The risk is very high.
The county department of building is notorious in delaying the building permit, meaning that it's quite possible I can't even start the work for the first month or two, waiting for the permit to be issued, (no electricity in the house yet).
Anything else unexpected which causes money will impose more risk on the weak financing.
My question is: Should I pursue this flip? Or should I wait until I got better financial situation for future deals, which won't have that much in this area (this is one of the best flipping candiate in two years in this area I think).
Thank you guys for any suggestions and advice!
The numbers sounds reasonable...
The questions are:
- Do you have the experience to pull it off?
- Can you raise the cash?
If you can raise the downpayment, I'd think you should be able to raise an extra $40-50K to ensure you have a buffer on the loan payments.
Worst case, sounds like a deal you could probably wholesale for a few bucks...
I agree with @J Scott. Seems like the numbers are there, but investors will be looking to invest in you on a project like this just as much as the property itself. You'd be looking at partnering with an experienced investor in a good cash position. Perhaps spend a portion of your earned-income money on a good partnership agreement you can use and be prepared to market yourself as the project manager to your new-found investment partner. Also you might consider putting together a quick business plan, firming up the numbers you're assuming, so that you can more confidently present the project and yourself as the manager... showing you have something to offer to the partnership and a reason to collect some of the returns.
Thank you @J Scott and @Joshua Durrin for the quick reply.
I guess this is what I consider the most risky part: Experience.
I've bought two 1-4 unit houses as rental properties around NYC, totaled over 1 million in market value, with the some cash raised from all my close relatives, so I have experience with cash raising, but I don't have much capacity any more due to the holding strategy.
For renovation, both of the houses are majorly renovated and I have relatives as my contractors, low cost and very good job done, so renovation is not a problem.
The only thing is that I have not yet sold a house before, only buying and fixing and rental. And I was planning to get a small flip, hopefully below 100K one. This deal just pops up near me, 10 minutes away, so I went to see it and fell in love with the numbers.
And I think I am still a starter even with two properties in hand, I've never gotten the mindset like the investors from BP. Although I've read a lot of posts, books and listened to the podcasts, but doing it is the hardest step and I am determined to, just don't know if I could try this scale for my first flip.
You can try to take some money out of your first two properties by Refi, home loan, or HELOC.
I would like to have more money reserve at hand while holding it. Discuss with lender about this one to do a balloon at the end of year? Or at the end of your flip?
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