Rehab or Sell

11 Replies

I've been analyzing this darn property for months now and I just don't know what to do with it. My family owns it free and clear and we currently rent it for $1,200 a month, which is a steal in the Seattle market place. 

It's never been updated and needs about $20K worth of foundation/structural work. It's looking tired inside and has knob and tube wiring, asbestos lined heat ducts (gravity heat), original plumbing, it needs a new roof and windows soon and some siding work and a paint job. Not to mention all of the cosmetic work, etc. 

Built in 1919, it has about 1,200 livable SF but if it were re-habbed closer to 2,700. 

If we sold today, I predict we'd get between $350K and $450K as-is. Estimate to re-hab is $300K, estimate to tear down is $600K. 

It's possible I could get $850-$900K when done. 

Should I sell as-is, rehab and sell, rent as-is, rehab and re-rent? I look at the comps and they're all over in this neighborhood - this home also sits on an arterial. 

Thanks for any help - I'd be curious to know what others would do in the same situation. 

If you sell you get 400k, if you rehab, you'll get 500-600k. If you have the cash for rehab, go bigger. It's only 3 months, if you have the right contractor.

In this scenario, i assume you are able to sell at $850K just to be conservative.

If you sell it as is, you are already making $400K already out of the gate just doing nothing.  (350-450..i use 400 as an example)

If you want to do a rehab for $300K and sell if for $850K, then your profit is $550K ( the marginal profit is $150K for your hard work)

If you tear down and build for $600K then your profit is 250K (you are actually making the less profit here but you are doing all hard work)

Compare the marginal profit

400K vs 150K vs negative150K

I may rehab it if I were you.  $150K extra profit sounds good to me. 

Do you have experience with rehabs? Where in Seattle is the house? The answer probably depends on the location and we probably need to get more info to help you out.

Since you own it free and cleared, you could subordinate behind a hard money loan and rehab for free if less than 65% of ARV for the HML. If you don't know how to rehab, you should talk to an experienced Rehabber that would JV and where you get 70% of the equity and they do all the work.

I am buying rentals right now an hour from Seattle north and south and east that fall under the 1%+ rule. A house would have to be worth $120,000 for me to be okay with $1200/month rents.

@Manolo D. and @Billy Au-Yeung - this makes sense, you confirmed how critical the ARV is.

@Ryland Taniguchi - I think I'd like to find a contractor/investor on here that would be willing to work with me. I would love to apprentice with someone who has done this before.  I don't know what that would look like but I'm in the market to hire a contractor to do the work. I'm not a novice when it comes to construction however, this would count as my first rehab. The house is in West Seattle where quite a few of our rentals are located. 

Financially, I have the funds to do the rehab so I'm not sure how a hard money loan would be in my best interest. Perhaps you can shed some light there? We have about $60K in cash we can throw at it and the rest would come from a "cash out refinance" loan on another property. 

The rent is definitely below market - my parents felt that because the home isn't updated and needs cosmetic work - that was fair at the time. 

Thanks for your help, I really appreciate it! 

If you are able to finance the whole project by your own cash and equity from another property, that's the best.  Private lending is not cheap. Most require 1% origination fee then about 1% interest each month. It is intended for short term project like 90 days, so time management is very important. If you can't get the project done on time with funds from private lending, the interest chew up your profit fast. 

You could approach your bank and see if you could get 250k loan for it, let them know what your plans are. They move slow, but I do not think you are in a hurry. HML are expensive, and 250k you're looking at 150/day. If it is a 3 month rehab, that's 15k, short term loans are much more faster and easier, but banks you might only be 3k or less for the 3 months. Private lenders are your best shot and lesser paperwork. I do think your 300k is a bit extensive. Unless you're putting up retail stuff, it should be less, most buyers wouldn't like everything you put in and would probably want some room for the improvement of those, so don't get carried away too much.

@Manolo D. makes a very good point, if you're looking to rehab into the high-end market, it's important not to skimp on materials or fixtures. However, it is equally important for your profits to not over-improve on items that won't add substantially to the re-sale value of the property. I would definitely consult a few real estate agents on any planned additions to see if they'll be worth your time.

@Nicole Sorensen Hull

I would strongly urge you to sell the property as-is and move on and reinvest or start flipping houses with the proceeds. 

Flipping an old house with asbestos, knob and tube and old plumbing is a monumental undertaking for your first flip.  I have been doing this for 25+ years and I doubt I would tackle a project like this.  In this business, you just don't know what you don't know. 

Thanks @Manolo D. and @Alex Chin - that's great advice, I really appreciate it. 

@Greg H. you're right, this is a big undertaking, I'm practically building a new house (which was my original plan) however, that proved to be less fruitful. Selling might be a good option.

My concern is that it would likely attract a flipper or builder who is going to analyze the same numbers and try to nickel and dime us, especially since the foundation needs about $20K worth of work. It's a great leverage point. So, maybe we test the market and see, it can't hurt and then if it's likely to procure less than $350K, we bite the bullet and rehab. 

For the extra 150k (850 -300 rehab -400k sell as is ), I think she has room to play and earn 150k more on the flip PLUS experience and portfolio for the next lender/deal, even at potential losses at 50k she still has 100k more than as-is, I say kick them in the teeth and still learn from the experience. Rather than take as-is, and still have the potential loss of the 50k on the second flip. These are extreme scenarios and won't happen 95% of the time. Document them thoroughly, this might help you on your next gut-out rehab, historical rehabs are hard to do, but not that hard, but if you pass one, the next rehab is much more easier.