Differences in Rehabbing a $150k House vs a $250k House

[Tim Crosby]

So, I've been looking for a house to flip in my area and I've been purposely looking around the $150k ARV price range. Surprisingly, the biggest problem I've run into is funding. It's not that people don't want to lend, but when you're talking to hard/private money people about buying something under $100k, for the most part, they're uninterested. However, if I look at spending over $150k, suddenly all these doors open.

My reasoning for choosing such a low price point to begin with was for security. If all else failed, I knew that at the end of the day, I could buy the property for myself. I did not expect to run into this problem - the property is too cheap to fund!? So now, I'm looking at more expensive properties and I've noticed that other than quality, there's really no major differences. The square-footage is the same, a lot of the amenities are the same. The biggest differences are the neighborhoods, where they're located and the age of the home. In many cases, the material used for the flooring, cabinets, counter-tops, tiles, paint and all that... it's all the same stuff! You're not paying much more, just because it's a nicer house, so a lot of that value has to do with those other features, mainly the location!

My question to those more experienced - what am I missing? Have you found this to typically be the case? Am I wrong to assume that a simple rehab on a $150k house with 1500sqft isn't going to cost much more, or be much more work, than a $250k house with 1500sqft? 

[Greg Dickerson]

Yes location is key and dramatically affects value and private lender perception. The capital has the loudest voice so you need to shop where the money wants to be.

You are correct rehab costs are what they are regardless of the location if all other thugs are equal like size of house, condition, number of bedrooms and bathrooms etc.

Be careful borrowing hard money for rehab projects as the interest cost will add up fast. The key to hard money is getting in and out quick.

[Dan Maciejewski]

You are correct.  The finishes aren't that much different in those price points in my area (median sales price in my county is $280k).  Two identical houses (same builder, same finishes, same floor plan) can sell for $150,000 in one area and $380,000 in another, more desirable area.

The rehab itself is going to be almost exactly the same price (i would finish to the level of the best in the neighborhood). One of the reasons that the lenders don't want anything under 100 is the profit margin is too low.  Which leads into another reason -- with a low margin, the risk is actually higher.  

Plus, a more desirable neighborhood is that way for a reason.  Safety, schools, commute, nearness to attractions and amenities, etc. . . , and will remain (most likely) desirable for a long time.  That means that on a resale, it will have more buyers, which means higher price and less days on market.  

After looking at those factors, most investors -- including lenders -- will determine that although the cash outlay is higher with a median-priced home, the "risk" is actually lower.  

[Tim Crosby]

Thanks guys! I guess the biggest issue for me now is getting that initial 10-20% down to start the whole process. I've found that many HMLs are not interested in going 50/50 with another outfit to fund a deal. Likely the best option for me is to find a PML or someone I know personally to be willing to go in on the deal. Another option would be partnership, I suppose. I can find the deals and do the work, but I lack the capital to make it happen on my own. It's actually quite frustrating! If I can solve this first puzzle, the future projects become so much simpler!

[Will Barnard]

Looks like you receive good answers to your questions. To touch on your last post, go after private money. Talk to everybody you know, tell them what you do and what you have to offer. The trick is to not ask for money, rather, offer others “opportunities” not typically found in the stock market or other investment vehicles. Show them how their funds are secured, all your due diligence and all the numbers. Keep their money safe and you will find that more and more will come your way. I started off with family and friends for private money, after doing a few deals, I started gaining interest from people all over the country, although mostly local.