About to close on a 3/1 REO as an owner-occupant for 190k(cash), current county assessment is 220k, ARV is about 325k and I plan on BRRRing. House is from the 60's and has a 15 year old roof. House has an illegal bathroom and illegal room extension. Ive done a sewer scope and normal house inspection and the estimated costs seems to be 20k from the inspection reports( will probably need to do a gut job). The floor plan is pretty bad but I have some good ideas on the rehab, but Its my first one and I'm at a crossroads. Its clear for rentals you don't want to spend too much on the rehab as long as you cashflow, but I don't know what the appropriate threshold is for a BRRRR because you want a higher appraisal and for the cash out refi and still cash flow at the end of month. I also don't know what To do about the code violations and how that'll effect the appraisal. Any advice?
When you are employing the BRRRR strategy the ARV is critical. The appraisal can make or break you. I tend to rehab them flip ready. There will be disagreement on this philosophy, but by taking the rehab to this level it provides higher ARV, higher rents and better quality tenants. If you conduct a quality rehab the code violations should get addressed. Get a copy of the code violations to avoid any surprises.
Thank you for the feedback, I was leaning towards a higher quality rehab but I wasn’t too sure. I also don’t want to overdo it either, I’ll have to find a balance
Well, my best guess is, the 190K house in a few short weeks will be worth a lot less(min 30% less). Right now is not a time to purchase a damn thing. Millions of Americans will be unemployed in a few moments and homes values will go down to nothing. You will be in way better situation 2 years from now buying house for peanuts. Just my 2 cents
@Mike Rios I'm not the sky is falling type of person... but personally, I'm sticking to easy, slam dunk BRRRRs. Nothing that requires permits, the city, or a bank (for REOs) to complete and with very short timelines (which I'm prepared to minimally double). Additionally, I'm not sure I'd tie up $190K cash at the moment. That's just me.
To answer your questions, underwrite your ARV much lower than you think to stress test your numbers. Also, double your timelines for construction, and add in contingencies for cost of materials increases for the short-term. Lastly, if you are relying on the city to help with resolving code violations, add more time for that too.
For the level of finishes, review 20+ properties that are currently for rent in that exact area. Take a look at the level of finishes. Meet or beat those finishes. That said, you can keep costs low with updated paint, flooring, and fixtures. What you can't easily fix is the layout... which that piece alone would probably make me walk away from this as a BRRRR. To have it rent easily (or sell if you must), the layout has to be great.
Hey thanks for responding I appreciate your insight. I definitely understand your perspective and was really scared about the pandemics effect on the economy and real estate market. I even considered backing out of the deal armed with a similar rationale to yours, but after doing some research I’ve decided to stick to it for the following reasons:
1.I live in Miami, deals like these do not come often, I looked for 3 months and finally got It, right now real estate prices are stable and it isn’t a guarantee I’ll find another deal after the pandemic. (An investor has already offered me 205k to take it off my hands)
2.It’s a wedge deal, I gave myself plenty of room Incase values decrease. Worst case scenario - I hold off on the refinance and just rent it out without worrying about any mortgage paydowns.
3. This recession is different than 08, it was caused by a real estate bubble, people have way more equity in there houses now and the government is offering a moratorium on foreclosures for 60 days which helps.
4. Pandemics don’t last forever, Goldman Sachs GDP released strong growth Q3, Q4 and the beginning of 2021.
5. Real estate values have actually appreciated in the 3 of the last 5 recessions. An average of 3.58% excluding the most recent recession caused by the RE bubble .
That’s pretty much how I rationalized the deal, but I am interested where you got that 30% decrease in home values though, thanks
Thank you so much for the feedback, there are some gems in your response. In an ideal world I would also be closing on slam dunk BRRRRs, but it just isn't feasible with my criteria and market(Miami) at the moment. I wrote my rationalization for going through with the deal on the comment above.
The REO due diligence period was fast but I was able to make an informed decision based on several inspections.The house has good bones and didn't see any glaring code violations, but im currently doing a title and lien search so well see how that goes.
I'm courting several GC's now to see there ideas and bids, but getting permits right now is impossible so im thinking about leveraging my handyman, electrician and AC guy that I use for my grocery store. It'll save my money but it will take much longer which will cost me in that end.
The numbers make sense,I have very conservative underwriting and have stressed them for the worst case scenario, the asset is still very appealing, but as you know numbers aren't everything and I will need to properly execute the rehab for it to work.
Thank you for the tips on forecasting contingencies and rental comps in the area, I will also be checking out your page for more tips =)
Mike, I cannot be mad at you because sounds like you know your stuff and we all have different risk tolerance, although I think that you are just more optimistic about this crisis than I am.Not that you are wrong and I am right but just different believes about what's about to happen in next few months. People may have more equity in their homes but possibly more debt due to their cars, their kids student loans and credit card debt. No one cares if you are only 2 years away from paying off your house entirely because if you (not you but people out there ) lose your job and income you lose your house. I travel a lot to Miami and I do remember that during last crisis cities like Miami and Las Vegas go first down to nothing (real-estate wise) because those cities have a lot of 2nd and 3rd homes sitting empty(while being terribly overpriced), plus when **** hits the fan vacation homes lose the most value. I really hope that your deal works out for you and brings you lots of profits.Cheers
@Mike Rios I checked out your post to Luke. I do disagree with a couple of points of your analysis.
1. As an epidemiologist, this pandemic does have the potential to be short-lived. However, there are sooooo many unknowns about this disease. And what research we do have is not longitudinal so we can't make future assumptions. I wouldn't bank my deals on that assumption until the research can catch up. We are operating now betting our GDP that herd immunity will work.
2. I read that Goldman Sachs report as well. They have the most opportunistic numbers for recovery. Remember they are at a conflict of interest with the general investor. If they don't have your money in the market, they don't win.
It sounds like you have put quite a bit of thought into this, and you feel well-positioned to take this deal down. Good for you!
@Mike Rios Hello Fellow Floridian. Code violations must be addressed and cured prior to closing in order to clear tile and be able to fund. I would definitely recommend doing so.