Comps are all over the place. How to valuate?

Question

The house is in a neighborhood where every street now has at least one million dollar home. This street has two. Builders are coming in tearing down these 1950s houses and rebuilding. The sold comps range from $131 sq. ft (low) to $399 sq. ft (average) to $1000 sq. ft (high). The leased comps run $2200 to $2500/mo for the same age/size as the subject property. The lots are going for $300K average. This home is about 1600 sq. ft, 2/1 double carport, with formal dining, converted garage family room, and den. The home has some wood rotting on the rear of the home (perhaps termites) but otherwise well kept and should be a lipstick rehab for a buy and hold. The seller thinks it would be a great tear down and wants the lot price of $300K. Being a wholesaler, I want to make sure I buy right to be attractive to both rehab/tear down buyers and buy and hold buyers. Please advise on purchase price and selling pricing.

Jean Norton · Answer

Hi Cyndi - this is going on in Austin as well.  You are right to price at lot value.  Do more research and see what the new builders paid prior to building their property.  The bottom line is the builder will tell you what they have left over to pay for the lot.  This is the builders formula:

Expected selling price of the property (minus) sales costs (minus) profit they need to make it worth their while (minus) construction/permit/holding costs = what they have leftover to pay for the lot.

They will tell you if it will work or not - don't be afraid to get the property under contract and shop it around.  If no bites, then find out what the builders are willing to pay and go back to negotiate with the landowner.

Everyone has to make money in these deals, or nobody makes money.

Michelle Ellis · Answer

Cyndi,

You want a win-win for all parties involved.  If the property can obtain a higher price by selling it as a tear-down/lot value rather than a rehab, then that's what should be done.  The builders I work with have a *general* rule-of-thumb of paying 20% of the total sales price for the lot.  For example, if the new house will be sold for $1,000,000, the highest they'd pay for a lot is $200,000.  In the hottest areas of Austin, I've seen them go as high as 25%.

I ran into a situation like you're describing a few months ago.  As a rehab, the most I could offer the sellers was $150,000, due to old roof and extensive foundation issues, among other things.  As a tear-down (i.e. lot value only), I easily wholesaled it to a builder who paid $180,000 (that included my fee).  The elderly sellers netted more, I netted a higher wholesale fee, the builder was thrilled to get a lot within 5 minutes of downtown, and the whole street will benefit from the dilapidated, abandoned house being replaced with two new homes (duplex/condos).

Don't worry about pricing it out of the range of rehabbers; if there is a lot of new home building going on in that area, then you should not have a problem selling it to a builder.

Also, I agree totally with Jean--get it under contract, giving yourself plenty of option period to shop it around to the builders and re-negotiate if possible.  The market will decide the value.

Let us know how it goes!

Michelle

Real Estate Agent

TruBlue Properties

Austin, TX

512-203-0516

Cyndi Fleming · Answer

Not really. I have not had many realtors to last long. They mostly start off good and then the responses get slower and then just disappear or they fit you in and in the meantime the lead has been snapped up by another investor who is already an agent.

Michelle Ellis · Answer

As an agent, I would go into the MLS and find out. Do you have a realtor who can do this for you?  If it hasn't been very long since a sale, sometimes there's a delay in the public record being updated, so you can go to your County Appraisal District website and check if the old owner is still on the record.

Michelle

Ellis

Cyndi Fleming · Answer

Thanks so much for the advice and reassurance. Any ideas on how to find out who the builders are for some of the already completed and sold ones?

Comps are all over the place. How to valuate?

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