Is this a deal?

Question

Looking at an 75 year old 2600 sq ft 3/1 raised ranch on 1.8 acre lot. structure is good but the floor plan needs a little adjustment (including adding at least a half-bath). Estimating total rehab costs at around $55k with an ARV of about $110,000 (based on sold comps in the area). I may have a contractor friend walk the property with me to verify the rehab cost. It's a foreclosure listed for $39,900 but I'm thinking of putting in an offer of $20,000. Would this be a decent flip deal at that offer?

Jim Viens · Answer

After looking at it again I was thinking of offering $15k, but I'm ok with making a little less on my first deal. Also, like was mentioned before, the bank likely won't accept that low of an offer this early in the process but I'll at least put it in and see. You never know! :)

Bill Jacobsen · Answer

If you use the 70% rule you get a buy price of $22,000.  I assume that you will make a profit 50% of the time using that formula.  You need to develop your own formula and then your profit will be dependent on how  accurate your input is.  My numbers show that I would buy at $11,267.

Good Luck.

Bill

Jim Viens · Answer

@Nathan Brooks , I am working with a realtor on this (as I did on another REO I was looking at before) and am learning some of the nuances of REO's & short-sales. (I realize patience is the key as the cogs in the machine tend to grind slowly.) I also know that they don't go that low for very often which is why I'm not planning on hanging my hat on the deal but figure it doesn't hurt to put in the offer. The house is in KCK and I got the ARV by looking at comps that have sold with similar bed/bath/sq ft. It can be difficult sometimes if the immediate area isn't very active but I'm pretty sure with the right updates the house could go for that but still need to verify that with my realtor. That is one area where I'm trying to hone my stills is estimating a good ARV (as well as estimating repair costs...hopefully J. Scott's book I just ordered will help with that). I'm getting better but there's always room for improvement. Again, I'm pretty sure the offer won't be accepted but I'm not going to be heartbroken if it doesn't. I try to make sure I don't get so involved in a deal that I'm reluctant to walk away. I want to have the mindset that I'm willing to walk away from ANY deal if it doesn't work (just training myself on how to tell if it doesn't work :) ). I'm getting ready to start my first direct-mail campaign in the area (1,000 pieces/mo over the next 4 or 5 months) so I'm hoping to get a few deals before the end of the year. If you're ever out near the Legends/Speedway area maybe we could catch lunch and talk shop (I work at Cerner).

Nathan Brooks · Answer

@Jim Viens you should definitely speak with your realtor about these kinds of deals.  Foreclosure properties/REO/Bank Owned ... whatever they are, all have little nuances.  But I have not ever seen one sell (I am sure there is someone who bought one ... that was 200 DOM or something) at 50% of its list price.  That's not how they work. If it isn't at least in the ball park of where you are, and especially if it is newer on the market, don't expect to get that much off the list price.

Also, is this house in KCK?  Where is the 110k ARV? I would be very careful ...

Bill Jacobsen · Answer

Yes, give this one up.  If I felt good about the numbers I would be offering about $11,000.

Good Luck.

Bill

Jim Viens · Answer

@Leigh C That's kinda what I was thinking. I've had my eye on the property for about a month but just got inside today. Didn't realize how much work it was going to need inside. I think I will pass on this one. I'm getting ready to start my first direct mail campaign so I think I'll wait to see what that turns up. Thanks for the input.

Mark Ferguson · Answer

You need to figure all your costs an then decide if the potential profit is worth the work.

Leigh C · Answer

Getting an REO at 50% of list is hard to accomplish.     This asset is 75 years old, leave it alone and let it be whatever it is.    If you actually buy it for 20k just sell it for 45k with a quick whatever and leave it alone.     Trying to pull an extra 10k with a 55k investment seems silly and stressful.