High End SF Bay Area Flip - Risk-Return Opinions

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High End SF Bay Area Flip - Risk-Return Opinions

Andrew Eaton
Investor · San Carlos, CA · Member since 2014 · 41 posts · 37 votes

I am negotiating the purchase of a well located home on the SF peninsula. As it stands, it is a 2BR 1.5BA, 1,020SF home on a 5,000 SF lot. It is currently a rental that needs some TLC.

Purchase price will be approx. $867,000

Construction of a 4BR 2.5BA 3,000 SF home will run $750k ($250/SF)

Breakout of $750k construction is as follows:

$100k - soft costs (architect, permits, etc)

$400k - Contractor - shell only

$200k - finishes

$50k - landscaping

All in costs pre-financing $1,617,000

Financing

Local Private bank will finance 60% of as complete value ($2MM) -or- 80% of total project cost.

Loan of $1.2MM at 5.5% + 1% loan fee.

Financing cost over 12 months $50k

Required skin in game (down payment) - $417k

Post Construction Sale $2MM

(less) $1.617 Acquisition/construction costs

(less) $50k financing

(less) $100k sales commission @5%

equals $233k pre-tax profit

Cash-on-Cash Return = 56%

After tax profit = $150k

Assuming 35% income tax / Total ROI = 36%

Would you do this deal?

Sticker shock aside, take a zero off if you need to relate, is there enough profit for the risk taken?

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Account Closed
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
12y

@Jay Hinrichs,

Hear hear.  I saw the massive gains of my real estate holdings in 2012-2014, and I was wondering....how long would it take me to make this kind of money if I owned 100 doors and made $100/door?  The answer is ..... a long long time. 

The rent increase was incredible too.  We're talking about $300- $700/door in a couple of years. Gotta feel it for the renters.  However, the tech workers are making a lot of money here though so I don't feel bad charging them.  It's just the blue collar workers that you have to feel for.  I have more than a handful properties that are a good $300 - $500 below market rents, but I leave them alone.  Their rents are even cheaper than what @J. Martin is charging his renters in Oakland.  Gotta let others live.  I've gotten more than my fair share.  Don't be greedy.  :0)

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  • Account Closed
    Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
    12y

    How long would the deal take day 1 through sale?  12 months?  36% is pretty good and I think you get paid for the risk.

    Are there additional holding costs factored in?  

    1Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Andrew,

    Are you sure your exit value is not too conservative?  Could the actual exit value be closer to $2.2 - $2.4M???  That would worth the effort in my opinion.

    A friend just flipped 1.4.7 Peralta Ave in SF and cleared just shy $500k.  Not shabby for a year worth of work.   

    Good luck.

    0Reply
  • Jay V.
    Tulsa, OK · Member since 2014 · 31 posts · 4 votes
    12y

    My thoughts:

    Your financing costs feel low

    Are there other holding costs - taxes, insurance, utilities

    Permit costs? (probably included in the construction budget)

    Any realtor fees?

    Closing costs?

    Overall no one can really give a strong opinion without knowing the market and if your ARV and construction estimates are accurate. If I assume everything you state is accurate, it seems like a very good deal. Given the size of the deal anything you may be missing that I pointed out above is pretty small in comparison, but I'd still be as accurate as possible.

    1Reply
  • Andrew Eaton
    OP
    Investor · San Carlos, CA · Member since 2014 · 41 posts · 37 votes
    12y

    @Account Closed I failed to include insurance and property taxes, which would probably run another $10-12k.  Realtor fees on the exit are included, & I am buying off-market up front.

    1Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y

    Personally I won't do it if the numbers are accurate. There are much easier ways to make 250K that don't involve new construction. I think profit has to be at least 500K to be worth the trouble. But maybe your numbers are just too conservative and when all said and done you can clear 500+.

    1Reply
  • David C.
    Investor · Bay Area, CA · Member since 2014 · 207 posts · 190 votes
    12y

    Given the capital & time frame, few quick flips would probably net more money & less risk.  However, if I was in Andrew's position, I would still do the new construction.  There is more personal satisfaction building something from the ground up.

    So Andrew, go for it.  I am cheering for you.  :)

    2Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    @Andrew Eaton , the dollar figure looks nice. And as @Manch Hon  and @Account Closed said, there may be some cushion in the price.. But I might lean towards Manch on the margins as projected, and here's why:

    Just over 10% net profit on the sales price means that if your construction costs vary by a few percentage points and/or the sales price varies by a few percentage points (relative to those total costs), your whole profit could be wiped out. Any further variations could be more. Make a little spreadsheet and measure your risks..

     What would a 10% variance in construction costs due to your exit? 15%? 5-10% variance in sales price? Both? Upside on sales price? What are the odds of all of these? I don't know the answer to that question, but it's nice to understand the range of outcomes you may experience given some variation in the most key inputs.. Then see if that upside is worth the potential downside, based on your judgment and knowledge of the market, along with input from anyone you trust..

    It looks like most of these bigger deals do have thinner margins due to the larger dollar figures.. But just think about how nailed down you have your costs before you get started, and try to get firm numbers with signatures and commitments from your contractors/3rd parties to the extent possible. I'm surprised by the way some flippers have tied their contractors tight to prices.. Have a chat with @Mark Mynhier  on his strategy if you're interested.

    12 months sounds quick from close of escrow to close of escrow. This sounds like in an ideal situation, even with no problems from the city, neighbors, delays in materials or labor, etc..? No? How does an 18mo turnaround impact it? Is the city that friendly to rush through new construction? If so, and you're good with those upside and downsides, best of luck and godspeed!

    0Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y
    Originally posted by @David C.:

    Given the capital & time frame, few quick flips would probably net more money & less risk.  However, if I was in Andrew's position, I would still do the new construction.  There is more personal satisfaction building something from the ground up.

    So Andrew, go for it.  I am cheering for you.  :)

    David, one thing I learned from @Brian Burke 's last podcast was about doing whatever adds ROI to the property - not what makes you pat yourself on the back, or personally like. To the extent that the new buyers pay up for new construction, that would give me some personal satisfaction. But if the new construction had lower ROI/returns than adding on to it, or doing a couple other deals, all else equal, I would pass on the personal satisfaction of having organized the construction of a building for the extra returns of a non-construction deal, if those were the numbers.. But maybe that's also because I'm not a construction expert, so I would need higher returns for a construction project, for me..

    1Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y

    @J. Martin brought up the time aspect, which I think is more important. There is the possibility of (much) bigger holding cost, and the opportunity cost of deploying the money in better ROI projects.

    But if OP has many rehab projects under his belt, new construction is the natural progression. It also looks like his numbers are on the conservative side. So things may be rosier than presented. :) I am by no means expert on any of this. I am in the middle of my very first rehab project in SF. And I am already enduring quite a bit of delay.... 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Account Closed 

    Yes but one could buy a 3 rentals in Memphis for cash that will cash flow after all in 900 a month  and in 500 months you could make as much as this one flip in in the Bay...  How long is 500 months OK let me see   O yea 40 years or more.....

    But if you don't have the 300k or more for the price of entry then whats an investor to do..?

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  • Tom V.
    San Francisco, CA · Member since 2014 · 345 posts · 281 votes
    12y

    Do you have a real bid from a contractor who says he can build for $250 a foot on the peninsula?  That number sounds very low.  With as busy as everyone is, you will get a joker or a poor quality product.  I would budget $350 and hope to make that.

    Have you researched how easy it will be to scrape the existing house?  What is the process for a demo permit and the cost?  Do you know about trees on the property?  Are they protected?  Yard setbacks?  Are you building a supertanker house in a row of little dinghies?  Will the end product be equivalent to houses around it?  At $867K purchase I doubt it.  

    12 months sounds short.  How does it work with 18 months?  

    Maybe the play is to add 1000 sf at $350 a foot.  350K + 867K = $1,217K.  Sell 2000sf @ 800sf(?)  = $1.6mm.  Shorter time frame, easier to get an addition permit than a demo one.  Fewer worries about new sprinklers, energy regs, etc..  Easier to get through local planning.  

    Mostly your time and build costs sound too short and too low in your hypothetical scenario.  

    2Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y
    Originally posted by @Jay Hinrichs:

    @Account Closed 

    @J. Martin 

    @Manch Hon 

    Yes but one could buy a 3 rentals in Memphis for cash that will cash flow after all in 900 a month  and in 500 months you could make as much as this one flip in in the Bay...  How long is 500 months OK let me see   O yea 40 years or more.....

    But if you don't have the 300k or more for the price of entry then whats an investor to do..?

     Out to the periphery East Bay in Richmond, West Oakland, East Oakland, on some good streets, w/ some hands-on management, bought at significant discounts, and improved to a highly performing property. Or so I've heard! lol

    Or talk to someone like Jay who can put your money to work making some returns.. ;)

    0Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    @Tom V.,

    Great suggestion.  I was exchanging a lot of these ideas with Andrew off-line earlier.  That was why my post above was so short.  Seeing your name reminds me of Tom Vu in FL back in the late 80's and early 90's era.  :0)

    1Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y
    Originally posted by @Tom V.:

    Maybe the play is to add 1000 sf at $350 a foot.  350K + 867K = $1,217K.  Sell 2000sf @ 800sf(?)  = $1.6mm.  Shorter time frame, easier to get an addition permit than a demo one.  Fewer worries about new sprinklers, energy regs, etc..  Easier to get through local planning.  

    That seems to be the favorite play up in SF, even in some hyper hot markets like Noe Valley. That's on my to-do list. 

    I have heard $250-300/ft is definitely doable in peninsula and south bay. I actually explored this route but later gave up because I just had zero experience. :) Better start small I figured. 

    0Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y
    Originally posted by @Account Closed:

    @Tom V.,

    Seeing your name reminds me of Tom Vu in FL back in the late 80's and early 90's era.  :0)

     Wait a minute. Do we have Tom Vu in the house?????

    0Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    @Jay Hinrichs,

    Hear hear.  I saw the massive gains of my real estate holdings in 2012-2014, and I was wondering....how long would it take me to make this kind of money if I owned 100 doors and made $100/door?  The answer is ..... a long long time. 

    The rent increase was incredible too.  We're talking about $300- $700/door in a couple of years. Gotta feel it for the renters.  However, the tech workers are making a lot of money here though so I don't feel bad charging them.  It's just the blue collar workers that you have to feel for.  I have more than a handful properties that are a good $300 - $500 below market rents, but I leave them alone.  Their rents are even cheaper than what @J. Martin is charging his renters in Oakland.  Gotta let others live.  I've gotten more than my fair share.  Don't be greedy.  :0)

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Tom V. 

    @Account Closed 

    OK that's it  I am moving back to the BA  .. Minh saw my home that I built all in for 110 a sq ft. and I am not sure if I showed him my spec around the corner that I built for 105 a sq but they are certainly of a quality that would sell on the peninsula.

    I am going to move my guys from OR  pay them double and still build at 200 a sq>

    anyone got a place we can rent for 700 a month we won't smoke in the unit and I will make sure they are well behaved :)

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    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    @Andrew Eaton On your costs, do you have all the design and permit fees included? Also, I don't see anything for the demo and hauling off of the existing structure, which could add a considerable amount. Is the house a complete tear down, or can you use it in a remodel? In some areas it's much faster on permits, and easier to do a remodel than a tear down and new construction. 

    1Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    @Jay Hinrichs,

    For $700/room/month, you will have to move very South SJ.  Otherwise, you're looking at around $1k/month/room for the Peninsula.  We just rented our 1-bedroom unit in downtown SJ for $1,550/month. 

    Your house is just beautiful.  My house is worth almost twice as much, but it's no where as big and as beautiful as your house.  Yes, you showed me your 2,600+ sq.ft. spec house.  It's nice, but not as nice as your house.  I'm still thinking of moving to Portland.  You get so much bang for the bucks there.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Account Closed 

      so Minh your an engineer lets put your engineer thinking together bring labor form out of area provide housing for them and we would kill it.. Materials are materials the reason things are 350 a foot there is labor and extreme profit form the GC and other tech subs.

    I will let you noodle it... :)

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    0Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    @Jay Hinrichs ,

    My partner and I thought about bringing in labor from the Central Valley. We even let them stay in one of our rentals for free, and we would still be ahead. No need to go all the way to Oregon. 

    0Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y
    Originally posted by @Account Closed:

    @Jay Hinrichs,

    For $700/room/month, you will have to move very South SJ.  Otherwise, you're looking at around $1k/month/room for the Peninsula.  We just rented our 1-bedroom unit in downtown SJ for $1,550/month. 

    Your house is just beautiful.  My house is worth almost twice as much, but it's no where as big and as beautiful as your house.  Yes, you showed me your 2,600+ sq.ft. spec house.  It's nice, but not as nice as your house.  I'm still thinking of moving to Portland.  You get so much bang for the bucks there.

     So Minh's moving to Oregon, and Jay's moving back to the Bay?!? What kind of potion have you two been dripping in each other's ears? lol  You definitely get a lot more bang for your buck on the properties/size, etc. All depends what you're looking for, family is, activities you enjoy, etc.. So tempting though at some point..

    Or like @Rich Weese , you just strategically place your properties around the countr(ies) so you get all the best seasons and everything you like ;)

    By the way Rich, I traded an old truck of mine that couldn't pass smog for a coin-op washer and dryer on the deal I finished in July of this year. I was going to take it to the junk yard, so I asked the appliance guy if he wanted a truck. He uses it to haul around washers and dryers now, and I have a coin-op that makes me money ;)  Not anywhere near your scale yet, but the first time I've traded a car to help my RE game ;)

    1Reply
  • Andrew Eaton
    OP
    Investor · San Carlos, CA · Member since 2014 · 41 posts · 37 votes
    12y

    First, thanks to all for the amazing feedback & support. BP is an amazing resource.

    @Account Closed  I estimated only 12 months because I will be buying off-market and will likely control the closing date and have the flexibility to push it. As stated it is currently a rental and I will likely scheduled the close for 6-9 months out. I will front the money for architect work and begin process with city so that I will be able to begin construction shortly after closing. Without this convenience, I think 18 months would be accurate.

    1Reply
  • Andrew Eaton
    OP
    Investor · San Carlos, CA · Member since 2014 · 41 posts · 37 votes
    12y

    @J. Martin Thanks for the 'range of outcomes' suggestion. I will work on it. I honestly just had the same 'pat on the back' discussion at lunch today with my boss. I would prefer new construction and would get some enjoyment out of it, but am also willing to change scope for a higher ROI. That being said, I am exploring a reduced scope as @Tom V suggested. "Maybe the play is to add 1000 sf at $350 a foot. 350K + 867K = $1,217K. Sell 2000sf @ 800sf(?) = $1.6mm. Shorter time frame, easier to get an addition permit than a demo one. Fewer worries about new sprinklers, energy regs, etc.. Easier to get through local planning."

    I need to speak with my architect & contractor again about this and will consider.

    0Reply
  • Andrew Eaton
    OP
    Investor · San Carlos, CA · Member since 2014 · 41 posts · 37 votes
    12y

    @Jay Hinrichs I have friends who are high end Palo Alto contactors with prices that are too rich for my blood. I will find the right balance. Sorry @Jay Hinrichs, $700/month in this area will get you a closet. For the right price, I may consider parking a trailer on the site for your crew to crash in it. I had a neighbor remodel a kitchen in Lake Tahoe and they brought in a Mennonite crew from somewhere in NV to do the work. Amazing craftsmanship and apparently the price was right. :)

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