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

    @Karen Margrave 

    All the design and permit fees are included in the $100k of soft costs.

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

    @Jay Hinrichs @Account Closed The multi-family shop I worked for that had 20k+ units west of SLC used a GC out of Vegas for most big CA jobs, NorCal and SoCal.  The CA GC's couldn't compete on price and got very frustrated.

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

     @Tom V. has the same point, which I think is very fair. If you're a hammer, everything looks like a nail. (Extra pun for construction deal totally intended!)

    Take a step back and see what the most profitable approach is on this deal. The MO I see around the Bay right now on flips is adding additional bathrooms, and bedrooms when possible, to collect the spread between the cost of add-on square footage (and higher functionality of better bathroom/bedroom ratio desired today), and the overall cost/ft of sales prices. Some are also doing tear-downs, but they tend to be in the highest-value areas w/ larger lots and very small and/or poor condition existing structures.

    If the deal is also to get the experience of the construction deal, then factor that in. Maybe it influences your decision, and broadens your horizons for the future also. But look at all your options before you gest started.. Good luck @Andrew Eaton !!!

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

    Andrew,

    At $2.2M - $2.4M exit value, I'd say go for it. Now, that's worth your time and effort. 

    @J. Martin , you have to see the quality of construction there. It's much nicer than the crap we have here. Beautiful houses for $200-$225/sq. ft., and they have bigger lot too. My cousin lives in Forrest Heights, which is supposed to be a nice neighborhood. Man the houses there are so nice. Tudor, Colonial, Provincial, you name it.  It seems like every single house is custom built, not track homes like here. 

    Well, home is where your family is so I'm not moving anywhere. 

    0Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y

    @Account Closed is the construction costs dominated by labor costs? If you brought in crew from Stockton to work in SF, do you need to pay them at least SF min wages? I know labor is cheaper in the Central Valley but I doubt how big an arbitrage opportunity there is.

    And I suspect Bay Area has tighter and more onerous building code, plus permit departments that feast on developers. Just saw an article on LA Times about how bad LA is zoning-wise. 

    0Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    12y

    The exit value will probably be 2.2-2.4 in 12 months.  Today's comps won't be the same comps.  

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

    @Andrew Eaton 

      my Siders are Mennonites and yes they are very good.. only issue with them is they have religious holidays all the time.. and they just don't show up.. But for quality and price can't beat them... Also we have a very large Russian population here in PDX.. great painters.

    I was kidding about the rent.. I know what rent cost on the peninsula. when my daughter first went to work for Intel she paid 2800 a month for 2bd apartment in Whisky Gulch  PA.

    If anyone who is actually building would like to swap hard cards we could go through line items and see why we can build custom for 110 to 120 a foot and your paying 300 a foot.

    Not sure what permits are on the peninsula on the Spec in Lake Oswego that I show Minh when he was here I paid right at 40k for building permits and all SDC's.. Plus arch fee of 8k to custom design the home we had tight environmental set backs .. But if we have a flat lot with normal set backs we buy off the shelve plans all in for 2 to 3k. Out in some of the smaller cities I build in permits all in can be as low at 12k..

    But then you take Texas and the builders there can build and sell and make a profit at 100 a foot including dirt.. now that is amazing.

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  • Account Closed
    Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
    12y
    Originally posted by @Manch Hon:

    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+.

     @ManchHon

    I'm curious what you see as much easier ways to make $250k in 12 months that don't involve new construction.  

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

     @ManchHon

    I'm curious what you see as much easier ways to make $250k in 12 months that don't involve new construction.  

    I am not talking about any one single transaction that grosses 250K, although that is not uncommon. In the Bay Area (San Francisco all the way down to San Jose) I regularly see flips with not much put into it, quick turn-around in 2 months or less and grossing 100K or more. 

    Take this one for example:

    https://www.redfin.com/CA/Pacifica/732-Edgemar-Ave...

    I was ready to put in an offer until the listing agent sorta told me to not bother. Listed at 449K, bought for 500K all cash. Less than a month later all dolled up and listed at 639K. Finally sold for 660K.  Compare the before and after listing photos, rehab cannot cost more than 30K. 

    So even if you are conservative about your costs, that one deal easily grosses 100K. Do it 2 times and you have a safer way to make the 250K that doesn't involve new construction.

    1Reply
  • Johnson H.Pro Member
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    12y
    Originally posted by @Manch Hon:
    Originally posted by @Account Closed:

     @ManchHon

    I'm curious what you see as much easier ways to make $250k in 12 months that don't involve new construction.  

    I am not talking about any one single transaction that grosses 250K, although that is not uncommon. In the Bay Area (San Francisco all the way down to San Jose) I regularly see flips with not much put into it, quick turn-around in 2 months or less and grossing 100K or more. 

    Take this one for example:

    https://www.redfin.com/CA/Pacifica/732-Edgemar-Ave...

    I was ready to put in an offer until the listing agent sorta told me to not bother. Listed at 449K, bought for 500K all cash. Less than a month later all dolled up and listed at 639K. Finally sold for 660K.  Compare the before and after listing photos, rehab cannot cost more than 30K. 

    So even if you are conservative about your costs, that one deal easily grosses 100K. Do it 2 times and you have a safer way to make the 250K that doesn't involve new construction.

    The problem is finding these deals. Everyone is looking for spreads like this!

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

    @Jay Hinrichs 

    Construction on the peninsula is expensive and contractors are all over the map as evidenced by the range of kitchen remodel bids I got last year for my house. They were X, 2x, and 3x. I kid you not. And the lowest price was the guy I trusted the most going into the bidding. Guess who I went with and did a wonderful job? He might have had a smaller crew and taken a week or two longer, but well worth it.

    There are dumpsters on every block in my town, very little even for sale on the market. The story in my town is that the schools are good and it is a very good alternative to the tier 1 cities of Palo Alto, Menlo Park, and Burlingame, which have reached beyond crazy territory. I have heard stories in Palo Alto that if you don't come with an all cash offer and without an agent (sellers don't want to pay the additional 2.5% commission), they won't talk to you. Lots of all-cash money from China driving up prices and then the homes sit empty. This frustrates other buyers who then realize they get more bang for their buck a few towns away, still with great schools (and without the attitude). And the demand has trickled down and pushed our city's prices up as well. 

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

    @Manch Hon 

    $500k profit on new construction is possible but difficult when you are spending $800k+ just for the land.

    @Franklin Romine  notes, a lot more work. I plan on considering such deals once I am done with what on the table for me now. For now, it is new construction because I can make a nice return and I don't have to pay 10% over ask, all cash. I understand that these flips are happening all around us, but it takes quite a bit of work to win those two deals per year.

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

    @Tom V. 

    I think $350/SF happens all the time on the peninsula. You have to be careful. I think it can be done for $250. In fact, I know it can, because my contractor just did a large scale flip himself on the Mountain View / Los Altos border for $250/SF. Sold for $2MM (5BR 3BA), he paid $1.1MM. Overall similar numbers to this deal.

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

    @Andrew Eaton 

      We moved to PA for the schools that was 1986.. and I thought it was outrageous to pay 186k for a 3 and 1  900 sq ft home that had no dishwasher or garbage disposal.

    But my kids got a great education as you stated and I sure wish I owned that little jewel today  LOL

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  • Johnson H.Pro Member
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    12y
    Originally posted by @Andrew Eaton:

    @Tom V. 

    I think $350/SF happens all the time on the peninsula. You have to be careful. I think it can be done for $250. In fact, I know it can, because my contractor just did a large scale flip himself on the Mountain View / Los Altos border for $250/SF. Sold for $2MM (5BR 3BA), he paid $1.1MM. Overall similar numbers to this deal.

     Is that $250/SF his costs or does it include his profit margin and that is what he is quoting you? I did some research on a new build a few years ago as I almost purchased a piece of land in San Rafael and I was getting prices between $300-$350/SF for a modern looking house without fixtures and appliances. 

    I don't think I saw this question asked yet, have you been to the permit and zoning office yet to see if this tear down and new build is feasible? I'm not sure where you are building but here is a link to the San Francisco planning permitting process http://www.sf-planning.org/ftp/files/publications_reports/SF-Planning-Permitting-Process-June2011.pdf

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

    @Andrew Eaton Another thing that I don't think has been mentioned. New construction is NEW. no matter what improvements you make to an old house, how much you doll it up, it's still a remodeled older house. There are a lot of buyers, especially younger buyers, that want a new, modern, never been lived in home, in an established neighborhood. 

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

    @Jay Hinrichs When I met my wife, she was working at PayPal and living off of Embarcadero in PA in an Eichler.  The house next door sold to a Russian lady and she wanted to scrape it and build a 2 story house.  This was in 2003.  Made sense then, makes more sense now.  But oh she got a rude awakening when she was faced with the 'Save the Eichler' crowd in PA.  Look at this recent article: http://www.paloaltoonline.com/news/2014/05/28/neig...

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

    I grew up with Eichlers never lived in one but a bunch of my grade school friends did.

    in Portland they knocked them off and call them Rummers  they sell for a big premium in our market

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

    @Karen Margrave 

    You are very right.  There are maybe a dozen 4BR 3,000SF new construction homes in our town per year.  We have a lot of 5,000-6,000 SF lots and older homes and as evidenced in the continued demand and multiple offers for such new homes, there is plenty of demand even at the higher price point. Granted it is likely a smaller buyer pool than the nicely redone 3BR 2BA. 

    Another example of this is when a few months back 2 homes sold and then sold again three months later.  I noticed that nothing had been done to the homes and I was expecting a flip.  The only difference was that they had plans done for a larger 4BR 3,000 SF home. I don't know the details, but why do the construction for a year if you can 'sell the dream' and let someone else deal with the headaches of construction.  Both sold, quickly and for big numbers.  $1,000/SF for the privilege (land) to spend another $350/SF to build your dream home.  Here are the 'Sell-the-dream' links: https://www.redfin.com/CA/San-Carlos/1989-Belle-Av...

    https://www.redfin.com/CA/San-Carlos/2668-Thornhil...

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

    Another example of this is when a few months back 2 homes sold and then sold again three months later.  I noticed that nothing had been done to the homes and I was expecting a flip.  The only difference was that they had plans done for a larger 4BR 3,000 SF home. I don't know the details, but why do the construction for a year if you can 'sell the dream' and let someone else deal with the headaches of construction.  Both sold, quickly and for big numbers.  $1,000/SF for the privilege (land) to spend another $350/SF to build your dream home.  Here are the 'Sell-the-dream' links: https://www.redfin.com/CA/San-Carlos/1989-Belle-Av...

    https://www.redfin.com/CA/San-Carlos/2668-Thornhil...

    Selling dreams has always been a darn good business. That's what the whole entertainment and cosmetics industries are based on. :)

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

    @Andrew Eaton  The market that you have there is much like Newport Beach, Corona Del Mar, and other high end areas. Some of those areas buyers like to have the character of the old houses, pay high prices and leave the homes as is to live in or rent as vacation rentals. Others buy the old houses, tear them down, and build new. Another advantage to some of the older places is they have bigger lots. If they're big enough, a developer can split the lot and do two houses instead of remodeling the one. 

    It all depends on the original house too. If you have 8' ceilings, and a two story house, raising the ceiling height requires a huge investment, and most people like the spaciousness of higher ceilings now that they're used to them. On the other hand, if it's a one story, it might make sense to find a way to get extra height. 

    On the examples you showed, it could be that they just understood that on average, most people have NO imagination, and cannot visualize what could be on that site without the plans, and renderings. Getting those done helps get past that, adds some value to the property, and helps in flipping the land to someone that wants to build. At the same time, if there are actual "approved plans" ready to pull permits, that has a lot of value to a builder. 

    There's a lot of ways to play the game, and so many angles to consider. Good luck.

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  • Navi Veski
    Contractor · Potomac, MD · Member since 2013 · 64 posts · 3 votes
    12y

    do your due diligence and then go for it...whichever way you choose to go will be a winner.  I just finished work on one in emerald hills and it was great for us and the investor.   

    Consider documenting the entire process in a thread here or on a blog like J & Carol 

    Cheers 

    0Reply
  • Toby Johnston
    Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes
    12y

    Andrew, I didn't know you were on BP but good to see you here.  Send me a PM so we can connect for lunch sometime.  Courtney and I have been discussing a potential flip as well even though I'm more of a buy and hold guy myself.  As to this discussion, your tax rate may be too low if you end up holding for less than 12 months and don't get long-term gain treatment.  You would also want to make sure that your activity qualifies as an investment and not as "business income" which is often the case with regular flippers.

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    12y

    coming in here kinda late, but I think you got a bunch of good advise. My main takeaway: the devil is in the details!

    1- I do think your $250 SF build is on the low side, as you're including soft costs, old house demo, and landscaping.  Can you get a firm bid from the contractor you used before?  Is he avail when you need him?  If that's all a go, than use $250. But if it's iffy, you could easily be spending more. 

    2- how easy/hard is it to demo in San Carlos?  In San Fran (my market) = royal pain in the ***!  And if it has any historical significance, fugrtaboutit!

    3- I'd weigh out the expand existing vs new construct very carefully. 

    4- you really need to get a strong sense of the current value. Is it 2.0, 2.2 or more?

    5- you need to accept the risk that if tech hits a snag, and it could in 12-18 months, can you still safely sell at 2.0?

    6- I think $200k profit on this is not exciting. 4-500k is where it's at for a complex, and somewhat risky, project like this.  The San Fran flippers I see want at least $4-500k at mid range spec,  and they get more if market shoots up, and can still make the $150-200k if market softens. 

    7- you're right, it's very hard to land a decent deal!  You may be looking a long time if this one ain't it. See how feasible it is to have the expansion plan as a back up, if entitlements drag on and/or if the market starts to soften.  After a crazy 2012-13, I'm definitely seeing appreciation rate soften (i.e. It's not a crazy 15-20% YOY). Market is still very good in SF, but may only appreciate 5-7% this year and next. I know....boo hoo. (Glad I'm just keeping my SF properties and enjoying the ride up :)   

    Good luck, and keep us posted on what you're doing with this project. Might as well keep this tread alive, like a little personal blog about your project :)

    1Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y
    Originally posted by @Jay Hinrichs:

    @Andrew Eaton 

      We moved to PA for the schools that was 1986.. and I thought it was outrageous to pay 186k for a 3 and 1  900 sq ft home that had no dishwasher or garbage disposal.

    But my kids got a great education as you stated and I sure wish I owned that little jewel today  LOL

     Keep 'em all Jay!!

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