Help Analyzing Deal

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Help Analyzing Deal

Scott Dwyer
Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes

Hi,

I've been reading these forums for a little while now and have learned a tremendous amount in the short time I've been here. I was wondering if anyone could help analyze my first RE deal?

I put a 4 BR/1.5B house under contract 10 days ago. I have it under contract for 70K. My ARV is 123K(Appraisal). My rehab costs are 21K.(not to exceed quote)

Since rents in the area aren't as high as I'd like, around 1,000/month, the property doesn't cashflow. I'm thinking about flipping this property since it seems like the only option I may have at this point.

I've sent an addendum to the seller today to drop her price to 65K to compensate for overages in repair estimates. I have an inspection/contractors clause in the contract where I can back out after the 15 day inspection period and recoup my deposit.

If she accepts the addendum at 65K my total in money is 88K(65K+21K rehab+2K CC) = 88K

If I sell the house for 123K my gross profit is 35K. Subtracting 7% CC out ($8,610) my margin is $26,390.

My monthly holding costs are approx. $500/month.(incl. taxes, ins., utilities & interest on loan).

Is this a deal? Should I be pressing the seller to 60K?

If the property doesn't sell for six months my holding costs are ~3K. Bringing my net profit to $23,390.

I'm having trouble sleeping the last few nights overanalyzing this in my head. I understand fear is a good thing and is very natural when doing something like this for the first time, but I keep hearing this voice in the back of my head telling me to pull out.

As an avid poker player I understand that scared money doesn't make money, but I can't shake this voice. It seems to get louder and louder as each day goes by.

Oh, I almost forgot to mention I'm getting married in 4 weeks. Yeah I know I'm crazy. The closing is scheduled for the day before my wedding, although I'm trying to move it up 2 weeks.

I thank you in advance for your responses.

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  • Josh Morgan
    Winter Haven, FL · Member since 2008 · 10 posts · 0 votes
    18y

    My concern would be what are comps selling at not what the appraisal would be. At 65k it would be bought for approximately 71.5% ARV. At 60k it would be bought for approximately 67.5% ARV. As already mentioned i would have to be sure that i could sell for close to the ARV and get it for 60k. At 65k i'd have to backout.

    Thanks,
    JT Morgan

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    It seems OK at $65K, but like Josh says, you need to know what's really selling. An appraisal is helpful, but you really must know the market yourself. An appraisal is based on only three or four sales, and can be easily cherry picked to make it look good. If the appraisal is based on the three retail sales that occured in the last six months, but 20 REOs have sold at much lower prices (like, $60-65K), you'll have a very hard time selling at that price.

    From your numbers, I assume you are getting very cheap money rather than hard money. At $500/month holding costs, your money cost must be something like $350-400/month, or 6% or so.

    What about the loan origination fee? Inspections? Survey? Flood certificate?

    You'll need a vacant house or builders risk policy. That will be quite expensive, I'd guess $400-500 for three months. If you cancel it after a week, no refund.

    You selling costs seem low. 7% is barely more than the RE commissions. I don't know your area, but seller concessions are common here. I'd figure 10% for sell closing costs.

    Still, it seems like a good deal. Especially if you have cheap money. If your money costs for six months are really only $2400, that adds a bunch to your bottom line. Hard money would be something like $9-10,000 for that period. That one item gives you quite a bit of wiggle room.

    Making $23,000 on a deal like this would be excellent. Making $12,000 would still be a good deal.

    I assume you don't really mean its all in your head. If it is, write it all down, in detail. Create a plan of what needs to be done when and who will do it. Manage the work in detail. Be sure to account for lead times, and properly overlap long lead time items with other work.

    But if you ARV, rehab, and money costs are correct, and you're confident this will sell quickly, this sure looks like a good deal.

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    18y

    Hi Guys,

    Thanks alot for the responses. Just to answer a couple of your questions. I'm not using hard money I'm borrowing from a private source(parents) at a very good rate. No origination fees.

    I have 7 good comps from the last few months all recent rehabs. All sold within 50 days in the range of 115K- 121K.

    My Closing Costs out I calculated at 7%. 5% to commissions and 2% transfer tax. My Realtor is getting the commission on the way win in and out so I told him he would have to sell it for 5% but still offer the buyer's agent the full 3%. Of course he sounded hesitant at first but then realized he's going to be making a lot more money with me down the road and agreed.

    What kind of ROI do you guys look for when doing flips? Does anyone even do flips anymore? All the people around me who know nothing about REI think I'm crazy. I keep telling them you can do anything you want if you buy right. And now is the perfect time for buying right.

    Wheatie, I wouldn't mind having to pay $400-500 for three months. If it sold quicker I'd be pretty happy and wouldn't mind the couple hundred extra in premiums. Thanks alot guys. Still awaiting word on the addendum.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    If you have comps from $115K to $121K, I'd use $115 in the calculations. 50 days is quite good, so sounds like you shouldn't have much problem selling.

    You're missing a bunch of things in your closing costs. There will be a bunch of fees from different people involved. These vary a lot, so call a few title companies and ask about all the fees. A big one will be the title insurance you have to buy for your buyer.

    I'd ask you agent about seller concessions. Maybe you don't have to give these, since your market seems pretty good.

    If you can buy right and sell right, and properties are selling, flip away.

    I missed the getting married part first time around. You'll have a challenge to balance your time between the rehab and the new marriage. Especially if you have a day job.

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    18y

    Thanks again for your input Wheatie. I really appreciate it.

    You're correct, I forgot to add the .75% for title insurance. Which is around $900. Even If I sold for 115K I'd still be profiting in the 15-16K range. Which is pretty good for me since my current business is pretty slow right now.

    Yes it is going to be tough juggling the new marriage and the rehab but I figure if we can get through this unscathed there aren't too many things that will be able to get between us.

    As far as other junk fees that realtors and title companies try to pass off as necessary, I'm not buying. Everything is negotiable. I find it reprehensible that realtors try to charge a broker fee when they are getting paid from commissions. My realtor tried to include these in the preliminary closing sheets and I told him I will never be paying these so don't try.

    Again thanks for your input. This site is truly a WEALTH of information my only regret is I didn't find it sooner. Keep up the good work guys.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    18y

    Scott,
    Another option for you is to sell and carry the paper. Collect a nice down payment (10% or more) and charge 8-12% interest rate depending on credit and job worthiness. Include a balloon payment in two years. This assumes your loan from your parents can be longer term. This strategy gives you upfront profit of the down payment + positive cash flow from the interest, and a final payday in 2 years. If they default, you keep the down and sell all over again. You can also demand a premium price for the home due to the buyer's advantage of no bank qualifying.
    You eliminate most risk as the new buyer is responsible for the property, insurance, taxes, etc. All you are is the bank.

    Podcast Guest on Show #130
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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    18y

    Will,

    This is why this forum is my new favorite place. So many great ideas all in one place.

    Will, is what you're describing also called a lease option? Unfortunately I don't think my parents want to wait two years to get their money back. They're retiring in two years and looking to purchase a new home out of state so I'm pretty sure they would like to have their money back in a reasonable and timely fashion.

    Couple questions about lease options. Where do you generally find people in need of lease options? Do you contact local mortgage brokers for people who were denied for a home loan? Are the ideal candidates for this people who make a decent living but have bad credit for any number of reasons? Can you explain what a balloon payment is. Also, is the 10% up front payment then deducted from the final sale price or is that strictly payment for the option? I'm a little confused.

    I don't think in this early stage of my REI
    I'm in the position to be the bank but maybe a few more years down the road this could be an option.

    See there you go. Now I'm going to scour the lease option section to learn a little more about it.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    18y

    Scott,
    Lots of questions asked, not enough time for them all, but here I go:
    I was not talking about lease options, however that is just another option available to you. I was talking about an owner financed property in which the buyer buys the property on day one (no lease) and you carrry the note.
    A balloon payment is when the entire balance of the loan is due on a set date, ie in 2 years or whatever you both agree upon. The down payment is not an option payment, but a down payment and thus deducted from the purchase price. Example: You sell the property for $130,000 require 10% down ($13,000) and carry a note for $117,000 at say 10%. Then in 2 years the balloon becomes due and the buyer must refi with a lender to pay you off. If they do not, you foreclose and either repeat the process or sale in a number of alternative ways.
    Lease options are another great startegy in that you receive profit via an option fee on day one, hopefully cash flow during the lease term, and then final payday on option exercise day (assuming they buy, if not do again).
    Look into this as it can provide a great way to make $ in RE, particularly these days where loans are hard to come by and many buyers do not have the proper credit scores to qualify for traditional financing.
    Good luck to you.

    Podcast Guest on Show #130
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  • Josh Morgan
    Winter Haven, FL · Member since 2008 · 10 posts · 0 votes
    18y

    Scott,
    It seems you are confident in your numbers so you should be ok. Good luck on the deal.
    Thanks,
    JT Morgan

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    18y

    Thanks Josh i appreciate it. Still haven't heard back on the addendum so I have no idea If I'm going through with it. If the seller isn't willing to budge to 65K I'm not buying. That simple.

    I'm not a motivated buyer and I don't want to get emotionally attached to any deal. There are simply too many out there to fall in love with one. When I hear something I'll let you guys know.

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    18y

    Scott,

    I personally think you have your priorities a little out of order here. With your wedding approaching the last thing you should be doing is adding the stress and distraction of putting this deal together.

    Once in a lifetime deals come along with amazing regularity but, you and your bride will have only one wedding day.

    0Reply
  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    18y

    Hi Tim,

    Thanks for your response. I appreciate and understand what you're saying.

    Fortunately for us all the wedding plans have already been made. So it isn't as stressful as it was a month or two ago. I'm sure the week before the wedding we'll be pretty stressed but once it's over we''l have a lot off of our minds.

    I do understand that deals are all over the place right now but why pass up an opportunity to make good cash if it's sitting on the table. No matter the timing. I've invested a lot of time in this over the last few months and I don't want to get cold feet just because of the timing. Some people look for excuses to not do deals out of fear. If it wasn't a wedding there could easily be something else that I could think of to make me hesitant. Basically what I'm saying is money comes to those who act regardless of fear and circumstances..

    I'm not doing the rehab myself. I have a very good contractor who is a client of mine and who comes very highly recommended from a couple of my REI mentors. I understand I'm still going to need to check up on the property a few times a week to make sure we're still on the correct timetable and to make sure the work is being done to my standards.

    As I'm typing this I received confirmation that the seller has accepted the addendum and has agreed to close early. Two weeks before the wedding. Her we go.

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    18y

    Scott,

    I understand what you are saying, I really do and maybe your future wife is as understanding about business coming before everything else as she appears to be with this. But, there are more important things in this life than money and all those things you take for granted while taking money off the table because it is there can be gone in a heartbeat.

    During the rehab, you should walk the site with the foreman or contractor, every day. That way you spot any problems at the earliest possible point, which is when they are easiest and least costly to fix.

    Good luck and congratulations! May you and your bride have a long and happy marriage.

    0Reply
  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    18y

    Tim,

    Thanks for the kind words. We've been together for almost eight years now and I think this will actually help us grow stronger. She's just as if not more excited than I am about this deal. Being an accountant and someone who is financially savvy, she's been interested in investing in RE for quite some time now. It just took us a while to stop dipping our toes in the water and finally jump in the pool.

    I told her last night that we can still back out and we wouldn't lose anything. She asked me if I was crazy. So I'm pretty sure she's on board.

    Thanks again for the congrats Tim. I'll keep you guys posted on how things turn out. I met with the contractor this morning and he's ready to go two days after we close. The job is scheduled for 4 weeks but I've budgeted for six. Maybe I'll try to get some pics up on the gallery with before, during and after shots.

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    17y

    Hi Everyone,

    Just wanted to come back and let you guys know what was going on with my flip.

    I haven't been here in a while. Obviously a ton of stuff going on over the last few months.

    Of course the contractor took longer than he quoted. The job started the 3rd week of September and didn't get finished until just before Christmas.

    So it took three months as opposed to six weeks. Damn contractors.

    The only unexpected problem we had was a roofing issue. We had that corrected for $2100.

    We listed the house on Jan. 2nd at 119,900.

    We received a full offer on Monday (17 days woo hoo!)with 6% sellers assist.

    In total we're looking to profit around 12K.

    I'm pretty psyched we were able to get it under contract so fast in this market.

    Couple of questions:

    Since the buyer is pre approved we shouldn't have any financing issues should we?

    Of course it needs to be appraised by the bank and have inspections done, but I'm fairly confident it will pass all inspections.

    Is there anything else that could potentially go wrong. This is my first deal so I'm not to sure what to expect during the closing process.

    Thanks in advance for your responses.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Six percent is pretty high for a seller assistance. Does the buyer have a decent down payment? 10%+ for OO, 20%+ for NOO. The lender may balk at that high a seller assistance. Check some of the other threads on buyers having problems getting financed. A pre-approval doesn't seem to mean as much as it once did.
    Sorry.

    Potentially could be seasoning issues. But sounds like you've now held it long enough, and can substantiate the new value.

    It won't "pass" inspection. Buyer inspections aren't pass or fail. The inspection will note all the issues they see, and then the buyer will want to haggle a discount or repair credit to cover those items. Rest assured they will find SOMETHING. They always do. Just like you did when you bought it.

    Are all the permits on file and properly closed out?

    Congratulations on getting the flip finished and under contract.

    Hope married life is agreeing with you.

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    17y

    Hi Jon,

    Thanks for the response.

    The buyer is going FHA and they're putting down 10%. I was told by my realtor and another realtor friend that 6% is pretty common for FHA.

    Sorry I mispoke with the "pass" inspection. They might find some little things but I'm more than happy to accommodate to anything within reason.

    As far as permits go. We didn't have to do anything major to the property. ie plumbing, electrical, HVAC, etc. The house had pretty good bones. We basically just put lipstick on it.

    I'm pretty sure you don't need permits for paint, carpet, refinished hardwoods, tile flooring, windows, new int. doors, ceiling fans or light fixtures etc.

    Married life is agreeing just fine. Thanks for asking.

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    17y

    Hi guys,

    Another update:

    Inspections went well. Of course the buyer found some small things they wanted fixed. We were more than happy to oblige with their requests. It appraised at 121K, so no problems there either.

    Just got a call from my realtor today and he tells me the bank wants to push the closing up. Originally it was schedulued for March 4th, but they want to move it up to the end of February.

    What's the reason for this? Why does the lender want to get this done before the end of the month? I'm not complaining by any means, but I wasn't sure why they want to do this. Is this common?

    I'm just happy I get my money a week earlier and pay one week less utilities.

    Thanks for all the support you've all given me throughout this. This site has become a new addiction for me. There truly is a wealth of information on here.

    Can't wait to start searching for the next deal!

    0Reply
  • Jim Doine
    Real Estate Investor · Myrtle creek , OR · Member since 2008 · 343 posts · 13 votes
    17y

    Congratulations Scott, its great to hear that there are still successful flips being accomplished in this market. Jim

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  • Brandon E
    Real Estate Investor · Philadelphia, PA · Member since 2009 · 57 posts · 5 votes
    17y

    Scott-
    Congrats on all your most recent successes. Many others would have waited to invest after making the transition into married life, so I commend you on having a backbone, a brain (for doing the due dilligence), and multi-tasking (for lack of a better term)
    What I find most interesting is to go back and read your initial posts about being unsure about whether to proceed, and then to read the follow-ups about the tremendous progress you made.
    I can only speak for myself in telling you how much I appreciate that you continued to update us of the step-by-step process; There are members that ask for helpful (money-saving) advice, receive feedback on several different approaches on how to handle their situation, and never return as to do so much as thank the people that gave a complete stranger both their time and honest opinions. - Brandon

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  • Scott Dwyer
    OP
    Real Estate Investor · Furlong, PA · Member since 2008 · 17 posts · 0 votes
    17y

    Hi Brandon,

    Thanks for the kind words. The least I could do is say thank you to the people who helped me. This site is great for that.

    What part of Philly are you from? I'm in Bucks County. My flip is on the edge of Univ. City.

    Are you currently investing in Philly? What kind of properties are you looking for?

    Maybe we could network and bounce some ideas off one another. Two heads are better than one.

    PM me if you're interested.

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  • Matt H
    Edmonton, Alberta · Member since 2009 · 32 posts · 1 vote
    17y

    Because your dealing with single family h then I think you have a lot of options if you keep looking around. Remember the saying "if you're not embarassed to ask for the amount, then you're paying too much". It's a buyers market out there. Offer something very low. See how they react. Lots of houses for sale. Also go with your gut instinct.

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