The art and science of asking questions is the source of all knowledge. (First potential deal)

16 Replies

Hello BP family,

I hope that you all are well. I recently found a potential deal and i wanted to get some opinions and advice about moving forward. My goal is to get the house at a great price, make the necessary improvements and flip it. I have never worked with a hard money lender before, I know that i will need one for this project.  Any advice with approaching hard money lenders and how to prepare my self would be greatly appreciated.

The House is a REO listing at $41,500

Its going to need about 15k-20k in Rehab. 

I checked the comps in the area and there has been numerous homes with the same Sq Ft that have sold for around $87,000 -$90,000.

The house has  2Beds 1Bath

768Sq. Ft.

$54 / Sq. Ft.

Lot Size: 5,550 Sq. Ft.

Built in 1918

The house has been on the market for 59 days. I would like to know what your thoughts are regarding this listing. I have a lot to learn as a new investor, I figured i would reach out to my BP family. I look forward to hearing from everyone, Thank You sincerely.

There are so many unknowns, I could write a book. Based solely on your numbers and very vague post, looking at this like a typical deal, like the most typical flip one could possibly have without any deviations, I calculate a $10K pay day in there - Solely looking at the numbers and based on the details you provided. If it is what you say, I wouldn't do that deal because I wouldn't want to work that hard for $10K, but I'd tell someone about it and get a $2,000 wholesale fee out of it. Heck, I might even lend the investor the money out of my Roth to make the deal happen and squeeze a bit more out of it. However....

As for the unknowns, not even sure where to begin. Here's a few though;

Do you have any experience?

You're in Los Angeles and you found a 100 year old house that has been on the market for 59 days at $41K, and is worth $87K when rehabbed. I'm going out on a limb. Way out there. I mean, I'm almost out by the leaves, and guessing you are not shopping in Los Angeles, are you? 

So, you have a 100 year old house, in some unknown, possibly far away location, but maybe the IE, high desert, or Palmdale/Lancaster, that has been sitting on the MLS for 2 months, every other investors in that market has access to said MLS, but you think you found a good deal that nobody else noticed? Things that make you go Hmmm?

You ever hear that story about the patsy that played poker? The story goes, if you don't know who the patsy is at the table, grab your money and get up.

@Aaron thank you for your response. Your post was interesting, and your patsy poker story was amusing. As for my experience, I am a new investor as stated in my bio and recent post. The house is located in the central valley. We all have to start some where right? Even if only $10k was made on the deal, sometimes the best thing to do is to take that first step.  Thank you for the great advice.

Matt, hopefully this question helps answer yours. What would you want to see from someone asking you to invest 60K in their project.

I would want to see rehab estimates from a qualified and verifiable contractor or projects you've completed including numbers.

Every comp within 1/2 mile within the last 6 months.

Seeing how long rehabbed properties take to sell in the area is key.

All that said, BP has an article "10 Questions on Hard Money Loans" and Brandon Turner from BP has a video entitled "Hard Money Lenders - Where to Find Them and 4 Tips to Get Your Loan Funded".

Jeff,

Thank you sincerely. I will definitely take a look at the article you suggested. Definitely something for me to think about.

I bet if Account Closed was writing this post, he wouldn't identify rehab cost as a range of $20,000 - $25,000. That's a 25% margin - we can't possibly work with margins that big, Matthew!

So, Aaron will agree with me that a realistic rehab will run at least $30,000, if not more. And then, you still have a 2x1 PIG from 100 years ago...but, never mind for now...

Your cost of capital will be 15% in 6 month. Your carrying costs will be at least $4,000, depending on taxes. 

At the sale price of $85,000 (since it's only a 2x1) your profit margin will be about $10,000 - $12,000...why bother?!

Originally posted by @Matthew Horn :

@Aaron thank you for your response. Your post was interesting, and your patsy poker story was amusing. As for my experience, I am a new investor as stated in my bio and recent post. The house is located in the central valley. We all have to start some where right? Even if only $10k was made on the deal, sometimes the best thing to do is to take that first step.  Thank you for the great advice.

 As your doctor, I have determined you are suffering from Got-to-do-a-deal-itice. It is a horrible disease and if it goes full blown (the day you close), you'll suffer sleepless nights, stress, lots of depressing road trips to your project, lost capital, and most likely be stuck with a rental house you won't want to own. Best case scenario, you'll lose a significant amount of money and have a great story in 10 years... if you stay in real estate and succeed. If you don't, you'll have a horrible story that you'll tell anyone and everyone that ever tries to talk to you about investing in real estate as you try to convince them it is a scam. The flashbacks will be crippling. 

It's not the ones you don't buy that hurt you. I'm also doing a rehab on a 2/1 built in 1937 right now. It is about 3 miles from my office. My rehab budget was $30K when I started. I've spent $32,400 so far and there are a few more "surprises" coming, I'm sure. But, my deal doesn't have a thin margin. I paid $140K and it is worth $229K. I also converted my 2/1 into a 3/1 which has a much larger buyer base.

Originally posted by @Ben Leybovich :

you still have a 2x1 PIG from 100 years ago...but, never mind for now...


"PIG" LOL - That little piggy going to love to eat that money!

@Matthew Horn some clarity on what you're getting into with a pre-1940s house:

They didn't have much in terms of appliances back in dem ol' days. Maybe needed to plug in a lamp and a radio, but not much else. So, you'll be doing a full electric upgrade. Probably only had one outlet in each room. You'll need one on every wall. The plumbing is galvanized and will need to be completely replaced by copper or pex. Since you're busting all those holes in the plaster walls, you might as well just gut the place and sheet rock it. Plaster wall houses have no insulation, so you'll be insulating all the walls now or you won't pass inspection. (Learned that one from experience! Nothing like ripping off brand new drywall to add insulation.) 

There is definitely termite damage. Add at least $1,000-$2,000 for that. If it is raised foundation, I bet a few of those piers need to be replaced. Never bought an old 2/1 that didn't have a few spongy floor spots. Hopefully, the roof is good, but might not be...

Hot water heater will probably have to be upgraded. The wall heater might be OK, but do the comps have A/C? If they do and yours doesn't, add another $3,500 to the budget. Most likely a tilt up wood garage door that looks like a guillotine. $1,000 bucks for a new roll up... if it even has a garage. Hopefully it does and lets get down on our knees and pray that it is a 2 car. Sprinklers? What sprinklers? $1,000 bucks added to the list. Got to have that curb appeal! Hows the driveway? Concrete? I bet not. Asphalt? Most likely. Is it cracked and falling apart? Yup. Add in another $500 to get it sealed and let's keep praying we don't have to rip it out and put in concrete.

Oh, we haven't even gotten to the painted shut, termite eaten wooden windows that don't operate have we? We might be able to tune a few up, but we'll most likely need some retros. Can't just do 2-3 windows though can we? Add another $1,000 for new windows. Front door? Yup, we'll need one of those. New kitchen and bath since we had to gut them to put in all that electric and plumbing. Those 100 year old cabinets have a lot of character just like that guy talking to himself on the street. Unfortunately, they also smell like that guy talking to himself on the street. Can't do new cabinets and not put granite or quartz counter tops on. Need to put in those appliances too. Add in a back splash, sink, faucet and garbage disposal. Flooring, baseboard, new doors and trim, door handles, electric fixtures...

Man, the list just keeps growing.

Now, on another note, you might have found a charmer of a 2 bed that just needs some polishing up. Nothing wrong with old. People like old. A whole industry is centered around old - Antiques! But old houses are really only good if they are located in a community with historic charm, like the beach communities dotting the California coast, or a nice old city like Orange, Pasadena, etc. 

I'd say you might have something there, but you have a 2 bed in the Central Valley. I'm not that familiar with that entire area as I zip through there on my way to locals in the north of the state and I don't tend to stop and look around in between here and say, Yuba or somewhere along the Trinity River. The few times I have gotten off the freeway for gas or a restaurant, I wasn't entirely impressed with what I saw, but again, I never ventured much further than freeway close.

If you think you have a deal, you better get a good contractor to go through that house with a keen eye and a sharp pencil while you still have time left on your inspection period.

Originally posted by @Matthew Horn :

@Aaron thank you for your response. Your post was interesting, and your patsy poker story was amusing. As for my experience, I am a new investor as stated in my bio and recent post. The house is located in the central valley. We all have to start some where right? Even if only $10k was made on the deal, sometimes the best thing to do is to take that first step.  Thank you for the great advice.

I'm pretty familiar with those numbers in the central valley. I'd say your resale opportunity and retail buyer pool are likely a challenge. What do the comps look like for rehabbed props. How many are resales to owner occupants? Are there any? What do the rents look like. I'd bet on terrible. A property in that price range in CA with that amount for repairs on the MLS would already be gone unless it's a low rent situation and/or way rural.

Is it a mobile? If stick built, does it have a foundation?  Lots of desert props with wooden footers to the ground, not even cement piers. Can'f finance that with any lender these days. Is it on a well or muni water, septic or sewer?  Or is it waterless with a holding tank for hauling? Are the systems still in place?  Meaning is there operating electrical and plumbing?  Lots of newbies underestimate junkers as they don't know how to account for systems and utility hook ups.

Originally posted by @Ben Leybovich :

I bet if Account Closed was writing this post, he wouldn't identify rehab cost as a range of $20,000 - $25,000. That's a 25% margin - we can't possibly work with margins that big, Matthew!

So, Aaron will agree with me that a realistic rehab will run at least $30,000, if not more. And then, you still have a 2x1 PIG from 100 years ago...but, never mind for now...

Your cost of capital will be 15% in 6 month. Your carrying costs will be at least $4,000, depending on taxes. 

At the sale price of $85,000 (since it's only a 2x1) your profit margin will be about $10,000 - $12,000...why bother?!

 Ben, 

Thank you. 

Originally posted by Account Closed:

@Matthew Horn some clarity on what you're getting into with a pre-1940s house:

They didn't have much in terms of appliances back in dem ol' days. Maybe needed to plug in a lamp and a radio. So, you'll be doing a full electric upgrade. Probably only had one outlet in each room. You'll need one on every wall. The plumbing is galvanized and will need to be completely replaced by copper or pex. Since you're busting all those holes in the plaster walls, you might as well just gut the place and sheet rock it. Plaster wall houses have no insulation, so you'll be insulating all the walls now or you won't pass inspection. (Learned that one from experience! Nothing like ripping off brand new drywall to add insulation.) 

There is definitely termite damage. Add at least $1,000-$2,000 for that. If it is raised foundation, I bet a few of those piers need to be replaced. Never bought an old 2/1 that didn't have a few spongy floor spots. Hopefully, the roof is good, but might not be...

Hot water heater will probably have to be upgraded. The wall heater might be OK, but do the comps have A/C? If they do and yours doesn't, add another $3,500 to the budget. Most likely a tilt up wood garage door that looks like a guillotine. $1,000 bucks for a new roll up... if it even has a garage. Hopefully it does and lets get down on our knees and pray that it is a 2 car. Sprinklers? What sprinklers. $1,000 bucks added to the list. Got to have that curb appeal. Hows the driveway? Concrete? I bet not. Asphalt? Most likely. Is it cracked and falling apart? Yup, add in another $500 to get it sealed. 

Oh, we haven't even gotten to the painted shut, termite eaten wooden windows that don't operate have we. We might be able to tune a few up, but we'll most likely need some retros. Can't just do 2-3 windows though can we? Add another $1,000 for new windows. Front door? Yup, we'll need one of those. New kitchen and bath since we had to gut them to put in all that electric and plumbing and those 100 year old cabinets have a lot of character as that guy talking to himself on the street. Unfortunately, they also smell like that guy talking to himself on the street. Can't do new cabinets and not put granite or quartz counter tops on. Need to put in those appliances too. 

Man, the list just keeps growing.

Now, on another note, you might have found a charmer of a 2 bed that just needs some polishing up. If it were located in a community with historic charm, like the beach communities dotting the California coast, or a nice old city like Orange, I'd say you might have something there, but you have a 2 bed in the Central Valley. I'm not that familiar with that entire area as I zip through there on my way to locals in the north of the state and I don't tend to stop and look around in between here and say, Yuba or somewhere along the Trinity River. 

If you think you have a deal, you better get a good contractor to go through that house with a keen eye while you still have time left on your inspection period.

Definitely not your farm.  Curb appeal isn't even a thing in most of small town or rural Central Valley.   Garage doors are optional.  As are driveways.  And what about that swamp cooler.  Is it still there? How's that roof under and around the cooler?

Originally posted by K.marie P.:
Originally posted by @Matthew Horn:

@Aaron thank you for your response. Your post was interesting, and your patsy poker story was amusing. As for my experience, I am a new investor as stated in my bio and recent post. The house is located in the central valley. We all have to start some where right? Even if only $10k was made on the deal, sometimes the best thing to do is to take that first step.  Thank you for the great advice.

I'm pretty familiar with those numbers in the central valley. I'd say your resale opportunity and retail buyer pool are likely a challenge. What do the comps look like for rehabbed props. How many are resales to owner occupants? Are there any? What do the rents look like. I'd bet on terrible. A property in that price range in CA with that amount for repairs on the MLS would already be gone unless it's a low rent situation and/or way rural.

Is it a mobile? If stick built, does it have a foundation?  Lots of desert props with wooden footers to the ground, not even cement piers. Can'f finance that with any lender these days. Is it on a well or muni water, septic or sewer?  Or is it waterless with a holding tank for hauling? Are the systems still in place?  Meaning is there operating electrical and plumbing?  Lots of newbies underestimate junkers as they don't know how to account for systems and utility hook ups.

 Thank you for your response. I noticed a lot of issues with the home when I went to take a look at it. Your responses have given me a greater understanding. 

At the risk of creating a Sunday Stampede and traffic jam on the 5, I present the following listing for study:

http://www.realtor.com/realestateandhomes-detail/426-Eastern-Ave_Taft_CA_93268_M27397-50015?row=13

This one actually presents better than average.  Market rents are about $600.  However, Sec8 rents in the area are about $700-750 for a 2BDR.  Why do you suppose it's still on the market?  Why are most of the comps even lower?

Account Closed Note lack of garage door.  Note lack of curb.  :)

Originally posted by K. M.:

At the risk of creating a Sunday Stampede and traffic jam on the 5, I present the following listing for study:

http://www.realtor.com/realestateandhomes-detail/426-Eastern-Ave_Taft_CA_93268_M27397-50015?row=13

This one actually presents better than average.  Market rents are about $600.  However, Sec8 rents in the area are about $700-750 for a 2BDR.  Why do you suppose it's still on the market?  Why are most of the comps even lower?

@Aaron Mazzrillo Note lack of garage door.  Note lack of curb.  :)

 As you so intuitively stated, "Not my farm." LOL

When I leave my area of expertise, my level of incompetence quickly rises to the occasion.

Flipping property with those #'s and outside your market is like swing around a can of gasoline without a lid while smoking a cigarette.

Frank

Frank Romine, Real Estate Agent in CA (#01957844)
Originally posted by @Frank R.:

Flipping property with those #'s and outside your market is like swing around a can of gasoline without a lid while smoking a cigarette.

Frank

Thanks frank for your great advice. I live in Los Angeles and was born and raised in the Central Valley, which is where the home is listed.  My family has owned and operated a construction company there for over 40 years. I didn't just decided one day I was going to pick up and find an old home and just take a chance. I have been studying the market for some time now. I choose that particular neighborhood because I am familiar with the comps in the area. There are a lot of homes selling and many developments that are taking place in the city. Thanks again for your response. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.