What do you think of this deal?

3 Replies

We found a rehab in the local area in a good neighborhood surrounded by good schools.  Here are the specifics.

Sale of home = $80,000
Cost of rehab = $30,000
Real Estate Fees =$6750 (max)
Bank Closingg Fees (I need help here)
ARV = $140-$150k

There are comps and homes listed that support the ARV so that I am not so concerned with that. Since this is our first flip, I have done a lot of the math required to make this deal a reality, but I am completely stuck on estimating closing costs (specifically with the bank).

I have negotiated with my realtor a 1.5% listing fee and a 3% buyers agent fee so my real estate closing costs will be roughly $6750.  Our current contract paperwork from the bank is telling me the closing costs to assume the loan will be roughly $5000 which seems extremely high (this is a conventional/rehab loan at 5.6%).

Does anyone have any experience with this that can tell me if $5k closing costs to assume the loan seems high or not, and #2 what do you estimate the closing costs will be when we sell the home?  These are the 2 pieces missing for us to get all the math to work.

And finally, knowing what you know and seeing what you see...  is this a good deal?

Thanks in advance!

Chad ~

BTW, Here is a list of my closing costs

Origination Charges = $2616 (This seems very high to me)
Appraisal = $820 (I know this is extremely high and the bank is making me us their guy)
Consultant Fee-Reno = $415 (no idea what this is for?)
Tax Service = $75 (again... not sure)
Pest Inspection = $215
Title Service & Lenders Title Insurance = $890 (Seems high to me in my experience as well?)
Owners Title Insurance = $265
Govt Recording Charge = $138 (again, not sure what this is)

TOTAL = $5434 in closing costs just to get the loan.I am sure my lack of understanding in all of this is due to my limited experience in getting loans on investment properties, but I just wanted to run this by you guys to see if this seems normal to everyone else?

There are a couple of ways to look at this deal. One look at the actual cost you have to put into the deal and look at your cash on cash return. 

So you have 5k in fees, but how much are you putting down? How confident in the 30k rehab number? Other cost you need to factor are your holding cost, cost of interest on your loan while you rehab and sell it, (also factor any pre-payment penalties), insurance, utilities, property taxes, and then you also have closing cost for escrow. Being you first flip I would think you need to pad your rehab number 10-15%, also assume the bottom end price for resell and then know how long you are going to need to hold the property as this will allow you to come up with a property tax, insurance, interest, utility cost. 

Overall I think this is a fairly skinny deal given the level of rehab needed. But also the best teacher is getting out and doing it. 

Good Luck,

Jake

Originally posted by @Jake Harris :

There are a couple of ways to look at this deal. One look at the actual cost you have to put into the deal and look at your cash on cash return. 

So you have 5k in fees, but how much are you putting down? How confident in the 30k rehab number? Other cost you need to factor are your holding cost, cost of interest on your loan while you rehab and sell it, (also factor any pre-payment penalties), insurance, utilities, property taxes, and then you also have closing cost for escrow. Being you first flip I would think you need to pad your rehab number 10-15%, also assume the bottom end price for resell and then know how long you are going to need to hold the property as this will allow you to come up with a property tax, insurance, interest, utility cost. 

Overall I think this is a fairly skinny deal given the level of rehab needed. But also the best teacher is getting out and doing it. 

Good Luck,

Jake

We are putting 15% down on the home.  The $30k could flex to $35K, but we are pretty confident that $35k would be the worst case scenario as we have run the numbers over and over.  Our estimation tool does calculate holding costs based on what we think the timeframe would be to sell the property (again we consider the worst case scenario), there are no pre-payment penalties, and utilities have been considered in our holding costs numbers.  

Our estimation is that our potential profit from this opportunity would be between $10k - $15k.  Your right about the margins being thin, and even after all of the math and work we have put into evaluating this opportunity, I am just not sure $10k-$15k would be worth the risk (especially on our first flip), so I appreciate your feedback for sure.

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