How bad is too bad?

Question

There is a single family REO that has a very bad mold problem and needs a new roof and a new kitchen and new floors and subfloors.  I want to get started doing flips and this home seems like a good one because of the beautiful architecture, large windows, skylights.  My theory is that if I can buy it for the right price, as long as it isn't a teardown, its worth buying and rehabbing ... even it needs a lot of work.  What do you all think?

Account Closed · Answer

@Tiffany Ward This is largely a math question: if the numbers work, then sure.  But if you're inexperienced, it can be very hard to take on a major project like this, so be careful!

Lisa Phillips · Answer

Hi there.

Numbers game is right. I'll take a mold problem if I can purchase the property from 15k-20k, and rents are 850+ a month, and its only a few thousands cosmetic dollars above mold remediation that will fix the problem (~40k all in costs). I'm cool with that.

However, as a new investor, you need to be aware that if you dont have an experienced person go with you (or a really good home inspection), It may be more cash as this sounds like an older home that hasn't been kept up. I wouldn't take a mold problem ON TOP OF everything else needing to be upgraded, but if its one of the few things that needs updating and only other cosmetic items.

Every project is so different, I just try to make sure my all in costs are 35-45k.

Lisa

Ned Carey · Answer

Wise choice. It sounded like a pretty substantial rehab for a first deal. especially if you are investing from afar.

That said mold is a non issue for me. It is simply another cost to fix.

My theory is that if I can buy it for the right price, as long as it  isn't a teardown, its worth buying and rehabbing ... even it needs a lot  of work

In Baltimore the right price may be less than zero.  Some of the properties can take more to rehab than they are worth when they are done. But you are right it is a  numbers game. It doesn't matter how bad it is, if the numbers are right. But the bigger the rehab the more risk and the better the numbers need to be.

Ramon Jenkins · Answer

Where the property located?

Do you have any pics ?

I would agree with Account Closed

She is taking the bull by the horn with recent Baltimore renovation project.

George Krajacic · Answer

Hi Tiffany,

I think your decision to stay away is wise since you are a new flipper.  In general, I recommend that new flippers stick with rehabs that require paint, carpet, some landscaping, and maybe appliances.  Put most of your hard work into finding a good deal for now.  Then work your way up on more difficult flips and pick up some education and good subcontractors.

Good luck,

George

Lisa Phillips · Answer

@Tiffany Ward Sounds like your thinking with your head, not emotions, so that's going to serve you well going forward.

Its okay to take risks - let's just make sure its worth it!

Lisa

Benjamin Hirsch · Answer

Hi,

As I go into many homes that look like a disaster, the finished product usually ends up looking pretty good. I find that the best investors and rehabbers, look past the deficiencies of the property and see the potential it could be. As was mentioned before, it's really a numbers game, and the numbers need to make sense. But with creative imagination you can take a real ugly house and convert it to a beautiful sellable home.

I hope that helps.

Ben

Jeff Joachim · Answer

@Tiffany Ward It depends on a number of factors.

The size and scope of rehab can greatly increase your holding costs. Many times when you get started on simple projects, they can develop into more complex rehabs. A property needing significant rehab, may likely have some hidden problems not readily visible to a new investor.

Most investors I work with here in Orlando will make sure that the risk is worth the reward. In particular they typically like to make sure that their profit will be equal or greater than the amount of rehab they put into a project. For example if a home is available for $50k with an ARV of $170k it may seem like a good deal. However if it needs $70k in repairs, most investors I know will pass because that would only be a $50k profit. If the rehab costs exceeds the profit, I'd look elsewhere.

I typically start new investors out with basic properties that only require cosmetics and updating, with very little structural issues. When you start getting into mold issues, and re-configuring floor plans that is something better left to more experienced investors.

Best of luck...help this helps!

Russell Brazil · Answer

@Tiffany Ward I stay away from mold problems myself.  Most of the population does not have mold issues...but the individuals that do can have extreme reactions to it. I feel like one of my nightmare scenarios is having a house with a mold problem and ending up with a tenant that gets sick from the mold.  Many people think you can just clean the mold off and be done with it...and there are situations where that is the case....but you do not know what lurks behind that drywall till it is opened.

How bad is too bad?

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