Would you buy this property? Need some advice!

Question

Good evening, I am a new investor. Currently own a rental property in Virginia Beach and renting the MIL suite at the home I live in.

My friend is going through a bitter divorce, they are desperate to sell their home ASAP and selling it for cheap. I think it would be a good property to buy, flip and sell. The problem I'm having is funding the deal, which makes me think it might not be worth it. This is why I need some advice from the BP forum :) Here is the breakdown.

Home is being sold for 550K
Appraised for 662K
Minor rehab of 10-15k 
ARV 720-730k

The comps in the neighborhood have sold from 695-860k and taken an average of 52 days to sell.

The hard money lenders I have contacted want me to put 20% down, pay about 3 points, and interest of 12% +.

I'm worried that since it's almost the end of the year, the house might take longer to sell. Also, I will have to get a  personal 40k loan to be able to pay the 20% down.

Thoughts? Is it worth it for me to do this?  I would at least profit 30k if the home is sold in less than 6 months.

Thank you!

Patti Robertson · Answer

@Karla Torres - This is not a potential flip at these numbers.  My guess is you are looking at comps that sold this past spring and summer, and the market now has slowed down considerably, especially in the high priced arena.  Like @Christopher Phillips, I agree that if the house was appraised, that’s where you ARV is.  It sounds like you didn’t really have it appraised, but were using RPR, which did not know your property condition.  Most likely in that price range, it was comparing your home to houses in perfect condition. Be very, very careful in this high price range.

Christopher Phillips · Answer

@Karla Torres

Okay. That being the case, your agent can paint a relatively accurate picture of the current value and the potential ARV.

RPR just pulls properties from the local MLS. But uses much better looking reports.

Essentially, the agent would look for similar properties within 1/2 mile to 1 mile (a little further if rural). Usually, 3 recently sold properties. 3 currently active or under contract. Then make adjustments for any differences like 3 bedroom vs a 4 bedroom.

Sometimes agents don't make the adjustments and just print out the listings. If you're lucky, you can easily find pretty close matches to the Subject property. But in older areas with a lot of different styles it might not be so easy, so the agent would need to make adjustments.

With the RPR analysis in hand, you can make your ARV assumptions based on the work needed. But you have to be careful about this. You can easily find recently rehabbed properties. But your comparison has to be to the work you actually want to do. If the ARV properties have a new roof and new kitchen/baths/floors. That has to match the final product of your work. Otherwise, you're really looking at finding average condition properties, which probably are closer to the current value of what you have now.

Here's the thing, when buyers look at a house, they don't notice small things. So, fixing that one cracked tile somewhere might not make a difference. New appliances and new paint would make a difference. But buyers expect new appliances, they might not necessarily want to give you dollar for dollar return.

Once you figure out your rehabbed value, then you can calculate your max offer that will consider protecting your profit margins given the purchase and rehab costs and the carrying costs.

Karla Torres · Answer

@Christopher Phillips yes I have been to the house twice and it is pretty much in good shape but of course I do not know of any damages not visible to the eye.

Christopher Phillips · Answer

@Karla Torres

Have you seen the inside of the house? Or just the photos?

Karla Torres · Answer

Thank you for the honest feedback and taking the time to help me out. I greatly appreciated your advice.

Karla Torres · Answer

Great tip! Thanks!

Joshua S. · Answer

Also, just a BiggerPockets user interface tip, when you reply using the "quote" feature, you want to type your response below the quote. Otherwise, it can cut off your response, because the quote gets rolled up. If you type under it (you'll notice it's not italicized) then it will show up where this one does. Good luck on this endeavor, I hope it all works out!

Christopher Phillips · Answer

@Karla Torres

Of course... Welcome to BP!

If they are in a pinch, they are using what would be considered 30 day pricing. Essentially low enough that it should be under contract within 30 days. It usually would be that low. But, desperate measures for desperate times. I would expect the price to bid up rather quickly unless there's a hidden issue you might know about.

"IF" the $662K number is good, let's say +/- 10%, then your ARV with some paint and tile work won't be much higher. Maybe $670K to $680K.

When doing flips, the profits come from getting the property at a deep discount, like with this situation, and managing rehab and carrying costs. Outside of that, it's hard to get $1 for $1 increases in ARV. Depends on where you put the money.

If you can lock it up, even at $600k, put in the paint and tile work needed, you could get $670k to be safe and still have a decent gross profit.

You should use the BP calculators or a spreadsheet and look at where your max offer price might be.

Would you buy this property? Need some advice!

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