Waterfront REO - Deal or no deal?

Question

Hey BP!

This is my first post so if it is a bit naive I'm receptive to feedback on improving it :)

My partner  and I came across this interesting property in a great location in Natick, Massachusetts. The situation is a bit complex, as it is an REO with a trespassing former owner. The property has been at auction 5 or 6 times so far on Auction.com and the highest bid so far has been around $320K. We saw the property with a local realtor and asked him to look up the land value. The land portion is currently assessed at $347,500. Auction.com has an estimated ARV of $600k, but we are taking that number with a huge grain of salt since any comps close by seem to be more around mid 500s.

A quick plus delta of the situation as we see it:

+ great location (corner lot, water front on a small lake, good neighborhood with very nice neighboring properties, close to main road).

+ REO with a motivated bank seller (assuming they will be dropping their minimum each time they put it up for auction?)

- Condition of the 2br 1ba is very poor, and not being able to see the inside makes it difficult to fully estimate repair costs. Might be more worthwhile to tear down and put up new construction.

- Not sure if title is free and clear. Is there an easy way to check this out?

- Not sure if proximity to main road generates substantial road noise, but the property is somewhat wooded

- Might need to do an eviction? Not sure how that works if the resident is trespassing and not an actual tenant.

What we would like some ideas on are the following:

1. Assuming the bank eventually comes down on their minimum and we can offer something in the neighborhood of $320K would you consider this a deal? I know that it is hard to say from brief descriptions, so what would be the make-or-break info you would want to have before saying deal or no deal?

2. What are your thoughts on demolishing and selling the land as is? Compared to doing like a BRRRR with either fixing up the house or demolishing it and putting up a duplex?

Let us know what you think!

Best,

Michael

Dan K. · Answer

Hi @Michael Boyle, welcome to BP.

To do some title research, go to the Registry of Deeds made for Middlesex County -- http://www.masslandrecords.com/middlesexsouth/

I am doing new construction on my property and I think you're a bit low with your $162 per square foot estimate.

As for you cashflow calculation, I highly doubt you're going to be able to find a bank willing to do a cash out refinance with zero money down. Every bank I know of will give you an LTV of around 70-80%.

Assuming the property is worth $667,000, and you pull out 80% of the equity ($533,600) at a 5% interest rate, you'll be looking at a monthly payment of $2,864 a month. Of course you'll then have insurance, taxes, water, etc.

So in essence, in your scenario you'd have $16,400 of your own cash left in the property. Of course you'd also have a brand new rental property.

Michael Boyle · Answer

Thanks for the advice Jon!

A lot of what you said rings true, I think what was mainly attractive about this property was the price-point relative to everything we have been looking at on realtor.com/zillow/redfin in the Natick area. Here are some of the numbers we were thinking about when considering this property.

I don't have a lot of experience estimating construction costs, but it seems like what would be the most worthwhile for this property would be to rebuild into a SFH or a duplex the size and style of the neighboring properties which are estimated on redfin at $667K to $700K (those are 3br/2.5ba and 4br/2.5ba respectively).

I searched around a little and it looks like the average cost for custom construction in Natick  is about $162 per square foot. Assuming we build a 1800sqft duplex that would cost about $293K not including demolition. Average demolition in Boston is about 12K, so in total this project would run us around $300K-$350K not including purchase price. Based on the two comps above, to meet the 70% rule for fix and flip we would need to pay $100K to $150K for the property which I don't think is likely but we were planning on renting and holding it as an option as well. Assuming we build a duplex with 2 2br1ba units, we can rent them out for about $2,275 each.

I have been struggling with computing the cashflow assuming we refinance after the new construction. Assuming we pay $200K and spend $350K to fix it up all for an ARV of $667K. If I use the 50% rule for operating expenses and then just calculate a mortgage payment of 667K at 5% with no money down, the cashflow  would be negative at around $1700 per month, which certainly is no deal. Am I doing that right though? Do you typically have a down payment when you refinance? The difference between what we spent and what we got ($667K-$550K = $117K) is what we would then use to invest in other properties as per the BRRRR strategy correct?

Thanks in advance!

Best,

Michael

Jon Crosby · Answer

@Michael Boyle, thanks for the post!  So,  just my 2 cents here but it sounds like a lot of effort to acquire, rehab, validate clear title, remove squatter, etc. etc. for what sounds like an 'average' return?  You are going to be holding up your capital that could be deployed on easier projects for a lot of 'what ifs' in this process and from what I have heard, purchasing thru Auction.com has it's own perils you need to watch out for (not that I'm against using them for a home run deal).

You are going to know the area best however but I would just caution to not get infatuated with the deal when there might be something easier and with better returns out there.

If this was your dream home (primary residence) then maybe it's worth all the effort but just sounds like a lot of work to acquire an income producing rental property.  Maybe show us some of the numbers on the back end though for more context and the returns that make it worth it?

Good luck to you either way!