A Deal or No Deal

General Real Estate Investing
1

Out of State REO - HUD
exit strategy - buy with 100% financing (HML perhaps) rehab and sell.

In good area of country with growth very high and very close to a major city (within 8 miles).

price: 45,000
3br, 1 ba, kitchen, laundry, living rm
Ranch
.53 acres
tax values: 61,400 bldg 7600 land
estimate from Zillows.com - $95,262.00 (don’t laugh, it’s all i’ve got right now)

recent homes sold in area [comps on location, sales price, and age]
4/06 - 81,000 - $20 more per sq ft comp
1/06 - 82,500 - unknown sq ft comp
2/06 - 35,500 - $40 below per sq ft comp
12/06 - 78,000 - $1 less per sq ft comp

for entire list of comps, the average seems to hover around 62k but this is very scewed as many of the properties have been sold recently real cheap (probably other reo’s).

We will fly there to:
close
do the work

and realtor will sell for us

figuring 15,000 in rehab costs:
taking the lowest estimated value:
83,000 ARV X .7 - 15,000 (rehab costs) = 43,100

So i’m figuring 45k is not a bad price to pay.

Total projected cost out of our pocket:
CC’s - 1500 (purchase and resale)
rehab 15,000
Realtor 5000
Misc 12,450

Net Profit = uummm…$4050.00

oh boy.

the Misc i factored 15% of 83,000…is that too much?

also, the rehab costs may be high to very high as per the realtor.

2

your closing costs looks low.

your misc looks high. if you have that much “misc” you haven’t estimated your rehab very well.

personally, that’s too much work for only $4k profit. now, if I could get it to 10…

3

if i went through your basic rehab, which i did - i find that with a few estimations on size of rooms and sq. ftage - for a 1000 sq ft home without any roof, siding, foundation, major plumbing/electric will run:

6000 - 8000

this figures for basic appliances in kitchen, new floors/rugs, paint (int/ext), doors (int/ext), fixtures, bathroom (sink, toilet, vanity, flooring, walltile), and materials needed.

this figure does not include:
windows, kitchen counter/tops/cabinets, ba tub, driveway, garage.

am i in the ball park?

and my rehab costs are probably high and my misc is high, only because i added 15% of the ARV to costs.

i think this deal might get us to over 10k. plus, all the work will be done by us as well.

4

Did you factor in the cost of the plane ticket and cost of hotel / room and board while there?

A HML will run you roughly 15% interest (some are lower, some are higher) so did you factor in holding costs?

I know you have ‘misc’ costs but not sure what this entails.

Also, at $4k profit, if you’re in 25% tax bracket that’s $3000 after taxes. Assuming you’re doing the work yourself, what is your time frame for completing the work? I mean, no offense, but you could wait tables and make $600 after tax income at some place like chili’s and have zero risk. If you take more than 4 weeks to do this from start to finish, and you net $3000 after taxes that means you were saddled with that much risk and yet you made less money than a college kid makes waiting tables / bartending for a few days a week. Seems like a terrible deal to me.

5

the closing costs are pretty spot on. they’re cheap in this neck of the woods (not ny).

as far as the flight stuff that would be lumped in to the misc.

the rehab costs are a very general estimate.

i have not seen this home. i just have the tax info, and free online estimates.

and i typed this post while i wrote up the numbers, that’s why at the end i wrote: profit: “uuummmm”

because i knew it would looked very bad.

i’ll keep on keep’in on. i’m flying down to this area of country in three weeks. the realtor who has me linked through the client gateway for reo’s is going to show me around and get me into some of these properties. when i find a few good ones - i’ll need financing. i’ll need this financing THROUGH LLC, not through my personal credit.

any suggestions?

i know of a few guys on here that have offered as well.

6

unless it a pretty light rehab, the margin looks thin. I’ve done a number of small houses and the material alone can be $5k in a blink of eye (that doin’ the work myself; except for carpet).

Also, if you have to pull a loan vs. cash makes a difference.

I’m guess in the ARV is more line low 80’s and you need to pick up for 40k tops. I always figure conservative and tell the owner staight-up (if they ask), I’m taking big risk and put C-A-S-H down so any upside is mine. This tends to shutdown the “my castle is worth xxx(inflated)” discussion

7

roger that.

when i see some of these houses, i’ll have a better idea of what i’m faced with.

8

Dealing with out of state properties can be a daunting process and some essential factors you need to consider first.

What is the value of your time and cost involved for travel and how much would you save by dealing with a property in your local area.

How do you plan to evaluate the market area of the property?

One important factor is this is a HUD property, This property had no interest to investors during the foreclosure sale so this should weigh heavily on your purchase decision.

Another factor in this deal is how do your comps compare with the subject property.

Let’s take the comp of $78,000 as a number to work with as the sold price

Realtor fee @6% = $4,680
Your hardmoney loan payoff of say $65,000 (covers all cost your 100% loan with less than 12-month payoff).
Your Closing cost on purchase and sell = $1,500
Misc = $12,450

Total cost $83,000 plus (a loss based upon the low comp)

Let’s take the estimate from Zillows.com and round it off - $95,000 and not taking into account any other factors you would net if lucky $12,000 before any tax issues your rate of return would be around 14% if all goes well.

This kind of marginal deal can work but I would suggest you make this kind of deal more in your local area and not take a gamble in an area you can not properly monitor.

Good luck

9

point taken.

i’ll keep looking.

10

TMCG,

In my opinion, you are doing things backwards. What you are doing is taking a listing and trying to make it into a deal. What you should be doing is:

  1. Become an expert in one area
  2. Become an expert at doing the math for a rehab (easy to do)
  3. Do the math for your area and determine what you’re looking for (something that will make a REAL profit)
  4. Find a property in your target market that matches your criteria

What you’re doing is flailing all over the place. It will be extremely difficult to ever be successful without a better plan. It is also going to be extremely difficult to be successful without a presence in your target market. In my area, we have a bunch of California “investors” that at the height of the recent REI Fad thought they could make money with rentals in our Ohio market - WRONG! Many (if not most) have now realized that they are losing their butt and have become motivated sellers. Just part of the 80% of new investors that fail.

Good Luck,

Mike

11

prop’s,

you’re right. however, i do have some idea about what it is we (partners) want to do.

purchase property and rent it out

or

purchase property, rehab and sell.

so then to the numbers:

we have 30,000 operating capital. And a good CC limit

so the purchase price of any home must be low so that we can absorb mistakes we will make along the way.

The reason I am flailing about is because I’m trying to navigate through possible deals, so that I can actually get a handle on exactly what we’re going to do on the first investment. We really are unsure about whether to rehab and sell or rent on the first few deals.

i personally would rather rehab and sell maybe 2 or 3 to make some profits, possibly even file 1031 exchanges in the process. then buy a nice little rental LOCALLY.

So to me, the numbers should look like this:

Purchase Price: Under 45,000
Appraisals: Over 90,000
Area: Growing and also familiar to me
Market: Selling!
Property: REO - most likely, given the purchase price range and area that we are looking in.

I’d say that’s about it for now. Thoughts?

And listen, I’d love it if I could find a “distressed” seller, buy their home and turn around and sell it in 3 months for a profit, but here, locally, it ain’t happening. Long Island market is turning into a buyers market as we speak. But, it’s on the way DOWN.

Yes, I am planning to buy here locally - but in January/February - but even then, it will cost me 280k then, for a home that is listed at 340 to 360k now. And 360 is cheap right now!! hello.

:stuck_out_tongue:

12

you MUST know the market! otherwise you end up with sucker deals. (and must make the numbers work)

I only invest out of state in VA as I know the market since I grew up there and knew the dynamics. As an example I’m working a deal that is “West of Main” ina town. Since I know it pretty well I knwo how to figure the deal (I backed off a deal 6 blocks over in the wrong direction 8 mn ago).

MB

13

what are your plans for this investment in VA?