A Rehab Opportunity

Rehabbing, Fix and Flip, Rental Properties
1

A new one for me - something I have no experience with, but this one is full of potential on the upside, I just want a reality check before I make an offer, should I?

The home in question is in the nicest area in town, homes range in price from $400,000 to over $1,000,000. It’s in the mid-range on comps, no less than $475,000, not likely more than $659,000, dependent on upgrades we need to do to it if we go forward - it was built in 1985 and the appliances in the kitchen, as an example, were last updated in 1995, the counters are laminate and original from when it was built - it needs updating badly.

The asking price is $375,000 at the moment, down from the original list of $549,000 three months ago - it’s a foreclosure, a bank REO, and public records show it was foreclosed for $275,000…that is the amount I’m willing to pay the bank, what they have in it, the current agent for it feels the bank will take $250,000 at this point to get it off its books, so I’ll offer $225,000 and see what comes back.

We think we’ve figured out why the owners walked - the house settled, badly, the lower level foundation buckled to the point where it lifted the entire sub-floor up and the lower level flooring needs to be redone, along with a re-pour on the foundation. A structural engineering analysis shows the house is sound, that a year ago a full piering on the foundation was done to stop the settling and that the house (I know the guys who did the work) should not have any additional structural issues other than repairing what looks like a horrific nightmare to anyone walking in downstairs. The estimate on the re-pour of the foundation is $7,500 and includes rebar in the foundation to increase its strength, there are no additional piers needed since even the center of the house, on the main load bearing walls, were piered.

Adding to that expense is the master bath gut and remodel - $15,000
Kitchen counters, appliances and new floor (cabinets are amazing already, no change) - $10,000
Lower level flooring - $10,000
Repairs to cracks throughout interior - $5,000
New Deck outside - $8,000
Grading front yard - $5,000
Driveway resurface - $5,000
Painting interior throughout - $10,000
Miscellaneous - $10,000

Total $78,000
Price to Pay $250,000; down payment will be $50,000
Total in $353,000
Holding cost 1 year (PITI + basic utilities) = $25,000
TOTAL = $278,000

My out of pocket over the year $50,000 + $25,000 + $78,000 = $153,000

ARV estimate $450,000-550,000

Low sale price = $450,000
RE Commission 6% = $27,000
Loan = $195,000
Down-payment back = $25,000
Hold costs back = $25,000
Repairs back = $78,000
PROFIT = $100,000

If you had the cash on hand to do this, would you?

EDITED to add, my fall back position would be to rent it out, the neighborhood it’s in gets $2,500 a month for rent, so it wouldn’t make money, but I wouldn’t lose money if I had to rent it out.

2

I would do it, but your estimates are screwy. Some are high, others look too low.

Countertops shouldn’t be over $3k, hardwood flooring in my area is $6.25/sq ft. The deck is twice what it should be unless this is some really elaborate deck. Gradig the yard should be a few hundred bucks, a grand tops. Paiting shouldn’t be that high, probably half that unless the hlouse is huge. My new construction house (for me) is huge and my paint estimates aren’t that high.

3

The house is huge - 7-bedroom, 5.5 bath, 7,500 SF

The counters are in the kitchen, each bathroom vanity and the wet bar - all totaled, I’m looking at 150 linear feet of counters, some will be granite, some I haven’t decided on yet, so I actually think my estimate is lower than it’ll cost.

The deck is a two level, full back, up and down - with the settling in the house, it needs to be just taken off and a new one installed - each level is 1,000 SF, so 2,000 SF total to do a new deck, which I can use existing foundations and piers for, so maybe my estimate is high?

The flooring in the basement (2,500 SF) includes an entire sub-floor put in first to level the basement before putting in the flooring, so it’s really like doing the floor twice, ya know? The settling of the house resulted in 2-4" differences between high and low points on the lower level, so that needs to be taken care of so the floors are level again.

Add to that, I’d prefer my estimate is too high - it’s a beautiful house and I don’t want to go crazy, but I also have to be cognizant of the level of quality that is going to be expected by a buyer at that price point, which is a very small segment of buyers in our area, less than 3% of houses here are over $400,000.

4

The one item I am not looking forward to having to replace is the built-in sub-zero - it’s huge and I had no idea they’re that expensive - I’m looking at $5,000 minimum for a refrigerator? Oy!

5

I didn’t realize the house was that big. That’s even bigger than the house I am building.

Where in the country are you? Are you in a large market with a VERY desireable neighborhood?

I wouldn’t even consider it in a marginal location. YOu have a limited audience, so you have to be willing to let it sit on the market and make price concessions.

6

It’s in the best area of our town (mid-missouri) and sales within the neighborhood run 6-12 months for homes priced $450-550,000, 9-18 months when priced between $500-750,000 and up to 2 years when they’re the million dollar homes. From talking to the agents I know, it’s the time factor that makes many of the investors in town skittish on this type house, the holding cost can be maddening if you’re not fully prepared for it. With it’s size, I could technically price it around $700,000, but I don’t want to hold it long enough to get that price…the house two doors down (about 6 acres away) is $699,000 (5,600 SF), another down the street and turn the corner is currently listed (and now pending a sale after 33 days on the market) for $729,000 (7,000 SF), so it’s in the right neighborhood.

It’s not a big town, but there is enough buyers to support the market of the larger homes if you’re willing to wait and are priced right (approximate 9,000 within our area can afford this price level home) - this neighborhood is highly desirable and first one usually viewed by those with the budget to buy at that level, so I’m not too concerned about saleability, it’ll sell, I just need to plan for having to sit and wait for a buyer to pull the trigger once I put it back on the market.

I’m still vacillating - do I want to tie up that much money for at least a year? I dunno.

7

Shoot that’s big even for a town here like Las Vegas that’s known for big.

Here now anything that’s even remotely a decent deal gets tons of offers and taken out of potential flip realm when 2 years ago I would be the only bidder on simple cosmetic REO rehab jobs. Lead me to open up to outside my typical range deals so got a $600k short sale late last year and didn’t think twice as the market here has plenty of buyers at the high end. I would be highly concerned in an area with few high end buyers. From your numbers seems you still have lots of room to drop your list price to draw a quicker sale if needed but just put serious thought into would a lower price have any impact on bringing a buyer into town.

8

Rah,

A couple things.

  1. Have you ever done a rehab? of this size?
  2. With this much rehab you will probably have to utilize hard money to get financing. This will make holding/acquisition costs closer to $57000.
  3. Your own stated numbers put rehab at $90500 not $78000.
  4. With a project this size, I would anticipate another 20% to your rehab budget for everything else that will come up as you go along.
  5. Closing you will have to pay title insurance, commision, concessions, I’d look closer to 8% then 6%.

So I’m seeing more like:

Purchase: $250k
Rehab: $90,500 (78k+foundation, 7500+refrigerator, 5k)
Contingency: $18100 (20% of $90500)
Holding/Acquistion: $57376 (Hard money 16% of Purchase, rehab, contingency)
Closing: $40k (8% of 500k sales price)

Profit: $44k ($500k-$455976)

You will need to have $91k available to make this happen…

Hard money will fund 65% of ARV $500k = $325k

You will need $15500 to put down.
(Difference between Purchase+rehab and HM Funds, $340500-325000)
You will need Holding costs for the year: $57376.
You should have contingency funds of $18100.

This should net you a nice 48% cash on cash return.
$44k on $91k

That is how I would evaluate it assuming your rehab numbers and sales comps are good for your area.

9

Mid Missouri and sales prices like that? I’ll admit to now knowing much past Kansas City, but that surprises me. I would hesitate before doing that in my area. I hope you know columbia or wherever better than I do!

Good Luck!

10

Go for it!