First deal... looking to cover bases

General Real Estate Investing
1

Ok, so here’s the deal I came across (accident)…

Type: Foreclosure (Tax deed currently in Upset Bid phase, last day Monday, November 5th)
Style: Ranch
Amount: $17.5K
Comps: $82K-$102K (recent sales within last 6 months)
Tax Asses: Mid $70’s (2006)
Built: 1992
SF: 1120
Beds: 3
Bath: 2 (one is in master)
Heat: forced air
Cooling: Central
PT: $900/yr

Repairs incl: Landscaping (4 trees removed - dead and on ground, 1 standing to be taken down, misc. bushes removed, curb appeal added - flowers, etc.) , new carpets in two bedrooms, hardwood laminate flooring in master, new linoleum in kitchen, new laminate counterop in kitchen (I make - $400, buy for $1200) or solid surface top (I make - $1000, buy $3.5K), considering new cabinets (I make - 3.5K, buy for $6K), paint interior, new toilet in one bath, reglaze of tub in same bath, new linoleum floor, new vanity and top, two louver doors replaced for washer/dryer area, new blinds, paint porch, new mailbox, possible new heat unit (will confirm after inspected, but as of now looks operational), gutters cleaned and shields installed, one screen to window replaced (look like someone sliced it to look in - no, not me), trim, wall, ceiling painted. Adding an alarm system (loss prevention during flip and added benefit when selling - $400 for ADT monitored system).

Had a title search company run a report and the only thing found was original mortgage (still nervous about this).

Questions…

  1. We are buying the house cash, and are budgeting an additional $17K for repairs with us doing alot of the manual labor, and $22K for added labor. Unrealistic? Keep in mind that being that this is our first flip, a majority of the work will be done by us, so we can get a true blueprint of the inner workings of unanticipated items, timelines, etc. for subsequant flips. I realize that each flip is different, but this should help to provide a baseline. Carrying costs each month (to cover repairs) are $396.

  2. What types of insurance should we carry? I know title insurance (although I am still not schooled in this, but know we need it, as I am not confident that a title search can reveal all problems)… does this cover us in case the title search missed something? What about house insurance, or what type of insurance needed?

  3. Exit strategy is rehab and sell - After renovations, we are still not sure whether we should use a realtor or not. If not, what other strategies for selling would you recommend for beginners? In the planning stage, we plan on putting it on the market for $78K-$91K, based upon existing comps, tax assesed value and work to be performed. This will obviously change depending on market conditions at the time (we are looking at a February listing), and what a real estate appraisel will determine.

  4. Does this look like a good deal?

Thanks for your anticipated input… positive or negative…

P.S. - we were planning on spending the winter months researching more, but this deal came out of nowhere, so we moved our plans up due to bidding time constraints and are looking for sage advice from the experts.

2

Well, I see lots of views, but no replies… :help

Any takers… could really use some feedback. Thanks to anyone who is kind enough to reply…

3

At 17K it is a good deal if total repairs are going to be 40 000$, depending if you took worse case scenario rehab numbers.

Why not just do a little cleanup or ASAP rehab and sell it as is?

It’s so much better to get a 10000$ check in 3 weeks, than a 25 000$ check 4 months later + huge amounts of time doing the rehab.

If you want to do the rehab yourself for 1st time for experience than that is ok too.

4

Tien, thanks for the response and breaking the ice… hopefully that will bring more responses.

Our thinking is that with this being our first flip, we would document everything (i.e. - processes, pitfalls, unanticipated items, etc.), which we planned on doing anyway, until this opportunity presented itself, so we decided to do it as we experienced it.

With many analysts talking about a true “bottoming out” of the RE market being realized over the next 4-6 months, we were hoping to capitalize on it with a well done flip giving us more capitalization. Our overview numbers work out to:

Purchase Price: $17.5K
PT: $900.00
Title Search: $75.00
Home Inspection: $500.00
Title Insurance: $250.00
House Insurance: $??? (not sure what we need, see original post)
Attorney Fees: $500.00
Alarm System: $400.00
Repairs (our labor): $17K (padded with 20% overage)
Repairs (outside labor): $22K (padded with 20% overage)
Dumpster: $300.00
RE Comm. @80K: $4K (5%)
Carrying Costs (6 mos.) $2400.00

Selling Price: $80K-$90K (subject to market conditions)

Potential Profit: $36-$46K (although the $10K you mentioned would be nice and quick,
this allows for better capitalization)

What about the questions in the original post… any thoughts? Are we missing anything that we should be aware of?

Thanks for any replies… :biggrin

5

Close to 100 views, and only one reply??? :huh

Anyone willing to give feedback?

6

ughhh… how disappointing! :smashpc Thanks to the one who did respond…

7

You have to realize that people on this board are busy, it can take a few days to get responses.
Some people who view your thread are newbies who have no advice for you, so don’t answer.

It’s good that you padded your budgets for the rehab.
As far as selling with a realtor - unless you know your comps stone cold, you might want to use one on your first flip. Or - you could do a flat rate MLS listing service. IMHO - you need to have your property in the MLS. The more people who can see your house, the larger pool of buyers you will have. Just offer a buyer’s agent commission - you will still save money.

For your insurance, you will want builders risk insurance, especially if you are going to have crews there working.

8

Lori, thanks so much for the response… my apologies to everyone… I am a newbie to this site and didn’t realize the reality. All I saw was lots of views and no responses. I have been combing the threads myself, so I guess I should have realized this… my bad. :redface

I guess also since I am leaving town next week and the upset bid process ends on Monday (fingers crossed), I may have been a little agressive in seeking a response.

I would love to hear from any REinvestor as to whether or not they think this is good deal and whether or not I am missing something. I think this is a good deal, but this is my first flip, and I am trying to due as much research and get as much feedback as I can before plunking down the bucks for the house.

Thanks again all…

9

it was not quite clear, but it sounds like you are buying at tax sale.

you should be aware that getting title insurance upon trying to re-sell quickly is very, very difficult. That’s not say the tax sale (foreclosure) is improperly done, but there is risk to the title company so many of them just avoid those siutation all together.

also, what are the other emcumburances? just a 1st mortgage and nothing else (which is wiped out by tax sale). its rather unusual that a 1st mortgage will let themselves get wiped out by a tax sale.

also flipping within 6 months is pretty tough; especially given a signifcant amount of work and the slowing of the market in most areas.

10

This looks like a good deal. I don’t know what “Tax deed currently in Upset Bid phase” is. I do know that foreclosures at auction do not guarantee clear title, and that there could be second mortgages or seller carrybacks which are outstanding, but not necessarily disclosed during auction.
There are many sources of information for generic prices for construction projects. Any block and mortar hardware store (Home Depot, Lowe’s) should have a reference book that general contractors use to determine how much materials and labor cost for any given job. It sounds like you are in the general neighborhood with your rehab estimates, but if you plan to do it yourself, nothing is as easy as it looks, everything takes longer than you think, if anything can go wrong it will, and at the worst possible moment. Can you afford to carry this thing if things don’t go as planned? Do you have another exit strategy besides flip?
I only have rentals, but I have hazard insurance. Definitely fire, maybe flood, earthquake, tornado, hurricaine (I don’t know where you are). If you have contractors working in your property, you will want to make sure that they are bonded and insured. In California, you can go online to our state contractor’s licensing board, and the board can tell you whether a potential contractor has workman’s comp, is bonded, ect. You may want to get an umbrella insurance policy, and you may want to operate the property as an LLC (if you hold and rent) and opertate the rehab business as a seperate LLC.
You can look up “cash flow” on the search feature of this website and get all the information that you could ever want to know about cash flowing rental properties, but perhaps you should keep this property as a buy and hold. If you can make money your first year, you’re doing well.
I would be interested in hearing what other investors have to say about the title search process on foreclosure properties.

11

Thanks for the replies Funder and aak5454…

To answer your questions… the property is a tax deed, which is why we did a title search on it. In our state, a tax deed is sold at auction to the highest bidder. After 10 days, called the “updset bid period”, if there are no other bidders during this period, the property is yours after you pay the taxes, fees, etc. We did a title search anyway to cover our bases, which, from what I’m told, makes it easier to get the title insurance.

We are paying cash for the house, and using a HELOC for repairs.

“Planning on doing it myself” - I own a remodeling business, so that end of it is covered. I am not worried about the scope of repairs, just if I am not accounting for anything. Guess I could have made that more clear. My wife has great taste, but we are rehabbing to the market, and I hope we don’t get sidetracked with “design”. Just want to clean it up, update it, and sell it.

“Carrying cost” - being that we are buying the house and insurance outright, the only hard carrying cost would be the HELOC of around $400/month, which shouldn’t be a problem.

“6-month flip” - I will be out of town for a week or so next week and upon returning, plan on closing, getting house inspection, complete project plan/timeline. Based upon project timeline (which is still subject to change after a complete house inspection), I expect to actually begin the flip December 1, 2007 and conclude January 15th with a two week padding of January 31st, putting it on the market February/March 2008, as we come into the spring selling season. I don’t plan on doing the landscaping or glazing of the bathroom tub, but everything else… yes. Didn’t schedule any work (except for a wall unit) during this period to keep my schedule clean. I really want to document the process on this one as I want to determine whether or not it is more profitable for us to be the remodelers on the projects or farming the work out and GC’ing it. There have also been three sales, ranging from $87k - $102K in the last 3-5 months (all three within .1 miles, one two houses down).

“Exit strategy” - not interested at this point in being a landlord, so only exit strategy is a sale.

“Title Insurance” - getting it prior closing.

Any other thoughts would be most appreciated… :biggrin

12

I believe that there are owner’s title insurance policies and lender’s title insurance policies; be sure you are getting owner’s title insurance to protect you from potential leins on the property.

13

Just curious, are you in NC? Just sounds like our weird procedures you are referring to. Good luck getting title insurance on a tax deed sale if you are in fact here. You will probably need an attorney to “quiet title” your deed. Which runs around 2K around this part.

14

What is the average days on market for the comparables?

Thomas

15

ProfitTigerPro - I didn’t have the MLS comps, but was looking at public records for sale dates, so I don’t know what DOM data is… one thing I didn’t consider; guess I should look into that… thanks for the tip.

Funder - Being that we are buying the property, I guess we need to get owners title insurance… meeting with the attonrey when we get back to determine what’s needed.

jb_bak - yes, we are in western NC, and the property is local to us… we’re not aware of “quiet title”, but it sounds like it will give me no “quiet” ($2K?.. ouch). Have to check with the attorney on that one… :frowning: Come to think of it, the attorney we used for the title search didn’t even mention a “quiet title”, but if it proects us, it’ll be done. If that’s indeed the case, then I guess I’ll have to do the landscaping after all to offset the expense… ugh!

Thanks all… this is the info we are needing… first one out is always a bit scary, and like I said, we are trying to cover all our bases.

Keep 'em coming!.. :biggrin

16

One other thought… met with the accountant and she thinks we are better off buying the property as individuals (as an investment), then we’ll only have to pay the capital gains, as opposed to buying it under a business name, which would entail income taxes and social security taxes, which would east a chunk of profit.

My only concern doing it as an individual investor is liability issues…

What do you guys think?