First-timer seeks advice on a big deal.

General Real Estate Investing
1

Hello to all, and thanks in advance for any advice. Here’s the deal:

I have an option on a single-family ranch in a very nice Philadelphia suburb. It is my mom’s place, and she will be retiring soon and relocating. The catch on that part of it is, the timing is indefinite, so all talk about actual numbers here is premature.

But as it stands today, I could probably get the place for $400k. The plan is to add a second story (at least) and various other upgrades, and sell after the renovations for maybe $950k. (I will involve a realtor and an architect to pinpoint everything to get to that price point.) The neighborhood will definitely bear that sale price, btw…there are multi-million dollar houses close by.

So here’s where I need advice:

I am a contractor, in business for 23 years, so I know my stuff on the renovation end. But the project will be so large that I will have to bring in subcontractors, I can’t do it all “in-house.” Best of all, I have no money and my credit sucks! Haha…exaggerating a bit, but not much!

Mom wants all cash, that is, I’ll be treated like any other buyer other than I get first dibs. A traditional mortgage will never be offered to me, so I’m thinking private money.

Questions:

Is private money feasible in my situation? (First timer, large project, etc.)

Will they lend at 65% of future (post renovation) value? I need that extra money over purchase price to carry the renovations.

Am I crazy to do such a large first deal?

Are there any other ideas for how to do this?

How should I structure it, I mean sort of corporation-wise. Seperate my construction company from the purchasing company for the puposes of getting potential draws, or anything else?

Thanks again!

2

This sounds like a recipe for disaster in my opinion. Unless Phili fell off the continental U.S. and is now ocean front property the market SUCKS!
I have contact with lot’s of realtors and the high dollar stuff is just laying there, the only real movement is entry level homes. Wall Street is on edge dude, when these guy’s get scared they pull in the check books.

I’m in the Northeast so I’m not that far from you. What you have to worry about in this type of deal is the overall economic outlook 1 year from now. That’s because it will take you that long to finish this type of project. I wouldn’t want to be ANYWHERE near a project like this 1 year from now. We WILL be in recession or very near it, the Democrats will be months away from the White House and lending standards in this country are going to be tighter than a frog’s *ss by then.

The safest play for you is to get Mom to agree on a price and see if you can find a buyer for more than she wants. basically a straight option deal. Mom gets her dough and you could make 5 figures on the deal without spending a penny.

Just my 2 cents.

3

I wish we can predict what happens in 1yr, but no one can. Lets see, Portland Orgeon had appreciation over 10% in 2006, some area of the city as high as 20%. Yes the highend market has declined. Your looking to create a home that only 3% of the buyers market can afford. YOu say there are million dollar homes in area?? Is that the house next door, or down the street, make a left, go over the railroad tracks and then another left. Remember neighborhoods have that invisible line we can not see to justify area pricing. You do not want to over do the home. Something many people do in a rehab. If you in an area with all 1 story homes and make a 2story, you will not get the full value. (ex. I looked at an incredible rehabed home last week, asking price 499K, will aprraise for tops 425K since it is a 350-400K neighborhood but owner spend over 90K on the kitchen and is an idiot i told him while I offered him 360K since I know this will be worth 500K in about 3yrs as the area is changing)

As for the cash deal. Since you have experience, many HML will look as that being a plus… Bad credit?? how bad, FICO’s pulled?? Do you own a home now with current up to date payments?? Bring on a cash partner… Split profits 50/50 but collect money to do the rehab at cost and enough to pay employees at least.

Honestly, your mom is being smart…She is treating you like anyone else, since this is business, not personal… She needs to protect her asset as this is her nest egg i am sure for retirement.

4

I agree with the previous poster that this could turn into a endless project that becomes a money pit. REhabbing a high end house is anot a great way to get into the game and has a lot of risk. If it such a great deal, just do an option and make some fast cash. Otheriwse, in 12 months, you’ll be holding a over-priced house that you can’t afford to cover the carrying cost.

5

I’ll add one more thing here.

You CAN make money on something like this, BUT you usually purchase this type of home to remodel, live in, then sell and do an exchange. This way you pay no taxes on the income. Worse case scenerio you end up with a beautiful home. (assuming you can afford it) This would only work if you had a home you could sell and move up to this kind of project.

I know this is not your situation. I mention it only for others who maybe looking at a similar opportunity.

6

Thanks to all who replied.

Yes, the market is a bit scary looking down the road, and I am definitely keeping that in mind. The thing is, though, this deal might not go down for a year anyway, so maybe that will work in my favor.

As to my financials, FICO score, etc, I’m trying to get things ironed out before I pull a credit report, because I don’t want to do that too often. But I have heard it both ways on hard money lenders…either they DO consider one’s credit, or they DON’T. Hmmmm…

And yes, I agree it would be easier to just do a quick flip and pocket a small amount, or bring in a partner and go 50/50. But I’m greedy, I admit it. I stand to make maybe 300k if it works. Of course, that’s a big “IF.”
:smile

7

Everyone like a 300K paycheck, but for the first deal think smaller like 30K on a rehab… Do not let your eyes get to big here… Remember you need to learn to crawl before we walk, walk befor we run and then run before we hit the hurdles… You looking to do the hurdles right now…

What you do bring to the table is yrs of experience in construction and ability to do alot of the work and oversee or act as the GC I hope. Bring in a cash partner and split the profits. Look for someone with experience this way you can get some of that experience and advice from them to move on to other deals alone…

8

If I’ve seen people lose their shirts within a short period of time, it’s often on higher-end projects. Depending on your area those homes easily take 1-2 years to sell, so you have 1 year to build, then 1-2 years before someone can buy them. Bad mistake. You can do 10 deals for the effort you’d be putting in. Just sell the home, make the money, or get a home equity line of credit and use that to flip properties.

9

You should also focus on the houses that didn’t sell for a million or more. Have a realtor pull comps on houses in the area and see how much they got marked down before it sold and how long it was on the market. I’ve seen houses that were bought at 400k, then knocked down and a new house was put up at 1.5 million, but then it sat on the market for several months and got marked down several hundred thousand. Would you still be happy if your 300k payday turned into 100k? Or what if it went negative?