"Handyman's Special" house for sale

Rehabbing, Fix and Flip, Rental Properties
1

I was out and about in Dallas today looking for houses as prospective deals, ran across a “For Sale By Owner” house handyman’s special, with a price of $65K on the sign. It needs new siding, soffit and fascia in areas, new fencing and some landscaping for curb appeal. Peering through the windows gave me an obscure idea of how much work was needed inside. I’d say 4 to 5K would take care of the exterior, the inside is hard to tell but not all that bad. I’m an estimator for a GC in multi-family for the past 20+ years, but new to REI.

The Dallas County Appraisal District website lists this house’s market value at $88,390. If by worst case scenario this house needs $20K in renovations to be up to par and marketable, is this a viable deal? Is what the county appraises the house for (for taxing purposes) a lowball figure on what the house will actually sell for?

I’m new, confused, but very motivated in learning how all this works. I have several pictures I took of the outside of this rehab special, but not sure if posting here is allowed, if it makes any difference in helping my case.

Thanks for any input and advice!

2

Extant,

The assessed value is not something you can rely on. Their accuracy varies from area to area, but usually they provide only a ballpark idea. You have to get a more accurate idea of the true market value through comparable sales (comps) that have gone through in the same area in the last 6-12 months. A realtor can help you with that, or there are some (less accurate) websites that some folks use.

Let’s assume, however, that the current market value is, in fact, $88k. That’s really not the number you care about. What you want to know is what other houses in good repair are selling for (the ARV, or After Repaired Value). (As an aside, my experience is that the assessed value is usually closer to the ARV than it is to the house in its’ current, poor condition.)

The formula many use to determine an offer price on a house needing repair is to multiply the ARV by 70%, then subtract the repair costs. Here, that might mean 70% x $90k minus $20k. That gets you a purchase price of only $43…a far cry from the $65k asking price.

Ron Guy

3

What you want to find out is what the seller will do. Is he motivated or can he sit on it until he gets his price. Will he owner finance or partner with you until you get it fixed up and sold.

In Dallas at that price I suspect east Dallas.

4

Extant:
The assessed value is not reliable. You need to run your own set of comps. I would recommend two sources of comps, Title Company and MLS. You also want to check in the MLS to see what others are selling for.

The deal you have posted does not sound like a deal to me. As a rule of thumb in your price range, you want at least a $30k split between what you are purchasing for and what the house is worth if you are getting your own financing based on a normal rehab. Make sure you always figure in these 5 Factors when purchasing to ‘retail’.

5 Factors To Always Consider When ‘Retailing’:

-Purchase Price: Always run two sources of comps to figure ARV. Also check MLS for listings in that area and price range to make sure you will be competitive.
-Acquistion Cost: are you taking it over ‘subject to’, getting a hard-money loan, private investor loan, using a credit line or paying cash? Dont forget you are going to pay around $1500.00 for Title, Escrow, Fire Insurance, notary, and this is not counting the any points or garbage fees by the lender.
-Rehab: most new investors think they will get away with paint and carpet and pay only $2500.00 on their rehab. This is why they are done after their 1st deal. When you rehab a property, you are opening up a can of worms. After doing over 300 deals the past 10 years, I can tell you some horror stories. Oh, make sure it is not on septic either, if there is a sewer within 100’ of the house, you will have to hook-up. There are many factors. I typically spend $8k-$10k on every rehab and that is when everthing is there. If I have to replace a kitchen or roof, even more to rehab.
-Carrying Cost: You need to figure at least 6 months. This is a cheap insurance policy! I have had perfect houses in the middle of the block fall out of escrow 3 times for no rhyme or reason. If it sells faster, great, you make more money.
-Selling Cost: This is often the most overlooked item by new real-estate investors. If you are paying 6% with an agent to sell your house, you are also going to pay an additional 3-4% for items such as:

-Title
-Escrow
-Taxes
-Termite
-Home Warranty
-Home Inspector Repairs: everyone is sending out their home-inspectors now which can be a deal killer. I would recommend you do the inspection with the home inspector so you can expain any deficiencies.
-FHA non-allowable
-Buyers Closing Cost
-FHA Non-Allowables

I would personally try to sell your couple deals FSBO or use one of those MLS listing services. For a couple hundred bucks, you can have your house listed and pay only 3% commission and the agents all call you to present offers. Has worked great for me.

There are things you can do to cut down your cost as an investor. Try to work out deals with the escrow company or closing attorney, title company (always buy a binder policy), termite company, and state in your contract when you sell that you will only pay $1,000 in FHA non-allowables. I would not recommend that you sell FHA when you do a flip due to the ‘seasoning’ issues. I would recommend you take before and after pictures, keep a copy of the rehab receipts so that you can submit to the conventional lender when you go to sell the property. Also, try to use a seasoned broker who knows who to submit to.

Best Riches,
Jeff Adam

5

Typically, the assessed value on property records is lower than what the property will sell for. Just how much lower is going to depend on the area in which you are working.

For instance, in one county I work in regularly, it is about 60% of what the property is worth when in top condition and in another county, it is about 80%.

To find out what it is really worth, you want to pull comps. You can do this by working with a licensed agent, contacting an appraiser, or even a title company and asking for a pencil search.

Make sure that when you are doing your numbers, you are not forgetting all of the other costs such as purchase costs (will vary significantly based on your financing), holding costs (including repairs, mortgage, taxes, insurance, utilities, lawn maintenance, etc) and selling costs (prorated items, any seller contributions toward closing, realtor commissions if you will be using, newspaper ads, title, attorneys fees, etc.)

Heather

6

Thank you all of you for your replies. It’s something I decided needed too much work for a full-time employed person to mess with, and too many potential problems to deal with.

You folks give a lot of detailed explanations as to how things work/don’t work, and I really appreciate your time. As I muddle through this learning process I hope I can ‘give back’ by offering some help to others on this forum when my knowledge allows me to. At this time I have more questions than answers.

Thanks again!