** how do you evaluate the financials on a tear-down purchase?**

Rehabbing, Fix and Flip, Rental Properties
1

There is a property in my neighborhood that sustained severe fire damage several months ago. God knows what was going on with the city and the owner but now they are finally doing something about it and it’s listed with a realtor. Supposedly a structural engineer for the owner’s insurance co has deemed it structurally sound (I guess the foundation and footings still are). It’s marketed as a gut job but to me I cannot see any way around it but a tear down - possibly trying to keep a wall or two for ease the permitting process.

Anyway, the list price is about 25K higher than the most recently assessed value of the land in the tax records. This is in a high foreclosure county and prop values are definitely declining. I am thinking of it for buy and hold for the land only an demo the structure.

I am getting comps on what a comparable house would sell for NOW in this market but do I use the same formulas to try to determine what the value of the land only is?

I’m thinking - should I use the tax value minus the cost of the demo and maybe depreciate the tax value of the land too. . .props in my area are selling on average for about 82% of list so I’m thinking maybe the tax value x .82 minus cost of demo?

Any advice on how to evaluate the financial on this type of deal (buy for tear down b/c value is in the land and hold) would be appreciated.

2

Contact your tax man and ask him what the land is worth. They break it up. Part of the value of the property is the land, the other part is the structure on it. Then take the cost of demolishing it, leveling the lot and planting grass seed and subtract it from the lot. Around here it costs 10-12K to do this.

3

Hooch is right on the money here…

I’ve bought and sold a few fire damaged homes. I did exactly what Hooch suggested you do…Take the value of the land and subtract the cost of demo for the structure. What’s left is the REAL value of the land.

I will tell you this…If a structural Engineer says that the place is rebuildable that means it’s probably no where near as bad as it looks.

The last house I purchased was just like that…The owner THOUGHT the house needed to be completely demo’d…It didn’t…I purchased it for $70K, put about $40K into and sold it For $225K.

Does the house you’re looking at have ANY rooms that did NOT burn through the wall board???

If the wall board is intact…chances are those rooms can be cleaned up and touched up.

The house I purchased in the example had a kitchen fire that burned right through the rear wall and roof of the house. Kitchen, living room, and dining room were heavily damaged…But the bathrooms and bedrooms were just smoke damaged. Smoke stains on walls clean up relatively easy. After cleaning just prime then paint…

I had my framer come in and repair the roof and reroof the entire house. Fixed the rear wall and resided it. New electirc in kitchen, dining, livning, obviously new cabinets and counters…It took 3 months start to finish.

4

The last house I purchased was just like that…The owner THOUGHT the house needed to be completely demo’d…It didn’t…I purchased it for $70K, put about $40K into and sold it For $225K.

And OldStateLine, this is where the REAL deals are found. When the owner thinks you will have to demolish the house some major negotiation can take place. Then you “change your mind” about demolishing it once the deal is done.

Home values around here are much less than FD’s and I really throw a hard ball at them. I make it seem like they may have to pay to get rid of the property. (lots around here are often worth 7K or less, but demo 10-12K) Then offer a couple thousand “shut your mouth and walk” money and the deal is done.

5

Remember that your offer is just that it is your offer. It has no bearing on his asking price. Decide what the house is worth to you. Don’t offer anymore than that. If someone pays more, they overpaid. You won’t get every deal, because if you do you will overpay on most of them.

Don’t use their asking price as a starting point, use your exit strategy as the start. Get the price you need to sell if for first. Then subtract repairs, holding costs, acquisition, sales costs and profit from it and that is the most you can pay for any house.

6

First, thanks for all the responses to all my threads and my DMs/PMs/ whatever they call them now.

So, so helpful. I love this website and I need the straight talk it provides to keep me focused and EMOTIONALLY UNATTACHED to the deal process.

The fire job -

got a GC that I trust that has done work for my personal home to come out and we got got the lockbox code and “entered at our own risk.” what a mess. The people didn’t come back for a THING!!

Translated - that means more $ going out to the haul-off part of the job.

I think evry room has a burned through part on first part (fire started in basement under the kitchen area) and the 3 bedrooms upstairs - the firefighters just hacked through everything. However, the home was built in the early 1900s and the plaster used really protected alot of the beams on the first and second levels.

The gc thinks that the house will have to be jacked up to shore up strutural beams in the basement where the damage and fire was most intense. Some work on it seemed like it was problem done w/o a permit so that means more $$$ along the line.

Here’s what we thought with an overestimated ballpark figure, trying to leave room for the “WTF” moments during the process-

30-50K to gut, clean out, haul off, retrofit oil heat to gas, parchitects and permits (this house is not deemed historic but in an historical district so have to go through that commission to get everything approved) and a few other things.

250K to reconstruct house to footprint. This MD side of metro DC area so we are still in a relatively expensive market compared to middle America.

So lets say 300K. Now, sold comparables in this area are median 250K. Since I plan to hold this for at a minimum 10 years, that doesn’t really matter to me now. I want to make the mortgage pyment and cover all expenses – don’t need cashflow at all. Again, a long-term investment. It is a good middle class neighborhood. 3 bd/1 ½ bath (have capacity to add another full bath at this point and will do so for future, future resale).

Rent would be 1450/mo based on the two verified rents within a .5 mile range and they are similar SFH homes.

The other idea I was given was to demo it and put a prefab that the commission would approve on it, substainally less in construction costs but I’m wondering wouldI have to excavate the existing foundation and rebuild it (which adds substainal costs right back it) – and I am not sure I can do a 203K on a prefab (anyone know if you can?).

It was suggested to me to use Wells Fargo for 203K – anyone use them?

Is this just o much – should I just demo it and hold the lot? I am not opposed to that but it would be nice to have the mortgage paid by OMP!!!

7

Sooo… if I use the Hooch method at 2%,

It looks like I’m looking at offering 72,500 (1450 X50)?

But it needs 250K worth of work! and I will be negative if I sutract that from 72,500.

Now that I think about it, maybe I should offer $1.00?

The land is tax assessed at 75K (over assessed) but I would sy 50K is a good value for about 7,000 sq ft of land that is developed with utilities on site in this area (and public water, sewer)

What should I offer?

8

Sooo… if I use the Hooch method at 2%

That’s not the Hooch Method, that is the 2% rule

Hooch = rent X 30 minus repairs (low income property)
2% rule = rent x 50 minus repairs (never go over this if you want to make money, middle class neighborhood)


It looks like I’m looking at offering 72,500 (1450 X50)?

If you are buying using the 2% rule than you are correct. Do not pay more than 72K.

But it needs 250K worth of work! and I will be negative if I sutract that from 72,500.
Now that I think about it, maybe I should offer $1.00?

So that means that you need to move on to the next because $1.00 won’t work. AND you need to start looking for other people to do your work. Us landlords hire jacklegs to do repairs and we are the GC’s. I don’t suggest you do a repair to this degree now that I know that you don’t have some good CHEAP people lined up to do it.

The land is tax assessed at 75K (over assessed) but I would sy 50K is a good value for about 7,000 sq ft of land that is developed with utilities on site in this area (and public water, sewer)
What should I offer?

I think you are biting off too much as a newbie. Get some cheap people to do your work off of craigslist and have them come out with you to tell you repair costs on another house and another deal that isn’t quite as bad. Step into this stuff once the feet are wet. I don’t see any workable deal with this particular property. Find another and bring your numbers here.

9

Hooch et al,
Yup. I’ve come to that realization that it just isn’t going to work. Luckily the city will condemn it and tear it down so I don’t have to see it anymore - it’s on the street behind me.

But the great thing is I’m getting great advice and running numbers like crazy with the 2% and the Hooch and this is awesome.

And yes, I DO have a pro forma Excel spreadsheet I created as well as formulas for getting the cap rate and analyzing by the capitalization rate method.

Hopefully I won’t be an old lady in a rocking chair before I get my first deal.

And now I’m going to post something on finance - first here and then in the financing forum if ncessary. I’m finding the best info in THIS forum.

10

Hopefully I won’t be an old lady in a rocking chair before I get my first deal.

You won’t be if you jump in there as you have been. Actively look for a deal and you will find it. Once you have analyzed a hundred or so deals you will start to get a good feel for what is a deal and what isn’t. You will get good practice doing this on REO’s on the MLS. Then open up to some direct mail etc to find deals that aren’t on MLS, which is where the good stuff is.