Hello, I am a newbie on this forum and have been absorbing every bit of information on this site as possible. After talking to a few seasoned investors, realtors, and friends, I decided to jump in and start contacting realtors to look for rehab projects that can net 15-20% profit after ARV. I havn’t done the whole marketing thing, I figured my strategy would be to get realtors to help me through the process till I have some experience under my belt then I have more confidence to find the deals myself. Anyways, my realtor works soley with REI’s in Austin and found this deal. I checked it out with him today and here are the results from our conv:
listing at 125k, preforeclosure, sellers already moved out
house listed never mentioned swimming pool until we stepped in (needs to be drained, filled, power washed)
requires 15k of repairs (mostly pool and deck, landscaping, replace kitchen appliances and minor cosmetic repairs)
I got prequal for 120k loan, 80/20 100% financing with 0 down, pmts for 980/mth(includes title/ins, based on 795 fico)
Assume 6 month of holding costs, 5k closing costs, and ~6% selling fees. My realtor says if I can fix up the pool real nice and spend the money landscaping, I can net 30k at least, but I am afraid a pool can limit the amount of buyers interested and create more liability. The area has an exemp elem school and a great medical center, but most of the houses in this area are built in the mid 80-s - upper 90’s, so typical middle class neighborhood.
Another issue:
electricity/gas/water (pipes been winterized) are all shut off. Should I get this all activated by the utilities co before I bring an inspection ? The risk involved with this is another investor could come in with a bid and I get stuck with utility activation fees. The reason I have to get inspection before we put a bid in is because the bank owns it, they do not allow an opt out period so the offer we give must be official and have the necessary repair values documented.
So my questions are:
Is this doable for a first time project?
Am I missing any important calculations?
Will pool end up hurting bottom line? Should we put a bid for less than 125k to compensate for pool?
Is my financing pretty good or should I continue to shop around?
Please let me know your thoughts and concerns, I value everyone’s opinions on this board.
Sorry for the long winded post, I have a lot to think about in the next few days…
Not sure I’m best person to answer you but I saw no one else had responded and I didn’t want you to get discouraged.
I am going to review some figures with you. Please bear in mind these are very high level and not all inclusive. Also, for simplicty I am including the agent commision as an expense rather than deducting from sales price. Here is what I see
Assuming you buy the property for $120K and are 100% financed:
120K Purchase
5K Closing Costs ( might be more like 4k, but let’s est high)
6K holding cost (980 6 months, not including Ins and taxes))
10K Agent Commisions at sale (based 6% of $170K sales price)
15K Repairs
156K Total Expenses
170 Sale Price
= $14K Gross Profit
$ 4K Ordinary Income Taxes (Swag - not adjusting basis, etc…)
= 10K Profit
Opportunities:
Reduce your holding time. If all you need is pool repairs, paint, appliances, landscaping. Why hold 6 months? Fix it in 1 month, assume 2 more months to close and you save yourself $3K in holding costs
Negotiate your agent costs. If this is an agent you know well, perhaps they will take 5%? That is pretty typical for my area. Why dont you do some reserach and see if agents in your area will work at that rate. Be careful here. Better to pay the extra 1% than offend a great partner.
Risk:
Repairs costs could be a lot higher. With utilities off you have a lot of unknowns. Plumbing and electric issues can be costly. Why dont you talk to good local inspector and ask him/her how much they can tell you without utilities on. If not much, then this remains a risk.
Overall-
Pool could be a good thing depending on local demand. Your agent should be very, very familair with local demand and be able to answer this confidently.
Bottom line -
This could be a good first deal, but the blind spot (utilities) could blow up on you (even literaly). You might make $10K, or you might just break even. Is the experience you would gain valuable enough to you to go through this and not make much or any money?
You need to sincerely evaluate your comfort with risk. If this deal makes you nervous, find another that fits your risk level better.
If you are shaking with excitment ground your numbers and pursue it!
I would offer $110 or even $105. At $120k purchase price the margin is too thin. Also, preforeclosure means motivated sellers; they will probably counter/neg. with any offer you put in front of them. Prior to that, you might want to try and figure out how much they owe on the palace. This could determine what they are willing to accept.
Sure you MIGHT be able to keep the hold time to a couple of money, don’t count it. I would stick with the 6mo estimate and if you do it faster then its upside/bonus.
I would have utilities activated if you are serious. Who cares about other investors; you will have bidding purchase contract in place prior to spending the money for the inspection; if you walk away due to big problems found in the inspection its a sunk cost anyways. Better to spend a few hundred dllrs to know what youare get rather than figure out in 3 mo. that you bought a money-pit
The key to this deal is the comps. Find the comps JUST like your house within 1MILE of your house for the past 12 months. Look at actual sold prices, not asking prices. That is ALL the house will sell for. No more but can be less. If that number minus the costs you will have in the property (your list looks pretty complete) leave enough profit for you, you can buy it, if not don’t. Don’t go into the deal thinking that you are going to put some magic makeover into the house and make someone pay any more than what the comps are…they won’t
Also in Houston pools are free. You don’t get any more money for a house with a pool as without one. It does, however, limit the buyers to only people that want a house with a pool.
Thanks for everyone’s comments, this is such a great board for advice. Sometimes it is hard to discern my realtors advice, but I know I can trust ppl on this board.
Just an update: After thinking about this more and reading your inputs, I have decided to pass on this opportunity. I think it has great potential for profit, but as a first time investor, I don’t think I am ready for this type of project yet. I have learned from these boards that you have to spend a lot of time sifting through houses and learn to walk away, even if it seems like a good deal. I am not even close to sifting as many houses as experienced investors do, so this was a good learning experience and I was able to talk to the realtor and start a good relationship with him and the lender as well…
Thanks again for your posts/advice and I look forward to posting more messages on this board.