I need some advice---Please!!

Rehabbing, Fix and Flip, Rental Properties
1

Hello–

I am new to this forum, but it seems like it’s a pretty informative place. I am new to REI- as a matter of fact, I know absolutely nothing about it. I know it can be a great way to make money, but you can also lose money if you’re not careful. If anyone can offer me some advice on a situation I’m in, I would greatly appreciate it…and please forgive me for not using or knowing the correct real estate terminology…I will have to use Layman’s terms…which is funny b/c my last name is actually Layman ;D

Anyway, here’s the situation:
I have the opportunity to purchase a home for only $8,000. It is a small house, but it needs a lot of work. The owner, (who is a friend of a friend) doesn’t want the house anymore and wants to get it off his hands asap. The place is definitely a disaster, I haven’t hired a professional inspector, but looking at it myself, I know it needs a lot of work. I’m guessing maybe about 30-35k at least. Being that I’m new at this, I don’t want to take on a project that’s too big for me to handle. But on the other hand, I’m thinking, $8,000 for a house! I mean if it’s still standing, there’s some hope for it right? And if I purchase it and decide it’s too much for me to handle I can always sell it to an experienced investor or rehabber. My dilemma is I’m thinking about going for it and using my own money to purchase and rehab it. I have about $66,000 in savings and I know that this will probably be more than enough to fund this project. Is it a mistake to use all of my money on this? I truly believe that I can make a decent profit. The other houses in the area sell for about 80-85k. I’m 25 years old and I do want to invest in real estate and now is the perfect time for me to start. I’m just wondering if its crazy to use my savings for this. What do you all think?

2

Assuming that there are no structural issues and you can get clear title for $8,000, this sounds like a good deal to me. I’m assuming that you are planning to do the work yourself. If so, it should be hard to lose on this deal IF your numbers are close to being right.

Good Luck,

Mike

3

Check to see what comparable vacant lots are selling for in the area. If the price for a vacant lot is more than $8000 it could be a great deal - worst case scenerio you could clear the lot and just rebuild. Some times it is cheaper to rebuild than to restore. Becareful not to underestimate The full cost of rehabbing/restoring. When you start digging into older homes it always seems like problems just keep getting worse. Having the ability to purchase a home for $8000 is great because all that you would risk upfront is your original $8000. Your risk reward ratios seem very appealing. Just make sure you do your home work on this property (get inspections, estimates on work)

4

Sounds like great numbers… Have you considered a Hard $$ loan??
I have found that setting a budget, organizing the financing and
construction with a third party (hml) allows the process to flow properly.

8k is not a lot of cash to buy - but if the 35k rehab turns into 55k rehab
then you are completely out of $$$$$. Big risk… Better to have it inspected
and appraised before moving forward

5

Thanks for the advice! I have considered a HML and maybe I’ll look more into it. I am not planning on doing any of the work myself, except for maybe a few minor things. I was just going to hire people to do everything. I am going to go look at the house with an inspector on Friday.

6

I have a rule of thumb. I don’t do business with anybody that I can’t sue. Because if the unexpected happens I may have to sue them. If I sue anybody in the deal and it will make the next family gathering, or Christmas party, or pool party uncomfortable then I don’t do business with them. I will give them advice I will give them money I will even give them a house, but I will not do business with them.

Think about it. He can’t make it work, but he wants to sell you this dog. Is he your friend? If you buy it and lose a bunch of money will you still see him as your friend? I would not do the deal just because of that. Now I am friendly with everybody I do business with. Some of them may even think of me as their friend, but if I think I got a raw deal from them I will sue them as quickly as I will sue a stranger and I tell everybody I do business with that.

7

Bluemoon–
I don’t know him personally. I just met him when he showed me the house. He doesn’t live in this house, he’s just trying to get rid of it b/c he doesn’t want it anymore. He lives a few houses down from a friend of mine and she was telling me that he was selling the house, which is how I found out about it. I actually wouldn’t call him a friend of hers, just a neighbor.

8

I agree with diesel1… if you can sell the vacant lot, or put a house on it yourself, you may be in better shape.

Rehabbing can be tricky, but can be a killer for you if you have never done one before. If the house is in really bad shape, then you could expect to pay up to $30/sqft to repair if you are going to contract it out. Keep in mind that if its an older house, and you are going to repair more than 30% of it… you may have to upgrade everything to meet current codes. Unless you can fly under the radar without getting permits (yikes!)

Having said that, if you are buying the house right, it could be the perfect house to learn on because you will have a lot of equity to work with if the deal goes sideways on you.

I have been rehabbing properties for a few years, and the real trick is to build systems for the whole process. Once you find all your contractors, and learn all the headaches involved, and make your mistakes… then you can fine tune it and know how to go about the next one.

There is no better way to really learn, then just doing it. And if you can pickup a house for basically nothing ($8k), and have a lot of room to work, then you have ample room to make mistakes and still be able to recover. Or better yet, make few mistakes and get paid very well.

Back when I bought my first rehab I paid $30k for it, and I estimated $20k in repairs. I ended up spending $35k in repairs ($35/sqft). But because I bought it right, I still ended up making about $11k on that deal. Had I not negotiated the seller down from her original price of $50k… then I may not have continued investing.

Since then I have found ways to save money, rehab faster, and avoid situations that can cause me to be held up by red tape from the building department, and my rehab costs have come down significantly.

Anyway, I guess what I’m saying is… if you can buy this house at a price that you can afford to make a few mistakes… then even if you break even, you will have gained the knowledge and experience to make a lot of money in this business.

That’s the biggest step… getting the nerve up to do your first deal.

Good luck!

John