I'd like to get your opinions on this deal...

Rehabbing, Fix and Flip, Rental Properties
1

This is my first flip and I’d like to get some opinions on the deal outside of me and my investor.

I paid $220,000 by a 100% financed, 30-year loan for a pair of adjacent residential properties, both on identical .25-acre lots. One is an empty grass lot that used to have a house until it burned down. The other is a 2-story, 2000 sq. ft., 2-bed, 2-bath house that is very beat up but has a lot of potential. When I say beat up, I mean as in mostly everything needs to go. Siding, deck, kitchen appliances and cabinets, bathroom and fixtures, popcorn ceilings, laminate and beat-up wood flooring, nasty carpets, uninsulated attic, and out-of-code electrical wiring. The roof, plumbing, climate system, and septic are all ok.

It’s not a very hot area but the houses that do sell have been going for anywhere between $130 to $150 per sq. ft., and up to $175 in some rare cases.

Our ideal plan is to fix the house (converting it onto a 3-bed, 2-bath, and eliminating a wall to create a large master bedroom) flip it, and then build a house on the empty lot. Failing that we’ve also decided that we can sell the lot to finance the rehab on the house. Our worst case scenario is selling as-is to the highest bidder.

My investor wants to do the rehab without selling off the lot. We have a good crew available that can do good work for low prices, the only problem being that they’re not the quickest working bunch.

I’m just curious what other RE investors in the forum think of this deal and what your plans would be on a deal like this. What kind of time frame would you say is reasonable for that much rehabbing work to be done (other than as quick as humanly possible :wink: )? Is this a deal you would’ve taken or do I have the business sense of a buyer of swampland in Arizona?

Any input would be much appreciated!

2

Real estate investing is all about the numbers. You have not included enough information to property judge this project. For example, how nuch will the rehab cost? How much is the lot worth? How quickly are properties selling?, etc, etc, etc.

Mike

3

I would say 3 months is the best case scenario. Meaning everyone shows up when they’re supposed to and nothing surprising pops up.

That means you’re there every single day, pretty much all day. You reconfirm contractor start dates a week prior, three days prior and the night before. You’re there before they’re supposed to arrive (I would suggest with donuts and coffee in hand). If they’re not there within two hours of the agreed upon time start calling the manager. At noon, if they’re not there start looking for a replacement.

Have deadline date contigencies in their contract which penalize them for going over the deadline. Have a clause that says if they fail to show up without prior notification twice, they’ve forfeited payment for any work they’ve done. In other words, make it painful for them not to live up to their contract. Never give a deposit up front. Too many disappear with it and never show up.

If you’re really intent on pushing the project, I would suggest getting a critical timeline software (I use the Microsoft version). This makes it easier to keep an eye on the progess and where you’re getting hung up.

4

Well, we’re looking at about $40,000 for a rehab budget. Looking at comparable lots, I think we could get $40,000-$50,000. I’ll also be doing a lot of the demolition work myself. My plan is to strip the house of all the crap by ourselves to save on labor costs and then call in the pros to fix it up when the garbage is gone.

5

In my opinion that is one of the biggest mistakes new flippers make.
Demo on a project that size will take you 3 to 4 times as long as you think it will. You will fill 2 or 3 dumpsters and you’ll be fried by the time you’re done. It’s real bull work, dirty, dusty, filthy. The problem is by the time your done the real work is just starting. Get some prices on the demo. A good crew with experience can demo and remove all debris in a couple of days. I think you’ll find that it is money very well spent.

Once that’s done, get your framers, plumbers and electricians going. I usually have these guys all working at the same time. If the plumber needs a wall built a certain way the framers right there, same for electrical, be on site all the time if possible and COMMUNICATE with your trades. try to think 2 to 5 days out.

6

This deal looks pretty thin to me.

Cost=$220 (purchase)+$40k (rehab)=$260k

Value House=$260k ARV +$40k ==$300k

By the time you figure in holding cost, selling commission, etc, you might be lucky to make $10k.

Plus it sounds like your lot need to be cleared (i.e. burned out house demo’ed).

7

I forgot to mention that the house burned down years ago so the lot’s nothing but grass. I’m not too worried about the demo because I used to work in a demo crew and I know what to expect.

The town inspector told me that the electrical system will only need to be replaced if the total value of the remodeling exceeds the value of the house, so that’s a load off my shoulders.

Thanks for all the pointers!