I’m looking at a SF property, but unsure of a few things and looking for some insight. It’s a 3/1/1, 1100 sqft and sitting on a double lot. It’s listed at $74,900. With a newer roof, windows, and furnace it mainly is just in need of cosmetic updating. There are 2 scenarios I can do for the rehab. The first would consist of the rehab costing around $10K. It would be for the cosmetic updating and keeping the house a 3 bedroom. I know the area very well, so I am confident the ARV would be low end $140K, high end $150K (not counting the double lot). In the second scenario I would do the cosmetic updating, and I would finish the basement by adding a family room and a 4th bedroom. That would bring my repair cost up an additional $15K for a total of $24,500. The ARV for a 4bed in that neighborhood would be $160-$165K. Where would you recommend I start my offer at? After figuring all my associated costs for both scenarios, using the highest repair estimates and holding costs and lowest ARV’s, even if I were to offer full price I could still profit $25-35K after taxes. Rehabbed correctly and priced right, a home in that area won’t last long. Even after the tax credit disappears. Is it ever ok to start out by offering full price on a bank owned property? Is there enough after tax profit there or would you walk away appreciate any help with figuring some of this out.
Lets look at the numbers and see what makes economic sense.
3 bed 4 bed
PP=74,900 PP=74,900
Repair=10,000 Repair=24,500
total=84,900 total=99,400
Sell P=140,000 Sell P=160,000
Gross profit 55,100 Gross profit 60,600
Now gross profit we need to subtract selling expenses and buying expenses so that net profit would be much less.And carrying costs.
I would not do the 4 bedroom option because of the added risk for very little gain. You would add a lot of time to the project and carrying costs. You would spend 15,000 extra in repairs for a max gain of 5500 most of which would be eaten up by extras.
Is it ever ok to start out by offering full price on a bank owned property? Sometimes it is ok but where is the fun in that? I like to find out what they will take. It also depends on if you are offering cash or a loan. If cash and a quick close then I would try 50,000 to see what they say and negotiate from there. If you have to qualify for a loan then I would start around 60,000 . If there is competition then choose a drop point before hand and if the bidding gets over your drop point then look for another house.
Redhawk
Redhawk thank you very much for the great response to my question! What you said in your response and the way you broke down the figures, makes complete sense. Since I am going to be using my own cash, I put the offer in today for $50,000. For my new calculations I plugged in being able to purchase the property for $55,000 and after subtracting all expenses I should profit around $40K. I created an Excel spreadsheet to help me with my all calculating all the costs associated with buying and selling of potential properties. Would you be willing to take a look at this spreadsheet and give me your perspective about how accurate you think it is and/or how I can make it better? I posted that question to the forum in a previous post in hopes of getting some insight from others, but didn’t recieve any responses. Thanks again for your response and I look forward to hear from you again.
Yes I will look at your spread sheet. Email me a copy and I will discuss it with you. Or you could just post it with copy and paste and maybe get several responses.
Redhawk
Ok here it is. Let me know what you think. Is this something i can use and feel comfortable using?
$55,000 Purchase price of rehab
$10,000 Cost of repairs
$0 Assignment fee
$0 0% of loan / 12 x 6 # of mos held
$0 0% Point(s) for loan origination fee
$1,250 Other purchase fees = appraisal ($400), title cost ($550), inspection report ($300), etc
$903 $1,805 Taxes / 12 mos x 6 mos
$700 $1,400 Insurance / 12 mos x 6 mos
$1,200 Utilities ($200 x 6 mos)
$2,750 5% Hedge factor
$8,400 Sales Fees (6% realtor commission + 3% seller closing costs)
$80,203 Total cost of project
$140,000 ARV (Low end)
$20,051 25% Projected Goal
$59,798 Before tax profit
$19,733 33% Capital gain taxes
$40,064 After tax profit
I wasn’t sure it would post correctly here since it originally was an Excel spreadsheet. Since I would be using all cash, I have changed the loan interest rate to 0% and loan origination fee to 0% as well. I’m not sure if my hedge factor % is too low, and if my tax % is accurate. For deals requiring more funds then I can put in I just input the corresponding loan interest rate % and % for loan origination. I’m curious how you determined you would offer the $50,000 on a $74,900 listing? Do you typical start $25,000 below listed price?
Your spread sheet looks complete. Hedge factor is good. What I look for in a deal is Return on Investment. You are going to spend 80,000 to net 40,000 in 6 months= 100% annual ROI. That is what I shoot for,if you have to negotiate a few dollars away to get a deal like that it is worth it.To make a deal like this work you have to look at the numbers and be sure of the arv and the repair costs as these can get away from the most seasoned rehabber if they are not on top of the process. Your spread sheet is your business plan for this project and it is your job to make it happen as written or better.
Redhawk
I put another offer in today, my 5th in 3 days. Hopefully one will stick! Quick question for you, I posted this in the forum also. The latest property I looked at I knew was good, so good that between the time I told my agent to set it up and I met him at the property he informed me that they updated the listing and there were multiple offers and highest and best offers needed to be in by Tues 4/20/10 @ 12:00pm. I have seen this happen on more then one of the homes I have looked at recently. Since they typically are move in ready home , is it the 1st time buyers who are offering full price and using their $8K credit to fix the cosmetic issues? Redhwk, or anyone for that matter, do you mind I throw a bunch of questions from at you now and time from time on my deals and just questions in general too? I will post them here, but is it ok to PM or email too?
srslim1124 you can PM me because that is what it is for. You can e-mail me if you like as I will try to answer your questions, however they are presented.
It is time to do a reality check on the relationship with your Realtor or your criteria for a rehab property. 5 offers in 3 days and no takers? Did you offer in writing with earnest money on each one? If so the Realtor did not submit your offer,you should receive an answer within 48 hours or the property under contract to someone else. Your Realtor should also submit your offer as a backup in case the financing of the first offer falls through.
This is what I call the Realtor runaround. They convince you that other offers are coming in and you need to act fast with a full price offer so that you can land this fantastic deal. What are the odds that every time you make an offer that they go for full price in this market? Yes I will use another Realtor to check on the first Realtor so that I know if they submitted my offer and how many offers have been placed,It will be a real eye opener.
If you are satisfied that this is not the case then you are looking at the wrong criteria for your rehab projects. What I look for are properties that for some reason nobody wants them. They are not insurable and therefore not buy able by the general public. These need to be purchased with cash and the problem cured to make the property have the value that we are looking for.
For example My latest purchase had a side note on the listing that plumbing not working. I want these because that usually an easy fix but in this case it needed a new well. I planned for that contingency and bought a 3bedroom 2 bath house for about 25% of current value because nobody wanted to take the risk and home buyers can;t because they are not insurable. These are the ripe fruit.
Redhawk
Hi,
In your case I would suggest you to just hear to your heart and what so ever you think the best you do that.
Because the situation is quite confusing for you and the way you can solve you is the best in this.
Thanks