I am new at rehabbing and have just purchased my first project-a 3 bedroom bungalow (1275 sq feet) in the hotest area of the city for $190K (bidding war)…we figure we can sell for $235…We plan to invest $10K on cosmetics/roof…Should we finish the basement as well at an added cost of $10K- How important is rehabbing a unfinished basement in terms of maximizing ROI?
Please let me know…
Thanks 
First, let me point out some problems.
You purchased a rehab deal for $190K because you got into a bidding war. As an investor, I don’t get into bidding wars. I know before I ever make an offer on a property actually how much I can, and will, offer on the property and still make a good, and safe, profit.
You say ‘we figure we can make.’ And that’s part of the problem with above. You need to know what the property will resale for BEFORE you make your offer. I hope that your “figuring” is a little more detailed than just wishful thinking.
You say ’ we plan to invest $10K on cosmetics/roof.’ Again, the estimated repair costs should have been known BEFORE you even made your offer. It doesn’t should like that you really know what you’re going to fix/replace and what you’re not (except the roof). Does the roof really need replacing?
Working back from the numbers, IF $235K is FMV, then you should not have paid more than about $165K minus the estimated repair costs, or $155K ($235K x 70% = $164.5K [I rounded up] - $10K in repair costs). That’s standard rehab figuring.
At your $235K resale price, if you put it back on the market with a RE agent, assuming 6% commission, that’s about $14K. Depending on your taxes and insurance, your monthly holding costs should be about $1500/month. Figure a short 2 months = $3K. Figuring a low 2% in closing costs on each closing (buying/selling), you have about $4K in the buying, $5K in selling.
As it stands, you’ve got $235K - $216K (190K + $26K) = $19K
Not bad, but I used low numbers and a quick turnaround. If your numbers are off, or it takes longer to sell than expected, or you find a repair that you didn’t expect, your profit is gone.
At any rate, you definitely don’t have enough potential to even toy with the idea of finishing the basement.
Each area has different costs, but in general, unfinished square feet (ie a basement) is figured about a 3rd of the value for finished. Here, for example, 1st floor heated square feet goes for about $60/sqft. Unfinished = $20/sqft. However, a finished basement only adds about 1/4 to 1/2 the unfinished value per square. So a finished basement area would be value at $25-30/sqft. So to come out finishing a basement here, I’d have to spend less than $5/sqft to make any money at it, and that’s tough to do.
Again, you need to know your market area. Basements in your area may be different.
Raj
I think that depends on your market. If you have comps that indicate the house should be worth $235k once it’s rehabbed, did those comps have finished basements? Before you bought, you should have had a good idea of FMV based on the amenities common to your area. You then should have been able to put together a good rehab budget based on what your house needed in repairs and updates.
Thank you for your responses. Houses in this area range from $175K-400K. Most comps have finished basements…A comp I was looking at- same sqare footage/style/location just sold for 264K- however, it had a finished basement. All properties sold in River Heights have been subject to bidding wars, selling for 20-85K above list…I realize that it was a mistake to get into a bidding war (lesson learned) my first property…However, it still has amazing potential…The problem is I over paid…and now need to shrink my budget…I guess, I am wondering what I should focus the bulk of my money on to maximize my profit…and get the heck out!
This may sound chauvenistic, but houses are really “bought” by women…
Money should be focused on:
(1) Kitchen
(2) Bath(s)
(3) Bedrooms
If you’re going to spend to rehab, put your assets towards the kitchen and the baths…everything should be spotless (cleaning is cheap), new paint (idf needed), new carpets (if needed), etc.
As far as the basement, if I were to finish it, I would do it with common-sense for the area (another bedroom? a family room? an office?) but I would sheetrock it, paint it off-white and carpet it with inexpensive carpet…I would leave some unfinished storage area and not finish any utility areas (laundry room, furnace room, etc…
Just my two cents.
Keith
Nothing wrong with that statement, Keith. It’s just a statement of fact.
In most cases, a woman is the deciding factor in a home purchase. Hey, I know first hand. My wife just bought a new house for us. I say “my wife” because a) I already knew that she wouldn’t wait on me to find a real deal, so we’re buying retail, and b) because of that, I said to her, let me know when you find what you want, then I’ll go look and sign the papers. Trust me, if it’s down to two houses, one has a double-large workshop, tools included, and one has a double-large kitchen with cabinets galore, the kitchen house will win 90% of the time.
Again, I’m not familiar with your area, but I doubt that you can come out ahead cost-wise finishing the basement.
Raj
Hey guys, in my house the hubby is the cook. I just need a fridge and microwave. They have models small enough to fit in the bedroom now, right ;D
I agree with Keith. Also, consider a drop ceiling as well (very easy to install). If the concrete floor is smooth and in good shape, consider some nice paint (cheap, quick, looks better than unfinished).