Potential 1st Deal
Hi everyone,
I've been working with a realtor and I've got my sights set on an REO that needs extensive rehab. Because of the condition, the entire home needs to be basically gutted.
I've gone through the home with several general contractors. Only one seems to truly be interested in the job. Their itemized estimate came in at just shy of 60k. They then told me to expect 70k to cover permits and possible cost overruns.
The home is a 3 bed / 1 bath in a suburb of Cleveland, Ohio. Similar homes are selling for about $89/sq foot, so I estimate this 1450 sqf home is worth about $129k
Holding costs will be about 1k/month until it is resold.
I imagine I'll have to get the home for no more than ~105k after purchase price, closing costs and repairs. Does this sound about right to the more experienced investors on TCI?
Also there is the issue of financing. I have some leads on purchase/rehab loans but nothing I can be sure of. Due to my age (21 years) and my relatively short credit history, I'm concerned about my ability to get a rehab loan for $70k. I do however have FICO scores in the 730s range, and was approved for several 95% and 100% LTV no doc purchase loans. What are my chances of getting a purchase and rehab loan for this deal that won't kill me on points and the interest rate?
I have very little of my own cash to invest, but I do have untapped credit cards for this purpose with about $13k to use. I was hoping to not have to use those for anything except my holding costs. So, am I on the right track with this deal?
-Tim
You didn't talk about what the bank wants for the property. I would guess that you can make more money with another property. $13,000 is more money than I had when I started.
Look for a deal that requires less money to put into it. I'm not sure what else I can advise you other than to read up on everything you can.
Unless you come from a family of contractors or have done this sort of project before it is a little much as a first deal.
There are so many things that can go wrong the project could eat you alive (holding costs, project over run, permit issues that were not expected, delays when you go to cash out, changes in the market).
It might be wise to find a partner who will buy in or might even pay you a fee to step away.
If you can get it at a great price you may make good money selling it on rather then taking on the project.
Will the contractor partner so that he is motivated for the same reasons (as opposed to being on the clock, etc)?
I am guessing you have never worked with the contractor before so you might not end up with a good working relationship once you are deep into the project.
John
[addsig]
Thank you for the responses thus far...
The actual rehab estimate was $59,200. The contracts said to figure in $70k to cover potential overruns and permits, so there is a $10k cushion to cover these items.
I didn't talk about what the bank will sell for yet, because I really do not know. The property has been listed on the MLS for $84,900. Given the condition of the property, they won't get anywhere close to that. I'm not too concerned about what I think they'll accept right now. I'm much more concerned about what my maximum offer should be.
Since I've put the time into checking this deal out, I'd like to write an offer on it. I just need to make sure I'm figuring enough profit for myself to make this deal worthwhile.
My numbers should look like this:
129k value
120k after agents commission and negotiation
-70k rehab
-3k closing costs
47k
That leaves me with 47,000 for purchase price, holding costs, and profit.
Holding costs will be about $1000 per month. Allowing for 6 months holding costs would leave me with another 41k to work with.
If I require 15k profit on this deal, that's gonna drop me down to a maximum offer of $26k.
I doubt the bank will sell the house that cheaply, but it doesn't hurt me to make an offer. Furthermore, I've got photos of how bad the place looks inside, along with an estimate of $107k from another contractor, and that doesn't even include internal and external painting. I'd plan on sending both of those along with any offer I send to the bank.
So I suppose my question is, given all the information, how much profit should I require on a deal like this?
In my humble opinion, $15k is not enough profit for that amount of work. I just did a rehab gutting 3 of 5 rooms. It took me about 1.5 months and will produce dramatically more than $15k profit.
I generally like to compare profit to a salary at work. If you work on tha house for 6 months and get $15k profit, you are making equivalent to $30k per year. Not bad, but considering you could make $30k per year sitting in an office with AC working 8 hours, busting your hump on a rehab for six months for (probably) more than 8 hours a day is not too worth it for me.
Hope this insight helps you some.