Possible First Rehab Deal. What Are Pitfalls?
I think I have my first rehab deal. I am going to use a hard money rehab loan and I know that I’ll pay high rates and points, but I don’t have any start up money myself. Would you do this deal?
Purchase Price: $130,000
Estimated Rehab: $120,000
FMV after Rehab: $333,000
Total Profit: $83,000
I am considering purchasing an 1,100 sq. ft. house and adding a half story which would increase to 1850 sq. ft. I am purchasing for $113 sq. ft. and selling for $180 sq. ft. I am estimating the total rehab time at 8 months. It seems like a no brainer, but I’m scared that I’m not seeing the big picture. What are the pitfalls that can occur?
Your total profit will not be anywhere near $83,000. You have to factor in the cost of the loan itself and at 15% for 12 months you have nearly $40,000 in interest payments alone. Plus you have utilities, taxes, insurance, points, and acquisition costs that come out of your cut. In the end you have $20,000 to $30,000 profit before taxes. If you are going to use a realtor you can knock another 20k off.
A couple of things to keep in mind. Your interest payments alone will be nearly $3,500 per month plus the other expenses. That comes out of your pocket.
You really need to take a good hard look at your carrying and cost of doing business expenses as this does not look like much of a deal on the surface based on your numbers. You are the only one that can determine whether you want to do this deal, but not having any startup money is going to make this very difficult as you will have monthly expenses that are not included in the loan.
Then again, this could be very profitable if you can come in under budget on the rehab, and sell the house quickly. Then again...
The best laid plans of mice, men and unfortunately newbie real estate investors often go astray.
I truly hope you do have $83K in potential profit in this deal since you may need it all as a buffer if you have caculated wrong.
There is a big difference between a rehab and an addition. If your project goes horribly astray in mid construction things can get really ugly, really quickly and all you are left with is some framing and a defective foundation and the search for a new contractor to come in and fix it all at double the original prices you thought that were required.
and the increase cost of a 2nd story.
Carfully review your numbers.
Find a new hard money source. 10 points is a lot. Many will do hard money for 4-6 pointsdepending on amount.65% LTV is about right.
I feel your pain. In the same boat. I shop day & night for lenders. I finally found a loan broker who has the credit and means to get low cost, high LTV loans on his credit. We are working on a partnership kind of situation. When I look at it, 50% of the profits is actually less than if I paid 5-10% of the total deal to get the loan, plus 10-13% int. and 50% of something is more than half of nothing. Now I can also be more competitive with 100% cheap financing and low points and fees. Anything to get the bird off the ground.
have you tried giving the seller the same percentage and points youre willing to pay... I bet half of the deals would love to make 12 % 3 points for 90 days... Almost all the money I need is from sellers I am buying from...
You can also do a concurrent transaction and share some of the wealth with the seller for allowing you to.
if you get stuck log onto my site and call me, I would be glad to help.
Most of the houses are bank owned. Do you think they would do that ?