Is This Worth It?!
I am buying a trashed hud house for 118. houses in the area have sold recently for 139 (comparable, on the same street, same design), so I'm thinking I could get 145.
Taking out the 3% for the realtor's comission, 12k for rehabing, 1k for interest on loans, 2k for closing costs... This may leave me with a little under 10k in profit.
The place is a mess though, all the walls in the basement are covered with mold, and the kitchen is destroyed, so it will need new appliances, some new cabinets, counters, etc...
Is this worth it? should I just cut my loss at 1k and back out of the purchase?
I know a couple of times when I made the least amount of profit (cash) was the most rewarding adventures I got into. In those deals I really learned from my mistakes. A couple of my friends said "I bought myself a job" on these deals. No one can answer if a deal is a deal except for you. I have even lost money on a few projects, which in the end helped me. You will have to figure out if your time and money wil be well spent or wasted even if it is for the learning process.
Lori
[addsig]
Well, this is my first rehab. I do believe I can make *some* money, and I guess you're right about the experience, there's alot I don't know yet.
Thanks =)
Hello,
Let me preface this with two things:
1. I have not done a deal yet
2. Lori offers good advice on the value of learning by doing
However, if you have the time before you have to close, I would QUICKLY get rough estimates from contractors ASAP. It makes absolutely no sense, IMHO, that if this house requires $50k rehab (if it is really trashed) to lose tens of thousands just to learn valuable lessons, unless you can afford that at this time.
Rehabbers, as far as I have learned, tend to price their retail/fixed up properties at around 95% to make them move more quickly, because they don't want to get stuck with excessive holding costs (read financing, heat, utilities, etc.). If your comps happen to be correct, then the most you would want to price it is approx. $135k to move it. This gives you $17k for rehab cost, holding costs, sales and marketing cost, closing costs (2 closings, one to buy and one to sell) and your profit. Most rehabbers need a 20% ARV (after repair value) to feel that it is worth it, but this can be less, but it should be SOME profit. A loss on an investment should occur by accident, or from missing something that you could have never known about had you not taken the risk. But going in knowing you will lose money is not smart.
If it is trashed, i just don't see how you are not going to take a big loss on this one.
But as Lori says, it is your call and decision. I believe it is always better to pass than to get into something that has a reasonable chance of clearing your bank account, even though you sure would learn a TON of valuable lessons.
Good luck, Dave
my question would be are your rehab costs accurate, are the houses in that area that are selling for your target sales price as is or fully fixed up, are you doing the work yourself or hiring someone.
Take all your rehab costs and the time it will take you to do the rehab AND multiply by two or three. If you can still make money do it.
Suggestion:
It's possible to buy pretty houses for 12-20% under market and they're ready to resell... quickly
The math you explain to the seller:
6% realtor fee
3% closing costs
3-6% holding costs 3 to 6 months of mortgage payments while waiting for house to sell and close.
You of course stress you'll need to completely repaint and carpet the house. (Maybe you do maybe you don't)
If you're talking to someone who has to sell for what ever reason you'll get a good discount AND they'll wait for any equity they may have.
Do Not buy a rehab as your first project unless there is a lot of room for the unexpected. They cost more and take longer to rehab then you originally estimate... without fail.
I have done a few rehabs in the past few years, so I am not an expert by any means, but you should always aim for $15,000 or more when figuring profit going in. Especially being a new investor, things are going to go wrong. It looks like best case you may get $10,000 out of this house. I hate to lose earnest money so here's my suggestion. Do as much work as you can yourself on this one. That may require late nights and long weekends if you work another job. I would also sell this one myself. You can't afford a realtor at those numbers. You may want to owner finance it. You can't wait around for a realtor to sell it. You will find a buyer much quicker and you can demand top dollar. Ask for $3-5,000 down and $200 more a month than your payments. It will be close, but you can make money if your comps are correct. Good luck and learn alot on this one.
How could I possibly convince a seller to sell for 20% below fmv when he's getting offers for 100% fmv?
Thank you for the advice, everyone. I decided to cancel my bid. I may or may not loose the 1k, but its better than probably loosing more.
I think you made a wise choice. If you picked up that property for $20k or so less, than the last guy's advice would have made a lot of sense, and I think there is a lot of wisdom in what they and everyone said here.
There's just no way in he11 that you would have made $10k on this deal, seing as how you only bought it $20k under comps, and it was trashed. The numbers just never worked, and you never knew the numbers to begin with.
Best of luck to you, Dave