Rehab Deal In The Works...is This Crazy?
I found a boarded-up log home in a hot lake community near DC. The home is ten years old and suffered minor fire damage years ago. It will cost about ten grand to get it ready for market. The owner is asking $100K, FSBO.
FMV is approx. $140K.
I can lock this down with $1000. Total cost (besides closing) is $11,000.
I would like to rehab it immediately and put it on the market ASAP. I have crews that can work through the holiday and have it ready in thirty days.
Should I do a purchase contract now and ask for ninety days to close? I could do the work, find a buyer or investor and double close or work out an assignment fee by the closing date.
As I understand it, the worst that could happen is that if I failed to find a buyer before the closing, I would lose the down payment and the money it cost to rehab the house. Is this a fair assesment?
(I could certainly find a mortgage, but would prefer to flip it quickly.)
Any thoughts?
(PS: most of my RE investing is limited to commercial. Rehabbing is new to me, thus the rookie question.)
Thanks-
Writergig
I think the concensus here is to not rehab a property till you own it. Opens the door to too many possibilities. After all, if you owned a house, somebody came by, looked at it, put in under contract, and spent a bunch of their money on it raising it's value, would you then sell it to them if you didn't have to? Nope, you'd say, "Wow, what a nice guy, thanks for improving my property for free, now, have a nice day.", and sell it for the higher value that you've created to somebody else.
Very True, it is a risk versus rewards issue. By doing a double closing, you are looking at eliminating the mortgage process, closing costs, time etc. But at the same time, you carry the risk of fixing up a property which for which you don't have Title. I would rather choose to own the property fair and square and then rehab because at this stage of my RE career, I can't afford to take an outrageous risk. It depends on your risk tolerance.
Hi.
Didn't I read that you did that before with a lease-option? Could you get control of the place so that it is part yours? Do you know the value that you will sell it? Maybe you could sell it before you make the improvements on some sort of flip deal partnership...
What lake...? ? ?
jam200:
Well, you're right about one thing...people do break contracts and that's a risk in itself.
However, a sales contract is a binding contract and I would nuke him in court, especially if he accepts my $1000 earnest money. I've litigated successfully numerous times in the past and have the resources and time to win. Of course, I don't enjoy the process, but I can and will enforce the deal through the legal system. Incidentally, the seller is desperate, recently divorced and quite destitute. He needs no more friction in his life and will gladly take the $100K at a double closing.
Like Commercial RE, where I've made great $$ as a silent partner, all deals are unique. In this case, my gut tells me the scenario I originally posted is the right way to go, despite the risk. But thanks for the feedback, I enjoy other investor's opinions.
RE: LEASE/OPTION
I did indeed work a L/O deal, but I occupied the residence. This deal won't work as a L/O, mainly because the guy wants to cash out and get out of town.
But thanks for the response.
Have a prosperous 2005---
WG
writergig, I think if you do some digging you will find that there are a few ways that a seller can get out of the contract, I don't know the details off hand because I don't need that knowledge because I would never put a dollar into a house I don't own. The last one I think I remember had to do with them going BK and the judge awarding them the house back.
is 140 the ASIS FMV or the ARV (after repair value). If it is the ARV, then this is not a good deal.
100
- 3% buying cost
- 10k rehab
- 2k (20% overage on rehab)
- insurance
- utilities
- holding costs (how are you getting the 100k and rehab cost)
- 3% selling cost
- 6% realtor commission
------------
12k profit
Thanks for the reply.
40K is the ARV.
Not sure what your financial situation is, but in my world, even $1200 is a good profit. $12K is fantastic profit.
Anyway, I have the cash and investment capital to cover the rehab costs and carry, for as long as I need to carry them.
The area is white hot in terms of re-sale and FSBO properties last a month at best. Thus, no 6% realtor fee.
I could rebut other fees/costs but it's all moot. You may think a 20K, or even 30K profit is peanuts or 'not worth it' and I can't change your mind. To me, $12K represents a couple of more deals, or a nice used sailboat on Long Island Sound.
In any event, if I walk away $1200 richer than I went in, then I win. But that's my math, your free to call your deals as you see them.
I doubt many here would walk away from $12K.
Thanks-
WG
$1,200 is an awfully tiny margin if something goes wrong with the rehab. Sometimes that happens.
12K is definitely better - as long as you don't have to hold the house on the market very long. It isn't the deal of the century by any means. I do see your point, profit is good. But why waste time with a 12K if you can find one worth 20K? Time is money.
Oh, and I agree with the folks above - I wouldn't put a dime or a minute's worth of work on a place I didn't own yet.
-Grey
This may sound like an echo, but expecting a $1200K profit when you are dealing in numbers in the rough neighborhood of $100,000 is a coin toss at best. Relatively small perturbations can easily wipe out your profit.
Your costs are likely to greatly exceed your expected profit if you work on the property while it is not in your name and your seller starts balking.
I'll chime in what first comes to mind:
Out of your post I heard that the seller wants $100k for the house and is willing to wait 90 days for the money.
What is the current mortgage balance and montly payments? Can you take over the payments? You can either pay the gentleman for his equity of have him carry back a note (due in 90 days for example).
Take the property subject to the existing mortage...now you own the property. Seller has zero control and zero input at this point.
You rehab...do your wonders and sell the property. No double close needed so it makes things simpler for idiot closing agents.
You still have some closing costs but not the craziness the banks charge...no underwriting fee, no apprasial, no closing fee....pay only the title work and transfer tax.
My first rehab I did something similar except that I bought the house on contract. I solved the sellers problem and guess what---your best friend now thinks that you are taking advantage of them...and refused to sign the deed at my double closing! And guess who my buyers were mad at?? ME! I'll never touch a house I don't have title to ever again...
Writer,
I'm from the DC area and i'm aware of how hot it is. However, I must caution you not to fool yourself into thinking FSBO is all that easy and will work. There are FSBOs in Arlington that don't necesarily move. Count on at least 3% realtor fees for the buyer's agent. It will likely be worth your while.
And at 100k, this place must be on the outskirts of the DC area!!!!
Good luck.
T
Writer,
I'm from the DC area and i'm aware of how hot it is. However, I must caution you not to fool yourself into thinking FSBO is all that easy and will work. There are FSBOs in Arlington that don't necesarily move. Count on at least 3% realtor fees for the buyer's agent. It will likely be worth your while.
And at 100k, this place must be on the outskirts of the DC area!!!!
Good luck.
T
Thanks All:
First let me make clear that the "$1200" profit was just an example. My profit margins here are far greater, for a number of reasons.
And while I appreciate the advice about passing over a $12K profit for a $20K deal, a deal that needs to be 'found' well, that's not how a do business.
There have been many great responses here, some with which I agree, others not. But the main reason for the post was to guage whether or not any rehabber would start work withouth having title first. Obviously, most would not.
In any event, this deal will most likely work as a wholesale flip, which can be executed immediately without taking title.
And RE: DC
The house is in a resort area an hour out. I can FSBO for two years with no hit to my funds, so I'm not concerned with a 3% realtor fee. But that's my choice.
The great thing about these forums is that feedback is given by some very talented, experienced folks. But also, you get a few here and there that 'claim' to have experience but really only parrott back material from other posts. And who knows? I bet there are a few 14-year-olds on here, giving advice with the best of them!
Happy Holidays all...
I'm taking the family to Hilton Head for Xmas.
-W
I resent that, I'm 15!