First Deal Frustration

[Jeremy Keeler]

Hello all,

So after several years of doing studying and research and getting my ducks in a row, we are now finally making offers on properties that we want to BRRRR. We are using our HELOC and hopefully an HML to leverage our funds. The issue we keep running into is rehab cost. On many of these properties, we get a handful of pictures or sometimes one! So we are going in blind as a bat and only relying on ARV comps to determine value. We are getting outbid by folks that are either stupid or are way more experienced than we are and know something we don't.
We just put in a bid last night on a HUD foreclosure that's listed at 80K with ARV at 179K. It's in a rapidly growing area where vacancy is around 1.5 to 4% depending on what you read. The shocker was the rough estimate we got from a contractor for the repair cost, 55K!

When you factor in the cost to buy, the cost to repair, the cost of HML interest, HML points fees, inspectors, draw fees, surveys, builders risk insurance, homeowner non-occupied insurance, brokers fees, and closing cost, this stellar deal becomes a loser costing us 25K out of pocket after refinancing!

Last night I kept asking myself and my wife what I was missing? How is it a house with an ARV of nearly +100K over list is going to cost us money? What are we missing?

Now I know it's possible that we could shave maybe 10-15K off of the rehab costs once the contractors get an up-close look at it, but that still leaves us in negative territory.

I'm at a loss and a bit discouraged. We find out in about an hour if we are the highest bidders.

[Kurtis Green]

@Jeremy Keeler

I broke down your deal and made a lot of general assumptions but I agree with you; With purchase, repairs, points, interest, closing costs, taxes, insurance, utilities, etc. using a HML and HELOC - It may leave you still owing $20-25k. You'll have $45k in equity on the house if you refi at 75% LTV, but you will still have that HELOC to pay back. If you rent the house after remodeling and cash flow several thousand annually, you can pay down that HELOC in a few years, but that seems like a lot of effort for very little. Whats worse, is you wont have those funds available for another investment. Also, as a side note, $55k for repairs on a house with an ARV of $180k has a lot of risk factors. There is a lot of time, money and headaches that come with that size of a budget, and being 3 hours away, you are at the contractors word when he says he "needs" to do something, which will cost you more.

With regards to your comment on other investors - There are several reasons why you may be outbid, here are a few: 1) the other investor is a licensed contractor who saves on repairs by using his own laborers and getting his discount on materials/supplies. etc 2) they could be real estate agents who act as their own buyer/seller agent, paying the commission side of things to themselves 3) some of them may be true cash buyers with no high interest loans to pay back 4) The other investor may not have the same investment strategy as you to BRRRR - they may just want to flip it for a quick profit. If you run the same exact scenario as above with a purchase of $80k, $55k in repairs, an ARV of $180s, and you're using hard money, someone re-habbing to sell may make ~$20k vs. trying to refi and rent which would leave money in the investment.

My suggestion is to find deals closer to you, with a lower cost of repairs which you can get more involved with and have more control over.