First BRRRR: Worcester, MA Single Family

[Doug Dias]

This is a long post – my apologies. Please don’t quote it when replying.

My wife and I started saving to buy our first investment property in MA in July, 2018. We started looking at properties one year later, in July, 2019 and probably saw 30+ homes in the greater Worcester area. Mostly foreclosed properties found on the MLS. We had a few limitations:

- We wanted to get a rehab loan, instead of working with hard money or private lenders

- We could only afford 20% down, so we were limited to a single family home (all the lenders I spoke with required 25% down for a multi-family rehab loan)

- We only had about $40,000, so acquisition and rehab together could only total $200K, which is not easy in the Massachusetts market.

- We wanted to be in or around Worcester because the City has been receiving a lot of investments in an attempt to revitalize the area. I'm not alone in trying to get in the "path of progress" here though, as many other investors are flocking to Worcester. Prices east of Worcester towards Boston have become untouchable for the "common folk," and first time homebuyers in the Metro-Boston area are being pushed as far west as Worcester.

We made about 15 offers before we got a bite on a 4 bedroom, 2 bathroom, 1600 sqft home in the Webster Square area of Worcester. This is a home built in 1880 that has lots of charm and is located on a nice one-way street and close to a pond, beach, playground, and hiking trails. Worcester can have rough areas, but this particular neighborhood seems quiet and quaint, while still within 1 mile to local colleges and other amenities.

We made the offer the day before Thanksgiving, and I am convinced that we only received a counter because things were slow at the time. After making 15+ offers and getting no bites, we were filled with self-doubt and wondered "what the heck is wrong with this house" for a while but decided to forge ahead. Here are the details as we knew them then:

Offer and Negotiation:

Original asking price: $178K, then lowered to $165K after 30 days on the market

We offered: $140K with $5K in seller credits towards closing

They countered with: $155K with $5K in seller credits towards closing

We countered with: $151K with $5K in seller credits towards closing

Then... nothing. Radio silence from the selling bank for over 2 weeks. We spent the weeks before Christmas kicking ourselves for not taking their initial counter. Finally, we heard back that we had an accepted offer, only to then start questioning ourselves again by thinking that there must be something hugely wrong with this place. How can no one be willing to pay more? Still, we forged ahead and got the P&S on December 23rd.

Initial BRRRR Estimates:

• Property acquisition: $151,000
• Rehab: $30,000 total:
• $2,000 for kitchen (stove hood, refrigerator, stove, dishwasher etc)
• $2,000 for window repairs (about 4 broken windows)
• $4,000 for painting
• $3,000 for oil tank
• $2,000 for water heater
• $2,000 for second bathroom spruce-up
• $5,000 misc
• $10,000 for roof

• Estimated ARV: $230,000

The initial numbers looked good. But this is our first deal and, while I my background in finance makes me good with numbers, my lack of experience in rehabbing properties makes any projections I make very questionable. Once we brought in general contractors, the rehab costs quickly went from $30K to $40K. Closing costs also exceeded my expectations. We ran into a few surprises during this time:

• Our lender, who had previously said we could use multiple sub-contractors through the rehab-loan process, changed their tune and demanded a single contractor be used. This automatically increased our cost and required additional creativity on our end.
• The rehab loan process is a BEAST. It takes forever, and a mountain of paperwork from us as the borrower as well as from the chosen General Contractor. Given how much work GCs have these days, we had to carefully manage this as we felt that our chosen GC, who had wonderful prices, would give up on this process at any time.
• The selling bank had a clause on the P&S that if we failed to close in 45 days, we may be fined up to $100 per day. This was a constant stress point for me as this could quickly become substantial.
• We found out that the rehab loan process required the use of a rehab consultant, to the tune of $850.00 out of our pocket.
• We found out that some plumbing had been done poorly and without permitting. We also had some burst pipes from poor winterization. Expected costs up to $2,500 to resolve these issues
• We found about 30’ of asbestos pipe insulation in the basement. Apparently the minimum amount that asbestos remediation companies charge in MA is $1,500
• We found out that the furnace vents into the chimney from 1880, which is cracking. Chimney liner recommended for $2,000
• We found an additional $2,000 of electrical work was needed
• Our lender suddenly informed us that there was a cap on seller concession towards closing of 2% of selling price. Limiting the seller to pay only $3,000 towards closing costs instead of the agreed-upon $5,000. I quickly renegotiated the purchase price lower by $2,000 to make up for this. Thankfully the bank agreed within a few days.
• I realized that I was $4,000 short to close, and took a hardship loan from my retirement account for that amount.

Despite all of these surprises. We forged ahead. I kept hearing all of the podcast guests who say “you just need to get started. Buy property #1 and get started.” We finally closed on February 28th, and the GC started working immediately. We are now one week into the rehab as I type this.

Current BRRR Numbers:

Pre-closing Costs: $2,740

• Plumbing inspection (because the house needed to be dewinterized, $150)
• Home inspection ($525)
• Appraisal ($655)
• Electrical inspection (because power was off on the day of the appraisal, $150)
• CO and Smoke Alarm ($366.57)
• CO and Smoke inspection ($52.50)
• Rehab consultant ($840)

Kitchen Appliances: $2,000 (estimated)

Plumbing: $7,300 (estimated)

• Oil tank ($1,800)
• Water heater ($1,000)
• Chimney liner ($2,000)
• Re-piping as needed ($2,500)

General Contractor: $32,000

• Roof replacement
• Drywall patching and painting of entire house (trim, wall, ceilings)
• 2nd floor bathroom spruce-up
• Closing exterior door in master bedroom and finish siding
• Building two closets in two bedrooms
• Broken window repairs
• Window frame repairs
• Scrape and paint area over bulkhead
• Finish floors
• Remove and dispose drywall from basement spaces
• Rear deck repair
• Front steps repair
• Install handrail to basement
• Foundation masonry repair and painting
• Repair cement step
• Patch area of exterior trim near kitchen
• Patch two rotted window sills
• Cap extra basement door
• Fill in dining room window

Asbestos: $1,500

Electrical: $2,000 (estimated)

Closing Costs: $3,733

Home Purchase Price: $149,000

Total All In: $200,472

Expected ARV = $250,000 (initial appraisal for rehab loan came in at $235,000)

Amount I have invested in the deal = $50,000

Expected Cash Out at 80% = $50,000

The situation is still very fluid, as we still have at least three more weeks of the rehab in front of us, but the numbers thus far are still looking promising, despite all of the surprises. The mortgage payment with insurance and taxes are just under $1,200 currently, and I am expecting $1,800 for rent on the low end, and $2,000 on the high end.

I wrote to 30+ credit unions before finding one who does 80% LTV cash-out on investment properties. I am ecstatic to have found one, as I was almost settling for 75% and not being able to recoup all of my funds.

Sorry for the long post. I’ll update this thread once we near completion and place a tenant.