What to offer in San Diego if Major Rehab required.

[Karim Baker]

I have an inherited property in San Diego and I'm considering buying out my siblings with the 203k program. Its going to need a major rehab. I was estimating 150K -200k and a ARV of $750-800k. I was wondering what investors would realistically offer for a house like this in San Diego so I know what kind of offer I need to make. I'll get better numbers next month when I can have a contractor walk the property.

Thanks Karim

[Dan H.]

Quote from @Karim Baker:

Quote from @Dan H.:

My threshold on a BRRRR is that the value increases twice the cost of the value add. This is because they are work and have risk. I will add that finding such properties in San Diego is a challenge and I have not purchased since Dec 2021 (purchased $4m that month).

Using your numbers and always using the more conservative of the range yields $750k (ARV) - 2 * $200k = $350k.

If you want to extract all investment, the cost including rehab must be 70% of ARV (70% rule). Again using your numbers and taking the more conservative numbers yields $750k * 0.7 - $200k = $325k.

If I was purchasing to obtain a full extract of investment, I would need to purchase at $325k.   however, I am ok not extracting all of my investment and would be willing to pay $350k. 

Note I am not finding many properties that meet this buy criteria in San Diego.  Investors in San Diego are willing to be aggressive because the appreciation and rent growth has been so outstanding.  This likely means that some investor would pay over the $350k that I would be willing to purchase it.  If you desire a quick sell at $350k, contact me.  

by the way, What is the source of your ARV? The average home in San Diego is $1m. This implies a freshly rehabbed home value would average over $1m. Your ARV may be low

Good luck

 Thanks, Dan like I said I plan to do a purchase and rehab with the 203k loan. And your right about it being below average for San Diego, it's in south Lemon Grove. You are not going to see a lot for $1m over there.

I am familiar for with the 70% rule, but I also know that a lot of investors are more aggressive. I just don't know what that means in San Diego. Is that 75% - 80%?

I'll be buying out my siblings so I want to offer a reasonable amount up front, if they think I'm trying squeeze them it's just going to make this a long drawn out process. I figure as long as I'm within 5% of what investor's will pay in San Diego, I can avoid that issue.

I plan to live in it initially, then will rent or sell based on the market in a couple years.

My view is that there are RE investors in San Diego that place offers that seem to make no financial sense. I suspect someone that does not understand the risks and work involved would pay slightly close to $750k - $200K = $550K (maybe they would pay $480K). They would be interested in this purchase because so few SFH are priced this low in this market and because there are some under educated investors. From my perspective, $480K + $200K rehab is way too close to $750k and does not properly compensate for the effort and the risk. Every large rehab I have done, has had a surprise. One of my recent rehabs (one of the purchases from Dec 2021) had a 5 digit window replacement (long story) that I could have never predicted. It was also my first purchase that had significant chimney work; chimney work is expensive especially if there are 4 chimneys.

I would personally not pay as high as $480K, but I fear someone likely would.  If you believe someone would pay $480K, I suggest a fair offer would be $480K * 0.94 = $451.2K to reflect 6% selling costs (which is probably less than you would actually have).

Good luck