Denver (What Would You Do?)

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Denver (What Would You Do?)

Matthew Schroeder
Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes

Dear Denver BP Community,

What would you do with this Denver property?

We own a property in the Clayton neighborhood in Northeast Denver, about 10 blocks north of the Denver Zoo (36th & Cook).  It is a decent sized rectangular lot (typical of the neighborhood) measuring 6,250 sf, but the property is tiny with only 1 bed & 1 bath measuring all of 521 sf.  It is zoned USU.  

We bought it in 2011 as an REO for ~ $40k, and if we decided to sell it (which we are not considering at the moment), we should be able to get north of $100k. We have a tenant in there paying $695/month, which is probably under market, but it is up from the $550/month we were charging back in 2011.

The bungalow is situated toward the front of the lot, so there is a very large back yard.  Additionally, the bungalow is offset to one side of the lot (i.e. not in the center), so if we want to do an addition, we probably could do that.  In short, we are in a very favorable (and unexpected) situation where we have a lot of options!

Our options include (i) continue the status quo and rent, (ii) sell the property, (iii) do an addition to increase the number of bedrooms & square footage, or (iv) scrape and building a new property.

What do you view as the "highest & best" use ... what would you do?

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Bill S.Pro Member
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Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
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@Matthew Schroeder do the economic analysis. Since the zoning is USU it means you can only put a single family home on the property. As for adding on, does the addition add more value to the property than the cost of constructing the addition? If you scrape and build will it sell for more than the lost value and the cost of construction? To get an idea of this without going through the brain damage of this exercise, are there others doing this in the area? If not, there is no money in it. If so, you can back into rough figures by reverse evaluation of those that you can get before and after information.

You might try driving the area and seeing what is going on there. 

For rough evaluation on new construction, if your lot is worth $100K you would need to be able to build and sell a $500K home. If there are no solds withing 0.25 miles for $500K new construction is not likely to work.

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    11y

    @Matthew Schroeder do the economic analysis. Since the zoning is USU it means you can only put a single family home on the property. As for adding on, does the addition add more value to the property than the cost of constructing the addition? If you scrape and build will it sell for more than the lost value and the cost of construction? To get an idea of this without going through the brain damage of this exercise, are there others doing this in the area? If not, there is no money in it. If so, you can back into rough figures by reverse evaluation of those that you can get before and after information.

    You might try driving the area and seeing what is going on there. 

    For rough evaluation on new construction, if your lot is worth $100K you would need to be able to build and sell a $500K home. If there are no solds withing 0.25 miles for $500K new construction is not likely to work.

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  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    Looking at zillow and the recent solds in the area it looks like the most things are going for is about $200 a sq ft, however, $180 a sq ft seems to be average (ish).  As @Bill S.

     pointed out new construction is likely off the table.  But if your cost to expand is in the $100 a sq ft range, it looks like to me you can nearly double your profit if you add about 1100 sq ft.  

    But this depends on your actual expansions costs and your ability to handle the headaches of dealing with government bureaucracies.  

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  • Matthew Schroeder
    OP
    Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes
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    @Bill S. @Cal C.

    Thank you very much for your input!

    Regarding some of your queries, I just did a quick search of recent sales and $300k - $350k seems to the range of comps for a typical 3 bed, 2 bath SFR with ~ 1,200sf. Homes in the neighborhood are typically older (e.g. 1940s). A 3+2 w/ 1,200 sf property on the same block and built in 1948 closed a couple of weeks ago at $330,000.

    A new, custom 2-story home with 5 beds & 4 baths (2,280sf) about 5 blocks away (same neighborhood) closed in January 2015 at $520,000, but that seems to be more the outlier than the norm in the neighborhood.

    If you were to estimate the cost of doing an addition (say adding 1 or 2 bedrooms (300 - 400 sf)), based on your experience, what would be a rough estimate?  Is there any $/sf basis you use for Denver?

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  • Gordon Weakliem
    Denver, CO · Member since 2015 · 16 posts · 4 votes
    11y

    I live not real far from this neighborhood. The neighborhood is a bit rough (for Denver, people in other markets would laugh at what a "rough neighborhood" looks like in Denver). Look at the recent sales in the area - between Colorado Blvd & York St, north of MLK Blvd, there are very few recent home sales over $400K. South of MLK, there's quite a few. West of York, there's a lot (that's Curtis Park, a pretty hot area). If you're going to sink money in, you're making a play on gentrification. Having said that, it could happen.

    That $520K house is definitely the outlier. You're talking about 3526 Steele St, right? That was definitely a major remodel. I have a friend who used to own at Bruce Randolph & Steele, a block south of that house, and there were no $520K houses around at that time. Look at the sales history on Redfin:

    01/20/2015 $520,000

    07/03/2013 $169,697

    07/02/2013 $162,000

    02/28/2006 $137,900

    It looks like RENEWED SPACES LLC was the one who did the remodel, so you might try contacting them directly and asking them some of your questions. Just throwing that into Google turns up contact info on Manta on the first page.

    Also, did you know that the Denver County Assessor has all the real property records online and you can look up the entire chain of title, neighborhood comps, etc?

    http://www.denvergov.org/assessor/AssessorsOffice/...

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
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    I don't have current remodeling experience like your addition project would dictate but based on the numbers I hear from folks, there are no $100/sf additions. Also to get to 1,200 sqft you need to add about 700 sq ft. There might be some money in your project but you really need to sharpen your pencil, and get some real knowledgeable people on board. The first step is to truly assess the current value. Last I checked a few weeks ago there were only about 10 SFH active listings under $200k on the whole MLS. Right now it's hard to beat selling outright unless you are venturing into construction.

    You might try and find someone to partner with for a project of this scale.

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  • Matthew Schroeder
    OP
    Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes
    11y

    @Gordon Weakliem

    Nice work, Gordon!  Your comments are spot on.

    Yes, you found the comp I was referring to.  I definitely view it as on outlier in that neighborhood, but interesting nonetheless.

    We bought our property, which is by the way 3625 Cook Street, almost 4 years ago when the bank just wanted to get it off its books - it had been on the MLS for more than 6 months when we finally decided to make a significantly under asking price offer, and to our surprise, the bank accepted it.

    And yes, this specific Denver neighborhood is certainly not as nice as some of the surrounding neighborhoods.  I wouldn't characterize it as "rough", as rough in LA or Indianapolis means significantly more crime and boarded up houses.

    We are now in the fortunate (and somewhat surprising) situation where we are sitting on a property with a decent amount of unrealized equity, but which at the same time, is highly sub-optimal in terms of size/layout, so we are trying to consider/evaluate our options.

    It is possible that the best course of action may be to do nothing, but any ideas/thoughts are greatly appreciated.

    Thanks for your input.

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  • Matthew Schroeder
    OP
    Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes
    11y

    @Bill S.

    Thank you for your comments!  They are much appreciated.  Yes, before any major decision involving construction would be made, a very sharp pencil would indeed be needed.

    And thank you for that data point on the Denver MLS. I was aware that supply was very tight, but was not aware of the specific fact that only 10 SFHs were available below $200k in all of Denver.

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  • Gordon Weakliem
    Denver, CO · Member since 2015 · 16 posts · 4 votes
    11y

    Hi Matthew,

    I drove through the Clayton neighborhood on my way home from work (I come down MLK so I see the south side of that neighborhood all the time).

    A few blocks away I saw what looks like another pop-top in progress, and I saw several other ones that have already been done, though not very well. The one 

    From my glance at the area, it appears that there's some significant remodel / rebuilding going on in that area. It's easy access to downtown (10-15 minutes, barely any traffic on MLK). Curtis Park is already really hot and Clayton is next in line going East. 

    That said, that's irrational exuberance talking. I think everybody is speculating on the next big gentrification area. @Bill S. is right, you should take a cold hard look at the numbers. Unfortunately, that's out of my league, I don't have good contacts in construction. From what I read in other discussions on here, construction costs are a bit higher than average in Denver. 

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  • Walker Hinshaw
    Investor · Denver, CO · Member since 2014 · 135 posts · 37 votes
    11y

    @Matthew Schroeder

     I live in the Clayton area and there are definitely signs of renovation going around your property including a small number of pop-tops. However, I think a pop-top or scrape and rebuild would be premature. I personally think the area will continue to get better over time so a scrape-rebuild may be a no-brainer in 5-10 years. The real estate agents I have talked to claim young professionals have been eating Clayton up because it is one of the only places semi close to downtown that still has a price point they can reasonably afford. I think one of the keys to further improvement will be bringing in some decent stores to replace the eye-sores that exist now and building a decent grocery store (which the neighborhood is currently working with the city to do, they have a lot picked and everything).

    That said, @Bill S. has a great point: "right now it is hard to beat selling outright". Interest rates are low, the market is hot, and Denver investors are pouncing on anything under $250k. It might not be a bad decision to take the money and run instead of waiting around hoping for gentrification. Unfortunately I don't have any experience with additions so I can't advise you there but if you don't have experience building or aren't living in Denver at the moment, it may be best to let someone else do the dirty work and invest your winnings in something more in line with your core competencies.

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  • Matthew Schroeder
    OP
    Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes
    11y

    @Gordon Weakliem @Walker Hinshaw

    Thank you very much for your "on the ground" insight  - that is truly the power of Bigger Pockets!  The Denver market is changing greatly right now and it is incredibly exciting to watch.

    I believe that our path of least resistance on this specific property is simply to hold onto it and see what happens with the neighborhood and the Denver market.  The property cash flows and we don't have an urgent need for the proceeds, so we are under no pressure to do something.  

    Separately, to take advantage of the current strength in the market, we are looking monetize one of the properties which we bought around the same time which happens to be in Aurora, about half way between Stapleton and Anschutz Medical Center/Children's Hospital.

    Thanks again for your insights.

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  • Account Closed
    Investor · Milwaukee, WI · Member since 2016 · 12 posts · 3 votes
    9y

    @Walker Hinshaw Curious about if there is an update regarding a grocery store in Clayton?

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  • Walker Hinshaw
    Investor · Denver, CO · Member since 2014 · 135 posts · 37 votes
    9y

    @Account Closed I may have been mistaken about that grocery store. I haven't heard any updates from my source on that in quite some time. But with grocery delivery starting to become more mainstream it may end up not being much of an issue long-term.

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  • Account Closed
    Investor · Milwaukee, WI · Member since 2016 · 12 posts · 3 votes
    9y

    @Walker Hinshaw I know there is the ParkHill one (f/k/a A mart) and have been told the area doesn't have enough density to warrant a large grocery store. Yes, the delivery is quite handy and the new Natural Foods is going in RiNo soon. 

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