How much rehab is too much rehab?

Question

I have found a bank owned, rather tattered house sitting on 1.6 acres in a GREAT neighborhood that will need significant rehab to flip and get in shape to sell. The bank is asking 49k. A contractor estimates about 90 - 100k for a total gut rehab. All of the comps in the area range from 230 - 350k. I have a couple of friends that also do flips and they feel the rehab for this house is too extensive and therefore not worth the effort. So my question is this: how much rehab is too much?

Account Closed · Answer

@Paula Moore The question is not how much rehab is too much; it is: do the numbers work?  You have to make sure your info (ARV, Renovation costs, holding costs,etc) is rock solid.  Then it's just a math problem.

The amount of rehab you must do is: everything that is necessary to make the house commensurate with other houses in the neighborhood at the price point you hope to sell for.  In this particular case, $230K-$350K is a huge range and you can not possibly make a sound decision, without a more precise number.

Elizabeth Colegrove · Answer

Is the desirable area mostly subdivision? Just make sure the ARV is really what people are telling you. I know in our area properties out side of subdivisions are not as highly desirable even in the same area.

That being said, high risk are usually the deals with the best reward. I have found the key is finding a gem that others can't see. While there is always a learning price/cost. If you think it will work and understand it will have lot lots of moments and stress go for it. People thought we were nuts when we got started 4 years. Now people either still think we are crazy or more often, that we will be very thankful in 5 years so.

In the end dream big and go for it.

Good luck!

Paula Moore · Answer

@Andrew Syrios, @Bill Florence and Account Closed,

Thank you for the words of advice! This neighborhood is mostly upper class professionals, higher end houses and a very desirable area. The house itself sits at the end of a road, lots of trees, so fairly secluded and quiet. I'm told the beautiful wooded lot is worth the asking price even if the house were leveled and the lot sold for a new build, or divided for 2.

I am a newbie with not much rehab experience under my belt (yet), so not sure if I'm ready to jump in to something this large!

I will work on the numbers again, along with the other tips and make sure this is a good fit for me at this time.

Thanks again!

Percy N. · Answer

My best deal thus far was a $70K profit on a project which needed $90K in rehab.

However, since this is your first project, I would recommend partnering with someone who has the experience, especially in construction.

What if your contractor or sub does not work out? What if there are overages? Do you know the order in which to schedule the tasks? and the list goes on.....

Jeff B. · Answer

Wish I could post a powerpoint on this subject as it makes it easier to see, but I'll try this:

Take the various forms of REI and chain them in the natural order of possession:

• Wholesale - short sale-  flip/rehab - Owner Occupied - Buy&Hold.

Doesn't matter where you enter the game, but between each is some investors exit game profits(EGP) (or margin) so we get:

Wholesale(EGP1)- short sale(EGP2)-flip/rehab(EGP3)-OO(EGP4)- Buy&Hold(EGP5).

At the last play of the game, we're into the market FMV and the game is over(ignoring possible future appreciation).  This becomes the defacto LIMIT and the investor is into the wall.

So wherever you enter, the final math is always the same:

• Your purchase price + your EGP, plus all the remaining EGPs to the final FMV.
• {your PP + EGP becomes the next investor's PP}

As to too much rehab?  That's when your PP + Rehab exceeds the FMV to the final owner.  To assist in making the offer, you *MUST* know the FMV and the rehab expenses to calculate the highest possible bid you can make and still earn your EGP.  Not understanding this is how so many newbies get hurt in REI and so easily mislead by all the gurus :sigh:

Bill Florence · Answer

Wow, I wish I could find 50k houses out here that ARV at 230-250k. That is a 20% deal + rehab. If it were me, I  would get 3 contractor opinions in writing and/or have the place professionally inspected to get a sense if the real rehab cost, could be a lot higher or possibly lower.  Also think about if the block/neighborhood is really as good as the 250k comps - one block in any direction can sometimes make a huge difference. Corner lot, traffic noise, commercial zoning nearby, etc. Also check with local municipality for tax, other liens, eminent domain or redevelopment, ordinance issues, historic preservation, etc. Also check land values, 1.6 ac could be worth more/less ?

Andrew Syrios · Answer

It really depends on your comfort level and experience. Bigger rehabs are more risky, that's the way to think about them. More can go wrong and there's a bigger chance that budget will blow up on you. On this deal, you should expect some extras above the 90-100 the contractor predicts. But, at the same time, bigger rehabs are usually the deals that have the best profit margin potential. So it really comes down to what your experience and risk tolerance are.

How much rehab is too much rehab?

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