Wholesale?

Question

Hi - I am under contract for this house in Nashville area. I feel I got a pretty good price. It's a slight fixer upper, just cosmetic rehab. I feel I bought at 75% ARV but since it's in such a desirable area I think it will have value. I'm wondering if any investors would even be able to find profit in such a purchase. My estimated ARV is about 60k higher than my purchase price and I bought 23k under list, and 30k under Zillows estimated home price. Anyway, this is my first real estate purchase ever, so I'm pretty nervous undertaking all this work and feel my expenses will be so high I'll drain the profits. I think maybe it's easier if I can unload it for profit immediately to someone who is more efficient at rehab rather than do all the work to make the same or less amount... Any thoughts on how I should make that decision? Also, I live out of town so I'd have to fly in several times to manage the rehab, although my parents will be living there and managing most of it.

Devan Mcclish · Answer

@Leland Smith                      265,000 - 202,000 purchase = 63,000

- 8% of 265,000 (commissions and closing costs, 21,200)

= 41,800

- 2,500 for buying closing costs (I assume you didn't add this in the 202k)

= 39,300

- 30,000 (rehab)

= 9,300

- 5,000 (interest payments, taxes, insurance, utilities, lawncare)

= 4,300 net profit

This as you can see is a terrible deal. Don't buy it

Carrie Carlton · Answer

What area is it in ? I am an investor in Nashville. Nashville is booming right now. ARV are hard to approach at times.  I am happy to offer any help, and may be interested if you want to wholesale.

Luka Milicevic · Answer

@Leland Smith

I can't imagine you bought a good deal off the MLS in Nashville. Not saying it's not possible, but I just think it's very rare.

I will be happy to take a look at the property and let you know what I think. You can PM me if you would like.

Eric Delcol · Answer

Hey Leland,

Congrats on your first deal under contract!

You made the right move in getting under contract.  You can always walk away at this point.

It sounds like where you're struggling is your exit strategy.  Before you purchase, always have at least two exit strategies.

It seems you do, but you just need to solidify them more.

1) Fix and flip - I'm assuming this is your main plan?

2) Rent and hold?

"I feel the market in that area is good enough I can rent the place to  my parents after upgrade and wait for next year or later."  Is this because you need to wait for the loan to be seasoned?  Are you financing or is it all cash?  If you're planning on financing this may not be the best situation.  Also, are your parents okay with paying you market rent?  Usually, deals between family and friends get the FF discount.

It's great that you made A move, but now you need to plan out two different exits.

Shawn Torsitano · Answer

Your ARV certainly sounds high. I doubt could command a price 15k over a house that was 370 sqft larger, assuming that property was in pretty good condition, which it sounds like it was.  See if you can find something nearby that isn't almost 400 sqft larger, that's a pretty substantial difference for most places.

I would caution you on the plan with renting out to your parents. There may be seasoning periods with the banks that will prevent you from refinancing, so you need to make sure that the rents can support the higher interest rate if you're taking out high interest loans.

Leland S. · Answer

@Josh Braun

1. I am awaiting the inspection to be sure, but there is an HOA that insures the exterior which helps. Unfortunately my parents weren't in town to review the property so we asked the realtor to do the best she could to give us feedback on the quality of the house. I found out I have a contact who does flipping in that area so I will ask them to visit during the inspection for me and give me thoughts.

2. 1975 (listed as approx). It's a Town house with attached garage to second unit, but otherwise large yard and looks like a separate house.

3. The most recent comp on the same street was sold 7-22 but with another bathroom and +370 sqft for 250k. It was all remodelled inside pretty well. The average over the last 9mo (latest comp from 10/9) for that same street was 237k, but one sold very low for 189k on 6/1/16 with the same sqft but must have been a real dump because the next lowest sale was 230k for the same bed/bath with 300sqft less. If I remove the lowest # unit the average sale on that street is 254k.

So, I may have been a bit generous with a 265k ARV. But to me I feel the market in that area is good enough I can rent the place to my parents after upgrade and wait for next year or later. The cash flow should be about $300/mo for rent.

Josh Braun · Answer

If you are wanting to sell to another investor, you need to have confidence in your numbers, calculations and comps, showing data points.  Forget zillow's estimate, you need to use real comps in determining ARV.

• Are you confident it is cosmetic only? Given you live in California, I assume you flew into town or had someone else do a rehab estimate for you?
• How old is the house?
• What characteristics of your comp are comparable to this house? Size, age, lot, etc?

Leland S. · Answer

I assumed 30k of rehab costs. Cosmetic means paint, floors, fixtures, kitchen/bathroom upgrades, some outdoor cleanup. I bought off the MLS and made a low offer that was countered very close. I assumed 265k ARV with a 202k purchase. I'm not super confident on the ARV though because the sell prices in the last 6 mo vary by 100k, but I can't tell what condition these places are in. I figure that given the square footage and if it were fully upgraded nicely inside it should be in good demand.

Shawn Torsitano · Answer

Cosmetic can mean a lot of things, and could easy cost tens of thousands of dollars.

First off, I don't recommend judging ARV by "feeling". You're putting thousands of dollars on the line, and potentially your credit at risk of foreclosure. Take the time to ensure your ARV is valid.

Second, buying at 75% of ARV sounds high. Generally, the 70% rule is start at 70% of the ARV, and then subtract rehab costs. Paying 50% or less of the ARV is fairly common.

What do you have budgeted for rehab costs? It sounds like what you have it under contract for may be too high to wholesale it, but I would need a lot more numbers to comment on that further. $60k under makes it seem like a possibility, but 75% ARV doesn't.

Wholesale?

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