Is this a good deal?

Question

Hi Folks, we are new to the investing world and have just been offered a trade on our house that we just bought about 4 months ago in the Northeast quadrant of Washington, DC. This deal was brought to us by our agent/investor. This is our first big deal so maybe I'm analyzing this too much, there are a lot of parts of this deal, I keep going back and forth and can't seem to confidently analyze this deal, so I have decided to ask the BP family forum and get some advice.

Details:

We bought our house for 615K and would be selling it for 816K to a developer who would do a 3 condo conversion (In DC, a larger plot of land allows for a 3 unit, instead of a 2-unit, which our property has). Our property is approx 2500 sq. feet plus an unfinished basement on a 3,356 sq foot lot. At the end of the sale taking into account closing costs, agent fee, and a permit credit. We would end up making around 110K.

In return for this sale of our house, the developer is about to finish a two condo conversion in the same NE area (with high end finishes). We would be trading/buying one of the 2 units, the two-story first level/basement unit plus parking spot (about 1600 square feet) for 750K or market value. This is a two bedroom/plus den 2.5 bath condo, with gourmet kitchen and open floor plan living space.

In addition to this "trade", there is a "sub-deal" in which the developer would also help us flip a condo at cost (approx. 40k profit from this flip) and we would then lend some money, interest-free back to the developer to help with the renovation of one of his next projects.

My hesitations are:

We really want to trade for the upper unit because it has better views of the city and bedrooms are slightly more spacious. It seems like the upper unit at market value could be up to 825K. (It seems like 825K may be too high).

I "feel" I am not getting a good deal because I see the potential of our house, but I understand i don't have the skill set to convert it into a 3 condo conversion.

My pros:

We make a great return on our house purchase within four months.

We get "free" GC reno for a flip of another property we have.

We get a "high-end" condo, but our intent is to build our portfolio, so we never previously considered buying a property at market value.

What would your advice be on this investment?

Andrea Delgado · Answer

Thanks everyone. I have considered the taxes which are taxed at a short gain, ordinary income tax rate. I thought i was over thinking this but I'm glad I posted it because it just re-assured me of all those items listed on the comments. The plan on the loan was to loan the money in exchange for collateral such as the title. At this moment, i have chosen to pass on this given that he is not wanting to come down on his price of the upper unit that I think would benefit trading the property. I will probably end up waiting 2 years to avoid taxes and getting enough experience to do the 3 condo conversion.@Eric Teran I'm 100% sure we can build 3 on the property we bought. We invested on the property for that reason when we bought it. We are on the Trinidad neighborhood. Thanks again everyone. I really appreciated your input and helped with making my decision more clearly. Andrea.

Cassidy Burns · Answer

Hi @Andrea Delgado, I would really look at the comps for the unit you would be purchasing. Not many neighborhoods are trading for those #s in NE DC unless it is in Eckington and/or some parts of Cap Hill. The beauty of this, is you are in the drivers seat. You own the valuable asset so you should control the terms. I personally do not like the "sub deal" and the fact that you are loaning him $$$ interest free. Renegotiate. And again,Make sure your comps/values are rock solid. Oh and another thing, DC zoning isn't going anywhere. Hold the property, wait until you have owned for 2 years; avoid the taxes, increase the equity, and educate yourself, and then develop the 3 condos yourself by hiring a 3rd party GC company. Good luck!

Vasa G. · Answer

I am reading another comments and there are all valid arguments. Let me put more options to include Into your analysis. If you are planning to do development yourself , you need to know that condo conversions are most advanced project construction wise, as you a have to do full gut work with underpinning, building addition in the back and adding new uppper floor to maximize sqf. so if you are not into contruction world , your need to plan that your construction cost per sqf will be on the higher side.Regarding waiting for 2 years or more , Zonning in DC is constantly changing, and it is constantly changing towards restricting development.Before you could do a 3 condo conversion in most of neighborhoods and have high ceiling condo and roof access for roof deck as height limit was 40 feet for building. Now it is 35 feet height limit , only two condos per unit , no roof access from inside the house and you can’t touch the front of the building. That laws are mostly influenced by Historic Designations board and they are very active and influential in DC government. If Trinidad becomes historic designated , not only that you will not be able to do your planned expansion , but they will control what kind of windows , entry door and fence you can put on your house. Congrats on your purchase and good luck with your project.

Eric Teran · Answer

@Andrea Delgado are you sure that you can build 3 condos on your land? DC requires a minimum of 900 SF of land for each condo. If they want 3 condos your lot has to be at least 2,700 SF. I found this out when two of my clients with similar size lots were looking to do the same thing last year. We did more investigating and to get a special exception was going be extremely difficult The good news is that it is up to the developer to figure it out. If you can do three units why not start to ask the question on how it can be done. You will learn a lot by jumping in with both feet on a complicated project that all future investments will be a snap. If it makes sense you will find an investor. Let me know what zone you are in and I can take a quick look for you for the condo conversion requirements.

Lynnette E. · Answer

1. You will be paying taxes for selling your property, and since you had the property for less than a year, it will be short term capitol gains taxes, the highest form of taxes. Wait 2 years and you pay no taxes. You profit from selling will be very low, not the amount you are expecting.2. You are getting a high price home that is less desirable than what you currently have, and will always be the basement unit, harder to sell and less value over time, and this ties up your money.3. You are lending money to a stranger that you do not know their credit history (why can he not get a normal loan?? why do they need you for a bank?) Whenever you lend money you need to REALLY consider their ability to pay it back. If he goes belly up, you will loose out. Did he offer you title on the property you are funding with a loan? Or just his good word and a handshake?4. Why lend to a stranger for him to make a profit and not at least get market rate interest based on his credit worthiness and your risk?5. Seems your realtor is getting a LOT out of this deal, commission galore!6. The no profit part of his offer for work on your next flip may not be worth anything. He may be sooo high end that his cost is more that you can pay for your flip, OR he may not be available when you need him, or never, and no profit to him does not really mean much. I use one contractor a lot and pay him 15-17% above his costs. So really, you are getting a 15% discount---IF he is available when you need him, IF you get a price that is competitive from him (its a game with some contractors to say low profit, but increase their 'costs' to include extra things like management), and you will still have him bid the job, not give him a blank check, right?, IF he does not disappear, IF he has skills to match the flip you do.7. Oh, and if he is such a good flipper, construction company, why does he give you a real high price on the house you are selling, on which YOU are paying commission and back deal you paying for his permitting. If you do this deal at least do not pay commission on the part of the selling price that is paying for the permitting fees and any other kick backs.It just seems like he is getting your desirable house and giving you a basement house that is not selling. You are giving him a free unsecured, no credit approval, no interest loan, paying for his permits, paying for commission, and hoping to save 15% in construction costs in your next flip.SOOO many flags on this deal!

Shadonna N. · Answer

The mortgage goes up and you get a tax hit. Trading in a single family home for a condo? Does not sound good. I question the sub-deal . Check out the developer. Ideally you need someone to develop rental units where you are and your mortgage is paid.

Marian Huish · Answer

My experience is that if an Investor approaches you with a 'good deal', it's usually a good deal for them! Have you researched the work/reputation of the Developer? Is the condo you're looking to buy currently on the market and, if so, why isn't it selling? Sounds like there's quite a bit of risk involved- You may want to hire a RE Attorney to review these 'deals'! Good Luck!

Jaysen Medhurst · Answer

@Andrea Delgado, this makes me uneasy.What's the market value of your current house? If it's close to what the developer has offered, then you're not really getting anything here, except the "help" with a flip. Two questions:What's the true value of this "help?"How will that be structured? What kind of contract is going to be in place to protect you and ensure that everyone knows what's expected and delivers?My concern is that you do the deal, it comes time for the flip and then the GC is MIA or "too busy" or a hundred other excuses come up. Or what if something comes up on your end and you have to wait. Can this "help" sit on the shelf for 6 months or a year.My gut tells me the GC is either trying to take you for a ride or he's hustling to make a deal without giving proper thought to what you need or how it will be delivered.Lastly, have you talked to any other local developers? See what they would potentially offer you for your place.

Russell Brazil · Answer

Keep in mind here...you are going to owe taxes on the sale since you have not owned and lived in it for 2 years.Hold out for the upper unit.