Why the West End (Atlanta)?

Question

I'm think it's time to buy in the West End of Atlanta.  It's too late to talk me out of it, but I'm hoping some others will provide some insights.

Here's my recently inked deal:
Purchase price - $38k
Repair estimate - $85k
Holding costs - $1000
ARV - $170k

Projected profit before taxes - ~$50k
House is a 4 BR, 1.5 Bath 1925 Bungalow.

This is an urban, transitional area which started making a comeback but was clipped in 2008 collapse.   Amazing housing stock.  Half block to Atlanta Beltline.

Half the houses one street over have been rehabbed, listed or sold for ~$170k.  This street with 30 houses have been untouched since 1975 except for one rehabbed/sold pre collapse  and now listed for $165k.

Anyone with experience in this area?  thoughts on the deal?

Gabe Larkin · Answer

I am not very familiar with the market in the West End, having said that, after taking a cursory look at the solds since 1/1/2013 I am not very encouraged.  First, there are not many comps north of 100k and there are precious few >150k.  To make matters worse the DOM are really high for the few properties that will be comps for you.  Just my opinion.

If you contrast this with other ITP sub-market activity sine 1/1/2013, well done rehabs have extremely low DOM with many seeing multiple offers, selling above list, or selling before completion.  Areas I am referring to are Grant/Ormewood Park, EAV, Kirkwood, Decatur (City) and to a lesser extent Reynoldstown and Edgewood.

I am interested to hear how your project goes.  The way the aforementioned markets have been behaving has made me wonder if buyers will begin to branch into less established area ITP in search of sub 200k rehabbed 3/2's.

J Scott · Answer

I think the numbers are just fine to do this deal (I invest around Atlanta and would do it at those numbers), but I also agree with Jon that your estimates need to be a bit more refined.

In general, for cash deals reselling in the $150-300K range in Atlanta, you should expect your fixed costs (closing costs, holding costs, commissions, concessions, etc.) to be about 10% of the resale price.

So, your numbers look more like this:

ARV:  $170,000
Purchase:  $38,000
Rehab:  $85,000
Fixed:  $17,000

Profit = ARV - Purchase - Rehab - Fixed
Profit = $30,000

If you're confident in your rehab and resale numbers, you should be good to go.  A $30K profit on an approximately $120K investment (25% ROI) is pretty good in this market.

Jon Holdman · Answer

I think you're doing "Flip This House" math:

ARV: $170K
less purchase: $38K
less rehab: $85K
less holding cost: $1K (insurance and utilities only?)
"Profit" $46K

What about closing costs on the buy, closing costs and commissions on the sell, concessions (are those still required in your area) and money costs?  Even if you have your own cash, you could be investing that elsewhere, like making loans to rehabbers.   I'd guess all those costs at about $30K, reducing your profit to $16K:

buy closing costs:  $1K (maybe optimistic on a small deal like this)
money costs: $14K (borrow $123K, four points and 15% for six months)
sell commissions: $10K
sell closing costs: $3K
concessions: $5K

total: $33K, $28K without concessions.

Dave G · Answer

I'll be selling my house in West End soon. Need to clear some cash

Rick Baggenstoss · Answer

Gabe Larkin  I noticed the same thing.  West End properties move slowly compared to the East Side.  However, the East Side is very competitive which is why I'm taking on risk on the West End.

I have a good GC quote so the rehab costs are in line.

The low volume of comps and DOM are the risk factors on this one. My hope is the nearby rehabs I see underway will firm up the price.

Thanks for the thoughts.   I'll post more details as a follow up.

Jon Holdman · Answer

As J  Scott calculates, its a 25% ROI on your cash, so a reasonable deal. Do consider, though, that some of that return comes from the money you're investing, and you could earn that return much easier than doing fix and flips.  So, half your return is from the cash, half from the deal.

J Scott · Answer

Here's more about what goes into Fixed Costs:

http://www.biggerpockets.com/renewsblog/2010/03/17/calculating-fixed-costs-flip-rehab-wholesale-real-estate-deal/

Rick Baggenstoss · Answer

hi Jon Holdman -   I was summarizing to communicate order of magnitude.

BTW, it's a cash deal so no money cost.  (add $14k)  There are opportunity costs, but I don't adjust for those.  I do think about risk (rehab, time on market, etc.) and adjust my rehab estimates to include a contingency.

At the end of the day, it was go decision for me.  Would you have passed?

Rick Baggenstoss · Answer

Hi Ali Boone - The historic West End ... Peeples, Grady, ...  South of I-20, north of White (the Beltline) and west of Lee St.

I've noticed Capitol View and Adair Park borrow West End's name.  Type it into Redfin... you can see how dramatically different the comps are.

Ali Boone · Answer

Which part of West End are you talking about? I was over there a few months ago looking at properties and the parts I was in were still totally vacant and boarded up. I don't know how much of a comeback will be happening on that side, but more importantly, the income over there is very low so not sure who would be able to buy a house unless it was with government help, which is half of what tanked that area in the first place.

But again depends on what area you are talking about.

Why the West End (Atlanta)?

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