Should I continue to pursue this deal??

Question

Hello all,

I finally got my first property under contract recently. ARV is about 120k. Contracted price is 77,500. The home needs work (foundation, roof, and cosmetic updates). My contractor gave me a bid of around 46k. However, I believe the contractor bid is gratuitous considering the neighborhood. The major work (roof and foundation combined) is only around 14k total. I plan to complete all of the other work (mostly cosmetic - painting, changing fixtures, flooring, etc) myself. I also have a few family members that are contractors who are willing to help. My total actual costs to rehab the property should be around 20-25k at the most.

Here is the address: 1008 Brae Loch Dr Dallas TX 75217

Today my current lender is now having second thoughts due to the fact that homes in the area have only sold for 119k and the amount of work on the repair estimate provided. The thing is, I'm not looking to flip the property. I plan to complete the major repair work and refinance the property as a rental. The current rental rates in the area are about 1500/month.

The issue I am having is that my option period ends tomorrow at 5p. My option period initially ended on Sunday; however, I was able to get it extended to Wednesday, 10/12/16 in order to give my hard money lender time to give final approval.

Any help or advice would be greatly appreciated.

Thanks in advance!!!

- Greg

Andrew Michael · Answer

Ok lets take your rehab amount of 25k (which based on the pictures/ water damage seems light). As of now you have Purchase Price: $77,500.00 Renovation Price: $25,000.00 Total (Purchase + Reno) $102,500.00 Closing Cost: $2,325.00 (estimated at 3% which is likely low) Insurance: $900.00 (estimated) Lawyer Fee: $1,000.00 Appraisal Fee: $350 Points: $3,900.00 (5 Points which is probably low for a loan under 100k)Agent Fee: ? I'll put 0 for now to save you moneyTotal $110,975.00Already, not including back end closing costs (refi), carrying costs, or unexpected repairs, you are within 10k of your ARV. If your lender is questioning that ARV there is a good chance the bank will as well. If more construction costs show up you will have a problem, if for whatever reason you have issues renting it you will have more carrying costs, if for whatever reason you cannot rent it at 1500 but only get 1200 you may have a problem. If the front end of the deal is already cutting it close then is it worth the risk? Allow me to play out the worst case scenario. The original contractor was correct at 45k, you carry the home for 6 months, it only rents for 1200, and the banks appraisal only comes back at 105k. Do not forget the back end closing costs, lets say another $2,325. You are now in the deal for an additional cost of about 25-28k. Does this make sense?

Mark Allen · Answer

Good choice, Greg. Nonetheless, I'm sure you learned quite a bit in the process!

Patrick Ellis · Answer

Greg,If you unsure about how to review these deals, you may want to consider working with an investment friendly realtor (shameless plug). Andrew was spot-on about the risks in a deal like that. You have to be careful in evaluating these deals or you'll end up working for free or losing money.Good luck,Patrick

Greg Shyne · Answer

Thanks for the insight Andrew. I went ahead and cancelled this deal. Moving on to the next one... I appreciate your help. Regards, Greg

Greg Shyne · Answer

Thanks for the quick response. I am bringing about 40k to the table for this deal. The hard money loan is for 80k... I am a little confused as to how I'd be close to breaking even or losing money considering that this is a buy and hold deal.. Can you please elaborate a little bit for me?Thanks, Andrew!

Brian Pleshek · Answer

I've found that unless you have a good relationship with your contractor that costs are higher than quoted. I'd be worried about the costs exceeding what was quoted. Did you get your family members that are going to be helping to look at the numbers? What is the cost of financing? Taxes? Insurance? The purchase price looks a little high to me for all that needs doing. If you take into account the 50% rule the cash flow might be thin. Without more numbers and knowledge of the local area it may be too difficult to give you a better answer. Good luck. Brian

Andrew Michael · Answer

As a lender, I would only do this deal if you brought a considerable amount of cash to the table and my LTV was on the lower end. What is your cash position in this project going to be? Even using a rehab price tag of 14k this deal still does not make sense.By the time you factoring in (2) closings and holding costs alone you are very close to the break even mark. If anything at all goes wrong or the original bid was in fact accurate you will surely lose money on this deal. Having roof AND foundation issues should make it even easier to walk away from. I am not familiar with your market but I am guessing there are plenty of better deals out there.

Greg Shyne · Answer

By the way, here's a link to pictures of the property: https://www.dropbox.com/sh/b1xinldyeimgrea/AADb0Am7yeZ-VESr42XKpt_Da?dl=0