Should I pull the trigger?

Question

I’m a Realtor and a client of mine is offering her house to me prior to listing it on the market, if I pass.

It's on the borderline where it's not a sure thing but it feels like enough of a discount that I don't want to pass it up. I know it’s not a perfect deal and yet I feel like it could be a decent one. Rough numbers are...

Purchase price $200-205k.

Rehab is almost all cosmetic. Could be as low as $5k if I DIY a lot, high side is probably $13-15k if I contract everything.

ARV is $250-260k.

If I do it, I'm leaning towards quick flip. Comp rental rates are $1,800-2,000/month.

Thoughts?

Andy Eakes · Answer

@Troy Jaster If your numbers are correct, then I would say that you got a good deal. I would still get an inspection done just so you know nothing is going on that you cant see right away. Your rehab numbers do seem a little aggressive. An increase in 60k seems high to me if it was only cosmetic and can cost you so little. If the purchase price was potentially 60k less than what it could be worth, I would say there's something more than cosmetic going on. But its hard for me to say without at lest seeing pictures at least.

Good luck!

Troy Jaster · Answer

UPDATE: The house hit the market on Thursday for $269,900. We had about 30 showings in 3 days, 10 groups through yesterday's Open House, 5 offers (4 were over list), and executed a contract last night. So far this has been a very smooth project and everything has pretty much gone according to plan. Our buyer is cash and we're set to close on Feb 16th. Basically just need to get a clean inspection this week and everything else should be solid. There's still a lot that can happen. Hopeful, yet optimistic.

Troy Jaster · Answer

I suppose I owe everyone an update...

I officially bought the house yesterday. The rehab budget is more than I first projected (surprise, surprise!) and yet it still made sense. Here are the details:

Purchase price was $200k. I put $5k down and the seller is holding the balance of $195k for 3 months, no payments, no interest, no charges. Current rehab estimate is $25k. I estimate it'll sell between $260-270k which means I'll clear about $20k.

The timeline is tight but since I have a really good, long term relationship with the seller, she allowed me to get in and start the rehab 2 weeks ago. Therefore, I'm already about 50% done with the rehab. My goal is to have it on the market around Jan. 20th. Though it will be an anxious wait, I'm confident it'll close before my mid-March deadline.

I went back and forth a lot on whether to flip or to hold. Ultimately, my wife and I are wanting to build a real estate portfolio and we decided that we could better use the short term cash to continue to increase our real estate fund so that in the future, we can purchase with our own cash and then refinance out, post rehab.

One huge A-HA for me has been that I fully expected to do a lot of the work myself on this one. However, getting contractors at a great price during the holidays was actually relatively easy because many crews don't have work during these breaks. So even though I expected to be putting lots of 'sweat equity' into this one, I instead just became my own GC. I've done a few 'grunt' projects which has been fine. I'm excited to get this one finished up and on the market soon.

I'll keep you all updated!

Troy Jaster · Answer

@Jon Kelly The seller was renting it to her daughter and she just wants to liquidate some of her properties and is considering moving out of state.

No matter what, I’d get an inspection.

Jon Kelly · Answer

@Troy Jaster Do you know why they are selling? My guess is since it's an off-market deal and you have a relationship with the seller you will forgo the inspection. It's probably worth an inspection, since the rehab is your biggest risk here. Maybe the seller would split the inspection costs.

Seems like you can make $15-25k after taxes and fees in a relatively short amount of time. Not a bad deal.

Walter Key · Answer

Gotcha.

Troy Jaster · Answer

@Walter Key Haven’t run all the rental figures yet. Just visited it again last night and started with the flip numbers first.

Walter Key · Answer

@Troy Jaster Gotcha. Personally, I've never been a fan of all those crazy "rules of thumb". It looks like a pretty good deal to me. If you're confident in the numbers, I'd pull the trigger. Looks like a quick buck if you flip or a decent cashflow if you rent it out. What's your Cash on Cash ROI look like if you rent it out? Have you ran those numbers?

Troy Jaster · Answer

@Troy Jaster I meant to add in, if I pass on it, she’ll do the rehab herself and list at full price with me.

Troy Jaster · Answer

@Walter Key I’m basing the “not a perfect deal” comment off of the fact that it’s doesn’t hit some of those traditional metrics: ie. 70% of ARV or the 1% rental rule.

Should I pull the trigger?

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