Utilities turned off in a potential flip- would you buy it?

Question

I'm looking for my first deal and the market in Massachusetts is super challenging right now. Over priced and fast moving. Found a 6 room single family house, which the listing agent says is in poor condition. The photos actually look OK, but no photos of the basement or mechanicals. It's a 3/1, in a great neighborhood, has a nice fireplace, hardwood floors and a fairly pretty, level half acre yard and a tiny attached one car garage. It flunks the Golden Rule for a flip at 70% but comes in at 75%. The offer will have to be cash. Numbers are weak for a rental- cash on cash return is less than 6%. Numbers are great to buy it, renovate it and just move in to it. I would definitely end up with equity, but for my own home I want to buy a more rural property or maybe house hack. This is a suburban 60's ranch. It has asbestos siding, needs a new roof, and a new (small) kitchen. It needs a little wallpaper stripped, fresh paint, landscaping and a bath refresh. (It has baby blue vintage tile which is pretty and nearby comps show people keeping the original tile and even the tubs, whether they are pink, blue or yellow! It's a college area and people like vintage stuff.) I would probably add a 3/4 bath if there is room for it. I got ahold of a great local kitchen contractor and he said the earliest he could do a kitchen is May or June and he needs 6 weeks. The asbestos abatement guy is out of the office until Monday. I don't have a relationship with a contractor in that area. It took almost a day for the agent I work with in that area to get answers. Electricity is on, the water is off at the street. Town water and sewer, forced hot air heat. It has a sump pump. There are already several offers on it. I can't imagine once I get in the place and see the basement and the deck it won't have at least another $10,000-20,000 of unbudgeted work. The sales agent thinks the bank price is low and that is will go for about $12,000 over asking. Either of these, costly unforeseen repairs or it going way over asking, would pretty much kill the deal as a flip. How do you protect yourself from unknowable costly repairs or upgrades when all or some utilities are off? I have analyzed a bunch of homes, I have looked at eight in person. They have all needed way too much work. (Purchase plus closing plus repairs is usually at or over ARV, LOL.) I'm in the education phase. Is this is a cancel everything, jump in the car and go see it deal (5 hour round trip) or a put on track shoes and run away screaming deal, or somewhere in between? Would you touch it if you weren't a contractor or didn't have an established relationship with a good one?

Julie Williams · Answer

Thank you for the excellent response @Jody Sperling. The numbers are crummy for a rental. It's a fix and flip in a nice suburban area and to get top dollar for it it would require thoughtful and tasteful renovations. I am looking for a property where the numbers are strong on the one hand or where I would be happy to be stuck with it, and move right in, on the other hand if, as you said, "Maybe I'm wrong and I break even. No harm." Massachusetts is a tough market right now. Nothing meets the golden rule! I am willing to deal with tighter/lower profits, but I have limits.

John Mocker · Answer

Julie,One suggestion. Have your Insurance Agent do a quote for this with one of their companies that runs "CLUE" (claims Liability Underwriting...) reports. That may uncover any recent claims. It would be an double check on what you are being told and may point to areas you need to investigate. Some other items to look at that may limit the what Insurance companies will write the coverage:- any in ground tanks- any knob & tube or aluminum wiring- FusesGood luck with the project

Shane Cloutier · Answer

TL:DR = Too Long Didn't Read

Jonathan R McLaughlin · Answer

@Julie Williams actually 6% COC for a single family house isn't all that bad if the neighborhood/location is as you have described. I'm assuming thats after rehab and with appropriate reserves for expenses though. You are likelier to see that number than a 10% paper return for a riskier property. Type of house is also a positive and appreciating as it attracts both starter buyers and downsizers. You have the COC return, the loan paydown (assuming you refinance out most of your cash) over time and possible/likely appreciation. Your overall return could be 15% or higher fairly easily. Hit singles, don't swing for the fences.That said, we aim for at least 10% COC and 20% IRR over 5 years on things we hold. Good luck!

Jody Sperling · Answer

If you've done the research and are prepared to make the leap, put in an offer. On my first rehab, we tried so hard to over-repair, but contractors, our real estate agent, and many others kept coming back to "It's a rental, it's a rental."Can it help to make the numbers if you're a bit handy and do some work yourself? Yes. Is it necessary? No. I've gone in with the attitude that if I think I can profit on a purchase, I make an offer. Maybe I'm wrong and I break even. No harm. I now have a property where someone else is paying to give me equity.My second rehab had more problems than I expected, but I met better contractors along the way which drove the costs down and improved the speed of completion. Even though I had unforeseen siding replacement, an unexpected plumbing bill, and a need for a new water heater that should have been okay for a bit longer, I still earned a healthy profit on the finished product.Fear will hold you back. Unless you know in your gut not to offer, offer. See what happens. Best of luck to you!

Tom S. · Answer

@Julie Williams Just adding, for your future potential deals, you can always put in an offer contingent on due diligence / inspection, usually 5-10 days. Not as strong as an offer with no contingencies but I haven't had too many sellers (even bank owned / foreclosures) turn that down as it's a reasonable request.I bought a banked owned HUD property some years back, even with no water or electric turned on, the plumber can do an air pressure test to give a feeling of what needs to be done, and hire an electrician as well for a rough estimate.Although riskier, we wound up doing extremely well on that property.Good luck!

Julie Williams · Answer

@Shane Cloutier @Allen Li LOL. Guilty as charged. I come from a family of writers. Maybe I should write 1000 page novels instead of investing in real estate.

Julie Williams · Answer

@Allen Li thanks for the input. What is tl;dr please?

Allen L. · Answer

you should add a tl;dr section up top, you gave a lot of detail. Utilities are generally turned off and winterized for this kind of properties that you are describing. Nothing alarming but you should allow for some room for error. My suggestion is to get in contact with a property manager or contractor and work up a relationship and take them to see the property or others like it. It sounds like you shouldn't be making this decision alone right now.

Shane Cloutier · Answer

@Julie Williams with you moving further and further away from your home area, have you considered long distance investing in a better market? The mid-west is heating up for some investors who want to flee the harsher markets of the east and west coast states.