I'm a newbie with distressed property opportunity. What to do?

Question

Hi,

Just to give some quick background on me, my wife and I currently have one rental property that we purchased a few years ago that we did some minor repairs to (floors, paint) before renting it out. We've had success with that property and decided to reach back out to our real estate agent to look at some other properties and to keep us in the loop on any distressed properties she tells other investors about. Long story short, she recently presented us with a property in The Woodlands area that someone out of state recently inherited and is trying to get rid of. Won't even make its way onto MLS. We walked through the property yesterday, it's 1200 sq ft, was smoked in, needs new floors and paint on everything (walls, ceilings, cabinets, doors) will need new exterior doors, AC vents were all corroded so not sure what issues we could find in there, the roof seems ok but will likely still need replacing, small kitchen that needs new countertops, and the house was built in 1970.  It's not in flood zone and ARV would be ~125K. We have never done a major renovation before and don't have a contractor on standby to simply walk the house with us and tell us what's what. I'm also very inexperienced with the issues an older house like this could present. I've read about plumbing and foundation issues that start to arise in homes from the 70s. I also don't know what electrical issues arise in older homes or how easy it is to fully get rid of the smoke smell. Our REA has two other investors that have made offers and tonight is the deadline before the seller chooses someone. I don't think opportunities like this present themselves very often, but with our inexperience is it best to just walk away? If the house were built in the 2000s and wasn't smoked in, i'd feel more comfortable jumping in with an offer based on my own expectations of repairs, but it being nearly 50 yrs old leaves a lot of doubt for me.

Matt McGuire · Answer

I think you should make the offer. Most people look to be all in for 70-75% of ARV which in this case would be 93,750. But that typically is because they are using private money and want to refinance to pay their lender back. If you are going to use this as a buy and hold rental it makes sense. If you can get it for 60k and spend 30k on the rehab it seems like a good deal. But remember to factor in holding costs for the time it will take to get it rent ready and place a tenant.

If you don't have a contractor use Angie's list or Home Advisor. I had great luck finding a contractor on Home Advisor and now he is my go-to in the Bryan/College Station area. Another idea is drive around the area where this house is, and look for other houses being flipped/worked on. Sometimes you can just stop by and talk to the contractor and he/she will be available for your project.

Michael Geiger · Answer

Yes, sorry... we ended up putting in a cash offer for $68K, but it ended up selling for $78K. Our realtor said that we were in the same ballpark as the other flippers, but the person who got it plans to flip and rent like we were so she said they didn't follow the same "rules" (70% ARV). The highest we talked about going was $75K so either way it seems like it wasn't going to happen for us unfortunately. With ARV being between $125K-$150K I think we could have gone that high and still done better than just buying something more turnkey, but you live and learn I guess.

Matt McGuire · Answer

@Michael Geiger Any update on the property?

Michael Geiger · Answer

We walked through the property again yesterday with a friend who isn't a general contractor, but does a lot of home repairs and can price out most items. He was able to then speak to a contractor friend to help price out items he was unsure about. So we did come up with a number we were comfortable with for repairs and put in an offer without including an option period. It will be interesting to see where ours lands in regards to other investors. I believe there are 4 other parties submitting offers. We are looking at it from more of the BRRR standpoint whereas these other investors will simply be looking to a flip, so i think we are taking more into account in regards to repairs like roofing and piping whereas they will try to leave it alone if they can. We likely will not be following the "70% rule" with these larger repairs, but since we are holding onto the property this still gives us a great opportunity to be above 15% ROI (after obtaining financing later on), mitigate larger issues down the road with tenants in place, and get some experience with contractors and renovating houses. Right now it's impossible to find even 10% ROI properties on the MLS in htis area (if you know otherwise then please share these neighborhoods!)

Ronald Rohde · Answer

It doesn't sound like you're going to have much of an inspection contingency if you do go under contract. I don't know that you can offer a reasonable price given your experience. You'll either underbid professionals or you'll overpay.

Michael Geiger · Answer

Thanks for the comments. It would rent for about $1400/mth so after I financed down the road I would get above 10% ROI if the repairs fell in the $30k-40K range offering $60K. There is some competition though so I don't know if I would get it for that price. I'm not sure we would end up tearing into a whole lot other than the floors and the two doors. Would try to just get those replaced and paint everywhere I could. What would you recommend in terms of an inspection in a property like this? A thorough plumbing and electric inspection? A general inspection? No inspection? Our realtor said the other investors generally walk through with their contractor, get an idea, and skip the inspection. With me not being on that level, I'm afraid to do something like that, especially without the input of a contractor. I think I could probably get a 7 day option period for inspections.

Grant Rothenburger · Answer

@Michael Geiger This is (probably) not a good flip. Would you be holding this and renting it out? If so, what would it rent for?

I know it's a smaller place but with everything it needs for sure, and might possibly need once you start tearing stuff up and find all the other broken/outdated stuff, your rehab budget is probably best case scenario, I would plan (without seeing the property and only reading your summary) on $30-$50k

Michael Geiger · Answer

Thanks for the reply Hans. I'm very familiar running the numbers, just not as familiar with contractors and reno costs, especially on an older home. ARV is roughly $125K and looking at potentially a cash offer at 60-70K with the assumption there will be 25k-30k in repairs. With the time crunch, I plan on walking the property again this afternoon with a guy I know who does small jobs and handyman work, but not a contractor like I really need unfortunately.

Hans Schmitt · Answer

Hey Michael,

What you do with this offer really depends on how ready you yourself are to jump into an investment. Do you have any contractor contacts that you trust? If so, try having them go out to the property with you to get a feel for how much work really needs to be done. Off market opportunities directly from an agent (not a wholesaler) don't come around very often, and they can be really great deals. Do a comparable property analysis to see how much a property like this goes for in your area after repairs. After that, estimate the repair value and then decide what you could pay for the property and still have a good profit. Make sure to take into account all of the closing costs, commission costs, and any other costs you may run into. Using an online calculator may help you if you're not too familiar with running numbers.

Hope that helps

I'm a newbie with distressed property opportunity. What to do?

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