Turning a flip into a rental

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Turning a flip into a rental

Anita Ahuja
Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes

Hi BP members! Happy holidays to you all.

I’d like some advice on a flip I financed in central Phoenix . Basically I’m 127k into the finished flip. The labor partner ( guys who did the flip) are in about 10k, the rest is a hard money loan for about 130k. The labor partners own the home.

Unfortunately, the house has been sitting on the market for 60+ days now and with holding costs being around 1800 a month, we need to do something w the house.

I am considering buying the home from the labor partners. This would basically have me own the home outright and be able to put tenants in it ASAP.

The house is currently asking 310,000. After doing the math w the BP software, I basically need to buy the house at 285,000 to be able to break even, recover my money and carry the loan. This is expecting 1900 rent and accounting for pool fees, maintenance, 5% vacancy, 8% management ( I live out of state), property taxes , closing costs and a 6.5% 30 y loan after putting 25% down.

My questions are

- am I hurting myself in the long run by buying the house for less? Am I bringing down the value of the house?

- what can I offer the ground (labor) partners given that they will have lost a lot of time on the fix?

- any other red flags with this?

The partners are a stellar group of individuals who have integrity.

Thanks in advance!

Anita

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Bob Okenwa
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
7y

@Anita Ahuja

I know this property well. I had a showing at this property about two weeks ago. My clients' feedback was they thought the home was very nice and liked the garage/workshop, but they were not too keen on the area. The proximity to McDowell Rd. was their biggest concern since that is kind of a boundary where home values drop and crime increases. For that area, you may have to drop the price. When we were there, the clients' were put off by the condition of the neighboring homes as well. I know there's nothing you can do about the neighbors, but some of them had unkempt yards and shopping carts in their yards.

There is an equally nice home (smaller and without a pool, but has a larger lot) at 3324 E HOLLY St that is listed for 265k. The best comp in that immediate area is probably 3445 E GRANADA RD which sold for 291k. It's a little larger and has a larger lot, but isn't as nice as your interior but is lower in price.

3212 E Granada Rd. sold for 258k and is smaller with a slightly smaller lot, but sold in 2 months. It too is rehabbed. I think you are overpriced for the area and may need to look at a list price of 275k-290k to move the property. Granted, these comps don't have pools or garages, but the fact that your listing has been on the market for 5 months and has only had a 6k price reduction shows that your list price may still be too high for that immediate area. 

Your realtor should be getting feedback from showings to gauge buyer interest and feedback to help guide you on what steps to take next. This is simply my professional opinion based on first hand knowledge of the area and buyer feedback. Please take my opinion with a grain of salt as I could be wrong on this, but just wanted to give you my thoughts.

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  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    Hi @Anita Ahuja

    Have you reached out to your realtor for solutions? How is he/she marketing the property? Seeing as we are in the heart of the slow season, it is to be expected to see a slowdown in the fall/winter, and with the housing market slowing down both nationally and locally, the DOM is inching up. I'm seeing about 60 DOM as the average so that kind of lines up with what you're seeing. If you want to PM me the address, I'll be glad to take a look and offer feedback.

    To answer your other concerns:

    *A 6.5% 30 year loan seems a bit on the high side. I'd shop for a better rate.

    *What is the current market value of the home? It doesn't seem to be 310k if it has been sitting for longer than average. The value of the home is set by what others are willing to pay for it, and what other nearby properties have sold for. Buying it yourself for a bit less may or may not influence the price of the other homes for sale in the area, but in the long run, it shouldn't make much of a difference if everything else is selling for market value.

    *You can offer the partners their money back plus maybe a little more. Explain to them your concerns and the math behind what you are offering them and how you need to at least break even on the deal.

    *Most importantly, you need to have an open and honest meeting about your concerns and exit strategy. The exit strategy should have been outlined at the onset of the project so everyone would be prepared for a plan B or plan C.

    1Reply
  • Anita Ahuja
    OP
    Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes
    7y

    @Bob Okenwa

    Thank you for your reply. Yes, the exit strategy wasn’t clearly outlined from the beginning but my partners are very willing to do what makes sense for me ( the money partner).

    What I’d like to do is buy it for what’s into it and rent it . I’d like to at least make 200-400 a month to start with. It’s not a lemon. It’s a nice house w a nice pool in an area that is yet to turn around. The address is 3329 east palm lane in Phoenix. Would love your input once you take a look.

    One thing that's great about REI is when one strategy doesn't work, there's always a second strategy to try. I don't see a downside in buying the house for under market value. I can even buy and hold for some years.

    Thanks!

    1Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    @Anita Ahuja

    I know this property well. I had a showing at this property about two weeks ago. My clients' feedback was they thought the home was very nice and liked the garage/workshop, but they were not too keen on the area. The proximity to McDowell Rd. was their biggest concern since that is kind of a boundary where home values drop and crime increases. For that area, you may have to drop the price. When we were there, the clients' were put off by the condition of the neighboring homes as well. I know there's nothing you can do about the neighbors, but some of them had unkempt yards and shopping carts in their yards.

    There is an equally nice home (smaller and without a pool, but has a larger lot) at 3324 E HOLLY St that is listed for 265k. The best comp in that immediate area is probably 3445 E GRANADA RD which sold for 291k. It's a little larger and has a larger lot, but isn't as nice as your interior but is lower in price.

    3212 E Granada Rd. sold for 258k and is smaller with a slightly smaller lot, but sold in 2 months. It too is rehabbed. I think you are overpriced for the area and may need to look at a list price of 275k-290k to move the property. Granted, these comps don't have pools or garages, but the fact that your listing has been on the market for 5 months and has only had a 6k price reduction shows that your list price may still be too high for that immediate area. 

    Your realtor should be getting feedback from showings to gauge buyer interest and feedback to help guide you on what steps to take next. This is simply my professional opinion based on first hand knowledge of the area and buyer feedback. Please take my opinion with a grain of salt as I could be wrong on this, but just wanted to give you my thoughts.

    3Reply
  • Anita Ahuja
    OP
    Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes
    7y

    Thanks @Bob Okenwa

    I really appreciate you taking the time to post . Can you tell me what you would expect in terms of rent. Does 1900 sounds right? Also, I’ve heard in Phoenix, tenant can pay utilities. Is this your experience as well? Also, do you think getting good tenenats would be hard? 

    Given that I am not looking to make any profit on this property, I think I’ll keep it. What do you think in terms of this specific area coming up in the next few years? 

    Lastly, if you have any property manager referrals, please pass them along. Looks like I’ll be an out of state landlord! 

    Thanks again. 

    Anita 

    1Reply
  • Anita Ahuja
    OP
    Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes
    7y

    @Anita Ahuja @Bob Okenwa @Vivek Khoche

    My numbers were off in my original post

    My in: 127

    Hard loan 129

    Partner 10k

    This must make more sense now

    Thanks!

    1Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    @Anita Ahuja

    I think the rent would be closer to $1350-$1500, but you'd want to verify this with a PM company that is familiar with the area.

    Yes you can have the tenant pay the utilities. Getting good tenants in that area may be difficult since the median income of that zip code is about 25% lower than the city median. It all depends on how well your tenants are screened.

    This area has been pretty stagnant for years. The more vibrant area is north of Thomas Rd, closer to Indian School. Rd.

    1Reply
  • Dustin P.
    Realtor · Tempe, AZ · Member since 2017 · 541 posts · 442 votes
    7y

    @Anita Ahuja

    @Anita Ahuja

    I'll second what @Bob Okenwa said about the price. I just comped it staying between 32nd St, 36th St, Oak and McDowell. The highest to sell in this area was 3323 E Cypress St which was a little smaller and without a pool and sold for $305k. It's also further north though away from McDowell and in a different subdivision. After that comps fall off to the $260k range. You may get the $300k but you'd have to sit on the market longer, like Bob said 60 days on market is getting to be the average right now and if you're asking for top of the market you're likely to sit even longer. I work right off 44th St / McDowell so I know the area and McDowell is still a little sketchy, the prices aren't quite into the 300s there yet.

    I ran some rental comps also and I think $1900 may be a little high, although rents are going up right now. You may be closer to the $1500-1600 range with only 3 bedrooms. There is one that rented just a couple streets over for $1800, 3437 E Holly St. It's almost as nice as yours, not quite there, but also 200 square feet larger and 4 beds 3 baths. 

    For property management I've heard some decent things about Renter's Warehouse but haven't used them myself.

    1Reply
  • Brian Ellis
    Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Anita Ahuja my initial thought would be take the hit now and sell it for less, rather than take a chance and possibly take a hit with a bad set of tenants. Save yourself the aggravation of working with PMs out of state for very little cash flow. Regardless of what you decide I hope it all works out, good luck!

    0Reply
  • Anita Ahuja
    OP
    Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes
    7y

    @Dustin P. thanks for

    Taking the time to write. How much extra rent will the pool give? 

    0Reply
  • Dustin P.
    Realtor · Tempe, AZ · Member since 2017 · 541 posts · 442 votes
    7y

    It's hard to say in that area, there aren't a whole lot of pools. Not as much as you'd get in nicer areas. I would probably start it at $1700 if I were listing for rent.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Anita Ahuja. So you went in on this property out of state with some “labor partners”? What exactly was the agreement for this? Is it in writing? You’re in it for 130k and they’re in it 10k. Who’s paying for the loan? This arrangement seems kind of fishy to me. Most the times Propeties don’t sell is because their overpriced.

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    @Anita Ahuja if I were you, I would lower the price and sell. 

    0Reply
  • Vivek Khoche
    Investor · San Jose, CA · Member since 2017 · 343 posts · 102 votes
    7y

    @Anita Ahuja - It does not make any difference, Please read my PM carefully.

    Good Luck

    Vivek

    0Reply
  • Anita Ahuja
    OP
    Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes
    7y

    @Vivek Khoche

    Got your PM. Just wanted to clarify numbers. Yes, I agree there are 2 options but I wouldn’t call this house a lemon. Phoenix has been up and coming for years now and is prospected to continue to grow.

    0Reply
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