Analysis paralysis.....sort of?

Question

This is a two-part question.

So....

I've spent some time analyzing as many deals as I can the past few months. Probably 50+ or so. Not a huge amount, but not a little amount either. Pretty much all of them are sourced from the MLS.

Here's my problem, out of all of the listings, I've made zero offers because the numbers don't work. So I know I need to make tons of more offers on places, but I'm not going to do that JUST to make more offers. That seems nonsensical-it seems to make sense to only make offers where the numbers work. Right? Yet, here I am heading in a direction that seems to have analysis paralysis written all over it. I see/here people jumping in and after six months they've already loaded up on a few properties. So what am I missing?

The other part to this–the rehab costs on practically every analysis I do tend to land in the same area cost-wise. Typically in the 25k-30k range. Since pretty much every analysis I do seems to not work out numbers-wise, I'm beginning to wonder if my numbers are way off for some reason? I take my figures directly from The Book on Estimating Rehab Costs and judge as best I can from the pics/vid provided by my agent.

Again, what am I missing that is preventing me from being the person that gets a few properties under their belt in six months?

Any input would be greatly appreciated.

Thanks!

-Dave

Steve Hall · Answer

@David Vander Pol

Your bio says "I work full time in the entertainment industry, so RE investing is a side business for me at this point."

If this is a side business, then you probably don't want to be looking at 20k-30k rehab projects. They are very hands on.

That said, you haven't told us your investment strategy. Are you trying to do the BRRRR strategy, are you looking to fix and flip, or are you trying to buy an hold? Are you going to do any of the rehab?

After that we would need to see your analysis of those 50+ properties. Do you have this data in a spreadsheet, or do you have links to BP calculator reports?

We also need to know what you mean by "the numbers don't work"... Does this mean you can't get them to generate $10,000 per month? You can't hit 40% COCR? The cap rates aren't 20% or more?

There is probably a simple explanation that you are just over looking.

David Vander Pol · Answer

@Steve Hall yep, the numbers you exampled do make sense. The only difference I would have, is that I'm taking out cash via a HELOC, so the two or three months to regain whatever overage I have left int he deal most likely will not be paid back as the HELOC loan payment will eat that up. The other thing is, again, it seems like the market is so hot, getting an offer accepted at $70k in your example is possibly non-existent with MLS properties. I do have wholesale deals that come to me, but they are typically in areas that we do not want to buy in.

@Dan HeuscheleI totally agree with you on the appraisals. That is frustrating as hell. Your suggestion to determine what works for my criteria is a good advice. I guess we need to spend more time thinking about what we are comfortable with leaving in the deal.

I also heard an old investor saying recently that I hadn't heard before, "If you don't cringe when you make the offer, you offered too much."

Thanks again for both of your advice!

Edward Liu · Answer

Your purchase price is too high.  Purchase price + rehab cost should not be more than ARV.  Use 70% rule if possible.

Your rehab cost also seems high for a 1080 sq ft house.  Get multiple contractors to bid.  I am not familiar with Jacksonville cost, but without doing much to HVAC, roof, mold, structure, cost should be lower.

Dan H. · Answer

I typically cannot get all of my purchase and rehab costs out of the property.  It is a combination of not being able to purchase cheap enough, low LTV loans on refis, and conservative refi appraisals.  The only one of the 3 that I have a lot of control on is the purchase price.  The one that pisses me off is the conservative refi appraisals.  I see rehabbed units sell at a total different price than rehab units get appraised for a refi which should not be the case.

However, I have been pretty content to have increased my equity, increased my cash flow, and be all in for less than the rehab cost.  Am I settling?   Maybe but I question how many purchases I could have made if I needed the purchase price to be low enough to perform an extract of the purchase costs and the rehab costs.

Therefore, I am not surprised that you find it difficult to extract the purchase and rehab costs (I also find this difficult).  You need to determine that if the criteria of obtaining all of the purchase and rehab costs is obtainable or if that criteria will negatively affect your success.

Good luck

Steve Hall · Answer

You have to buy the property cheap enough to get it to work... The rule-of-thumb is 70% of ARV. And you have to keep your rehab costs to a reasonable level, like $15k to $20k for these cheaper properties.

Your subject property's $83,900 asking price is only 80% of the $105,000 ARV. If you get it for $70,000 or less, this would work...

• Asking Price: $83,900
• Accepted Price: $70,000
• Cash needed for 20% down payment: $14,000
• Loan amount: $56,000
• Rehab cost: $16,000
• ARV: $105,000
• Refi (@80%): $84,000
• Remaining cash after paying off $56,000 loan: $28,000

Remember, if you put in a bit more than you get back with the refi, it's no big deal. Within 2-3 months, (by the time you find your next property) you've already made the money back from rent!

Make sense?

David Vander Pol · Answer

@Steve Hall  @Edward Liu  @Blake Edwards  @Dan Heuschele

Thank you all for your input! I appreciate it. I do have to eat some crow here, though. Because, as Steve pointed out, I wasn't very clear with my goals, strategy, etc. I'm actually looking for properties in Jacksonville to BRRRR and hold for long term. I would not do any of the rehab myself, nor would I be on site. We have an agent, PM and a GC in place and we would be funding via a couple HELOCs we have on properties in Phoenix (150k worth) + some cash reserves. We're looking for homes in B/C areas, preferably under 100k, with rehabs under 30k.

I took the time to break down all the categories from Jay Scott's book on Rehab Costs, and created a check mark spreadsheet that calculates category totals based off his suggested costs for each item and using any required inputs like sqft, item counts/costs, labor, etc.

I then review the pics/video my agent sends me and go through my spreadsheet, checking off what I think needs to be done. Everything is calculated and tallied up at the bottom based off of what I checked and the required inputs in order to get rough calcs. Now that I have this rough estimate, I then plug in everything using the BP BRRRR calculator to get my final numbers. The whole process takes about an hour.

When I say "the numbers don't work", I'm typically talking about the amount we have to leave in the deal after refi. It's usually around the cost of the rehab and we don't want to leave that much in the deal. Hence, the numbers don't work...unless we give an absurdly low offer. But the hotness of the market is going to dictate that an offer so low will not be accepted.

As for my 2nd half question, I just found it odd that my rehab amounts typically come out in the same ballpark 25-30k figure and thought I'd get some pro opinions.

As an example, here is a Gdrive link to a property we passed on last week because the numbers didn't work:

https://drive.google.com/open?id=1LTUaFtDZegIECoj2...

The BRRRR report is in there, as well as my rehab spreadhseet in pdf. For simplicity sake, I just left the purchase price at the asking price of 83.9k. So at that price, we have to leave over 32k in the deal, about the same as the rehab cost, after a 80% cash-out-refi. So obviously, we'd have to put in an offer tens of thousands of dollars less, perhaps close to half of what they are asking if we want to be able to cash out all or most of our upfront capital....which I'd be more than happy to do, but the market is so hot, that an offer like that wouldn't even get looked at. Hence...50+ analyses.....and wondering if I am doing things correctly.

Thanks again everyone!

-Dave

Blake Edwards · Answer

@David Vander Pol Thanks for coming to our meetups!  We have clients looking for cash flowing properties in the Bay Area as well.  You have to be creative when looking at properties and figuring out the highest and best use of each property, and taking the rental comps with a grain of salt.  You would be surprised at what people will pay for a nice rehabbed property/room that they are comfortable in.

Good luck out there!

Edward Liu · Answer

If your focus is in the bay area, then likely numbers won't work based on cash flow - no matter how you slice and dice it.

If focus in the bay area, then don't worry about cash flow at all - buy run down property, dress it up, then sell immediately.   Don't house any tenants as no investor will buy these, so there is no Rent and Refinance.  An ex-coworker quit his job in January doing this for living now - he told me no way to do it part time.  He needs to be full time to quickly turn these and get the property back on the market within 1 month, max 2 months after close.  Also, he is hand on doing rehab so he can save time and money.

Analysis paralysis.....sort of?

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