Rehab Deals in the Bay Area, California?

Question

I know a lot of the people on this forum always push for the purchase price o 70% ARV minus repairs/fees.  But I live in San Francisco and it seems that fixers in the Bay Area still sell for very close to the market price.

Has anyone done deals in this area or know how to locate them?  I'm trying to look for my 1st rehab project but most of the properties are selling for 100% of ARV or if lucky, 95% of ARV.  I'm also a Realtor so I have extensive MLS access for all of the Bay Area.  Am I not looking hard enough or is the Bay Area just not possible for good rehab deals?

Account Closed · Answer

Thanks for the suggestions.  I will definitely start going out to my local REI club and start networking as well as hitting the newspaper ads.  That stuff sounds like a good idea because I never considered that those newspaper advertised buyers might want to sell some of their properties.

Btw, how many deals do you guys end up doing per year?

Account Closed · Answer

Thanks for the replies.  So let's say that I'm looking for my first rehab in the Bay Area.  If I find a house for $700k, that means that I need to look at buying it for $490k - my estimated repair costs.  That $490k purchase price could easily turn into a final offer of $400k.  Which is pretty close to buying a place at 50% of what the market value of the property could be after repairs.

Am I looking at this correctly?

I know most properties in my area, I'm looking at 1 million dollar properties.  Then wouldn't this also mean that I'd have to offer a price of $700k- costs, which could easily be about $600k.  $600k for a potential 1 million property and $400k for a potential $700k property sounds amazing but can these types of deals really exist in my area of California?

Would you be able to give me some pointers on how I could locate properties like these?  Door Knocking?  Join my local REI club?

Thanks for all your help!

Frank Adams · Answer

Rehab 702 is right on the money.

Geography does not change reality. I'm pretty familiar with the East Bay and 2 years ago you could buy at market, update kitchen and baths (granite, light fixtures and MAYBE floors) for about $15-$20K and resell in 90 days for a net $60K +/- gain.

Based on the number of ppties I see on the MLS now I'd say some of those "investors" probably got caught flat-footed, unless they timed the market exactly right-which I doubt.

I just spent a week in far eastern Contra Costa County, in a "waterfront" town. Houses that were for sale when I was there LAST SEPTEMBER all had PRICE REDUCED riders on the yard signs (to go with the cobwebs), and about 4 or 5 more for sale signs in each cul-de-sac.

I looked specifically at some golf course frontage ppty and had 2 of the 6 agents whose houses I saw give me the old "wink wink, nudge nudge, and intimate that ANY OFFER WITHIN $100K OF LISTING would get serious consideration.

I figure as this "selling season" nears its end in August/September some of these folks will be real serious about SELLING, not just bragging to their co-workers how much they LISTED their house for!

all cash

Account Closed · Answer

The smell of money when you walked in the door.

Hard money is one tool in an investor's toolbox. It is not the best tool in many situations. Given what you described in your situation you have better than hard money so there is no real reason for you to consider the HML route.

Note that I am a hard money lenders so I have no economic reason to suggest not to use hard money. Your line of credit is a better deal (assuming you have an LOC).

N/A N/A · Answer

I flip in the Walnut Creek, Lafayette, Moraga, area.  I am a real estate broker, and have found a few deals on MLS.  I look for a house that I can purchase for at least $225,000 less than the average price of the home’s comps in the area.  As you can guess, this means that I am purchasing a house that is a disaster area (I almost got sick from walking in the Lafayette house – that’s when I knew I had a winner).  A house in this condition generally needs $60-90k in work, and will take somewhere between 2-4 months to renovate.

Is there a reason why everyone seems to use HML?  Am I an amateur for going to the bank for a blended rate of 9% on a combo-mortgage package with 100% financing?  I know the mortgage process takes a while to complete (even with reduced docs), but is there another advantage to HML that I am missing?

-Josh

Frank Adams · Answer

Well Josh; if you're going to borrow money, that's the best way. I think the main reason a lot of these guys are going the HML route is because the lender doesn't like the FICOs they're seeing.

Puking upon entering the house is often a sign you're walking into a winnner.

Seeing a "cloud" of fleas hopping 6" off the floor is another, I used to see a lot of that in the late '80s early-'90s in Houston.

Fresh sawdust and sheetrock dust from the chainsaw to the walls is good.

A stack of "pink envelopes" from everyone from the power company to Columbia Records, to American Express means you've got a motivated seller.

When the only furniture is a lawn chair and a couple of boards resting on concrete blocks, you've either entered someone's college dorm, or a divorced guy trying to hold on. Couple that with the "pink envelopes" and it's often a slam dunk.

If the electrical and water meters have been removed, they may be motivated.

all cash

Richard Warren · Answer

With me it varies by how many good deals I can find and how extensive the projects are.  I just starting my second one this year because I haven’t been able to find anything suitable.  In 2005 I did 7 deals, in 2006 I only did 2 because I was involved in an off-roading accident that put me out of action for over 6 months.  The great thing about this business is that I never had to worry about money while I was out of action.

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Richard Warren · Answer

You need to remember that you are looking for the needle in the haystack.  You need to find that truly desperate seller which could be an estate situation or someone who is facing foreclosure.  Other good options are landlords who just want to get out from under their properties or someone who was trying to do a flip and just got in over their head.  The numbers may sound astronomical but what are the houses truly worth?  Is the million-dollar property really worth that much if it doesn’t sell for a year or more?  When doing your figures you need to consider where to price the house so that it will actually sell which means that you might have to price that “million dollar” house at 875k to sell it quickly.  Also consider the cost of financing and holding such an expensive house.  A hard money rehab loan can cost 14-18% plus 3-7 points, that’s a huge amount of money.  That 70% of ARV – repairs is a guide, sometimes you have to shoot for an even better price depending on the situation.  On the other side of the coin, you can deviate upward in certain situations.  I frequently use my own funds for purchases so that I can avoid using hard money.  I still have a cost because I either lose the use of that money for other investments or I my have used a home equity line.  That makes the money less expensive but not free.  So while each situation is different, you do need to be careful about deviating from that formula so that you don’t get burned.  I have been bailed out of bad deals because the market went up but you can never count on that, now the market going down is much more likely and you have to allow for that as well.

As far as locating deals, door knocking, driving through neighborhoods and chatting up neighbors of a property that looks promising, courthouse records for probate or notice of default.  My favorite is networking, the more people who know what you are looking for the better the likelihood of someone bringing you a deal.  Your local clubs are a great place to make connections with wholesalers and bird dogs.  You can also call the “we buy houses” ads, they need to sell the properties that they are buying.

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Richard Warren · Answer

Good rehab deals can be found anywhere.  However you will rarely find them on the MLS.  There is a reason for the formula.  If you were to buy something at 80% of ARV you will most likely lose.  You have to factor in things like the cost to sell which is generally 6% commission plus transfer taxes, title charges, legal fees etc.  So right there you are at 8-10%.  Then you have financing costs, if you are using a hard money rehab loan that might cost you another 10% between points, fees and interest.  Then you have the holding costs while you own the house.  That would include taxes, insurance, utilities etc.  the longer the house sits while waiting to sell the higher those costs are.  If you try to do a deal that is too “thin” you will lose.  The 70% - repairs rule should leave you with a 10-15% profit if nothing goes wrong, it also provides a cushion for unexpected things that pop up.  Most newbies fail in rehab because they make the typical excuse that “my area is different, you have to pay more in this market”.  The truth is that the hardest thing in rehab is finding a deal that will work.  If you believe the TV shows it’s simple, go buy something and fix it and then flip it for a huge profit.  If it really worked that way we would all be richer than Bill Gates.  For me things go in spurts, in 2005 I had more rehab projects than I could handle.  Right now it’s slower.  I sold a project in March and didn’t find another until now, I just closed on a deal last week.  You need to have patience and forget about finding a good deal on the MLS.  Go through the rehab posts on this forum and you should get some pretty good ideas.

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