What's the best possible outcome?

Question

Hi everyone, I'm working a lead that's a 2 bed / 1 bath / 634 ft home on a 2000 ft lot, so not much room to work with however, she owns the adjacent lot which is also 2000 sq ft and vacant. She is asking 106k for the home and would want "a lot more" than 106k to include the second lot in a package deal.

Ms. Owner says it's a complete gut job. New roof, windows, siding, HVAC, insulation, etc. I see 3 options here:

1) Fix and flip the current home

2) Demo and rebuild a slightly bigger home (800-1000 ft)

3) Rehab and add-on to the current home

Here's my question - assuming a $275 per square foot ARV, whats the best course of action? And whichever choice you think is best, whats your buy price? (A vague estimate is much appreciated)

Thank you in advance,

Max

Andy Sabisch · Answer

I am familiar with Wilmington - worked in the area. It is a dynamic market but remember you have to buy right to make the money . . . you don't make it selling if you paid too much. Are you in the area so you can oversee what is going on or are you going to have to find someone to manage from afar? The price to flip without demo'ing and rebuilding would have to be well south of $100K to make sure you walk away from closing with money in your pocket and not everyone else's.Looked to see what the houses look like in the area - really gone up in 15 years! The price / ft2 and the lot size of what you are looking for are on par with what you are shooting for. Have you done a flip before?One thing that stood out is that there seem to be a fair number of properties with sizable price drops yet are still on the market. Remember that as interest rates go up, the buyer pool shrinks. Are the properties selling rentals or vacation homes? If so, the demand for these is dropping faster than primary homes.I would walk through the property you are looking at and try to get a better reno cost so you can speak from facts rather than generalities to the owner and see if you can convince her to come down.Feel free to message me if you want to talk specifics and do not want the details posted . . . .

Andy Sabisch · Answer

An awful lot of unknowns in your question . . . you are saying it has an ARV of $275/ft2 but what is that based on? Similar sized houses, other houses regardless of size, etc. For a 634 ft2 house, you are saying it will sell for about $175K. With a reno as you have stated - New roof, windows, siding, HVAC, insulation, etc - you have a minimum of $50K assuming you do some work and contract the rest and that is not going high end. With the quality trades booked, you have holding costs to consider and if you are using a HML, that can add up quickly.Assuming you are correct with the ARV, 175K - $50K = 125K. Then you have closing costs, realtor fees, carrying costs, utility costs, taxes, insurance . . . . assuming a 6 month close-reno-sell-close, you can tack on another $20K easily. That takes you down to $105. Don't forget your 10% to 15% contingency number so another $5k to $7.5K and we are at $100Kto $97.5K. Now you need to figure what you need to make on a sale . . . . so let's say you are looking at making 20% on the deal . . . . $35K. So your line in the sand should be in the range of $65K to $62.5K.To demo and rebuild at today's prices, you will be lucky to break even with a $275K/ft2 ARV and 1,000ft2.Sometimes there is no deal to be had if you want to make any money . . . . but your experience and location will dictate if that is possible. As they say, every property has a price at which it makes sense to buy ... for some that might be $0.You need to provide some more details to help us give you a good answer otherwise we are speaking in terms that can be spot on or totally off. Saying Southeast NC covers a large area - from Fayetteville to Wilmington and everything in between and prices vary widely in that region. Are you near the coast - that adds value? We are not going to try and jump your deal but more specifics will help us give a better answer.

Max Jiampetti · Answer

@Andy Sabisch Thank you for taking the time to reply, I appreciate your input, this property is in Wilmington. The $275/ft ARV comes from similar sold homes in the neighborhood, within the last 6 months, under 1000 sqft with no special features like garage, pool, large patio, etc. The reason for my post is because I’m curious what strategies other investors would consider in this situation, and why. Wilmington is both a great rental and flip market with new construction popping up everywhere.