How to determine the value of a run down property that needs a rehab

Question

Hello,

I'm looking at an off market deal for a 1030 sq ft single family home on a 0.66 acre lot in south New Jersey.  The owner is willing to sell it very cheap knowing the house is extremely run down and needs a lot of love.

We can afford to buy it but we do not have the budget to rebuild the house.

I'm thinking we buy it and resell it to someone how has more expeirence rehabbing properties and has the money to invest in the work.  My issue is, I don't know how to calculate what another developer might purchase it for.

Does anyone have any advice?

Thank you :)

Drago Stanimirovic · Answer

Gary, figure out the ARV (what the house would sell for after rehab), subtract estimated rehab costs and a profit margin (usually 20–30%). That gives you the price a rehabber would likely pay. Also, check local land comps in case it's more valuable as a teardown. Need help running numbers or funding to secure it? I can help. Drago

Alan Asriants · Answer

Hey gary, without looking at the property it is tough to give you an exact cost for a renovation. Also someone who is experienced can do a project cheaper, quicker, with less mistakes than someone who has 0 experience.

Your budget changes entirely on year built, cap ex, structural, and other expenses.

For example, if your property was built in the 90s and it needs cosmetic rehab, you could probably get away with doing it for around $30-$40 a square foot with the materials and the guys that I use. Now if it's an older home that was built closer to the 50s that needs brand new sheet rock electrical plumbing but maybe not too much framing maybe that gets closer to $80 a square foot if you start introducing more variables like structural damage, etc. these numbers can jump up significantly.

If you're open to it, you can reach out to me I live fairly close and I can take a look at the property with you. Reach out anytime

Scott E. · Answer

The other posters have given good feedback on how to determine value but I'll add my 2 cents...

Oddly enough, in situations like this where "the owner is willing to sell it very cheap" it's possible that the numbers won't pencil out even if they give you the property for free.

If it costs you $300,000 to develop the lot but it's only worth $275,000 in the end, it's not a deal.

You need to talk to some builders who have experience doing exactly what you plan to do here.

Aryia Bala · Answer

Find a contractor to create a budget with and a lender to get financing from, take the bigger profit home yourself. Many of our borrowers find their first deal this way. (Just make sure its arms length transaction as some Lenders may avoid this)

Charles Teryek · Answer

These other posts are great, but when you say develop, are you really saying that the house needs to be torn down to build new construction? Or is the property salvageable and in need of rehab?

If you want to determine after "repair" value in either case, you're going to want to look at comparable properties in the area (for new construction you'll try to find houses built within the last year or two and for rehab look at fully renovated comparables when possible and otherwise still look for similar bed, bath, sq ft.)

To figure out what an investor would pay, take that and the advice of the other commenters here and multiply by .7-.8 and subtract repairs in the case of rehab, but for a lot for a developer you're looking more at .15-.25 of construction value.

If you're able to get a hard-money loan, that would be a great option since you can already afford the property, it's likely you'd be accepted.

Corby Goade · Answer

This is where market comprehension is vital- not only understanding a general SOW, but knowing what kind of margins flippers require in your area. Using a formula without knowing what's possible in your market will probably keep you from taking action on opportunities because you might not recognize it.

That being said- if you have an ARV, subtract your rehab costs and then work in profit for yourself and an end buyer, everything is negotiable.

Better to make less and learn more on your first few deals.

Bruce Woodruff · Answer

Good answers above! I'd get a GC (if you have time) and get a firm-ish SOW and price. Only then will you know. It's not worth guessing. Just knowing ARV is of course important, but the other number that you need is the hard cost to bring it up to par.

Caleb Brown · Answer

Can you do a hard money loan to tackle it? This can be an answer if you want to tackle it yourself. If you bought then immediately resold you'd need to know the rehab and ARV. Every investor ranges on what they will buy for but a broad range is 70-80% of the ARV. Basically investors want to be all in on a property within that percentage. Once you determine ARV and rehab then you can base your offer on that and what you'd like to profit.

How to determine the value of a run down property that needs a rehab

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