When to walk away?

Question

I recently walked away from a rehab project simply because of the amount of work that needed to be done. I could have purchased it for a fair price but I just didn't feel comfortable with it. Do any of you have a formula you use to know if a property is just too much and maybe more like intensive care than a rehab. Just curious as to anyone has profited from such a property, and when to walk away.

Will Barnard · Answer

So first off, post the numbers so we can see what you are working with. To come up with your max purchase amount, you must have two numbers locked in and be very close to accurate in order to succeed. First is the repair budget (the rehab) and the other is the ARV (after repair value).

To get the rehab budget, you must know what things cost and how long they take to do. For the exit value, you must know how to analyze real and recent comps and make adjustments as needed.

Depending on your ARB price point values, the are a few rules of thumb you can use. Post your numbers and I can better help you.

Elizabeth Colegrove · Answer

What profit margin are you looking for, it is reasonable for your market? We are buy and hold investors. The first deal is always the hardest and scariest. While you don't want to make the biggest mistake of your career, at some point you do have to jump in! This is a great place to post numbers.

Mindy Jensen · Answer

I am assuming you are a novice flipper. As such, if your gut tells you to walk away, listen. Better to wish you had bought a property, than to wish you had not. Deals may be harder to locate, but the right one will come around.

Nicole Pettis · Answer

@Teal Lambert you really have to educate yourself on your market and what rehab costs will run. As for rehab costs, there are many ways you can figure those out.

One is the book on Estimating Rehab Cost by J Scott. It helped out tremendously on my first investment property along with his other book on How to Flip Houses. Both are great!

http://www.biggerpockets.com/store

Then you have BP's own resource of the Ultimate Beginners Guide to Real Estate Investing

http://www.biggerpockets.com/real-estate-investing

Start window shopping at Lowes, Home Depot and any other store to get an idea of cost of materials. Most of these stores will also do a Pro Account which will give you small discounts.

Talk to contractors, establish relationships with them. Have them walk with you in these foreclosures to get an idea and always have a Scope of work sheet with you. That way you know what needs to be done.

As for the formula, it has been talked about many times on the forums, but in its simple form it goes like this

ARV(after repair value) x .70 - rehab costs = asking price for example

ARV of $100k x .70 = $70k - Rehab costs of $30k = $40k asking

The key here again is know your market and researching what a 3/2 SFH completely remodeled will go for or whatever your strategy is.

How I learned my area was driving around finding homes for sale, saving them through Zillow and then when they sold, Zillow sends me an email to let me know what they sold for. Also I go to open houses to get an idea of what is on the market and I talk to my realtor to make sure my comps are close to what is happening with the market. But there are many sites you can use for research. Zillow, Homes.com, Realtor.com, Trulia.com. Now note that the comps on these sites are the most accurate. You really have to talk to your agent to get a solid idea.

While this industry is a fabulous thing to get into, it can also be the worst thing to get into if you don't educate yourself about the process, the cost and learning how to work with contractors and understanding your market and your buyers.

So that is my best advice to you. As for walking away from a project, each investor is different. Some just want cosmetic, while others will take on the worst of the worst. I'm one of those who will take on a challenge of the worst of the worst. Its all about you and your comfort level.

Take care!

Nicole

Edward A. · Answer

Here is one example of numbers I have been working - I'll change just slightly to keep it simple.  Bank is asking $200K for the property.  I did a walk through and checklist and estimated about $25K for a good rehab to $40K to do a great rehab.  I am looking at holding for 4-6 months for about $1800 a month in holding costs (financing, HOA, utilities, etc.)   You have closing costs to purchase and then sell.  Comparables in the area say the house is worth $290K when in great condition.  So what should be the asking price?  I was thinking $185K.  I have a much more accurate spreadsheet but basically I would like to know your rules of thumb using these numbers to get a second opinion.

Edward A. · Answer

I am finding the same thing - probably we need to start looking at ways to purchase before properties are on the MLS.  Banks according to my agent seem to be releasing foreclosures slowly to keep the prices higher.  They are also looking for owner occupants in my opinion who are willing to pay more since they are looking to make $ quickly.  In the Washinton Post, I read an old article about flipping starting to end -- not sure I agree, but since I am a newbie - I kind of feel like you in all the "deals" I have seen so far in my market.  Good Luck and I am a believer in looking for new ways to make it work.

Teal Lambert · Answer

I understand but that's the problem is getting the right numbers on such a major rehab. I guess I could post my best guess to the rehab cost.

Teal Lambert · Answer

Thank you for your quick replies. When such massive rehab is needed it could mean the difference of thousands of $ when something may be overlooked and not originally planned for. This is what scares me about properties like this. I know sometimes we must take risk, but Its hard sometimes to figure the right price.

Jesse Waters · Answer

A friend of mine and I keep trying to do a rehab/fix-n-flip in our local market.  Unfortunately, every deal, so far, doesn't look good by the numbers.  My partner for this venture is a contractor & I'd provide the  funding out of cash or LOC, taking a 50/50 slip of the profits after the funding was re-payed.

In each deal we have looked at, we ask if the work required is worth the projected profit.  Unfortunately, to this point it hasn't been.  Our market doesn't seem to have the upside at the moment, even though it has plenty of properties in just about every price range and things seem to be selling at a decent pace.

For most of our projects to work out, we would have to be purchasing somewhere between 25-50% of the asking price.

Dan Gheesling · Answer

@Teal Lambert - in my experience the balance between the acquisition cost and repairs should be your guiding decision maker, before even buying.

Understanding the true acquisition cost, combined with the repairs (even if something additional goes wrong) is what I use.

There have been some good looking deals on paper for the acquisition side, but once I've gotten quotes for all the work, the deal doesn't look as good.

I've never walked away from a home that I have acquired, because of breaking down the costs prior.

Hope this helps!

When to walk away?

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