What would you do based on these comps???

Question

I finally closed my first seller-financed deal last week in a great neighborhood. The home is a 3 bed 1.5 bath tri-level w/ 1350 sqft and a 1 car garage built in 1960. It took 2.5 months of back and forth negotiations with the seller to finally land on a 5 year term at 6% on a 20 year am for $78,000. I would hold and rent it out, but the taxes will double after all of the senior exemptions fall off and put an end to, what would actually be, great cash flow.

The market I'm in has been on the rise for some time now and all the schools are 8/10. I did a considerable amount of digging over the past few months while we worked on this deal and found comps that are both reassuring and confusing at the same time.

It seems that the sale price difference between the comps that were outdated and the ones that were fully rehabbed is around 10-15k. Sure they sold about a month or two quicker, but my holding costs are only around $800/month.

Below are some photos of the home I purchased and some links to the comps listed below; all within a mile of mine.

The roof and HVAC were replaced 3-5 years ago. The exterior paint and siding are in great shape as well.

https://www.redfin.com/IL/Crystal-Lake/201-Sunset-...

https://www.redfin.com/IL/Crystal-Lake/100-N-Cryst...

https://www.redfin.com/IL/Crystal-Lake/51-Erick-St...

https://www.redfin.com/IL/Crystal-Lake/934-Notting...

-Does it make sense to do some minor things like paint, carpet, appliances, vanities, and switch the fuses for breakers before just putting it back on the market?

-Is there even a good case for doing a full update, opening up walls, and rearranging things? It seems like I would spend 20k to make 15.

Any advice would be greatly appreciated!

Matt Motil · Answer

@Michael R. exactly! It's just a business decision at the end of the day!

Michael R. · Answer

@Matt Motil Thank you for your insights on this. I have a local agent coming by the property to take a look at it this weekend and give me a rundown on what they feel is necessary based on their experience. Since she'll likely get the listing it'll be a win-win. Based on my analysis of the market over the past 3-6 months the as-is value of this home is right around $140,000. The ARV, assuming a full cosmetic rehab, is somewhere between $165,000 and $170,000.

Like you said, it makes sense to do a $20,000 cosmetic rehab (assuming that's all it will cost) if it will net an additional $25,000+ sale price due to the ROI. If that work takes 2 months it's an additional $1600 in holding costs which would still lead to a return of 17% in worst case. I have the funds to do so which helps eliminate any need to pay fees or percentages to a partner. Then it comes down to the hassle factor. How much is it worth to deal with contractors or do some of the work myself over that 2 month period? Am I spending less time on acquisitions as a result, and what is that cost?

It looks like I'll have to sit down and write out all of the large and small details associated with both options before making a decision.

Matt Motil · Answer

When I wholetail a property I make my decisions based on business decisions - what is the ROI of you doing something? If you are not on top of the market, it helps to have a real estate agent that can help you with solid comps and numbers. You need to start with an as-is value. What is it currently worth on the market with zero work and effort on your part? This is your benchmark. If you sold it today, you'd get $X for it.

Now figure out what it would take to get it to the top of the market. How much rehab would be needed? What would that cost? Factor in your holding costs into the calculation of costs to make sure you have the whole picture. Once you have the rehab costs, you can figure out the difference between the rehab costs and the additional resale value. If you can invest 20k and seller for 25k more then you make an additional 5k for putting in the work. 5/20 would be a 25% ROI, but you're getting the money back when you sell, so it's really 25/20, which is 125%. Either way you slice it, it makes sense to do the work.

This is a simple example, but you need to look at all the little things. If you went in and cleaned it up, put fresh carpet and paint down and then walked away and sold it, how would that play out? As long as the return is there, then it makes sense to do it (if you have the money to invest).

Another option to consider, if you have a contractor you have a good relationship with, would be to partner with them to do the work. You can agree to pay them at closing for a premium and fee. Ask them for their estimate. Offer to pay them their estimate and then a percentage of the profit on the back end. Doesn't need to be huge, but large enough to entice them to wait to get paid until the place closes.

Hope that helps.

Michael R. · Answer

Thank you for your input @Kiersten Vance. It seems that anything I can do for less than 10 grand could make an additional 5 or so. That's why I'm hesitant to do things like cabinets and other big-ticket items in the hopes that the end buyer is eager to do those things once they own the home. I also don't want to make older items stick out like a sore thumb due to something new nearby. It's a delicate balance I suppose.

Kiersten Vance · Answer

Hi Michael. Based on my clients reactions to properties here in California. I would definitely say paint and some new flooring go a long ways. I would at least do that to the property before listing it. In regards to a major flip, opening up walls, ect, unless you can guaranteed make more than you will spend doing it, I would say don't bother. Freshen up the bathrooms and kitchen, paint and put in new flooring and then list it!

Michael R. · Answer

Any of you guys who are wholetailing care to chime in on this one? Again, any suggestions are appreciated.

Michael R. · Answer

The plan is to rehab/flip or just wholetail it. Like I said, the taxes will almost double once the 2 senior citizens exemptions and 1 homestead exemption fall off which will bring my cash flow down to around $250 a month if rented.

If flipped the lowest it would sell for is around $140k after paint, carpet, and some minor odds and ends. The numbers would look like this:

$140,000 - $78,000 purchase price - $5000 basic rehab & holding costs - $10,000 agent fees and closing costs = $47,000 profit before capital gains. The net gain would take approximately 12 years to make by holding it. My ultimate goal is financial freedom through rental property, but I would rather put the profits from the sale to work on a larger property with higher cash flow. The real question is: Sell as is or do some strategic rehab to net a slightly higher sale price?

Thomas S. · Answer

Are you selling or renting. If you are renting you freshen up with paint and advertise. Improvements are only done to make it rentable as is or to garner a higher rent.

No point in doing anything to sell as either way you are going to lose money.

What would you do based on these comps???

What would you do based on these comps???

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