What do you think of this flipping project?

Question

Found a 1927 two-story home.  Has tons of character.

ARV = $220,000- $180,000

Listed at = $99,900

Projected offer price = $85,000

Estimated Rehab $60,000 - $50,000

Holding Costs = $11,000

Realtor, Closing = $19,900

Estimated After-Tax Profit = $22,000

PROs:

Brand New HVAC system with ducting installed

Brand New thermo windows installed throughout

Beautiful hard wood floors on the first floor (need refinishing)

Tall ceilings (has a drop down ceiling right now though)

CONS:

Only 1 Bathroom on 2nd floor, going to add a half-bath on first floor

Has drop down ceiling on first floor and plaster walls

Kitchen needs to be completely reconfigured and floor leveled

I want to knock out a wall between the kitchen and dining room and make a kitchen with an island and either quartz or granite countertops.

Kitchen remodel = $17,000

Bathroom Addition = $10,000

Upstairs Simple Remodel (vanity, maybe new tiling) = $2,000

Walls and ceiling refinished = $8,000 (*** This is the most unsure costs I have, advice greatly would be appreciated ***)

Thoughts on this flip?

Ritch Bonisa · Answer

Make sure your rehab costs are accurate and if you do it, put together a great plan and don't deviate.  Be confident there are no foundation issues and make sure electrical is up to date and within code.  1927 was a long time ago.  Don't let the "unforeseen" kill your ROI!  I promise when you take out that wall, you'll find something you didn't know was there.

Bob Okenwa · Answer

@Jered Collins

I'm by no means an expert and every region has its associated costs so take my advice with a grain or two of salt. But re-piping and lead paint abatement can be upwards and beyond 10k apiece depending on home size.

Jered Collins · Answer

@Bob Okenwa I don't know if the whole house was converted to updated electricity but there is a brand new electrical box. Additionally, underneath the basement the wiring was all up-to-date style of wiring.  You're right about the piping and paint though.  How much additional margin do you calculate to cover those costs, if indeed they materialize into a cost?

Bob Okenwa · Answer

@Jered Collins You also need to be prepared for overages due to the age of the house if you have not factored that into your budget as of yet. A house that old may still have knob and tube wiring, corroded galvanized pipes, asbestos, or lead paint. Make sure that ARV is accurate before deciding to move forward.

Brian Garrett · Answer

If you go based off your worst case ARV scenario of $180k it's not a good deal at all. You have $175,900 in expenses. There's not enough meat on the bone there when being conservative.

Jered Collins · Answer

I'm working with a realtor team and this was a spitball estimate yesterday when we were in the property.  I'm waiting to hear back from him after he runs the numbers again.  The comps that have sold recently are usually around 1,700-2,100 square feet so this house is a little smaller than those.  The other homes have sold as high as $330,000 but most are selling between $260,000-230,000.  With less square footage I'm estimating at the worse at $180,000.  Realistically, I would expect about $205k as a legitimate selling price.

Chinmay J. · Answer

@Jered Collins -  A couple of points to be noted...

Why is there such a huge difference between your ARV? $40,000 is a huge amount. You need to get a better estimate of the ARV.  What do comps say? Have you used any experienced realtor to pull the comps?  If not, that's the first thing you should do. Your profit margin is tight at $180,000, but its pretty good at $220,000.

Put the house under contract and get bids from an actual contractor who has experience rehabbing old houses. Don't guess.  If its an off market deal and you are not competing with other investors/buyers, you can probably get away with a small earnest money check.

Make sure there aren't any foundation issues going on, as there are a lot of times with houses that old.

Jered Collins · Answer

There seems like there is hardly any good deals available right now.  Margins are so thin in my area.

Thomas S. · Answer

That is a tight profit margin considering the age of the building. Older buildings involving more than a simple face lift can have major cost overruns.

Be very carful that you do not over improve for the value of the home.

I would run the numbers on a simple "lipstick reno" first. In many cases you can realise the same profit margins in a much shorter time with less work and risk with a quicker cosmetic flip.

Try to cut your rehab and holding costs in half, get in and out in 1/4 the time.