Is this a good BRRRR or am I just excited?

Question

I need to be talked down. I’m convincing myself that this is a good deal before I really know what I’m doing and what to consider. I know this is not a proper analysis, I’m working on that. My market is western Kentucky, so the numbers are all relatively low in comparison to what most of you are accustomed to.

My husband and I are looking to buy our first property in the next few months and BRRRR it. I’m only halfway through the BRRRR book and haven’t even started The Book on Estimating Rehab Costs (it will be here this week!)

We found a falling apart property in a low income area, probably a C- neighborhood. The basement wall has crumbled on one side, the support posts have fallen off the porch and it is currently condemned due to structural damage. The current owner has it FSBO for $30k obo. It’s been empty for months. Seller is elderly, was selling to previous tenants on contract when the structural damage occurred and they left after not paying her for over a year.

She’s gotten one bid for the structural repairs at $25-$30k, the AC components have been stolen, the inside is in bad shape. Previous tenants apparently had large dogs and no inclination to clean. It looks like there is a plywood floor in the kitchen area, but we haven’t been inside yet, just peaked in the back window and talked to chatty neighbors.

Now, this is where I need the talking down.. I just about have myself convinced that there’s very little chance this isn’t worth buying and fixing for cash flow and here’s why. I think the seller would be likely to finance (she was selling to tenants on contract), and take a much lower price than $30k, say $18k, then the high end of the bid she received for the structural repairs, $30k, and another $20k in rehab would put us all in at $68k. This is a 4BA, 1BA, built around 1900, I believe. An updated 3/2 several blocks down built around the same time sold for $126k not too long ago. I’d hope to get at least $100k on the appraisal and pull out 75% on a cash out refi, leaving me with a $75k mortgage, escrowed payment likely under/around $700. Section 8 voucher for a 4 bedroom in my area is $1041/mo.

Tell me why this won’t work. Please. I need to pull back but I can’t talk myself out of it because I want it!

Ryan Howell · Answer

My answer is..."it depends".  You need to really understand the structural damage.  I would get an engineer to look at it.  If the numbers are correct, it could be a good deal.  Personally, I like lighter rehabs where I keep my rehab costs as ~<20-25% of the purchase price.  I don't see this talked about a lot, but if I buy a $100k property that needs $20k and I'm off on my estimate my 50% than I can generally be fine at $130k "all in" instead of $120k.  If I buy a property for $30k that needs $100k and I'm off 50%, I'm in trouble.  My point is that there are always unknowns and even more unknowns on your first one.  One way to limit your risk is to limit the scope of your rehabs.  I also look at a "sensitivity study" on my assumptions.  If my rents are off x% what happens?  What about if my rehab is off x%?  What about expenses, vacancy, etc?  Nothing will ever go quite as planned and your deal needs to protect for some contingencies.

Taylor Muell · Answer

I'm definitely no pro in estimating rehab costs but I'm curious about how you came up with 20K in rehab. If it is as bad as you made it sound on the inside, it sounds like you might need a lot more than $20K. And if it was built around 1900 I would want to know what kind of condition the plumbing system is in and the electrical is probably way out of code. Those are two big ticket items. New flooring and paint in the whole house is likely to cost upwards of $6,000 depending on what materials you choose. All that to say I would want to be more certain on what the rehab cost would be

Kris L. · Answer

@Kayla Johnson

I’m a but worried about this deal for you to be honest.  First, the property is over 100 years old, so it might have some very expensive potential issues.  I think there is a very high risk that $20k is not going to cover all your non foundation items.

1.  Foundation you already mentioned.  We can leave that as is, though I’d get at least 3 quotes for repair costs.

2.  Electric.  Hopefully electric had been updated at some point in the past 30 years.  You don’t want to find knob and tube wiring and have to rewire a 4 bed house.  Also check the breaker box.  If you don’t have 150 amp service at a minimum, you have to budget for that.

3.  Plumbing.  Again hopefully this has been done at some point since the Carter administration.  A lot of older houses used cast iron piping.  Some even used clay pipes.  Replacing those if they are in bad condition is thousands.

4.  You mentioned AC was stolen.  Sounds like you need a few thousand there.

5.  Permits.  I don’t know the permits cost in your area, but where I am at, I budget 3% of the  renovation cost for items that need permits

6.  A 4/1 is often undesirable.  Were you planning on making it a 4/2?

7.  Roof, windows, doors, siding.  Is the house weatherproof right now?  If it isn’t, renovating will cost even more.

All this being said, it’s great you want to take action, but you really want to be careful with a property like this.  Old and empty for a long time can be a recipe for very expensive renovations.  At the very least, I would get an inspection before purchase.  A few hundred spent on that could save you from buying a property that would end up thousands in the red.

Bruce Woodruff · Answer

^^^ Yep, a nice solid little slab-on-grade built in the 70-80s... :-)

Joe Splitrock · Answer

There is no way a 4/2 house in horrible shape with HVAC replacement will cost you $20K. Odds are good that rehab could run over $50K. The $30K to fix the foundation may be about right. I can tell you a property built in 1900 could have lots of lurking problems once you dig in. If you buy this for $18k and put $80K into it, only to have a property worth $126K then you are at $28K equity. That is 22% equity which may not even be enough for some investor loans that may require 25% equity.

My advice for a first BRRRR is do not tackle a property in such disrepair with foundation problems. Start with something that has solid bones on your first deal.

Matthew Crivelli · Answer

This situation sounds extremely high risk. First time investors should look for properties that need lipstick, not foundation work. If the seller didn't want to do owner financing, trying to find a lender on a property valuation that is that low will be a challenge in itself. I would suggest to keep looking because this property sounds like a nightmare with lots of unexpected costs that could pop up.

Jim Spatzenfeld · Answer

“A/C was stolen”: be careful, as soon as you put down a new A/C it might get stolen again the first night after you put it in, just like tools and materials during rehab. In many C- class neighborhoods the nice next door neighbors watch and talk and steal.

Bruce Woodruff · Answer

Run from this....your $20k in 'rehab' repairs is not even close. Depending on what it actually needs, you could be looking at $100k....but what you're describing is a complete redo.

Jaron Walling · Answer

@Kayla Johnson Without any experience in remodeling, repairs, maintenance, or home ownership I'd avoid this deal. It's a recipe for disaster. Other experienced investors may justify pushing the deal, tell you research, get bids blah blah blah, but the risks out way the reward. This is massive project and based on the location (burnt down neighboring property) do you even want to live there?

You found this property off market successfully. What's stopping you from finding another one with less risk, something without structural issues? Nothing.

Kayla Johnson · Answer

Thank you all for your insights! I will check more into the state of the major systems and go from there. My excitement has been tempered, which is what I was going for. It’s no good to go in with emotions high! Thanks all!

Is this a good BRRRR or am I just excited?

Most Popular Reply