When NOT to buy a house that looks good online

Question

Yesterday I went and looked at a house from a wholesale company locally in north Dallas (Carrollton) area that had a house they had under contract for $211K and selling to several investors for a starting price of $217K with a final sale price of $222K. What's enticing about the property (before walking the property) was location. The house faced a greenbelt area that is beautiful with walking trails. The houses on either side looked very well manicured and clean. The picture of the house looked nice. And then I went to view the property (while bumping into other investors touring the property and hearing all they would do).

About the house on walk through...

• Massive tree within 2 feet of the front of the house.
• Cracked foundation in living room. Easy to spot since most of the house was ugly painted concrete floors.
• Awful smell of dogs. They had 3 large dogs.
• Every room needed gutting. 3 bathrooms and kitchen.
• Driveway in back (alley) sloped down at least 5 feet towards the attached garage.
• HVAC looked ok but compressor outside was covered in dirt.
• Hot Water heater looked good.
• Tons of paneling in living room.
• Kitchen appliances hadn't been replaced since house was built in 1983.
• Gables outside had lots of water damage but roof looked good.

So I walked away from the property because of my analysis prior to the walk through. I analyzed the comps put the house in very nice condition (ARV) at $285K max. Other nice homes near the greenbelt were selling for $260K - $320K depending on size and updates. This house was on the lower end of size at 2,136 sq.ft. Houses in the $300K - $320K were about 2,500 - 2,800 sq.ft.

By the numbers...

• $222K selling price (I did my analysis prior to showing at $219K). 
• $285K ARV, $35K Rehab Budget, $5,652 closing costs. $240 monthly holding costs and loan payments.
• My initial (before walking property) rehab estimate was $20K. After walking property, that number jumped to $35K and one of the other investors agreed with me when we introduced ourselves as we were leaving the property.

In order to break even on the property, I would have to keep to my budget and get financing with no points and 7.83% interest rate with 6% realtor fees and closing fees total. My agent works with me to market house for only 2%, 3% to buyer's agent and 1% for other selling costs = 6%.

I'm not in business to break even so I walked away and you should too. Even a tidy $5 - $8K profit wouldn't be worth the hassle and time. If I had not done my analysis prior to viewing the property, I might have bid on the house due to the location and what I've seen elsewhere in the area where prices are on the rise.

Here's a picture of the house... (looks good. NOT)

James H. · Answer

I have not done a flip yet but my wife and I are interested.  We have looked at websites of several wholesalers and have  noticed that the standard wholesale offering in North Texas is around 70% of ARV -- *NOT* including repairs.  I asked one wholesaler about this and he claimed that people are still making handsome profits in such situations.  I do not believe it.

Another wholesaler refused to meet with me after business hours.  Apparently, he was uncomfortable with the fact that I work a full time job and my wife would be the general contractor.  (We have rehabbed a half dozen or so homes over the years to live in or rent out and she is very capable.)

So...  We are staying away from wholesalers in general.

Jason Hirko · Answer

@Rodney Marcantel one of my clients actually was the one that got this under contract last night. I will definitely be forwarding your take on this to him. Thanks for the heads-up and your insight!

Patrick Ellis · Answer

Rodney,

One of the things I ask Wholesalers to do is provide me with a list of 2-3 buyers that have purchased more than two properties from them.  It's a valid reference check and any Wholesaler that has repeat buyers should be able to provide it. The problem is that the market is so flooded with buyers, the wholesalers don't really care if you buy just one property. Because there are always new fish in the pond.

Good luck.

Patrick

Rodney Marcantel · Answer

@James H.  I'm not saying to stay away from wholesalers as they can and do provide a good service to rehab investors. Their profit on the sale to a rehab investor in most cases offsets the cost that a rehab investor would spend to get a deal under contract with the cost of time and marketing which can cost several thousands of dollars. All I'm saying is you have to run the numbers first before bidding and if you do, you'll be a smarter investor and lessen the risk of failure that so many new investors fall victim to.

Todd Plambeck · Answer

@Rodney Marcantel I'm glad I did not attend that one.  I have all but sworn off those "suicide showings" as I have come to call them.  10 or more investors all crammed in a how then try and kill themselves trying to make a questionable deal worse.

Leland Barrow · Answer

Interesting post. I always assume foundation problems if I am considering buying without seeing it in person because it is Texas. 5-10k is not a profit margin in my opinion. I would not consider risking any of my money for a 5k profit. I see people going with less and less margins and that is how you lose money. The problem that full-time REIs make when it come to flipping is that they are dependent on flipping income and when the market turns they become desperate for deals. That desperation leads to lower margins, and can lead to losses.

I look at deals and consider the most likely worst case scenario. If I can break even if the worst case scenario happens then I am interested. Since you are operating in Texas I would suggest that you always consider foundation issues as a possibility. What I didn't see in your numbers is a return on your cash. I would imagine you are going in at roughly 95K for the down payment, rehab, and other cash costs. Earning 5-10k on that is not worth the effort. How much effort and personal time would you have to put into that return? You could throw 95K into decent stocks and have far less hassle. At 95K cash I would want to see close to 25-30% return on my cash on a flip, because my time eats away at that return. It is not a true return on cash because I have to actively managed it and the opportunity cost of me managing it is that I can do consulting at $120-$150 per hour. You probably have opportunity costs also and you should consider what they are and how much they are.

I don't know that a house listed at 217k with an ARV of 285K would have made the first cut. Factoring in a rehab cost sight unseen of $20, $25, or $30 a square foot eliminates the margin pretty quickly. As a disclosure I am a cherry picker with a W2 so my opinion may not be the best opinion for you.

When NOT to buy a house that looks good online

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