Did I make a terrible purchase?

Question

Purchased a 2BR, 1 bath house in a blue collar neighborhood.  Other similar houses in range of 70-90,000.  House is just under 1000sqft.  The seller had planned to flip it.   He had gutted it to the studs, re-roofed it and stopped working on it because he was having a baby.  Seller had also put in a sump pump and spent $$ on waterproofing the basement.  Home has harwood floors which are in good condition and are currently covered with roofing paper to protect them. Seller did a poor job on the roofing-didn't quite complete the job.  Needs the roof caps placed, soffets and gutters.  House needs new window, new electrical, new plumbing, new HVAC including duct system-everything.  It will essentially be a new house when completed. The previous owner remove the garage door and enclosed the garage planning for a master bedroom where the garage is.  This area also could accomadate a master bathroom as well.

I paid 10,000 for the house.  I figure the lot was worth that amount. My contractor estimated about $40,000 to fix it up which was why I purchased it.  I just recieved a bid from another contractor in which the ROUGH estimate totalled $67,000.  Here is the breakdown:  Demo: 1800 (not sure what all this includes as aside from a toilet, it is an empty shell) Electrical 9.500, Hvac 10,000, Plumbing $8,500, Misc/carpentry-$1200, Drywall-$5000 Interior paint/plaster repair $1900, Insulation $4,500, Exterior doors/windows-$9,000,

Siding to repair damaged area only $1500 (this is a very small area). Finish roof correctly-$2000, Gutters-1500, soffet repair-$1000, Finish plumbing/fixtures-$4000, cabinets/countertops $3000, Flooring $3000.

Please advise me if all this seems reasonable or if I need to get additional bids from other contractors or subs.  I plan to rent this property out so I don't need to make a profit from this but that amount is really pushing the envelope as far as the ARV is concerned.

If these estimates are correct, not sure if I could even wholesale the property even if I wanted to.

Any help you can give me is appreciated.  Meanwhile, I am   going to find my rehab book by J. Scott and look up some numbers myself.....

Also, Should I convert the garage back to a garage or make it into a 3 bedroom home with no garage?

Colleen F. · Answer

No one has said it here and you may have your eye on this already but pay attention to timelines and holding costs. If you can sub out say roofing only now do it because that will save you additional interior repairs and speed up your timeline.

Sandy Uhlmann · Answer

Everyone,

Thanks for all the input.  I am awaiting a third bid now.   I think I will take all of your advice and keep looking for a contractor that is more reasonable as well as contacting subs myself.  As for the rental value, with the house essentially looking new, I am reasonably sure that I can get $700+ for rent.  Thanks again for the support:)

Justin B. · Answer

For a house in an area of $70k houses, a $67k quote is just too much.  Go ahead and tell that contractor no thanks and move on to other contractors.  Also, your numbers look too high in certain areas.  Yneed to keep it consistent with your area.  That means a $70k house should never have maple cabinets and granite countertops, while a $500k house would definitely want those items.  So be diligent and don't let any contractor talk you into $5/sqft flooring where $1/sqft flooring would be fine for example.

Joel Owens · Answer

Sandy you didn't list one of the most important components.

WHAT is the expected rent mid-market for this property once rent ready?

For example if you buy for 10,000 and put 40,000 in for 50,000 will the property rent for 1,000 a month (2% rule), 750 a month 1.5%, or 500 1% percent??

There are buildings or properties taking the same rehab per unit 8,000 for example but one will rent for 500 and the other 800. As you can imagine the rents received upon rehab will determine the forced appreciation and future cash flow.

If you bought this house and upon rehab the rent will be minimal then I do not think it was a good buy for the work involved. If you continue to get high bids you might want to see if you can sell it off for a profit to a contractor who can rehab it themselves for a flip or hold as a rental. They can do things much cheaper and still make the numbers work.

Hope it helps.

Ryan R. · Answer

The second estimate is way high. Call each trade yourself and get bids. Have them break down each of their costs; materials and labor. The more of these you get the better idea you will have of actual costs.

I like to separate their labor cost and divide that out to a daily rate for each trade. Then ask him if he really makes $400 a day on all his jobs..

Concerning the garage conversion. You need to know the cost to make it a 3 bedroom and how much that increases your ARV. If it costs $10,000 to convert the garage but only increases your ARV by $7,000 then don't do it. You also need to know how desirable garages are in your area.

Jassem A. · Answer

Probably a good buy if you know an inexpensive contractor or can do some of the work yourself.  Doing the work yourself will have the highest upside potential but may take longer if you have a full time job or little experience with repairs.  I wouldn't gamble on a gutted house unless I was planning on fixing a good portion of it myself and if the house was in a decent area otherwise I look for houses that have at least electrical, plumbing, a decent roof, and most the drywall in tact.

Michael Seeker · Answer

@Sandy Uhlmann - those prices sound way too high to me.  Not sure what kind of supply of contractors you have in Jeff City, but you should do some more digging.  You might have more headaches going with cheaper contractors...but I'd gladly take some headaches for $20-$40K.

I've remodeled several homes in the 200K-250K range and total spend was about $50K.  I would certainly not spend $67K on a blue collar rental.

You might save a lot of money just by getting your own estimates for everything and managing the work yourself.

Wayne Brooks · Answer

Keep getting other bids before you panic.  These sound like retail, "I'm gonna get fat if you pay me these prices" pricing. Areas are different, but here I can get a new HVAC system, all electric, with duct work for 1,000sf for $4k, from a small, licensed AC guy.  What about your original contractor?  Your market will determine whether the extra bed/bath ( my guess) or the garage is more desirable, but get it permitted if you convert.  Drive around and stop at every house under rehab, talk to owners and you'll find the type contractors you need.

Andy Robison · Answer

What does a 3rd contractor say?

Did I make a terrible purchase?

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