High End SF Bay Area Flip - Risk-Return Opinions

[Andrew Eaton]

I am negotiating the purchase of a well located home on the SF peninsula. As it stands, it is a 2BR 1.5BA, 1,020SF home on a 5,000 SF lot. It is currently a rental that needs some TLC.

Purchase price will be approx. $867,000

Construction of a 4BR 2.5BA 3,000 SF home will run $750k ($250/SF)

Breakout of $750k construction is as follows:

$100k - soft costs (architect, permits, etc)

$400k - Contractor - shell only

$200k - finishes

$50k - landscaping

All in costs pre-financing $1,617,000

Financing

Local Private bank will finance 60% of as complete value ($2MM) -or- 80% of total project cost.

Loan of $1.2MM at 5.5% + 1% loan fee.

Financing cost over 12 months $50k

Required skin in game (down payment) - $417k

Post Construction Sale $2MM

(less) $1.617 Acquisition/construction costs

(less) $50k financing

(less) $100k sales commission @5%

equals $233k pre-tax profit

Cash-on-Cash Return = 56%

After tax profit = $150k

Assuming 35% income tax / Total ROI = 36%

Would you do this deal?

Sticker shock aside, take a zero off if you need to relate, is there enough profit for the risk taken?