Austin Flip - Too much to turn around?

Question

So this deal fell in my lap out of nowhere, but it may be too much for a first timer.

Sales price: $140k

ARV: $195k

3/1 1160 sqf

The place is a wreck. There is no surface that can be left untouched. Rains over the weekend opened a huge gash in the roof causing a bunch of a debris and insulation to fall into the one bathroom

So beyond the roof, there's flooring, new kitchen and bath, HVAC and potentially some foundation issues.

After running the numbers, it would only make sense if I got the house for less than $120.

Would you run from this?

(Using hard money to purchase, cash to rehab).

Thanks!

Taylor Jackson · Answer

Hi KJ,

Welcome to the site. It sounds like you've already determined that it's a no-go, but I'd just run the numbers and stick with what you find. A couple of recommendations: (1) spend a few bucks on J Scott's "How to Estimate Rehab Costs;" (2) get another investor you know/trust to give a second opinion. Anyone worth doing business with in the future would be happy to help; (3) have a realtor run comps to make sure your ARV is on point; (4) insert a 10-20% contingency for unforeseen expenses--just a good idea as a new investor until you dial in cost of subs and materials; (5) put line items into a model including closing costs, rehab costs, carrying costs, realtor fees, actual cost of hard money, etc. Good luck!

KJ D'Costa · Answer

Thanks Justin. The numbers are much healthier if I can get the house for at least $125K.

KJ D'Costa · Answer

Someone bought it for $135k. I hope owner-occupied.

Jesse T. · Answer

What is the land worth?

What is the least they possible could sell it for?

With a 195K ARV and potentially 65K to get it repaired, even a 90%(which is thin) you would be looking at needing a purchase price of 110 or lower.

Darin M. · Answer

I have a very similar house that I have been dealing with here for the past three months and for what you are describing you could easily be 50K in to bring it to livable.  I will be in close to $65k when I am finally done with this current project

The best way to describe mine is a brand new house wrapped in the partial shell of a 1950's home.

Brand new:

Roof

Insulation

HVAC

Plumbing - internal and external

Electrical

windows

master bath

flooring

tile

kitchen

porch

re - Framing due to termites

Pay attention to the numbers.

Wade Goodwin · Answer

Like Gary and Taylor said, you definitely need to factor in contingency costs. I'd be conservative and lean towards 20%. My first flip also needed a top to bottom renovation and houses like that are full of unexpected surprises...especially once you start digging into the bones of the house. Just make sure, if you do make an offer on the house, to include a option/inspection period and make sure your inspector/contractors are really thorough. Best of luck and keep us posted!!

Marian Smith · Answer

when I said move in, I meant move in to do the rehab.  It isn't pleasant to live in a work in progress.  But it saves money.

Marian Smith · Answer

a lot of people start out cleaning a place up and moving in...your rent is your holding cost.  Stay two years and no capital gains.  If it is uninhabitable, well you may need to give yourself a large margin for error.  If your scared to live there, walk.  No one else will want to live there either--I say that because I don't want to live in anything in Austin worth under 200k...probably 300k.  Suburbs, yes.

Gary Ennis · Answer

@KJ D'Costa on a house that appears to need just about everything, the spread sounds really thin, especially when using expensive hard money.

$10K for roof/decking/insulation, $5-10K for floors, $10K kitchen, $6-8K bathroom, $5K HVAC, $2K paint, $5-8K foundation, $20K for holding costs / closing costs / realtor commissions, $20K profit... using the midpoints of these totals, that's $88K. Add a 10-20% allowance for "gotchas" as @Taylor Jackson mentions, and you're at about $100K. If the ARV is on target (which is an art in itself), it seems that you'd need to get the property at around $100K to be reasonably confident in moving forward. And that's without knowing the condition of the plumbing (old cast iron lines?) or electrical (old Federal electric service?), or windows, or termite damage, or...

I also agree with Taylor on the suggestion to consult J Scott's "How to Estimate Rehab Costs" book (and his Book on Flipping Houses). Very valuable resource.

Good luck and keep us posted!

Justin C. · Answer

140/195 - all the below numbers are very rough approximations.

- $10k closing costs on the buy/sell side = 150/195

- $10k for a new roof and another $10k on flooring, kitchen, bath, and paint = 170/195

- $5k holding costs for 3 months  like interest, insurance, taxes, and utilities = 175/195

Assuming your 195 is conservative, and without adding anything for HVAC or foundation concerns you're already looking at a $20k spread that is quickly diminishing.

These are all rough guesses but probably not too far off.

good luck!

Austin Flip - Too much to turn around?

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