Duplex in Sacramento over my head?

Question

Hey BP,I am looking at a duplex in a desirable area of Sacramento, wanted some deal analysis:Story is a guy in Oregon owns it and built it out from a three bed single family to a duplex with 2190 sq feet. It now has a 2/1 and a 4/2, but they are some tiny rooms... Ran out of cash or didnt want to finish the build, and is selling. Wholesaler I met has it under contract for two more weeks. Asking 200k.turned down 180k cash offer already (supposedly) I did a walk of the outside with the wholesaler and peered in the windows. Partial new siding and windows around the house, new framing and studs, part of a kitchen and part of two bathrooms completed and thats it. Its basically completely gutted to the studs.Had my realtor pull comps within a 5 mile radius. 5 duplexes sold within the last year ranging from 300-400k. most were two 2/1 or at most 2/2. But the actual street location may have been better, it is a good area but on a busy street.My best conservative guess for ARV is 340-350. could be higher.Had a contractor recommended by an investor approximate 80,000 for finished rehab. that leaves 60-70 on the table. he got to that number by seeing pictures and telling me a new build from studs is about $40 per sq foot.Rentometer evaluations lead me to believe the 2/1 could rent for 900-950, and the 4/2 could go for 1300-1400 (potentially 1500) in that area. so....flip: 200k cost 80k rehab (100k with perimeter work) 10K holding costs and fees potentially all in 300? ARV 340-350 as a rental aprox 2300 a month 280k mortgage at 4.5 is 1,450 a month self managed 25% down is 70k cash not sure on taxes or insurance but seems to work should cash flow at least 300 a month. Other considerations as I see it: holding costs for complete rebuild may be longer, up to 3 or 4 months? 80k rehab does not cover outside the building, and the yard is a complete mess. a lot of concrete would need to be poured, new fence required, landscaping and grass needed, and as of now no where for anyone to park (old garage got turned into bedrooms) Not sure how much that would influence vacancy or value.They have permitting that expires in August, but he mentioned something about a failed inspection for the permit and that it needs to be refiled (Not sure what that means exactly)Very strange floor plan, not sure what the original owner was thinking with the layout, like he got greedy with the number of bed/bath.anyways, thats what i put together so far. Hows it look to you guys? this is definitely not a simple rehab or deal to put together, and has a lot of little nuances that may get me in trouble.

Al Williamson · Answer

It's definitely a seller's marking here in Sacramento. Buy with a lot of caution. I've seen it three or four times around here - - people get carried away with the upticks.

Account Closed · Answer

If its a desirable area in Sac, and the permit thing works out, the buy and hold strategy might be an awesome option. With that square footage, you can conservatively get $2,200/mos. ($1/sq. ft.) in rents, and probably even more since everything would be brand new in one of the units (no need to go super high end with the finishes on a rental, either). I rented my duplex in the South Land Park area in 5 days for $1.17/ sq. foot with TONS of highly qualified applicants. I'm sure I could have easily gotten $1.20. At that number, you'd be getting $2,628/mos. And while my unit is very clean and shows well, it is not brand new like yours would be. I can only dream how much I could have gotten in actual Land Park!I think the rental market in Sacramento is really strong right now, and having a tenant in there while you fix the parking situation may help soften the initial cash flow burden.As far as comps go, I would simply make sure it is an apples to apples comparison as far as the property type goes. Five miles can make a huge difference in neighborhoods here, but there simply may not be as many MFs to compare. As long as the comps are MFs with similar bed/bath setup as yours, I would go with it. Comparing a 2/1 with a 2/2 makes a huge difference. Many of my applicants would not have even considered a 2/1.In any event, sounds like an awesome opportunity. Good luck working through it and let us know what happens!

Tyler Haskell · Answer

Thanks for all the advice, I did indeed pass on the property. Margins were thin, comps were shaky, and permit issues looked like a nightmare!

Pat McGrath · Answer

heck try a post on CL to see what the response is. It would be rather vague since you dont own it or have valid pictures, but it may help confirm or deny the amount. Have you tried door knocking the neighbors to see what their rents are??

Tyler Haskell · Answer

@Derek Jones@Pat McGrathThanks for the input. I had a typo there, the comps were run .5 miles away or half a mile. Spoke with him again and he mentioned they fixed whatever issue was with the permit but it has to be resubmitted for 800 bucks...contractor is walking through with me in about an hour. Ill see what he thinks.My financial strategy would probably be to get a 200k mortgage with 20% down and use a home equity line of credit or hard money or private money for the 80-100k rehab.

Derek Jones · Answer

If I were you I'd find out about all the permits with that duplex. Then get some real world rent rates. You mentioned the 4/2 has really tiny rooms and the layout isn't desirable so you may not get as much as you hoped. As far as comps go; depending on where in Sacramento this duplex is located a 5 mi radius can cover just about ever part of Sacramento from arden arcade/ south sac/ downtown/ north sac. If the comps are $3-400k by the time you purchase/rehad interior and exterior you may be in it for $320k

Pat McGrath · Answer

failed permits? Find out exactly why. Looks like you have done most of the homework. Doesnt pass the 70% arv -repairs thats for sure. Get ur contractor inside the house. Too much risk & too narrow $ to have hime guess costs over the phone. Would he solely be working on yours or busy doing others & then its 6 months down the road. What about zoning? Try trulia to see whats up for rent nearby. Zillow has an app for estimating mortgage but you wont get a loan on the cost + repairs, right? Its in such bad shape, could you even get a loan?? You may have to fund with cash. 5miles away for comps seems reallllyyy far out. Try 1mile at max. Totally different neighbors in 5 miles.