Don't over pay for converted Sq footage like garage & enc. porch

[David Wolf]

In the 12 or so deals we have done in our 1st year we have done really well, but we weren't perfect. We made a couple mistakes. Mostly on the buy side. My hope is to share the a main one that I have made 1.5 times that was also missed by few more experienced investors who were in on the deal. 

We had a motivated seller purchase on a 3000sq ft house that had a converted garage. It was a hot neighborhood and I had looked around the neighborhood and noticed a lot of nice homes still using carports or outside parking so I didn't consider the garage as crucial. Big mistake. We comped the ARV of the property at around $185/sq ft. I we are done with the flip and I think we will get that number without a problem. So where is the mistake? The problem is that we are probably only going to get that Sq/ft value on the natural sq footage of the house which is 2700sq/ft. During our rehab we converted the house back to having a garage, but we were screwed whether we did this or not. at $185/sqft, 300sq/ft is around $55,000 in value loss. Not something to trivial. We could have reduced the negative of the project by keep the budget of rehab ultra low or just selling out of the project but we went over budget on the rehab by adding a new bathroom and converting a room into a bedroom. To top it off. The complexity of adding the bathroom added a ton of time to the rehab as our contract was backed up. Had we not screwed up on the value of the property we would have been able to come out ahead even with the over budget rehab. Instead, this project will be our only breakeven or worse project because we overpaid for a property.

How to avoid this? This is more prevalent if you are in our boat and have the marbles to buy houses site unseen out of market, but be careful when you have a motivated seller and pull a house up at 1900 sq/ft and see a $ per sq/ft that you make work in your ARV*.7-rehab value. We recently had a property we bought that was a good deal larger than the average house in the neighborhood. The reason is because the home had a garage conversion a long time ago. This causes two issues. One is that the house has more square footage than the average house which means you probably aren't going to get the same $/sq ft as you mini houses next door. The other is that a 1900sqft without a garage or carport or porch isn't worth as much as a 1900sq/ft house with a both of those features.

We ended up doing the deal anyways because we had enough of a discount but here is how we now calculate non original space. 

Find another oversized house in the neighborhood if possible. There is a good chance they have done a conversion of some sort. Look up the plat card and find the original square footage of the house. Now find another neighborhood property that his a similar square footage to the BASE square footage of your home or your oversize comp and use the ARV comp sq/footage value. Apply that value to the original square footage of your house on the plat card and also on the oversized house. The rest of the value of the sale can be applied to the enclosed porch or garage square footage. In our case it resulted in an addition sq/ft value of $50 per sq/ft as opposed to $100/sq ft of the BASE are. No you can use the $50sq/ft to estimate the value of enclosed areas of your home.

Here is some calculations to help. 

Oversized Comparable home

2400sqft - 1400 original & 1000sq ft enclosed additional to square footage. Sale price $190,000

Normal Sized ARV Comp

1390sqft -  Sale price $139,000 ($100/sqft)

Target Aquisition Property

1900sqft - 1350 original & 550sq ft enclosed addition. (ARV Value ???)

Step 1) Find enclosed sq/ft value of oversize home. Apply $100/sqft to 1400 sq ft. = $(140,000)

Step 2) Divid additional square footage by remaining sale price. 1000/$50,000= $50/sqft

Step 3) Calculate value of Target property using original and enclosed values. 

1350*100+550*50= $162,500

This is a big difference over $190,000 you might mistakenly value the property at if you apply a $$/sqft equal to a base square footage. This is a basic price per square foot value and doesn't take other appraisal aspects into account. YOu can run your normal value ads and subtracts after this is done. This is how we now make our  Motivated seller offers.