Deal Analysis - Am I overthinking ??

Question

Looking for advice from seasoned investors for a potential offer I am going to put together. The house is in the market for now over 100 days and is a short sale but may satisfy 1% rule for buy and hold strategy.

Details below:

List Price:155,000

Potential ARV:~190,000

Rehab cost :~30,000-35,000

Rehab cost breakdown (from my realtor who has done quite a few rehabs himself over the years and seems to know what he is doing unlike me who does not know much about rehab!):

• Roof (Shingles and wood replacement as there seems to be a leak)= 5000
• Paint (entire home) =4000
• Hardwood (first floor)=2500
• Carpet (stairs/second floor)=2500
• Windows=4000
• 2 sliding doors/8 standard doors=3000 
• Kitchen remodeling/appliances=3000
• Powder room remodeling= 1000
• Main Bath room remodeling = 2000
• Junk removal and cleaning (owner may not remove his stuff given short sale) = 2000
• Potential mold remediation (roof leaked and perhaps mold exist) = 2000
• Ceiling repair in the family room (there was leak in the ceiling from first floor bathroom) = 1000
• Miscellaneous = 2000

Monthly Rent = 1500-1600

Monthly Expense = 1400 (PITI, HOA, property management, vacancy =  5%, repair = 5%, capex = 12.5%)

Monthly cash flow= 100-200

I am wary of the following facts, so any comment on any of the following will be appreciated:

• The estimate on rehab cost may be completely off 
• Why no investors put an offer on this for 3-4 months where finding 1% rule properties are really tough
• What would be a good offer price where I feel embarrassed on my offer as well as don't offend the agents/seller/lender

I am leaning for an offer of 120000 (or may be lower ?) and cap myself at 125000. If I get it at 125,000, then with rehab cost added (if the estimate is correct ?), I am looking at ARV of 155-160,000 which is still 15-20% lower than FMV for comparable homes.

Looking forward to some advice!!

Joseph M. · Answer

I would buy at a price that lets you sell as a flip too so that you have multiple exit strategies. With your current numbers, could you pay the 6% agent commission and closing costs in a worst case scenario and exit the deal without losing your shorts?

Nick Stageberg · Answer

@Muks M.  The realtor I work with is never embarrassed to make an offer.  If he thinks there is no point in making the offer I don't, but that's rare.  The only thing you need to worry about it making sure you are respecting your realtor's time.  If you hem and haw and never submit an offer that's ten times worse than quickly making a sound analysis, and submitting a low offer.  Put in a dozen of those lowballs and you will have a deal.

I definitely understand not wanting to insult someone and turn them off when you are looking at a great deal you really want.  I think that's a huge concern if a property is just listed, but if it has been on the market for a long time you can always go back in a week and offer more.  @Brandon Turner has a great story he's told a few times of a property that had been on the market for a while and he submitted the exact same lowball offer on week after week.  Literally took the previous offer, crossed out the date, and wrote in a new one.

I also love the advice that if you don't wince when you make an offer, you offered too much :)

Greg Scott · Answer

@Muks M.

This seems like there might be a deal there.  I'm glad you were recognizing $155K is too high.  That is pretty close to a full-price offer once you consider the rehab.

My reaction to the rehab budget was that the roof was too low.  Even if your are just putting a 2nd layer of shingles on, I spend more than that.  If you have to tear off the roof and replace some decking, it can get more expensive.

On the other hand, you may have some fluff in there for other things.  For example, do you really need to replace the doors or can you just paint them?  I'm not sure how big the place is, but carpeting and hardwood estimates seemed higher than I expected.

You didn't mention HVAC which can get pretty expensive.  How is the furnace and A/C?

I think you are being very conservative on the Monthly Expense side.   On properties I have rehabbed up front, I find my ongoing repair costs average $150/mo.  Your figures are at $255.

Assuming all your numbers are right, look to use hard money loans to minimize your total out of pocket.  If you can get it for $120, you could be all-in about $35K out of pocket.

Joseph M. · Answer

Closing costs shouldnt be calculated as a percentage, they don't scale much with the home value. They're usually close to fixed and depend on how your state does closings. In my State you can use a title company and normal closings run from $2-3k. Agent commission plus buyers agent commission where I am is a pretty strict 6% total, 3 each. Average close cost in my area reported a few years back from the Realtor association was about 17,500 so that 19k is still probably in the ballpark. I wouldn't view flipping as the primary strategy here, but rather as a fallback in case things go sideways. Having multiple exit strategies is a risk mitigation move.

Muks M. · Answer

@Joseph M.

I  am not looking to flip. But for the math sake, with 5% agent commission (if not 6%) and another 5% for closing (is that a good number to use in general for selling?), 10% of FMV after rehab (190K) would be 19K. 19K+166K (total project cost if everything goes as planned) = 185K which will perhaps leaves me 5K in my pocket and I am not sure all this hassle will be worth of 5K ?

Muks M. · Answer

@Nick Stageberg

I am leaning in the direction of 110K offer – reason being it is satisfying 70% ARV criteria (as you correctly pointed out) plus I am feeling embarrassed with offer, but kind of concerned that my realtor may think it is low ball and/or seller may just ignore us ? This being my first offer on investment property, I honestly was not looking for this big rehab but perhaps will do if only numbers make sense.

Have to agree that I am little scared with the idea of this rehab but willing to try as it may be good learning experience as I start building my portfolio on rental properties!!

Muks M. · Answer

@Greg Scott

Thanks for your feedback. Really appreciate it!!

My reaction to the roof was same as yours when I asked my realtor. His take on this was that this roof is not big plus it was very straightforward plain roof (Sq foot listed for house is 1450). Regarding doors, all of those were original doors from perhaps from 1980’s and he said it was ~$200/door installed and will give good look to the home but I can certainly cut on couple of those doors where it is more of looks vs necessity option. The heating unit does not seem to be original (38 yr old home) and so is the AC unit and nothing disclosed on the life/condition but seems to be working as of now as the seller is living there currently. Could not disagree there may be a big ticket soon. Any idea how much it could cost for both units and/or could I factor this cost into my offer at all ? Regarding repair cost, you may be right with me being conservative.

From the MLS description and pictures, both my realtor and myself thought its just cosmetics repairs (10-15K) and we were thinking to offer 130K to cap at 140K with a final price ~155K. Now that rehab is estimated at 30-35 K, corresponding offer price goes to 110K and perhaps cap at 120K (and final price of ~155K) but kind of concerned that 110K number on the offer may result in rejection right away ?

Deal Analysis - Am I overthinking ??

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