Could use some feedback

Question

Hi all,
This is my first deal since getting back in the game after a 4 year break. I recently won an auction for a 2br condo from Fannie Mae. Purchase price was 37500. Conservative FMV is 62000 after about 2000 in upgrades.
If I held this as a rental, Monthly cash flow would be about 300. My original intention was to buy low and wait for the market to recover, but now I am thinking about a flip after the 3 months fannie makes me wait. What are your thoughts? Sell now or wait?

J Scott · Answer

Do you need the cash or is cash flow more likely to get you to your financial goals? What do you plan to do with the money you generate from a flip? Would you use it to do another, more lucrative, real estate deal? Based on the appreciation you anticipate, what is the likely return you'll see if you hold the property vs if you flip it? Will you be doing the PM yourself or hiring it out? If you're doing it, do you want to be a landlord? Basically, it's going to be a combination of your financial situation, your personal preferences and your need for the cash. The nice thing is, it sounds like you can't go wrong either way!

Account Closed · Answer

So, you are asking whether to sell now or wait possibly a few years. IMO the value of holding RE is in holding them at least 10 years. If you are strategy is more short term then flipping in 3 months seems to make more since. Not much will be gained by holding onto it a year or two. IMO there will probably be little appreciation in that period. With tenants in place you may find that you have additional repairs in order to get the property ready to sell at or near retail.

J Scott · Answer

Depending on the type of financing your buyer goes with, and the amount of the sale compared to the purchase price, the lender may require you to provide documentation of your rehab expenses, including both labor and materials. Just something to keep in mind...

Jeffrey K. · Answer

Let us know what you sell it for. If it only needed 2k in work why couldnt a homeowner see the potential? Second, this is a cheap condo and condo loans are hard to get. Most people buying in this price range need a loan. How are they going to get a loan if you only put 2k into it? They are going ot see you paid x and put in 2k and they will say it is worth x + 2k three months later or x + 4k if you are lucky.

Vikram C. · Answer

How sure are you about your ARV estimate? In Phoenix, where I invest, a condo that was selling for 90K in 2007 is certainly not worth 60K now.

Joel Owens · Answer

Did you buy cash or do you have a loan on this property?? If a low fixed rate loan maybe you hold long term. If you bought it cash I say sell and buy more and grow your cash.This is one of the best buying times for residential and commercial in our lifetimes.You have a perfect storm of low interest rates for loans and cheap values. So I would be buying up like crazy as long as they are GREAT deals and not GOOD deals.There are many good deals out there but you are looking for the great ones.Especially if you have limited cash and are trying to grow your portfolio.

Steve Hucke · Answer

@Stan That's a fair question, but honestly just wanted opinions on whether to hold the property for a while or try and move it sooner.

Stan Jackson · Answer

Steve, Excuse me for asking, but could your reasoning for posting this situation could have been to see whom here would be interested in this deal? Because my thoughts are to sell the thing and put the money to a more impactful use. Getting $300 a month for a short period of time doesn't seem to equal the $24,500 (approx) you would get for selling. With the $24,500, you could go to the next deal, to really get the ball rolling. Let me know your thoughts. Thanks, Stan

Joel Owens · Answer

This goes back to when rehabbing a property NEVER over improve it for the area. Buyers will appreciate it but will not overpay for it. (typical investor mistake). Use the the Trump principle.Have one item in a room that is super nice so the buyer thinks quality and elegance.When doing buildings he would always put minimum code into the structure and save the money for the EYE CANDY for the potential buyers. In my market condo's are tougher to sell for sure.I think you overpaid and could have gotten the property cheaper. As long as you can make money off of it you can move on to the next one.over time you will build a portfolio of flips and ones you want to hold for the long term.

Jon Holdman · Answer

Without your input, potential buyers and their lenders would only know what you paid. Even though it was a foreclosure auction, they would tend to use what you paid as the value. If you put significant money into fixing it up, they would see that you added some real value. if you put in $2000, which sounds like paint and carpet and a few minor repairs, to me, they going to use $2000 or a bit more, like Jason says, as the value. Maybe somewhat more than that, if you get a more liberal appraisal. But there's no way you'll get from $37,600 to $62,000. This is not a hypothetical situation. I own a house right now where my business partner and I funded a loan. The rehabber paid $130K and planned to invest $30K. He thought it would be worth $210K. He put a bunch of work in - new roof, new siding, kitchen and bath remodels, new appliances, new carpet & paint. Unfortunately he did some things wrong (lack of permits) and when he found a buyer, a new appraisal was only $166K. Supposedly he invested about $30K, which was his rehab budget. Not everything was done, but he also put on new siding, which was not in the budget. Notice that while the appraiser had support for the estimated value with current comps, its very close to the price the rehabber paid plus their budget. We've put in yet more money to fix the permit issues ($16,281, just wrote the last check yesterday, almost $20K with landscaping, overdue taxes, insurance, and some other minor stuff). I hope we can sell it for enough to get our money back. Comps appear to support that. That "$210K" number is nothing but dust in the wind.