Analyze: Possible Sub-To Rehab (my first)

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Analyze: Possible Sub-To Rehab (my first)

Stinson Bland
Wholesaler · Dallas, TX · Member since 2011 · 294 posts · 152 votes

After several successful wholesale deals, I’ve been actively looking to take on my first rehab. I came across this deal and I need your help analyzing the situation. Do you think this is a deal?

My seller needs to sell ASAP and she needs to downsize to an apartment. My original offer was $78K but she quickly rejected it. She said she had to pay off her mortgage of $90.5K and couldn’t afford to take a penny less. I offered her a subject-to deal that she was very hesitant to take… so I added $1.5K to help with her move to her new apartment. She wants to do the deal but I'm a bit nervous... I explained to my seller that I’d have to get information on her mortgage and I’d have to get the deal approved by my ‘boss’. I do have a partner that needs to look at the deal before I can sign a contract, so I wasn’t misleading her. This house is in a very desirable part of town, next to a nice golf course. There are homes selling for as high as $91 a sq. ft. but I used a conservative number of $83 a sq. ft. At $83 a sq. I think the house would sell very quickly (under 45 days).

Details:
ARV: $151,000.00 (low estimate)
AVG DOM: 62 Days
Sub-to note: $90,500.00 (waiting to get a statement with monthly payment info)
Owner payment to close: $1,500.00
Repairs: $18,000.00
Built: 1985
Sq Ft: 1830

The house was rehabbed in early 2000’s but needs updating (paint, floor, kitchen, bathroom, lighting, landscape).

With all of the numbers above, my offer is $4.3K higher than 70% - Repairs but I figured I'm recouping that by not taking a HML. I have cash on hand to cover the rehab and I also have a low interest line of credit of $40K that could be used to finance the repairs. I am not sure how I'd fund the project but that's a good problem to have.

I've never done a sub-to deal but this seems like a pretty good opportunity to me. I will have very little money into the deal and it appears that there is at least $40K of gross profit to be made. My only cost would be: $1.5K to seller, mortgage payments, repairs, closing cost, and marketing cost. Am I missing anything?

It should be stated that my partners wife is a realtor, so we’ll save 3% on the sale.

How does this deal look to you?

Thanks for any and all advice you guys may have!

Stinson

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y

First, $/sq.ft. is a poor way to estimate values, unless you have strong, strong evidence this is a rock solid number in the area. You need to find actual comps and do the ARV estimate the way an appariser would.

You'll need a couple of grand in closing costs. You want to do this transaction at a real title company, with title insurance and proper recording.

When you sell, you'll also have closing costs. Do a "hold open" when you buy the title insurance on the purchase and you can pay just the difference on the sale. You'll also need to consider taxes, which will be a credit on your purchase and then a debit on the sale. They should be getting escrowed with the mortgage.

You'll need insurance. You'll want builders risk or at least empty house.

You'll probably have some seller concessions on the sale.

Nevertheless, if your numbers are solid, this looks like a good deal. Get in and out pretty quickly and even if they call the loan (unlikely) you'll have it sold before they can make good on their threats.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    First, $/sq.ft. is a poor way to estimate values, unless you have strong, strong evidence this is a rock solid number in the area. You need to find actual comps and do the ARV estimate the way an appariser would.

    You'll need a couple of grand in closing costs. You want to do this transaction at a real title company, with title insurance and proper recording.

    When you sell, you'll also have closing costs. Do a "hold open" when you buy the title insurance on the purchase and you can pay just the difference on the sale. You'll also need to consider taxes, which will be a credit on your purchase and then a debit on the sale. They should be getting escrowed with the mortgage.

    You'll need insurance. You'll want builders risk or at least empty house.

    You'll probably have some seller concessions on the sale.

    Nevertheless, if your numbers are solid, this looks like a good deal. Get in and out pretty quickly and even if they call the loan (unlikely) you'll have it sold before they can make good on their threats.

    1Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y

    Assuming the numbers you assume are accurate, this looks like a good deal.

    First, here are the fixed costs I always assume for a rehab:

    http://www.biggerpockets.com/renewsblog/2010/03/17/calculating-fixed-costs-flip-rehab-wholesale-real-estate-deal/

    Since I also save the 3% on the sale, but like to be conservative, I generally assume about $15K in fixed costs on the rehab/sale of any properties less than about $150K. This is pretty close to the actual average I've seen over a couple dozen projects as well.

    As Jon pointed out, make sure you have a very good grasp of the ARV. If you're off by even 10-15% on your resale estimate, most/all of your profit goes away, so that's the number you really need to be confident about. If possible, find a great agent or appraiser to help you pull comps and verify your ARV.

    Obviously, you also need to verify your rehab costs as well. Perhaps start getting some bids on the work.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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  • Stinson Bland
    OP
    Wholesaler · Dallas, TX · Member since 2011 · 294 posts · 152 votes
    15y

    Jon and J,

    Thanks for your response and I've read your article a couple of times now (thanks again). I've always felt pretty confident in my ARV's but now you have me second-guessing the theory I was taught. Please analyze my method of coming up with an ARV as I am not familiar with the techniques an appraiser would use.

    First, I pull comparable home sales, listings, and expired from the last 6 months within a quarter mile of my subject property. I then look at all of the comps and pull the properties that are built in the same subdivision, within 2 years of the same build year, and 10% of the square foot of my property. I look over all of the photos and see which homes are most like my subject after-rehabbed (similar exterior, layout, and same part of the sub-division). I take the sold properties in that list and figure the average price per sq. ft. I typically lower the average by a few dollars or lean more towards the lower-end of the list. I then multiply my square ft. by the average price per sq. $83 X 1830 = $151,890 and then I rounded down to $151K.

    I also look at the listed properties to see if I can identify a trend of any kind. In this case, it looks like most people are listing for $90-$95 a sq. and then lowering the price to actually get a sale around $85 a sq. In this particular neighborhood there are also homes selling as-is (mid 1980's with no rehab) for $70-$80 per sq. ft. There is a house that was built the same year, it is 10 sq. ft. smaller, the only rehab was paint/carpet and it sold at $91 a sq. in 100 or so days ($165K). With that being said, I feel fairly confident that we could list the house at $160K and more than likely sale for above my ARV of $151K after negotiations for lower price and/or seller concessions.

    Does this look like a solid system or am I missing something that could really skew my numbers?

    I really appreciate any and all input!
    Stinson Bland

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    That method will underprice the smaller houses and overprice the larger ones. Its NOT how an appraiser will make these adjustments.

    First, you need to compare only houses of the same style. Two story to two story, ranch w/o basement to ranch w/o basement, etc. Ideally, comps will have the same beds, baths, and living spaces. Figure out an adjustment factor for the square footage. If $/sq.ft is $85, then the adjustment factor for ground floor footage is probably close to $30-40/foot. Second floor might be $20-25 and basement more like $10-15/foot. Then, compare the comp to your house. If the comp is bigger, take the difference, multiple by this adjustment factor and subtract that adjustment from the comp's selling price. If the comp is smaller, add on the adjustment. An appraiser will also make adjustments for condition and amenities (e.g., add $2000 if the comp doesn't have AC and yours does). Then the appraiser will look at the adjusted values for the comps and come up with a value for your property.

    If you have two houses that are essentially identical (same style, condition, amenities, beds, baths, etc.) but one is 10% larger in sq.ft. than the other, the difference in price will typically be much less than 10%. That's why just a simple $/sq.ft. is deceptive.

    All that said, I did once look at one particular neighborhood where the $/sq.ft., including both ground floor and basement (whether finished or not), was almost identical for about 20 ranch with basement houses. Its not supposed to work like that, and this didn't extend to other styles nor to ranches without basements. But for that set of houses, this method was accurate.

    You also want to look at trends. If prices are trending down in the area, you should assume your price will be lower than you would predict right now.

    You also want to look at ALL the comps. You want to pick the lower end ones. An appraiser will certainly not pick high end comps and you'll be doing good to avoid them picking the lowest ones.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y

    Price per square foot for determining ARV has some limitations, but if the comps you are using are very similar (age, style, size, condition, etc), then price per square foot should be close. If the comps are a good bit different, then you'll need to adjust the prices of the comps based on the specific differences and then just average the adjusted prices.

    Can't hurt to find an agent an get his/her opinion as well, just to make sure you're not missing anything...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    15y

    Looks good, but I think your profit is closer to 30K than 40K, which is still great for a 150K sale price.

    1Reply
  • Stinson Bland
    OP
    Wholesaler · Dallas, TX · Member since 2011 · 294 posts · 152 votes
    15y

    Thanks for all the input guys.

    The comps that I used we very close to the subject property.: same builder, within a year of the same age, same neighborhood, same style, size, etc... I looked at a house down the street today that's listed (pending) for $147.5K and the only updates I could see through the windows were paint, carpet and some fixtures. We plan to re-do the bathrooms, kitchen, paint, all new fixtures, etc. I feel pretty confident in my ARV and I'm hoping we'll be able to list for $159K after all the updating.

    I also showed photos to a contractor and he gave me a 'ballpark' quote much lower than the $18K. We’ll see what my quotes are once I get the contractors into the house.

    I spoke to my seller again today and she is a little hesitant of a sub-to deal. Although, I think she's going to take the deal. I don't want to take a HML on this deal as that would put me over budget. Do you guys have any suggestions on info I should give her regarding subject-to? I told her we would put 6 months of mortgage payments in an escrow account. Any other ideas?

    Thanks again,
    Stinson Bland

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