Is this worth what my mind is telling me?

Question

Sorry if it sounds insane but forgive me I am a newbie to the whole "real estate world". Ugghhh.... This real estate stuff has mind going 100mph! lol..

Ok so, I am going to give you the numbers and some info about the home because I am in need of some advice.

This home is an early 1900 home. It is listed as a 1950, but it also states that it is questionable and up to the buyer to figure this out. I contacted the National Department of Archives and History and the man I spoke with said from the looks of it on google and the architectural design he would say that it is around a 1900-1920's home. 
My reason for giving you this info is, if this home can be listed historic than the price of this home after renovations could be MUCH higher than the number I am going to give you. 
Just to be safe and not sorry, I am going to give you my numbers without it being nationally accredited as historic.

This home is 1950sqft. home listed as a 4bd 1ba, but after renovations would be a 3 bd 2ba.

Asking Price: $29,000
Renovations: $70,000 
ARV: $130,000 (this is a low end number for a cushion barrier. I believe after repairs this home will sell for much more)

The renovations would include: an extended and upgraded kitchen, combine 2 of the rooms to make one big master suite with walk in closet and and a master bathroom suite, adding a bathroom, uncovering and refinishing all of the original hardwood floors throughout the entire home, add on back screened in porch with an additional open deck off to the side, new fencing and landscaping, a new roof and some modernized upgrading to the additional rooms.

Using that my MAO (maximum allowable offer) would be: $21,000

Now forgive me for thinking like a rookie but I feel like I would be taking advantage of the seller to ask them to lower the price to $21,000.... Seeing that the potential of this home would be worth so much after renovations. Not only is this home very close to the historic part of downtown Summerville, the neighborhood directly across the street has higher end homes that are in the $290k-$460k range. Not saying that this home would be that just giving you an idea of the area.

I also would like to know if someone could enlighten me on the "capitol gain" process and how that works. I am unfamiliar with the aspects of this and would really like to educate myself with this before I take on anything.

Thank you all in advance for your time and efforts, 
Erica Clark

Brian P. · Answer

Erica

Your use of the standard formula is good, but remember mao is what it says mximun and there is a lot of risk on your part with repairs being so high. I met one successful investor that said he wanted $2 back for every $1 he paid in repairs as a double check on the price he paid.

And I started using that as a factor myself when I evaluated a property and to deciide between properties but one thing it did for me was to put in my mind that the repair costs have a value too and are not just a break even factor.  Putting out $5,000 in repairs is a lot different then putting out $75,000 in repairs. So don't be hesitant to reduce your offer accordingly.

I wouldn't be embarased at all to make an opening bid of $15K or less since I am taking the risk and they are getting their money upfront but iif you want to spread the risk maybe consider offering a joint deal with the seller getting a percent of the profits and zero for the property.

And if they turn down that first offer you can throw that at them next instead of raising the price and it will help them to consider the price you are willing to give them upfront because then it makes them think in terms of risk and just not throwing a higher price back at you.

If they do come back at a price to high because they desire no risk and want to get the  money upfront and to end it, be sure to stay firm and say you know I would like to pay you more but my calculator says if something unforseen happens I could be doing all this and and putting out all this money and all this effort and end up making nothing and that doesn't put dinner on the table, and then you shut up. Maybe even look at the floor in defeat, which can make them think oh oh we are losing her.

Annette Hibbler · Answer

First question:  Are you looking to sell the house or do you want to rent it out for a while?  That will definitely affect your repair costs estimates. What are you basing the repair costs on?  Have you had a rehab contractor look the place over with you?

Think twice about registering this property as "historic" it's often a rehabbers nightmare.  If the historic society gets involved, they can dictate what kind of repairs, colors, surfaces, etc.  Could cost you time and money!

You are an investor willing to put in thousands of dollars, labor and time into a property that the seller doesn't want to be bothered with.  Do not ever feel bad about a low-ball offer!  In fact, they probably be thrilled to get any kind of offer for it at all at this point.  If it's a probate home, one that was inherited when grandpa passed away, then the relatives don't care at all.  Your goal is to obtain the lowest purchase price possible to permit you to obtain the highest gain at the end of the road.  Just like Ed said, the worst they could say is no.  So what?  Tell them to make a counter offer and take it from there.  Never, ever pay asking price!

Rick H. · Answer

@Erica Clark - you Southern Belles are just so darn sweet and considerate.  We could use more of that in my home community (So Cal).  Of course, business is business.  Buying real estate is tricky.  I'd be tempted to take a stop and think through the process, which you have already done a good job of analyzing.

You could offer less (I like Brian P's points) or offer a slightly higher price that includes some paper, and structure the deal such that there is some risk reversal. In other words, place some restrictive language in the note such that the seller would participate in the risk of repairs exceeding estimates and would reduce the note's unpaid principal balance accordingly.

Colleen F. · Answer

First , I love historic properties and have renovated some.  However they are not an easy fix. It is the structural stuff that can blow the budget. If it is on the MLS your offer should include inspections and you may want a specific structural and of course pest inspection given the age of the house.  If significant issues are found  take a contractor and get an idea of the real cost to fix.

Now on the topic of the national register of historic buildings be careful.  Unless you intend to restore wood windows and other specific elements you might want to skip this. I think if you look into it  there is no real increase in value based on registering and you may be forced into more costly historically correct restorations.  For example you can restore old windows (this is as costly as replacement) or you can be forced to use historically accurate reproductions, also costly. If you are renovating to sell this can cut into your profit and any sweat equity you put in.  I like to do things right but I am practical  on this point and I want the final decision to be mine as much as possible. Also any expansion of the property may not be considered acceptable  for a historic registered house.

Capitol gains well, if you flip you pay the tax. You need to talk to a tax guy about your specific situation.  I do wish you luck there is nothing like bringing an old house back.

Jonathan Sowinski · Answer

When you say “nationally accredited as historic”, do you mean listed on the National Register of Historic Places?  If so you may want to do a bit more research before you pursue this.  It is not easy to get a house registered especially a early 1900s unless something historically significant took place there.  Is it located in a historic district…?
Though it may add value it may also add rehab cost as well, you may have to match historic character, materials, and finishes.  
Though it could also save you $$ in being able to receive historic tax credits on the rehab. 
I would encourage you to do more homework on the “historic” aspect of this deal, as it is typically not a simple process (unless the property is already listed).  I own 3 properties built between 1890-1920 (as is most of the housing stock in my market) none are registered but two are in historic districts and eligible for HTC for certain repairs and fall under less stringent guidelines…if the one was one block south (in a different district) all of the work done would have to be approved by the State Historic Preservation Office.

Clay Huber · Answer

The ONLY way you would be "taking advantage" of the seller is if you held a gun to their head and "made" them sign the contract.

Real estate is about the numbers. You need to follow the numbers and be in the business to make money.

As long as the person has the option of saying "no" to your offer, then you can sleep easy at night.

Erica Clark · Answer

You don't think that would be like a slap in the face to person sellin? I don't want to be rude. I think I'm way to kind hearted for this, I don't want to insult anyone while trying to get this place. Lol. I jus keep thinking about the fact that this home is VERY old and has a lot of potential with the right renovations. 
Ahhh... ok, I am going to just do it and see what happens! 
Thanks for the advice and I will let you know how it goes.

Edward Burns · Answer

If your maximum price is $21K go with an offer of $19K.  Worst that happens is they say NO.

Is this worth what my mind is telling me?

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