Fix or Tear Down and Rebuild

[Geo Cruz]

I have an off market opportunity that I wanted to get the community's opinion on. I'm currently in negotiations on this property located in San Marcos, CA (North San Diego County). As some of you might know, San Marcos is a booming city with properties well over the 500k price range. This property is a "rural" part of town but within walking distance to schools and great parks. I would say, the block it sits in is a rural area but nothing really in San Marcos is rural to me. The current structure is a 949 SFR that sits on a 25,000 SF lot. It seems like they started renovations and stopped in the middle of a significant remodel. There are open stud walls and extensive clean up needed in the lot. The owner shared that they had stopped to wait for the city to issue permits for a sewer connection, as the existing septic system was not going to get approved (percolation issues with the soils). My first take on this property is a total demo and re build with a potential add of an ADU or an additional SFR if the city allows it.

I wanted the community's take on how to approach negotiations. Title shows that the current owner bought the property in 2017 for 300k. He also mentioned that he had recently sold the property or had offered to sell it to his niece, I think unofficially because no transactions were recorded. Comps in the area are sitting in the 700-800k. My initial thoughts are as follows:

• Offer 350-375K
• 140K repairs + 75K for a new ADU = 215K total
• Target ARV is 710K+ could be more
• Target rents are 5000-5500 with ADU
• Planning to use private lender for purchase and repairs with a 9% interest only loan then putting it on a 30 year
• Potential to add an ADU
• Initial plan is to buy and hold if I can BRRRR

My questions and concerns are:

• Does it make sense to flip in lieu of BRRRR
• Does it make sense to wholesale
• Does it make sense to try to split the lot and build an additional SFR + ADU? City said it might be possible to split.

My current goals are to build my buy and hold portfolio but I'm running low on capital to keep parking in down payments. I have a capital partner who is willing to finance my deals but I don't want to partner with him on long term holds. I really think I should keep this property as it's in a booming city that will only skyrocket in appreciation in the next few years. Any advice from you guys out there? 

[Justin R.]

If you buy the land for $375k and scrape the house, you'll be into the land for $400k before you do anything.

If an SFR and ADU will comp at $710k, that leaves you $310k to break even on an equity basis. I'm guessing you haven't done land development or ground up construction before (I could be wrong?), so you're not going to be able to build an SFR + ADU for $310k. And you definitely won't be able to when you add on design, permits, utility connection costs, and money costs.

Dividing the land, if permissible in this situation, may make such a project financially feasible because it cuts your land cost per sale down. An SFR+ADU on 12500sf will sell for about the same as an SFR+ADU on 25000sf. As a data point for you, I underwrote and negotiated a 5 home subdivision in San Marcos last year (that I didn't end up moving forward with because of utility complications) that had a $800k land cost.

The problem in this case is the land cost is too high for scraping and building.  Based on your description, I'd look at either finishing the rehab yourself or wholesaling.  Or, finish the rehab and rent ... and then spend the time and money later to pursue a land division.

Good luck!