Deal in So Cal, what do you guys think?

Deal in So Cal, what do you guys think?

Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes

Hey all,

Wanted to get your input on this one. We got a new lead via Craigslist (we've surprisingly enough have had a little luck with Craigslist marketing). The person sounds pretty motivated. They want to move out closer to where their kids are at, they don't want to list with and agent because they don't want a bunch of people coming through the house, and via prop stream we found out there is a lien on the house from a couple years back and they actually owe around $135,000 more on the mortgage than they paid for it 13+ years ago (which seemed weird but I think there was a divorce a few years back and ownership transferred). I'm going to try to look up the county record to see if Propstream is completely accurate.

It sounds like there is very little work that needs to be done on the house maybe some light cosmetic work. We are getting pictures today. The house is worth $615,000 as-is (comps were around $620K and a lot of the other homes in the area are even more), and with a little work may be worth even more. It's in an area with pretty good schools. Not only that, it is only a 10 minute drive from the beach, which carries a lot of weight in So Cal. They owe around $440,000 which is the problem (they paid around $300K when they bought it). But if we could help them out with their issue and get it for $460,000 (maybe help them move, and get them out of massive debt and a lien), and the rehab is only $20,000 (if that). An investor could still make $100K- $120K on the property after closing and our fee. I know we aren't using the 70% rule here, but would you all consider Southern CA a little different of an animal because the housing prices are so much higher?

Would you do the deal Subject to?

It seems like a great buy and hold opportunity for an investor. Maybe the numbers just aren't there though. Thanks for any and all input.

28 views

Most Popular Reply

Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes

You’re making some very fundamental errors with your numbers, @Mike Imbriglio.

You claim, “An investor could still make $100K- $120K on the property after closing and our fee.”

You can't take the ARV-Purchase Price-Rehab Cost-Your Fee and claim that would be the amount the investor would make. $615k ARV - $460k Purchase - $20k rehab = $135k. Not including your fee, this is not the investor’s profit. There are many more expenses associated with a flip than this and you’ll discredit yourself if you don’t include these when you present a deal.

Assuming your numbers are perfect -- they’re not, and not including any wholesale fee, here’s my estimate of the profit in your deal (click on the image to expand):

Here, as I always do, I assume a 6 month flip and a 9.9% + 2 point hard money loan. Good luck to any flipper getting these terms now, rehabbing, and then selling in the middle of a pandemic.

While the 70% rule of thumb is impractical in high ARV locations, we use 75%. This works in southern CA and will result in a good deal for a rehabber, which we define as a 10% to 12% of the ARV profit. FYI, at 85%, the deal roughly breaks even. You're at a $54k profit or 8.8% of the ARV which, on its face, is marginal.

This profit does not include your wholesale fee and I also take issue with your $20k rehab estimate. Not any sort of rule of thumb, but in our experience, a "typical" southern CA rehab costs (very) roughly 12% of the ARV. I'm sorry, Mike, but if someone says a rehab will only be $20k, we immediately assume they are either in sales mode or they don't know what they are talking about. In fact, I can't say I've ever seen a $20k rehab -- especially on a $600k+ house.

Also, and this is pandemic specific, but how do you know your ARV is accurate? There is not a comp in the world I'd believe now. That is, in this unstable market, how could anyone predict the sales price of a house 6 months from now?

Even if it were a month ago, Mike, once you add your wholesale fee and a more realistic rehab budget, this is not a very good deal.

See this reply in the discussion

21 Replies

Jump to latestLatest

Sort by

Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
It is a fantastic buy if they would sell it to you for $460k. The problem is they won't sell it to you for $460k because as much as they don't like having people walk through their house they'd probably much rather have the extra $100k+ a realtor would be able to get them.
People aren't stupid and people don't sell properties based on what they owe or what they bought the house for unless they are on the razor's edge of having equity at which point there is no equity to be gained. As a side note the 70% rule doesn't work in the primary SoCal markets.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Aaron K. thanks for the input. We asked her a few times if she wants to sell with a realtor and she does not want to do that. She also has a lien on the property from a few years back and owes more than she bought the place for, i.e. she's in financial trouble. If we can help her get out of debt and get her finances back on track, and she can get moved out to where she wants to and be free and clear of any financial problems she has. I respect your opinion, but that's what we do as wholesalers we help people out with their problems so it's not out of the question that she would sell for that low.
0 Reply
Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
@Mike Imbriglio you can ignore what I'm telling you and figure it out on your own but I'd wager they want at least $575k for the house if it is worth what you say it is. The lien is irrelevant because even after the money they owe there they still have a ton of equity. People don't give up equity like that because it makes no sense to do so and if they are truly in financial distress they likely have debts outside the mortgage that they want to use their equity to pay for. Not to mention that another investor would be willing to pay more for the property. I highly doubt you are a wholesaler in this area because if you were you'd know a lot more about SoCal than you have shown thus far. In addition if the as-is value is $620k why would you bother wholesaling it at all, just sell it for $620k and make all the profit, because you'd have a decent amount of equity if you catch the unicorn and can buy it for $460k.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Aaron K. I'm a new wholesaler, and I'm not acting like I know everything that's why I'm here asking for people's opinions. If you'd like to let me know what you would do I would consider it. Seems like you just want to talk down to people and act like you are smarter than everyone. I'm not scared to ask for help and I'm certainly a straight shooter and don't act like I know everything. Far from it. I think we are looking at this differently. Thanks for your time though!
1 Reply
Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
@Mike Imbriglio the reason I clapped back at you is because you read what I wrote, it wasn't what you wanted to hear and you dismissed it, I'm trying to give you a dose of reality so you can actually plan for what you want to do.
What I would do depends on the property but if I were to pursue it I'd offer something competitive, this property seems like it wouldn't be a good candidate for wholesale because it doesn't need much if any work. That doesn't mean it isn't a good investment but you'd be better off just buying it and then reselling than wholesaling. In that value range I doubt it would make a good rental assuming it is an SFR. If it were not for the current events and assuming this thing is in the buybox for Zillow they'd offer way more than you were proposing assuming your values are correct, and if they call around to others I'm sure they can find a better all cash quick close offer than $460k. The reason for that is that while it doesn't make a good rental there are lots of cash buyers willing to sit on it for 2 months and make 20% on their money doing literally nothing while they resell it.
1 Reply
Jeff S.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
6y
You’re making some very fundamental errors with your numbers, @Mike Imbriglio.

You claim, “An investor could still make $100K- $120K on the property after closing and our fee.”

You can't take the ARV-Purchase Price-Rehab Cost-Your Fee and claim that would be the amount the investor would make. $615k ARV - $460k Purchase - $20k rehab = $135k. Not including your fee, this is not the investor’s profit. There are many more expenses associated with a flip than this and you’ll discredit yourself if you don’t include these when you present a deal.

Assuming your numbers are perfect -- they’re not, and not including any wholesale fee, here’s my estimate of the profit in your deal (click on the image to expand):

Here, as I always do, I assume a 6 month flip and a 9.9% + 2 point hard money loan. Good luck to any flipper getting these terms now, rehabbing, and then selling in the middle of a pandemic.

While the 70% rule of thumb is impractical in high ARV locations, we use 75%. This works in southern CA and will result in a good deal for a rehabber, which we define as a 10% to 12% of the ARV profit. FYI, at 85%, the deal roughly breaks even. You're at a $54k profit or 8.8% of the ARV which, on its face, is marginal.

This profit does not include your wholesale fee and I also take issue with your $20k rehab estimate. Not any sort of rule of thumb, but in our experience, a "typical" southern CA rehab costs (very) roughly 12% of the ARV. I'm sorry, Mike, but if someone says a rehab will only be $20k, we immediately assume they are either in sales mode or they don't know what they are talking about. In fact, I can't say I've ever seen a $20k rehab -- especially on a $600k+ house.

Also, and this is pandemic specific, but how do you know your ARV is accurate? There is not a comp in the world I'd believe now. That is, in this unstable market, how could anyone predict the sales price of a house 6 months from now?

Even if it were a month ago, Mike, once you add your wholesale fee and a more realistic rehab budget, this is not a very good deal.
1 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Aaron K. my apologies if you got that impression no hard feelings. Thanks for your response, makes sense.

@Jeff S. Thanks for your insight. That is all great to consider, and a few things I didn't consider on the investors side so now I know. I had a couple questions in regard to your numbers. If one of our buyers is buying in cash, would there still be financing costs? Also the realtor fees could be 5% but if we have a broker in the area that is interested in rehabbing the house (which we might) they aren't paying any fees to sell it if I'm correct? I'm using this as a hypothetical.
In terms of rehab, I work in high end construction and remodeling. So I appreciate your opinion on it. If the only the flooring needs to be done and the exterior needs to be painted which sounds and looks like it may be the case, then yes it could be around $20,000. Of course if it was a complete gut job it would be way more expensive. A kitchen costs $30,000-$40,000 alone in CA.
Appreciate the insight and will take it all in to consideration.
0 Reply
Jeff S.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
6y
“If one of our buyers is buying in cash, would there still be financing costs?”

Clearly no, but who are you selling to? If this a good deal only if someone pays cash, then you are limiting your market, @Mike Imbriglio.

“Also the realtor fees could be 5% but if we have a broker in the area that is interested in rehabbing the house (which we might) they aren't paying any fees to sell it if I'm correct?”

If it’s sold by a broker, who sells his or her own property to an end buyer they found, then there would be no commission split and the Realtor Fees would be zero.

Once an agent is involved, then a commission will be due, which would be split with his or her broker. Or, to a broker or agent on the opposing side of the sale. Lots of combinations here.

The best scenario is to sell to a broker who pays cash and knows in advance that he or she will find the end buyer. Of course, this really limits your market. Could it happen? Of course. Is it something I’d rely on? No.

If you have to torture the numbers to make this a good deal, Mike, it’s not a good deal. You’ll only limit your market while the homeowner waits for you to sell.

Good questions. I appreciate your enthusiasm.
0 Reply
Barry Pekin
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
6y
@Aaron K., @Mike Imbriglio,
Regarding your differences on if the seller would sell at that much of a discount, there's only one person's opinion on that matter that counts. And of course, that's the seller.
None of us can or should assume what a seller's priorities are. There are reasons why people will sell at a discount. And if they are willing, it's an opportunity. It's not taking advantage of someone, either. You are presenting an option, and they are making the choice. As long, of course, as there's no coercion or lies or anything else that is meant to cheat or trick someone out of their equity. Honestly let them know they could get more listing with an agent, and then let them decide.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
Hi @Barry Pekin thanks for you insight. We've been very upfront with her that we purchase homes with our investors group a big discount. My business partner and I have asked at least 4 or 5 times, "Why don't you just wait a little bit and sell for a higher price with an agent?" Our goal is to be as transparent as possible

@Barry Pekin @Aaron K. @Jeff S. Just a little update, wanted to see what you guys think. We found out she actually owes a lot less on the mortgage than previously thought. We thought she owed around $445,000 but she actually only owes $340,000. We also dialed in on her motivation. Since she's a single income household it is getting very hard for her to pay the mortgage. She is also starting to have health issues and doesn't know how much longer she will be able to work at this capacity. Therefore she wants to move in to a smaller place, and a city where the cost of living is much lower. She said she is in a rush to get this done.
Therefore we are going to make our opening offer $420K now which is $40,000 less than our previous hypothetical offer. Not only that I personally offered to help her move and help her look for a condo in the new location she wants to move to. Our MAO will be $440,000, but I would love to get your input. She seems like she is motivated and wants this to be an easy process. It also seems like a good deal for any investor that may want to add value to the property. She sent us over pictures and its in great shape. All that needs to be done is paint on the exterior and a minor fix on the fence.
Looking forward to getting your thoughts.
0 Reply
Barry Pekin
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
6y
@Mike Imbriglio,
I don't normally try to dive into what the buyer's ultimate profit will be. That's highly dependent on many factors that are going to vary between investors. As for the $20k rehab costs, even if you do just need touch-ups, there are frequently other things that might pop up or simply were not considered. The most common updates, just to modernize, are bathrooms and kitchens. Even if they're in good shape, are the current and what homeowners are looking for in a new home?
It does sound like she's motivated, and that she understands your need to purchase at a discount - and that you will be making a profit. That's very good.
As for ARV, I agree that's hard to calculate right now. While it might seem like you're looking to take advantage of the situation, you're really not. You need to consider the potential that prices may very well drop as we come out of this COVID thing. That said, I've heard theories that prices will go up. So you really don't know for sure. Still, buyers will want some extra cushion in there - just to be safe.
Personally, I don't fret the details of the numbers. When talking to the seller, you're trying to get the best price they will accept. That's a skill and a challenge. When you get to their final number, you have to determine if it's going to be attractive to a buyer. And, of course, you have to have a strong list of buyers. You don't want to get this under contract only to find that all of the buyers you thought you had were in hibernation waiting for the storm to pass.
Go forward and pursue this. It's still far from a deal. There's a lot to be uncovered, and a lot that can happen. For now, all you know is that there's some potential here, which makes it worth the effort.
1 Reply
Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
@Mike Imbriglio if you can get it for that then good for you, I still have my doubts but I really appreciate the updates, as it will help follow this story to one conclusion or another, heck if it fits my profile I might even buy it. I still am a firm believer in what the seller breaks even at has little to do with the offer they'll accept in most cases, but I'm happy to be proven wrong.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Barry Pekin @Aaron K. I hope you both are doing well. I wanted to update you with where we are at. The seller has agreed to a price of $421K which is much lower than we originally thought. We are working on our contract today. Since we know there is a lien on the property, we know there is going to be an issue with title. Do you have any insight on something like this?
The property is in pretty good shape. If an investor wanted to do some minor rehab and hold it/rent it until things start moving again they could get more money than expected in my opinion. The estimated value of the house was $640,000 last year. I know things are changing right now but it could be a great buy and hold strategy to make some money on.
Would love to hear your thoughts. Thanks.
0 Reply
Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
@Mike Imbriglio the lien is for all intents and purposes going to be added to your purchase price, because it is unlikely the seller has the money to pay it off and you can't get clean title without paying off the lien, (that is what its intention was). How big is this lien? That is going to have a huge impact on this property, and is something you need to find out ASAP. Once you get it under contract I wouldn't mind taking a look at it if you want to share.
0 Reply
Barry Pekin
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
6y
@Mike Imbriglio,
That's great to hear. Congratulations.
Don't get complacent. Things change. Not to scare you, just to let you know you can expect some bumps in the road.
As for the lien, that's not a problem. Knowing about it upfront is the key. When the title company does their work, they will find this lien. If they are expecting it, all the better. It's just that the lien needs to be settled at closing. If you're feeling up to it, you can always contact the lien holder and attempt to negotiate a discounted pay-off amount.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Aaron K. @Barry Pekin Thanks for your response. It's pretty exciting but yes we understand there is still a lot of work to be done here. We are going to ask for a 45 day close just because of what is going on with the coronavirus. If you have any recommendations on clauses we should have in our contract that would be helpful. We have a contract from a CA wholesaling group but obviously going through a lawyer is best.

It's not a huge lien according to our data. It's less than $4,000. Now with that being said, we are going to write in to our contract that we have 15 business days to check title, mortgage, inspect, etc and any issues that arise could be grounds to cancel the contract. Any recommendations would be great.
0 Reply
Barry Pekin
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
6y
@Mike Imbriglio,
It sounds like you're on top of this. Great job!
If you got a contract from a local wholesaling group, you're probably fine. I'm sure it covers all of the basics. Padding the dates now is a very good idea.
As for the due diligence phase, I usually let it cover the entire duration of the contract. The only reason I do this is because I assure the seller that I will be doing my due diligence right away, and if something comes up I will let them know ASAP. I don't want to leave them hanging until the last day only to tell them I found out there were larger repairs or something, but I don't want to be rushed at 10 or 15 days because the title company is dragging their feet or something.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Barry Pekin Thanks for the follow up and your advice. We were able to get the property under contract. Appreciate all your help on this one.
0 Reply
Barry Pekin
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
6y
@Mike Imbriglio,
Great news! Keep us posted on how this ends up.
0 Reply
Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
@Mike Imbriglio now that you have it under contract do you mind sharing location, specs etc. I'm so curious at this point.
0 Reply
Mike Imbriglio
OP
Investor · San Diego, CA · Member since 2020 · 55 posts · 8 votes
6y
@Aaron K. just sent you a DM
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.

Log In Join for Free