Deal in So Cal, what do you guys think?

[Mike Imbriglio]

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. 

[Jeff S.]

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.