How to Value A Wholesale when the HBU is as a Scrape?

Question

I've been in discussions with a seller about their abandoned property with bad foundation and missing kitchen, which is certainly a property in bad shape. They don't want to have the property restored.  It has an assessed value of 230K and sits between an 800K house and a 600K house.

They want 280K for it as a scrape, and there are $1 million dollar homes futher down the street. The larger homes are in the 3000+ sq. ft range and this one is 1200 sq. ft.

My experience has been with rehabs only, not scrapes. How does one get to the demolition costs, ARV, and building costs? Looks like the buyer would be a builder instead of a rehabber. Apparently this is what in happens in a blistering, hot market. Unfortunately, I haven't heard this matter included in educational materials for wholesalers, etc.

How do you approach the matter when the seller wants 280K for a property appraised at 230K - which assumes it is a functional property and its not - and the seller is likely correct in the new Highest and Best Use?

Michael G. · Answer

Most of the rehabbers i work with also build new homes. Because have good relationships with my buyers I just ask them how much they think the property is worth as a scrap. They will tell me honestly what  they will pay for a knockdown and give thier honest opinion about the cost to buy the land, the cost to build a new propert on the land, permits, profit, etc. I can then go to the seller and make a legitimate offer that includes my wholesaling fee.

Burt L. · Answer

Ibrahim S - The reference I was trying to make is that the sellers want 50K over the assessors tax value - admittedly low- but which presumes the house is a functioning home, which it certainly is not after the owners long declined to put a needed re-roof on it and it shows the interior damage results where the ceiling landed on the floor in the kitchen, etc. I now see that their requested amount exactly matches zillow also.

You also raise good points about instructing a potential buyer not to contact the homeowner, and how all communication goes through the one with an equitable interest. I hadn't arrived at that, but likely would over time and a few good, hard knocks. Thank you.

Ibrahim Hughes · Answer

Burt by 'assessed value' do you mean 'tax assessed value'? If so the assessed value may or may not have anything at all to do with fair market value. And you go on to discuss "appraised value" so exactly which value are you talking about?

In any event I would establish relationships with builders as Michael G. suggests. I know you may not trust them but we go in to strange markets and homes without a contract with the seller and with rehabbers we've never worked with before. The key is 'posturing'. That is, you let your builders/buyers know that you are a specialist at finding great deals and that if they want to work with you they have to follow your rules:

Only discuss numbers with you the wholesaler.
NO exchanging of contacting info with the seller. All contact and communication go through you.
And NO going behind your back to the seller after they've seen the house.

Come off with confidence and rehabbers/builders will cooperate and follow the rules of your game.

Matt Devincenzo · Answer

Maybe not, one thing that new const has going for it is that in the right market it is cheaper than a rehab and easier. With a rehab you don't actually know what you might have to fix until you get into the project so there are contingencies built in, but with new const everything is being done so there are less chances for surprises.

Also money can be cheaper with a construction loan you have the money coming in draws and the interest is going to be cheaper to borrow especially for an established builder in the area.

Bill Gulley · Answer

Generally you don't want a lot value that exceeds 20% of the value of the home. You can then look to what home would be built and it's MV, estimate 20% building that home and deduct costs for demo, hauling and permits. Obviously, less than 20% would be better allowing profits for your demo and lot prep. :)

Burt L. · Answer

I much appreciate the replies - this would be a paradigm shift of sorts in working with builders.

Not having established relationships with builders, I would be somewhat reluctant to rely on that buyer to tell me what the offer price needs to be. I may be persuaded to make an offer thats too low for the seller to accept - before I understand the costs and profit margins myself. I'm sure a  builder would need a larger profit than on a rehab, due to the extra time and costs, though.

On the flip side of it, there will be fewer builders to sell to than in the rehab market.

Joel Owens · Answer

Well by what you said the only use is for houses (to the right and left of it) so you throw out the other things (commercial, etc.)

The house you can deconstruct and sell some parts out of it or give away for charity and then do a controlled burn on it with the fire department if the others homes are not right up against it.

Then you need and estimate to haul the leftover trash away where you have a scraped piece of land to work with. You find out the biggest size house that can be built on that lot and talk to a builder for the costs per foot to construct that fit and finish for the area.

Talk to builders and find out what their expected profit margins are. Take cost per sq ft and land acquisition price plus teardown and clearing costs   minus the anticipated sales price when built out. This should give you an idea of what you can pay for the property with your fee built in with selling to a builder.

How to Value A Wholesale when the HBU is as a Scrape?

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