All Forum Posts by: Chris Ferren

Hey all,

Haven't posted in awhile because I've taken a step back and slowed down a bit with the investing. I'm still at it, but I needed to regroup a bit as our deal went sour.

So my partner and I ended up trying to re-negotiate with the bank. Tried to lower the purchase price by $5,000 to an overall buy at $100,000. No dice. Bank said they were taking the offer off the table completely and would not negotiate any longer. So now it's sitting at $120,000 still. I hope it sells six months from now at $90,000. I would love that. I think it was pretty dumb they would not renegotiate, as we probably could have had a deal even if they would have offered to split half of the new credit we were asking for.

So the deal break down looked like this. With demoing the pool, pulling permits, and all the rehab that needed to be done, we were looking at a total cost for rehab around $36,000 + any unanticipated costs of lets say, $4,000 bringing the total cost of $40,000. It could have been a little less, but perhaps if things really got costly, a little more. With a purchase price of $107,000 and an estimated ARV being pretty conservative at $175,000 the deal really did not make financial sense. We walked from it, sacrificing the $400 we spent on an inspection and our time. It was pretty crappy as I was eager to get one done. The $400 was well worth it though, probably saved us from a lot of time/money/stress for a project with potentially no profit, and possibly even losing money.

Ohh well, onto the next one. I'm in the Sacramento area, and I'm finding the REO inventory to be pretty bad right now. Not a lot of inventory, and the good property's all have multiple offers on them, driving up the price of the purchase and squeezing the profit. Anyone else notice this going on? I'm hoping they will release more inventory soon, as there was substantially more about 1 year ago. Until then, I'm just trying to be patient and conservative until the right one comes along. As soon as I get one under contract again, I'll update the board if anyone is interested.

Best Regards,

Chris

Thanks for the reply Jeff. Yes, I know I'm not required to listen to anyone, but was just wondering if this is more of a gauge on a deal, or something most flippers use as rule. I'm glad it has been explained to me as I'll be sure to use this for all properties now going forward.

As far as the valuation goes, no I'm not just relying on the GC's opinion. I have an agent and she thinks we are good with our without the pool as far as value goes, but I just personally thought the pool brings a much added value. Was wondering what other peoples opinion on the pool was just for reassurance. My agent primarily works with investors who flip properties, that's really what she specializes in. I'm just a bit nervous and want to make sure I've thought about all the angles, renovations, and budget before moving forward.

I'll have to explore the pool issue more. I obviously did not anticipate a pool removal being thousands of dollars. I understood it being mostly demo work and then filling the remaining with sand. Maybe naive of me, but it didn't seem like a major obstacle. I'll have to explore the permit and testing necessary for this. Anyone go through with something like this?

In all we have written about 15 offers over about a 5 month time span. I appreciate your advise Jeff, and thanks everyone for giving me your input and thoughts on the matter!

Chris

Thanks for all the replies. Now I'm more nervous after I got all the replies, so I got that going for me. I do appreciate all of the honest advise, which will help me see things a bit differently now. So to go through all of the posts I got.

1) The 70% ARV is not something I obviously used when determining my purchase price obviously. I live in Northern CA, so it seems like sticking to that 70% rule would be very difficult. I don't think the same rate of return is as likely as maybe some other states. I'm pretty confident re-negotiating a lower price is out of the question, so I'm staying with my $107k purchase price. I feel like I would not be able to find any properties using the 70% rule, as everything I've seen go for and sell on the MLS and when looking at other investors in the area are doing, are not purchased at that point. That seems REALLY low to me. Do any other investors successfully follow the 70% rule?

2) Yes, most of the recent comps are in the $145k range. Two examples I'm looking at: $145k sold on 5/3/11 which is 1045 sq/ft and is a 3/1bath. The other sold on 4/15/11 and is a 3/2bath at 1,050 sq/ft. The problem is there are no recent sales for a larger house like a 4/2 or a larger 3/2 like my place. Again, my project is a 3/2 bath at 1,588 sq/ft so considerable larger than the prior 2 that recently sold and also has an additional bath than one of the flips above.

There were a few larger houses that sold but their dates are a bit farther back. One sold on 1/11/11 for $190k which was a 4/2 and and 1,450 sq/ft. Problem was that is sat on the market for 4 months before pending for 2 and finally selling. Obviously, less buyers at this purchase point. The other larger comp has a sale date of 11/23/10 and sold for $169,000 and was a 3/2 at 1,340 sq/ft. How many months prior to appraisers use? The 11/23/10 seems old, but will the 1/11/11 date still work? How many months old can you use to run comps? There is currently a 3/2bath that just went active for $165k and is 1,250 sq/ft so it will helpful if that sells for asking.

There is also one that sold on 5/1/11 for $182k, which is a 3/2 with 1,350 sq/ft, but this is on the other side of the freeway. The neighborhood is the same type of area, but just seperated by a freeway.

3) The $15k profit includes all the holdings costs, rehabs, utilities, and a 3% credit to the buyer. I think I'm being pretty conservative for all the costs associated with buying, holding, and selling the house. I actually even outlined for a rehab budget of $33k for unanticipated expenses that may come up, so I would be very happy with the $15k profit.

4) House was built in 1963. Had the inspection the other day and nothing came back too crazy. All the work that needs to be done for the most part: new capet entire house, paint inside/out, landscape work- fill the pool, etc, complete new kitchen, gut one of the bathrooms, 1 of the bathrooms we are salvaging some stuff, some termite damage was found on the pest report to the sub floor. The GC I have used to be a pest inspector, so he said he can take care of all the work and said it's nothing crazy- about $4k of damage. So the actual GC work is about $25k, but this does not include the pool issue. I was planning on keeping the pool, but now looks like the only option is to demo it. I don't know how much this will be, but I'm estimating it should not be more than $5k, hence my $30k estimate. Obviously, I have to get a new bid on the demo and landscape work, but I don't think this should be TOO much money.

4) I think the home "fits" the neighborhood. It's nothing outlandish, it's just one of the larger in the area. Others have sold in the area not too long ago, but there is no recent ( within the last 3 months) houses that I can see sold within a 1/4 mile radius at this higher price. Since most of the buyer are FHA, this may make things a little more difficult. It really is pretty normal though and blends right in with all the other houses.

So i'll continue to update everyone and let you all know how it continues to go forward. Thanks for any help and listening.

Hey Everyone,

So I finally got a house under contract after about 10 previous offers on houses. This is a 3bed/2bath that is 1588 sq/ft and is an REO that needs mostly cosmetic work. I have it under contract for $107,000 and have an estimated After rehab of about $175,000. From all the bids I got, it looks like it will need about $30,000 of work to really make it turn key. I've estimated about $7500 holding costs (costs to borrow the money, closing costs, holding costs). Based on my Excel spread sheet, I'm looking at profit of about $15,000.

So my problem is this: My after rehab estimate of $175k was based on the assumption that we would be able to salvage the pool. Unfortunately, it looks like the pool will not be able to be salvaged and the GC recommends filling it with sand and placing sod and re-landscaping the yard. He seems to think that the after rehab value will not change with the loss of the loss of the pool, and that it will remain at $175k. I was planning on the pool as an added bonus to help the house sell quickly. Does anyone have an opinion on the added value of the pool? Should I drop the ARV since there will be no pool now? Anyone care to share any experience if this pool is really vital for my ARV or not?

Just some quick additional info. For this particular area, the other comps of the neighborhood are mostly in the $140k - $150k range, however they are 3bed/1 bath and closer to a 1,000- 1,150 sq/ft. Most flip comps are selling around $125 sq/ft. Our house is 400-500 ft larger and with an additional bath, so I was thinking should be closer to $175k, which is around $110 sq/ft. It's one of the larger houses in the area, so it is cheaper by the sq/ft but more expensive overall.

Anyone have any advise before I move forward with sinking $50k of my own money into this. I'm currently in escrow, and will be closing within the next 25 days. If anyone sees anything wrong with my numbers/estimates or has any additional questions in order to provide any advise, please let me know. Thanks.

Chris

welcome!! I'm a new Sacramento investor. Currently I have been trying to aquire my first flip. In the process of reaching out to listing agents, and have made a few offers with no luck yet. Been very close a few different times. I'm looking for SFR homes in the range of $50-125k. Seems like it's a battle on REO properties right now. Are you currently working on any projects? Anything on the radar? Glad to see other sac investors frequent this site as well!!

I'm pretty new to investing, however this seems to be what is going on in the Sacramento, CA area as well. It looks like inventory is pretty low, as the banks have been slow to release their REO's. They are doing so very slowly so they don't flood the market. Everything I've heard from experienced flippers, and by looking at the properties closed on the MLS, it looks like profit margins have dried up. The market looks a lot different from what it was a year ago, and I'm looking at some deals on the MLS where I'm just totally confused and shocked that the investor was able to make any type of profit. I also think many people in CA who are cash buyers are long term buy and hold investors. As already said, they are buying near full listing price or over, which has made some of my recent offers look very weak even though I'm going all cash as well. In addition, the whole Sacramento market has softened up, and houses that were selling for $125 ago a year ago, are now just sitting on the market at $115k. Some investors look like they are doing some of these deals for nearly nothing. I'm just getting started, and I'm not about to do my first flip for a $1000 profit. I've found this to be very frustrating and honestly a bit depressing since I would really like to get started.

What are your thoughts? Is this a huge factor when selling a rehabbed home? Do a lot of buyers turn away? How bad does it affect your end profit? There is one house listed on the MLS that looks like it is in pre-auction status. I understand you can get big discounts right before a house goes to auction as the bank will take big discounts at that point. This house has been on the MLS for 150 days and in pre-auction, but one of the rooms is unpermitted? Is that a deal killer, or something to be concerned about? Also, anyone else pick up real good deals with pre-auction bids?

Thanks for all the help and advise everyone!!

Chris

Thanks for all the replies. I guess the partnership I was planning on doing with this GC is mainly for learning purposes. I figure if we had profit sharing between us, then I would really be able to question him about everything. I can talk with him about how much he would typically charge for each type of project. I could also do some walk through of some houses and get his thought on each project and potential. He's already done about 20 flips himself, so he would be a great for knowledge. I feel like if I just contract him for his labor, he'll be less inclined to share as much knowledge and labor costs.

I also think if I used some type of partnership with this GC, it would be less risk on me for my first flip. If I'm just paying for the costs of material, then I would not have to pay for all the costs of the labor up front. This is how I see it and tell me if I'm missing something. The purchase price is approx. $100k. It needs approximately $30k of work in it ($18k of labor and $12k of materials). If I have approximately $15k of holding costs, then the total investment would be $145k. I believe the house will sell ARV for approx. $160. So I have 2 options: 1) Partner with the GC and split profits which will total about $33k between the two of us and not have to pay for any labor costs up front, or 2) hire the contractor out and pay him the total $30k of front, and then take the $15k profit just for myself once the house sells.

Doesn't it seems like it makes sense to split 50/50 in this scenario? The profit is nearly the same either way, and it I partner I don't have to pay for any of the labor until the house sells. Right???

I think if I try and negotiate even a 60/40 split, he will not take 40% of 33k= $13,200 for the labor. So the 50/50 seems logical to me. I don't know, anyone again see anything I'm missing. Thanks.

Well I'm not entirely sure about how much he wants for the work. If we are splitting the total profits 50/50, then iIt does not seem like I should pay him anything for his labor. I'll just pay for the necessary materials. If we can agree to that, does a 50/50 split seem high? Should I try and negotiate a 60/40 split since I a bringing the deal and the money. I want to be fair with him, but also make sure I'm getting rewarded like I should for all the money and time I spent finding the deal. What seems like a fair breakdown of the profits assuming he's not charging for any of the labor?

So I'm currently looking for my first flip project and am getting more serious about writing my first offer. I have set up my LLC which will be will be taxed as an S Corp, found a great CPA who specializes in working with investors, and am currently in the process of taking my online college courses for my real estate licenses. My CPA has referred me to a General Contractor who is interested in partnering with an investor. Because this will be my first flip, I really want to take the opportunity to learn everything I possibly can about home renovation. I want to do a walk through with him, estimate rehab costs, and find out how much he would typically charge for the same work with someone else.

I spoke with him today and he says he's done approximately 20 flips in the past, and would be really interested in walking through a house with me this weekend. I'm sure we will discuss the rehab estimates, time, and money to get this house in good shape. My question is this: Is it custom to split the profit 50/50? He already told me over the phone, he'll do all the rehab at low cost to save on upfront cash, and then we would split the profit at the end. Does this mean he'll not charge for any of his labor up front, or just charge a smaller labor amount? I'm sure I'll pay for all the materials and supplies, but I just did not know what these partnerships typically look like? Should I be paid higher than 50% of the profit since I have the money and am finding the deal? I just want to know what I should anticipate when I meet with him this weekend.

Also two quick side questions:
1) A previous HVAC technician I've worked with in the past said it would cost approximately $8000 for a new system for a 1200 sq foot house. Seems high to me. Can anyone else give me a fair estimate on what one should cost?

Thanks for the help and advise,

Chris