Posted by dealmaker on August 05, 2007 at 10:47:38:
To me it’s strictly economics on when a fixer becomes a scraper. If it’s even going to be close I pass on the deal since developed lots are so cheap where I am.
Your second scenario is a good one to do in many instances, particularly older sections of town that are going throught "gentrification. Although a HML wojuld definitely not be the way to go, that’s a really expensive, and really short term way to borrow.
dealmaker
Couple of questions for help… - Posted by Michael
Posted by Michael on August 05, 2007 at 09:47:46:
Hi all. I was wondering if anyone could tell me their take on the time where a fixer-upper turns into a tearer-downer. I am thinking location is a big factor, but what else?
Also, since we have a ton of older homes in the world just sitting there, is it better to fix them up, or level them for better floor plans and added space? If I found 3 abandoned houses in a row, and they are relatively small, could I demo all of them, rezone the 3 lots to 2 larger lots, and build larger homes with garages to sell or rent?
Do HML’s work with an idea like demo-ing and rebuilding?
Thanks again in advance
Michael
Re: Couple of questions for help… - Posted by Rich-CA
Posted by Rich-CA on August 05, 2007 at 16:24:18:
I would look at the numbers. What kinds of prices are moving in the area you’re looking in. Nice as your finished product may be, the condition and pricing of the neighbors has an anchoring effect of what you’d be able to get.
With that price range in mind (expressed in $ per sq ft, so you can do the math for whatever size you come up with), you shop around. Based on the house, you need to be very good at estimating rehab costs because mistakes in that will cause you to over bid. Look for the very expensive repairs (plumbing, foundation, roof and so on) and make sure your eval of these is solid.
Subtract your rehab estimate from the market price estimate. Subtract another 15% of your rehab estimate as “fudge factor”, to cover the things that you may of missed or will require a “plan B”. Subtract 10% as your minimum profit margin and/or for your time on the project.
The result is the ballpark of what you need to pay.
You should also get the costs of new construction. It might be helpful to have a couple of stock plans fully costed out so you know exactly (1) what building from scratch costs and (2) what you can sell the result for in that neighborhood. Don’t forget the costs of tearing down and hauling away the old house. Check for asbestos/lead based paint because demo exposes you or your workers to it.
Compare the rehab numbers with the new built numbers.
Rule of thumb I used to use in developing large scale software systems was that if it costs 70% of a new system to upgrade/fix the old, you are better off building a new one. This would, of course, only apply if you were actually going to live there or if you didn’t want to get a reputation as a hack. With new, there should be no surprises as you put all the parts together yourself.